November 6, 1996
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Attn: Filing Desk
Re: Castelle
Registration Statement on Form S-4, File No. 333-14815
Ladies and Gentlemen:
Enclosed for filing on behalf of Castelle, pursuant to Rule 424(b)(1) of the
Securities Act of 1933, as amended, is the final prospectus used in connection
with the above-referenced offering.
Sincerely,
CASTELLE
By:/s/ Randall I. Bambrough
Randall I. Bambrough
Chief Financial Officer
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FILED PURSUANT TO RULE 424(b)(1)
FILE NO. 333-14815
CASTELLE IBEX TECHNOLOGIES, INC.
PROSPECTUS/JOINT PROXY STATEMENT
This Prospectus/Joint Proxy Statement (the "Prospectus") is being furnished
to the shareholders of Castelle in connection with the solicitation of proxies
by the Castelle Board of Directors for use at the Annual Meeting of Castelle
shareholders (the "Castelle Meeting") to be held at 9:00 a.m., local time, on
Tuesday, November 19, 1996, at 3255-3 Scott Boulevard, Santa Clara, California,
and at any adjournments or postponements of the Castelle Meeting.
This Prospectus is also being furnished to the shareholders of Ibex
Technologies, Inc. ("Ibex"), in connection with the solicitation of proxies by
the Ibex Board of Directors for use at the Special Meeting of Ibex shareholders
(the "Ibex Meeting") to be held at 10:00 a.m., local time, on Monday, November
18, 1996, at 4921 R.J. Mathews Parkway, El Dorado Hills, California, and at any
adjournments or postponements of the Ibex Meeting.
This Prospectus/Joint Proxy Statement constitutes the Prospectus of Castelle for
use in connection with the offer and issuance of up to 850,000 shares (less
shares reserved for issuance to Ibex shareholders who have perfected dissenters'
rights and shares reserved for issuance upon the exercise of Ibex Options) of
Common Stock, no par value, of Castelle ("Castelle Common Stock") (the "Merger
Shares"), pursuant to the merger of Ibex into Castelle (referred to herein as
the "Merger") as provided under the Agreement and Plan of Reorganization dated
as of August 22, 1996 (the "Merger Agreement") among Castelle, Ibex and certain
shareholders of Ibex (the "Signing Shareholders"). "Ibex Options" are those
options to purchase Ibex Common Stock outstanding as of the effective time of
the Merger which shall be converted into options to purchase shares of Castelle
Common Stock. In the event the closing price of a share of Castelle Common Stock
on the business day immediately preceding the effective time of the Merger is
$9.42 or greater, each share of Common Stock of Ibex, no par value ("Ibex Common
Stock") and each share of Series A Convertible Preferred Stock of Ibex ("Ibex
Preferred Stock") outstanding immediately prior to the effective time of the
Merger shall be converted into the right to receive 4.17731 shares of Castelle
Common Stock. In the event the closing price of a share of Castelle Common Stock
on the business day immediately preceding the effective time of the Merger is
less than $9.42, each share of Ibex Preferred Stock outstanding immediately
prior to the effective time of the Merger shall receive a pro rata allocation of
shares of Castelle Common Stock with a fair market value on the business day
immediately preceding the effective time of the Merger of $180,000 (the
"Preferred Stock Preference"). Holders of Ibex Preferred Stock and Ibex Common
Stock shall share in a pro rata distribution, based on the total number of
shares held, of the Merger Shares remaining after allocation of the Preferred
Stock Preference.
On October 31, 1996, the closing sales price on the Nasdaq National Market
of Castelle Common Stock was $6.00 per share.
This Prospectus and the accompanying forms of proxy are first being mailed
to shareholders of Castelle and Ibex on or about November 7, 1996.
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1.
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THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS. THE PROPOSED
MERGER IS A COMPLEX TRANSACTION. SHAREHOLDERS OF BOTH CASTELLE AND IBEX ARE
STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS PROSPECTUS IN ITS ENTIRETY,
PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS."
---------------
THE SECURITIES TO BE ISSUED IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Prospectus is November 7, 1996.
2.
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AVAILABLE INFORMATION........................................................................................... 1
SUMMARY ....................................................................................................... 3
The Companies.......................................................................................... 3
Meetings of Shareholders............................................................................... 3
Opinion of Financial Advisor........................................................................... 5
Recommendations of Boards of Directors................................................................. 5
The Merger............................................................................................. 5
Benefits to Ibex Executives and Shareholders from Merger............................................... 10
Additional Proposals for Castelle Shareholders......................................................... 13
Additional Proposal for Ibex Shareholders.............................................................. 13
Market Price Data...................................................................................... 14
Selected Historical And Pro Forma Financial Data....................................................... 15
Castelle Consolidated Selected Financial Data.......................................................... 16
Ibex Selected Financial Data........................................................................... 18
Unaudited Selected Pro Forma Combined Financial Data................................................... 19
Comparative Per Share Data............................................................................. 20
RISK FACTORS.................................................................................................... 21
Castelle: History of Losses; Accumulated Deficit...................................................... 21
Fluctuations in Operating Results...................................................................... 21
Rapid Technological Change; Risks Associated with New Products......................................... 22
Key Personnel.......................................................................................... 23
Product Transition; Risk of Product Returns and Inventory Obsolescence................................. 23
Competition and Price Erosion.......................................................................... 24
Combination of the Companies; Possible Adverse Effect on Financial Results............................. 25
Castelle: Concentration of Distributors; Distribution Risks........................................... 25
Lack of Product Revenue Diversification................................................................ 26
Dependence on Suppliers and Subcontractors............................................................. 26
Castelle: Government Regulation....................................................................... 27
Ibex: Dependence on Distribution Partners; Distribution Risks......................................... 27
International Sales.................................................................................... 27
Dependence on Proprietary Rights; Uncertainty of Obtaining Licenses.................................... 28
Possible Volatility of Castelle Stock Price............................................................ 29
Castelle: Future Capital Requirements................................................................. 29
Castelle: Voting Control by Officers, Directors and Affiliates........................................ 30
Castelle: Certain Charter Provisions.................................................................. 30
Shares Eligible for Future Sale........................................................................ 30
RECENT DEVELOPMENTS............................................................................................. 31
Litigation............................................................................................. 31
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THE CASTELLE MEETING............................................................................................ 32
Date, Time and Place of Meeting........................................................................ 32
Record Date, Voting Rights and Outstanding Shares...................................................... 32
Voting of Proxies...................................................................................... 32
Vote Required.......................................................................................... 33
Quorum; Abstentions; Broker Non-Votes.................................................................. 33
Solicitation of Proxies and Expenses................................................................... 33
Board Recommendations.................................................................................. 33
THE IBEX MEETING................................................................................................ 34
Date, Time and Place................................................................................... 34
Solicitation of Proxies................................................................................ 34
Record Date and Outstanding Shares..................................................................... 34
Vote Required.......................................................................................... 34
Quorum; Abstentions.................................................................................... 34
Voting of Proxies...................................................................................... 35
Solicitation of Proxies and Expenses................................................................... 35
Board Recommendations.................................................................................. 35
THE MERGER AND RELATED TRANSACTIONS............................................................................. 36
General .............................................................................................. 36
Background of the Merger............................................................................... 39
Reasons for the Merger................................................................................. 40
Board Recommendation................................................................................... 43
Opinion of Financial Advisor to Castelle............................................................... 43
Related Agreements..................................................................................... 46
Benefits to Ibex Executives and Shareholders from Merger............................................... 47
Representations and Covenants.......................................................................... 47
Escrow .............................................................................................. 47
Conditions to the Merger............................................................................... 48
Termination and Termination Fees....................................................................... 48
Waivers and Amendments................................................................................. 49
Certain Federal Income Tax Matters..................................................................... 49
Accounting Treatment................................................................................... 51
Affiliates' Restrictions on Sale of Castelle Common Stock.............................................. 51
Dissenters' Rights..................................................................................... 52
Merger Expenses........................................................................................ 53
Regulatory Matters..................................................................................... 54
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.................................................... 55
Unaudited Pro Forma Condensed Combined Balance Sheet June 28, 1996..................................... 56
Unaudited Pro Forma Condensed Combined Statements of Operations Years Ended
December 31, 1993, 1994 and 1995.............................................................. 57
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Unaudited Pro Forma Condensed Combined Statements of Operations Six Months
Ended June 30, 1995 and June 28, 1996......................................................... 58
Notes to Unaudited Pro Forma Condensed Combined Financial Statements................................... 59
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BUSINESS OF CASTELLE............................................................................................ 61
General .............................................................................................. 61
Industry Background.................................................................................... 61
Castelle Strategy...................................................................................... 62
Products .............................................................................................. 63
Research and Development............................................................................... 68
Sales, Marketing and Distribution...................................................................... 69
Customer Service and Support........................................................................... 70
Competition............................................................................................ 70
Manufacturing.......................................................................................... 71
Proprietary Rights..................................................................................... 71
Government Regulation.................................................................................. 72
Employees.............................................................................................. 72
Properties............................................................................................. 73
Legal Proceedings...................................................................................... 73
BUSINESS OF IBEX................................................................................................ 74
General .............................................................................................. 74
Industry Background.................................................................................... 74
Ibex Strategy.......................................................................................... 74
Products .............................................................................................. 75
Customer Support Packages.............................................................................. 77
Products Under Development............................................................................. 77
Competition............................................................................................ 79
Research and Development............................................................................... 79
Sales, Marketing and Distribution...................................................................... 80
Proprietary Rights..................................................................................... 81
Government Regulation.................................................................................. 81
Employees.............................................................................................. 81
Properties............................................................................................. 82
Legal Proceedings...................................................................................... 82
MANAGEMENT OF CASTELLE.......................................................................................... 83
Directors Not Standing For Re-Election................................................................. 84
Compensation of Executive Officers..................................................................... 85
Compensation of Directors.............................................................................. 85
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DESCRIPTION OF CASTELLE COMPENSATION PLANS...................................................................... 87
1988 Equity Incentive Plan............................................................................. 87
Castelle's 1995 Non-Employee Directors' Stock Option Plan.............................................. 92
MANAGEMENT OF IBEX.............................................................................................. 95
Executive Compensation................................................................................. 96
CASTELLE CONSOLIDATED SELECTED FINANCIAL DATA................................................................... 97
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF CASTELLE...............................................................................100
Six Months Ended June 28, 1996 and June 30, 1995.......................................................100
Years Ended December 31, 1995, 1994 and 1993...........................................................101
Selected Quarterly Operating Results...................................................................103
Quarterly Fluctuations.................................................................................105
Liquidity and Capital Resources........................................................................105
CASTELLE STOCK, OPTIONS AND DIVIDENDS...........................................................................106
IBEX SELECTED FINANCIAL DATA....................................................................................107
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF IBEX...................................................................................109
Six Months Ended June 30, 1996 and June 30, 1995.......................................................109
Years Ended December 31, 1995, 1994 and 1993...........................................................110
Liquidity and Capital Resources........................................................................111
IBEX STOCK, OPTIONS AND DIVIDENDS...............................................................................111
CASTELLE SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................................................................112
Compliance with the Reporting Requirements of Section 16(a)............................................114
IBEX SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND
MANAGEMENT......................................................................................................116
CERTAIN TRANSACTIONS............................................................................................118
Stock Purchase by Executive Officers of Castelle.......................................................118
Castelle Director and Shareholder Affiliations with Underwriter........................................118
COMPARISON OF RIGHTS OF SHAREHOLDERS OF CASTELLE AND IBEX.......................................................119
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ADDITIONAL MATTERS FOR CONSIDERATION OF CASTELLE SHAREHOLDERS...................................................120
Election of Directors..................................................................................120
Nominees .....................................................................................120
Retiring Director.............................................................................121
Board Committees and Meetings.................................................................121
Ratification of Selection of Independent Auditors......................................................122
ADDITIONAL MATTER FOR CONSIDERATION OF IBEX SHAREHOLDERS........................................................123
Approval of the 1992 Stock Option Plan.................................................................123
General .....................................................................................123
Purpose .....................................................................................123
Administration................................................................................123
Eligibility...................................................................................123
Terms of Options..............................................................................124
Adjustment Provisions.........................................................................124
Effect of Certain Corporate Events............................................................125
Duration, Amendment and Termination...........................................................125
Restrictions on Transfer......................................................................125
Tax Consequences..............................................................................125
SHAREHOLDER PROPOSALS...........................................................................................126
EXPERTS .......................................................................................................126
LEGAL MATTERS...................................................................................................126
OTHER MATTERS...................................................................................................127
INDEX TO FINANCIAL STATEMENT....................................................................................F-1
APPENDICES:
APPENDIX A - Agreement and Plan of Merger and Reorganization
APPENDIX B - Opinion of Unterberg Harris
APPENDIX C - Sections 1300-1312 of the California Corporations Code
APPENDIX D - 1992 Stock Option Plan
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NO PERSON HAS BEEN AUTHORIZED BY CASTELLE OR IBEX TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY CASTELLE OR IBEX. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED BY
THIS PROXY STATEMENT/PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES
TO WHICH THIS JOINT PROXY STATEMENT/PROSPECTUS RELATES SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
Castelle is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). These materials can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549 and at the Commission's regional offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of these materials can also be
obtained from the Commission at prescribed rates by writing to the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Commission maintains a Web site at http://www.sec.gov
that contains reports, proxy and information statement and other information
regarding issuers such as Castelle that file electronically with the Commission.
Castelle Common Stock is listed on the Nasdaq National Market and such reports
and other information concerning Castelle may be inspected and copied at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
Under the rules and regulations of the Commission, the solicitation of
proxies from shareholders of Ibex to approve and adopt the Merger Agreement
constitutes an offering of the Castelle Common Stock to be issued in connection
with the Merger. Accordingly, Castelle has filed with the Commission a
Registration Statement on Form S-4 under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to such offering (the "Registration
Statement"). This Prospectus constitutes the prospectus of Castelle that is
filed as part of the Registration Statement. Other parts of the Registration
Statement are omitted from this Prospectus in accordance with the rules and
regulations of the Commission. Copies of the Registration Statement, including
the exhibits to the Registration Statement and other material that is not
included herein, may be inspected, without charge, at the regional offices of
the Commission referred to above, or obtained at prescribed rates from the
Public Reference Section of the Commission at the address set forth above.
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Statements made in this Prospectus concerning the contents of any contract
or other document are not necessarily complete. With respect to each contract or
other document filed as an exhibit to the Registration Statement, reference is
hereby made to that exhibit for a more complete description of the matter
involved, and each such statement is hereby qualified in its entirety by such
reference.
Except for the historical information contained herein, the discussion in
this Prospectus contains forward-looking statements that involve risks and
uncertainties. Castelle'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 the sections entitled
"Summary," "Risk Factors," "Unaudited Pro Forma Condensed Combined Financial
Information," "Business of Castelle," "Business of Ibex," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Castelle" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Ibex," as well as those discussed elsewhere in this
Prospectus and any documents incorporated herein by reference.
2
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. The summary does not contain a complete description of the
terms of the Merger and is qualified in its entirety by reference to the full
text of this Prospectus and the Appendices hereto. Shareholders of Castelle and
shareholders of Ibex are urged to read this Prospectus and the Appendices in
their entirety.
The Companies
Castelle
Castelle designs, develops, markets and supports network enhancement
products, both software and hardware, that improve the productivity, performance
and functionality of local area networks ("LANs") and enhance the LAN user's
ability to communicate. The products are sold through domestic and international
distributors and selected Original Equipment Manufacturers ("OEMs") worldwide.
Castelle was originally incorporated in California in September 1987.
Unless otherwise indicated, "Castelle" refers to Castelle, a California
corporation, and its wholly-owned subsidiaries. Castelle's principal executive
offices are located at 3255-3 Scott Boulevard, Santa Clara, California 95054.
Castelle's telephone number is (408) 496-0474.
Ibex
Ibex Technologies, Inc. ("Ibex") designs, develops and markets
fax-on-demand, fax-gateway, fax broadcast and Web/fax applications that are sold
direct and through value-added resellers ("VARs"). Ibex products are sold
primarily to medium to large organizations through system integrators,
distributors and directly to end users. Ibex also provides significant
implementation and support services, both directly and through third parties, to
ensure the successful deployment and ongoing maintenance of Ibex products.
Ibex was incorporated in California in 1990. Ibex's principal executive
offices are located at 4921 R.J. Mathews Parkway, El Dorado Hills, California
95762. Ibex's telephone number is (916) 939- 8888.
Meetings of Shareholders
Date, Time and Place
Castelle. The Castelle Meeting will be held on Tuesday, November 19, 1996,
at 9:00 a.m., local time, at Castelle's offices at 3255-3 Scott Boulevard, Santa
Clara, California.
Ibex. The Ibex Meeting will be held on Monday, November 18, 1996, at 10:00
a.m., local time, at Ibex's offices at 4921 R.J. Mathews Parkway, El Dorado
Hills, California.
3
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Purposes of the Meetings
Castelle Meeting. At the Castelle Meeting, shareholders of Castelle will be
asked to consider and vote upon (i) a proposal to approve the Merger Agreement,
a copy of which is attached hereto as Appendix A; (ii) the election of directors
to the Board of Directors, to serve for the ensuing year and until their
successors are elected; and (iii) the ratification of the selection of Coopers &
Lybrand L.L.P. as independent auditors for Castelle for its fiscal year ending
December 31, 1996.
Ibex Meeting. At the Ibex Meeting, shareholders of Ibex will be asked to
consider and vote upon (i) a proposal to approve and adopt the Merger Agreement,
a copy of which is attached hereto as Appendix A, and (ii) the approval of the
1992 Stock Option Plan, a copy of which is attached hereto as Appendix D.
Record Date; Shares Entitled to Vote
Castelle. Holders of record of Castelle Common Stock on October 7, 1996
(the "Record Date") are entitled to notice of and to vote at the Castelle
Meeting. At the close of business on the Record Date, there were outstanding and
entitled to vote 3,621,261 shares of Castelle Common Stock, each of which will
be entitled to one vote on each matter to be acted upon. See "The Castelle
Meeting -- Record Date, Voting Rights and Outstanding Shares."
Ibex. Holders of record of Ibex Common Stock and Ibex Preferred Stock
(collectively, "Ibex Capital Stock") on November 1, 1996 (the "Ibex Record
Date") are entitled to notice of and to vote at the Ibex Meeting. At the close
of business on the Ibex Record Date, there were outstanding and entitled to vote
142,316 shares of Ibex Common Stock and 48,035 shares of Ibex Preferred Stock.
Shares of Ibex Preferred Stock will vote together as a single class and shares
of Ibex Common Stock will vote as a separate class on the approval of the Merger
Agreement. Shares of Ibex Common Stock and shares of Ibex Preferred Stock will
vote together as one class on the approval of the 1992 Stock Option Plan. See
"The Ibex Meeting -- Record Date and Outstanding Shares."
Votes Required
Castelle. Approval of the Merger Agreement will require the affirmative
vote of a majority of the outstanding shares of Castelle Common Stock. Directors
shall be elected by a plurality of the votes present in person or represented by
proxy and entitled to vote. Ratification of the selection of Coopers & Lybrand
L.L.P. as Castelle's auditors for the fiscal year ending December 31, 1996 shall
require the affirmative vote of the holders of a majority of the total shares of
Castelle Common Stock present in person or represented by proxy and entitled to
vote therein.
Ibex. Approval and adoption of the Merger Agreement will require the
affirmative vote of the holders of (i) a majority of the shares of Ibex Common
Stock outstanding on the Record Date, voting as a separate class; and (ii) a
majority of the shares of Ibex Preferred Stock outstanding on the Record Date,
voting as a separate class. Certain shareholders and the executive officers and
directors of Ibex have agreed to vote all the shares of Ibex Capital Stock owned
or controlled by them in favor of such approval and adoption. On the Record
Date, such shareholders and such executive officers and directors owned
approximately 70.3% and 100.0%, respectively, of all then outstanding shares of
Ibex Common Stock and Ibex Preferred Stock. See "The Merger -- Related
Agreements -- Irrevocable Proxy Agreements." Approval of the 1992 Stock Option
Plan will require the affirmative vote of a majority of the outstanding shares
of Ibex Common Stock and Ibex Preferred Stock, voting together as one class.
4
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Opinion of Financial Advisor
Unterberg Harris has delivered its written opinion dated August 22, 1996 to
the effect that the Merger consideration is fair, from a financial point of
view, to Castelle. The full text of the opinion of Unterberg Harris, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken by Unterberg Harris, is attached as Appendix B to this Prospectus.
Castelle shareholders are urged to read the opinion in its entirety.
Recommendations of Boards of Directors
Castelle's Board of Directors. The Board of Directors of Castelle has
unanimously approved the Merger Agreement and has determined that the Merger is
in the best interests of Castelle and its shareholders. The Castelle Board of
Directors unanimously recommends approval and adoption of the Merger Agreement
by the Castelle shareholders. The primary factors considered and relied upon by
the Castelle Board of Directors in reaching its recommendation are described in
"The Merger and Related Transactions -- Reasons for the Merger." In addition,
the Castelle Board of Directors, acting on the recommendation of the Audit
Committee of Castelle, has unanimously approved the selection of Coopers &
Lybrand L.L.P. as Castelle's auditors for the fiscal year ending December 31,
1996 and unanimously recommends ratification of the selection of Castelle's
auditors by the Castelle shareholders.
Ibex's Board of Directors. The Board of Directors of Ibex has also
unanimously approved the Merger Agreement and has determined that the Merger is
in the best interests of Ibex and its shareholders. The Ibex Board of Directors
unanimously recommends approval and adoption of the Merger Agreement by the Ibex
shareholders. The primary factors considered and relied upon by the Ibex Board
of Directors in reaching its recommendation are described in "The Merger and
Related Transactions -- Reasons for the Merger." The Board of Directors of Ibex
has also unanimously approved the adoption of the 1992 Stock Option Plan and
unanimously recommends approval thereof by the Ibex shareholders.
The Merger
General
Effects of the Merger. The Merger will be consummated promptly after
Castelle shareholder and Ibex shareholder approval and the satisfaction or
waiver of the other conditions to consummation of the Merger. Upon consummation
of the Merger, Ibex will merge into Castelle. The shareholders of Ibex will
become shareholders of Castelle (as described below), and their rights will be
governed by Castelle's Articles of Incorporation, as amended, and Bylaws.
Reasons for the Merger. In the discussions that led to the signing of the
Merger Agreement, the Board of Directors of Castelle identified a number of
potential benefits which would accrue to Castelle as a result of the Merger,
including: (i) the opportunity to develop technology and applications based on
the expertise of Ibex in the delivery of information-on-demand through the
mechanism of choice-fax, e-mail or the Web; (ii) the ability to diversify
Castelle's product base and in the process realize higher average selling prices
and higher margins; and (iii) the opportunity to establish a significant
presence in the VAR market sector as a result of Ibex's expertise in that area.
5
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The Board of Directors of Ibex has also identified a number of potential
benefits that would accrue to Ibex as a result of the Merger, including: (i) the
opportunity to take advantage of Castelle's established distribution channels;
(ii) increased operating flexibility and increased development capital as a
result of Castelle's current resources and access to public markets; and (iii)
the conversion of a relatively illiquid investment into a liquid one. See "The
Merger and Related Transactions -- Reasons for the Merger."
Conversion of Shares
Ibex Shares. Upon the effective time of the Merger, the Merger Shares shall
be available for issuance to holders of Ibex Preferred Stock and Ibex Common
Stock. In the event the closing price of a share of Castelle Common Stock on the
business day immediately preceding the effective time of the Merger is $9.42 or
greater, each share of Ibex Common Stock and each share of Ibex Preferred Stock
outstanding immediately prior to the effective time of the Merger shall be
converted into the right to receive 4.17731 shares of Castelle Common Stock. In
the event the closing price of a share of Castelle Common Stock on the business
day immediately preceding the effective time of the Merger is less than $9.42,
each share of Ibex Preferred Stock outstanding immediately prior to the
effective time of the Merger shall receive a pro rata allocation of shares of
Castelle Common Stock with a fair market value on the business day immediately
preceding the effective time of the Merger equal to the Preferred Stock
Preference. Holders of Ibex Preferred Stock and Ibex Common Stock shall share in
a pro rata distribution, based on the total number of shares held, of the Merger
Shares remaining after allocation of the Preferred Stock Preference.
If any shares of Ibex Common Stock outstanding immediately prior to the
consummation of the Merger are unvested or are subject to a repurchase option,
risk of forfeiture or other condition under any applicable restricted stock
purchase agreement or other agreement with Ibex, then the shares of Castelle
Common Stock issued in exchange for such shares of Ibex Common Stock will also
be unvested and subject to the same repurchase option, risk of forfeiture or
other condition, and the certificates representing such shares of Castelle
Common Stock may accordingly be marked with appropriate legends.
As of the date of this Prospectus, the Articles of Incorporation of Ibex
entitle the holders of Ibex Preferred Stock to receive $6.25 per share of Ibex
Preferred Stock prior to any other allocations to shareholders in a merger if
the total consideration paid to acquire Ibex is less than $8 million. The
holders of Ibex Preferred Stock have agreed to convert 19,235 (approximately
40%) of the outstanding shares of Ibex Preferred Stock into Ibex Common Stock
immediately prior to the consummation of the Merger. At the time of the Merger,
therefore, assuming the Castelle Common Stock issued in connection with the
Merger has a fair market value of less than $8 million, there will be 28,800
shares of Ibex Preferred Stock outstanding with an aggregate preference due of
$180,000.
Although the number of shares of Castelle Common Stock to be received in
exchange for each share of Ibex Preferred Stock and Ibex Common Stock cannot be
calculated at this time because the exchange ratios will be determined by the
fair market value of a share of Castelle Common Stock on the business day
preceding the effective time of the Merger, for illustrative purposes only, the
shares of Castelle Common Stock to be received in exchange for Ibex Preferred
Stock and Ibex Common Stock would be as follows as of the date of this
6
<PAGE>
Prospectus at the Designated Castelle Stock Prices shown below:
Shares of Castelle Common Stock
Received for each Share of:
----------------------------------------------------
Designated Castelle
Stock Price Ibex Preferred Stock Ibex Common Stock
- ------------------- ---------------------- --------------------
$ 6.00 5.07155 4.02988
$ 7.00 4.94378 4.05094
$ 8.00 4.84798 4.06673
$ 9.42 or greater 4.17731 4.17731
Utilizing a closing price for a share of Castelle Common Stock on the
business day immediately prior to the Merger of $6.00 as the Designated Castelle
Stock Price, approximately 146,061 shares of Castelle Common Stock would be
issued in the Merger to holders of Ibex Preferred Stock, approximately 645,792
shares of Castelle Common Stock would be issued to holders of Ibex Common Stock
in the Merger, and approximately 58,147 shares of Castelle Common Stock would be
reserved for issuance upon the exercise of Ibex Options.
Utilizing a closing price for a share of Castelle Common Stock on the
business day immediately prior to the Merger of $7.00 as the Designated Castelle
Stock Price, approximately 142,381 shares of Castelle Common Stock would be
issued in the Merger to holders of Ibex Preferred Stock, approximately 649,168
shares of Castelle Common Stock would be issued to holders of Ibex Common Stock
in the Merger, and approximately 58,451 shares of Castelle Common Stock would be
reserved for issuance upon the exercise of Ibex Options.
Utilizing a closing price for a share of Castelle Common Stock on the
business day immediately prior to the Merger of $7.00 as the Designated Castelle
Stock Price, approximately 142,381 shares of Castelle Common Stock would be
issued in the Merger to holders of Ibex Preferred Stock, approximately 649,168
shares of Castelle Common Stock would be issued to holders of Ibex Common Stock
in the Merger, and approximately 58,451 shares of Castelle Common Stock would be
reserved for issuance upon the exercise of Ibex Options.
Utilizing a closing price for a share of Castelle Common Stock on the
business day immediately prior to the Merger of $8.00 as the Designated Castelle
Stock Price, approximately 139,622 shares of Castelle Common Stock would be
issued in the Merger to holders of Ibex Preferred Stock, approximately 651,699
shares of Castelle Common Stock would be issued to holders of Ibex Common Stock
in the Merger, and approximately 58,679 shares of Castelle Common Stock would be
reserved for issuance upon the exercise of Ibex Options.
Utilizing a closing price for a share of Castelle Common Stock on the
business day immediately prior to the Merger of $9.42 or greater results in
approximately 120,307 shares of Castelle Common Stock being issued in the Merger
to holders of Ibex Preferred Stock, approximately 669,419 shares of Castelle
Common Stock being issued to holders of Ibex Common Stock in the Merger and
approximately 60,274 shares of Castelle Common Stock being reserved for issuance
upon the exercise of assumed Ibex Options. The foregoing numbers are subject to
change based upon the granting, exercise, termination or expiration of Ibex
Options at or prior to the Merger Date.
A recent price for Castelle Common Stock is shown on the cover page of this
Prospectus. Holders of Ibex Common Stock may obtain the daily closing prices of
Castelle Common Stock from The Wall Street Journal or by calling Ibex at (916)
939-8888.
Of the total shares of Castelle Common Stock issued in the Merger, 10% will
be retained for a period of time in escrow as security to Castelle against any
breach of representations, warranties or covenants by Ibex and the Designated
Shareholders (as defined below). Such shares shall be contributed out of the
shares to be received as a result of the Merger by the Designated Shareholders.
The Designated Shareholders are Ney Grant, Betsy Gray-Grant, Clovis Mattos and
Curtis Powell. Any shares not required to satisfy such obligations will be
released from escrow to the Designated Shareholders after termination of the
escrow period. See "The Merger and Related Transactions -- Escrow."
7
<PAGE>
No fractional shares of Castelle Common Stock will be issued in the Merger.
Instead, each Ibex shareholder who would otherwise be entitled to receive a
fraction of a share of Castelle Common Stock will receive an amount of cash
equal to $8.00 multiplied by the fraction of a share of Castelle Common Stock to
which the shareholder would otherwise be entitled. Castelle intends to use its
current cash resources to fund the payments for fractional shares.
Ibex Options. Upon consummation of the Merger, each then outstanding Ibex
Option will automatically be converted into an option to purchase a number of
shares of Castelle Common Stock determined by multiplying the number of shares
of Ibex Common Stock subject to the Ibex Option by the conversion rate utilized
to convert Ibex Common Stock into Castelle Common Stock on the date of the
Merger, at an exercise price per share of Castelle Common Stock equal to the
exercise price per share of the Ibex Option at the time of the Merger divided by
the conversion rate utilized to convert Ibex Common Stock into Castelle Common
Stock on the date of the Merger, rounded up to the nearest cent. To avoid
fractional shares, the number of shares of Castelle Common Stock subject to a
converted Ibex Option will be rounded down to the nearest whole share, with no
cash being payable for such fractional share. The other terms of each Ibex
Option, including status as a "non-statutory stock option" for federal income
tax purposes and vesting schedule, will remain unchanged.
As of the Ibex Record Date, 14,429 shares of Ibex Common Stock were subject
to outstanding Ibex Options. Assuming a fair market value for Castelle Common
Stock on the business day immediately preceding the Merger of $6.00 per share
and that the same number of shares are subject to Ibex Options at the Merger
Date as were outstanding as of the Ibex Record Date, such options will be
converted into options to purchase an aggregate of approximately 58,147 shares
of Castelle Common Stock. Should the fair market value of Castelle Common Stock
on the business day immediately preceding the Merger be $7.00 per share and the
same number of shares be subject to Ibex Options at the Merger Date as were
outstanding as of the Ibex Record Date, such options will be converted into
options to purchase an aggregate of approximately 58,451 shares of Castelle
Common Stock. Should the fair market value of Castelle Common Stock on the
business day immediately preceding the Merger be $8.00 per share and the same
number of shares be subject to Ibex Options at the Merger Date as were
outstanding as of the Ibex Record Date, such options will be converted into
options to purchase an aggregate of approximately 58,679 shares of Castelle
Common Stock. Should the fair market value for Castelle Common Stock on the
business day immediately preceding the Merger be $9.42 per share or greater and
the same number of shares be subject to Ibex Options at the Merger Date as were
as of the Ibex Record Date, such options will be converted into options to
purchase an aggregate of approximately 60,274 shares of Castelle Common Stock.
Surrender of Certificates. If the Merger becomes effective, Castelle will
mail a letter of transmittal with instructions to all holders of record of Ibex
Capital Stock as of the effective time of the Merger for use in surrendering
their stock certificates in exchange for certificates representing Castelle
Common Stock and a cash payment in lieu of fractional shares. Certificates
representing shares of Ibex Capital Stock should not be surrendered until the
letter of transmittal is received.
8
<PAGE>
Comparative Stock Price and Book Value Per Share
The following table sets forth the closing prices per share of Castelle
Common Stock on the Nasdaq National Market on August 22, 1996, the last trading
day before announcement of the proposed Merger, and on October 31, 1996, the
latest practicable trading day before the printing of this Prospectus, and
equivalent per share prices for Ibex Preferred Stock and Ibex Common Stock based
upon application of the conversion described above in "Conversion of Shares":
Ibex Equivalent (a)
-------------------
Ibex Ibex
Castelle Preferred Common
Common Stock Stock Stock
------------ --------- ------
August 22, 1996..... $7.00 $34.61 $28.36
October 31, 1996.... $6.00 $30.43 $24.18
- ----------
(a) Represents the equivalent of one share of Ibex Common Stock or Ibex
Preferred Stock calculated by multiplying the price per share of Castelle
Common Stock by the conversion rate applicable at that Castelle Common
Stock price per share.
At June 28, 1996, the book values per share of Castelle Common Stock, Ibex
Preferred Stock and Ibex Common Stock, the pro forma combined book value per
share and the book value per share of Ibex Preferred Stock and Ibex Common Stock
based on the conversion of outstanding Ibex Preferred Stock and Ibex Common
Stock as of June 28, 1996 at the closing price for Castelle Common Stock on June
28, 1996 of $7.75 were as follows:
<TABLE>
<CAPTION>
Ibex Equivalent (a)
-------------------
Ibex Ibex Ibex Ibex
Castelle Preferred Common Pro Forma Preferred Common
Common Stock Stock Stock Combined Stock Stock
------------ --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 28, 1996 ...... $3.23 $9.60 $3.35 $2.58 $12.74 $10.44
</TABLE>
- ----------
(a) Represents the equivalent of one share of Ibex Preferred Stock or Ibex
Common Stock calculated by multiplying the pro forma combined book value
per share of Castelle Common Stock by the conversion rate which would have
been in effect had the Merger been effective on June 28, 1996.
Accordingly, the conversion resulted in a premium to Ibex shareholders and
dilution to Castelle shareholders based on the respective book values of the
shares at June 28, 1996.
Related Agreements
Affiliate Agreements. To help ensure that the Merger will be accounted for
as a "pooling of interests," the executive officers and directors of Castelle
and Ibex and 10% shareholders of Ibex will execute agreements that prohibit such
persons from disposing of their shares during the period commencing 30 days
prior to the closing date of the Merger (the "Closing Date") and ending when
Castelle first publicly releases its quarterly financial statements including
the combined financial results of Ibex and Castelle for a period of at least 30
days. Pursuant to such agreements, Ibex affiliates will also acknowledge the
9
<PAGE>
resale restrictions imposed by Rule 145 promulgated under the Securities Act on
shares received by them in the Merger. In addition, certain shareholders of Ibex
will also sign agreements making certain representations pertaining to the
"continuity of interest" requirements for a tax-free reorganization. See "The
Merger and Related Transactions -- Certain Federal Income Tax Matters" below.
Conversion Agreement. As of the date of this Prospectus, the Articles of
Incorporation of Ibex entitle the holders of Ibex Preferred Stock to receive
$6.25 per share of Ibex Preferred Stock prior to any other allocations to
shareholders in a merger if the total consideration paid to acquire Ibex is less
than $8 million. The holders of Ibex Preferred Stock have agreed to convert
19,235 (approximately 40%) of the outstanding shares of Ibex Preferred Stock
into Ibex Common Stock immediately prior to the consummation of the Merger. At
the time of the Merger, therefore, assuming the Castelle Common Stock issued in
connection with the Merger has a fair market value of less than $8 million,
there will be 28,800 shares of Ibex Preferred Stock outstanding with an
aggregate preference due of $180,000.
Irrevocable Proxy Agreements. Pursuant to irrevocable proxy agreements
executed concurrently with the execution of the Merger Agreement, directors,
executive officers and certain major shareholders of Ibex holding in the
aggregate approximately 100.0% of the outstanding shares of Ibex Preferred Stock
and 70.3% of the outstanding shares of Ibex Common Stock on the record date have
agreed to vote in favor of the Merger and have granted Castelle proxies to vote
their shares of Ibex Common Stock and Ibex Preferred Stock in favor of the
Merger.
Benefits to Ibex Executives and Shareholders from Merger
Ney Grant, Director, President and Chief Executive Officer of Ibex, Curtis
Powell, Director and Vice President of Ibex, and three other employees of Ibex
have agreed to execute employment agreements with Castelle in connection with
the Merger. In addition, Ney Grant, Curtis Powell and one other employee have
agreed to execute noncompetition agreements with Castelle in connection with the
Merger. In exchange for the non-competition agreements, each signatory has
agreed to refrain from providing services, support, products or technology
related to the business of Ibex to any person for a period of two years after
termination of his employment with Castelle with respect to Messrs. Grant and
Powell and one year with respect to the other employee.
In addition, holders of Ibex Preferred Stock have been granted the right,
effective upon the Merger, to register the Castelle Common Stock received in
connection with the Merger for resale to the public, subject to certain
restrictions and the approval of such rights by the existing holders of
registration rights. Upon the approval of existing holders of registration
rights, holders of Ibex Common Stock shall receive more limited registration
rights which will be subject to certain restrictions, including the right to
participate in the registration of shares of Castelle stock initiated by either
Castelle or holders of registration rights other than the holders of Ibex
Preferred Stock identified above.
Representations and Covenants
Under the Merger Agreement, Castelle and Ibex made a number of
representations regarding their respective businesses, capital structures,
operations, financial condition and other matters, including their authority to
enter into the Merger Agreement and to consummate the Merger. Ibex covenanted
that, until the consummation of the Merger or the termination of the Merger
Agreement, it will maintain its business, it will not take certain actions
outside the ordinary course of business without Castelle's consent. Each party
covenants that until the consummation of the Merger or the termination of the
Merger Agreement, it will use its commercially reasonable efforts to consummate
10
<PAGE>
the Merger. Each party has agreed not to initiate or solicit any proposals
relating to the possible acquisition of that party or any material portion of
its capital stock or assets by any person other than Castelle's acquisition of
Ibex, and has further agreed not to enter into any agreement providing for any
such acquisition.
Escrow
The Merger Agreement provides that 10% of the shares of Castelle Common
Stock to be issued to Ibex shareholders will be placed in escrow by the
Designated Shareholders to indemnify Castelle for damages arising from the
following circumstances: (a) an inaccuracy in or breach of a representation or
warranty of Ibex or the Designated Shareholders in the Merger Agreement or any
related agreement; (b) a breach of a covenant or obligation of Ibex or the
Designated Shareholders; or (c) any legal proceeding in connection with clauses
(a) and (b). Representations and warranties which are reviewed in the audit
process shall terminate when Castelle publishes its audited financial statements
for the fiscal year which includes the Merger Date and the escrow will terminate
365 days after the Closing Date. The Escrow Agent is presently expected to be
First Trust of California, National Association. Subject to the retention of
shares in the escrow to cover claims made during the escrow period, any shares
remaining in the escrow after the 365 day period will be distributed pro rata to
the Designated Shareholders. See "The Merger and Related Transactions -- Escrow"
and "-- Benefits to Ibex Executives and Shareholders from the Merger."
Conditions to the Merger
In addition to the requirement that the approval by the Castelle
shareholders and Ibex shareholders be received, consummation of the Merger is
subject to a number of other conditions that, if not satisfied or waived, may
cause the Merger not to be consummated and the Merger Agreement to be
terminated. Each party's obligation to consummate the Merger is conditioned on,
among other things, the accuracy of the other party's representations, the other
party's performance of its covenants, the absence of a material adverse change
with respect to the other party, favorable legal opinions (including opinions to
the effect that the Merger will be treated for federal income tax purposes as a
tax-free reorganization), and the absence of legal action preventing the
consummation of the Merger.
Castelle's obligation to consummate the Merger will be further conditioned
upon (i) the receipt of a letter from Coopers & Lybrand L.L.P. that the Merger
will be treated as a pooling of interests for accounting purposes; and (ii)
holders of no more than 2% of the Ibex Common Stock being eligible to exercise
dissenters' rights of appraisal under California law. See "The Merger and
Related Transactions -- Dissenters' Rights."
Termination and Termination Fees
Termination. The Merger Agreement may be terminated by mutual agreement of
both parties or by either party (i) as a result of a material breach by the
other party of any covenant or agreement set forth in the Merger Agreement; (ii)
if the timely satisfaction of any of the conditions for closing the Merger has
become impossible; (iii) if any of the closing conditions have not been
satisfied prior to the Closing; or (iv) if the Closing has not taken place
before December 30, 1996.
Termination Fees. If, prior to the Closing or the termination of the Merger
Agreement, either Castelle or Ibex enters into negotiations or discussions with
a third party concerning the sale of all or substantially all of the assets,
business or stock of that company, such company shall immediately reimburse the
11
<PAGE>
other company for all expenses and costs incurred in connection with the Merger.
Should either company enter into a letter of intent, understanding or other
agreement relating to the sale of all or substantially all of the assets,
business or stock of that company, such company shall immediately pay the other
company a termination fee in the amount of $250,000.
Certain Federal Income Tax Consequences
The Merger is expected to be a tax-free reorganization for federal income
tax purposes, so that no gain or loss will be recognized by the Ibex
shareholders on the exchange of Ibex capital stock for Castelle Common Stock,
except to the extent that Ibex shareholders receive cash in lieu of fractional
shares or upon exercise of dissenters' rights. The Merger Agreement does not
require the parties to obtain a ruling from the Internal Revenue Service as to
the tax consequences of the Merger. As a condition to Castelle's and Ibex's
obligations to consummate the Merger, Castelle and Ibex are to receive opinions
at the effective time from their respective legal counsel that the Merger will
be treated as a tax-free reorganization for federal income tax purposes. Ibex
shareholders are urged to consult their own tax advisors regarding such tax
consequences. See "The Merger and Related Transactions -- Certain Federal Income
Tax Matters."
Waivers and Amendments
At any time at or prior to the effective time, to the extent legally
allowed, Castelle or Ibex, without approval of the shareholders of such
corporation, may waive compliance with any of the agreements or conditions
contained in the Merger Agreement for the benefit of that company. Neither
Castelle nor Ibex currently intends to waive compliance with any such agreements
or conditions.
The Merger Agreement may be amended by Castelle and Ibex at any time before
or after approval of the Castelle shareholders or the Ibex shareholders, except
that, after such approval, no amendment may be made that requires the further
approval of the Castelle shareholders or the Ibex shareholders under applicable
law, unless such approval is obtained.
Accounting Treatment
The Merger is intended to be treated as a pooling of interests for
accounting purposes. As a condition to Castelle's obligation to consummate the
Merger, Castelle is to receive a letter to such effect from Coopers & Lybrand
L.L.P., the independent auditors for Castelle. See "The Merger and Related
Transactions -- Accounting Treatment."
Dissenters' Rights
If the Merger Agreement is approved by the required vote of Ibex
shareholders and is not abandoned or terminated, holders of Castelle and Ibex
Capital Stock who did not vote in favor of the Merger may, by complying with
Sections 1300 through 1312 of the California General Corporation Law (the
"California Law"), be entitled to dissenters' rights as described therein.
However, it is a condition to Castelle's obligation to consummate the Merger
that not more than 2% of the shares of Ibex Common Stock and none of the shares
of Ibex Preferred Stock be eligible to exercise dissenters' rights. See "The
Merger and Related Transactions -- Dissenters' Rights."
12
<PAGE>
Merger Expenses and Fees and Other Costs
Castelle and Ibex estimate that they will incur direct transaction costs of
approximately $650,000 associated with the Merger. These nonrecurring
transaction costs will be charged to operations upon consummation of the Merger.
In addition, Castelle anticipates incurring a charge upon consummation of the
Merger of $200,000 to $300,000 to reflect costs and expenses relating to
integrating the two companies. See "Unaudited Pro Forma Combined Condensed
Financial Information" included elsewhere herein.
Whether or not the Merger is consummated, except as set forth below, each
party will bear its own costs and expenses in connection with the Merger and the
transactions provided for therein.
Castelle has agreed to reimburse Ibex for the first $25,000 of audit fees,
costs and expenses invoiced by Coopers & Lybrand L.L.P. and incurred by Ibex in
the audit by Coopers & Lybrand L.L.P. of Ibex's fiscal years ended December 31,
1995 and 1994, as well as one-half of any additional audit fees, costs and
expenses invoiced by Coopers & Lybrand L.L.P. Castelle has also agreed to pay
Unterberg Harris a transaction fee of $250,000, which amount has been included
in the direct transaction costs above, if the Merger is consummated. Castelle
will also reimburse Unterberg Harris for the reasonable out-of-pocket expenses
incurred by Unterberg Harris in rendering services to Castelle in connection
with the Merger. See "The Merger and Related Transactions -- Opinion of
Financial Advisor to Castelle."
Regulatory Matters
Castelle and Ibex are not aware of any governmental or regulatory approvals
required for consummation of the Merger, other than compliance with the federal
securities laws and applicable securities ("blue sky") laws of various states in
which Castelle and Ibex shareholders reside.
Additional Proposals for Castelle Shareholders
In addition to the proposal to approve and adopt the Merger Agreement,
Castelle shareholders will be asked at the Castelle Meeting to elect directors
to serve on the Board of Directors to serve until the next Annual Meeting of
Shareholders and to ratify the appointment of Coopers & Lybrand L.L.P. as
Castelle's auditors for the fiscal year ended December 31, 1996. See "Additional
Matters for Consideration of Castelle Shareholders."
Castelle's Board of Directors has unanimously approved the appointment of
Coopers & Lybrand L.L.P. as Castelle's auditors and unanimously recommends that
the shareholders of Castelle approve the appointment of Coopers & Lybrand L.L.P.
as Castelle's auditors.
Additional Proposal for Ibex Shareholders
In addition to the proposal to approve and adopt the Merger Agreement, Ibex
shareholders will be asked at the Ibex Meeting to approve the adoption of the
1992 Stock Option Plan. See "Additional Matter for Consideration of Ibex
Shareholders."
Ibex's Board of Directors has unanimously approved the adoption of the 1992
Stock Option Plan and unanimously recommends that the shareholders of Ibex
approve the 1992 Stock Option Plan.
13
<PAGE>
Market Price Data
Castelle initiated public trading on December 20, 1995. The following table
sets forth the range of high and low bid prices reported on the Nasdaq National
Market for Castelle Common Stock for the periods indicated which are subsequent
to that date:
High Low
Fiscal Year Ended December 31, 1995:
Fourth Quarter (beginning December 21, 1995........ $8 $6 15/16
Fiscal Year Ended December 31, 1996:
First Quarter...................................... $9 1/4 $7
Second Quarter..................................... $9 3/4 $7 1/4
Third Quarter (through September 23, 1996)......... $8 1/4 $6 1/2
There is no public trading market for Ibex securities.
As of the Record Date, October 7, 1996, there were approximately 156
shareholders of record who held shares of Castelle Common Stock, as shown on the
records of Castelle's transfer agent for such shares. As of the Ibex Record
Date, there were approximately 28 shareholders of record who held shares of Ibex
Common Stock and 2 shareholders of record who held shares of Ibex Preferred
Stock.
Neither Castelle nor Ibex has paid any cash dividends on any class of its
stock. Both Castelle and Ibex anticipate that for the foreseeable future they
will continue to retain any earnings for use in the operation of their
businesses.
14
<PAGE>
Selected Historical And Pro Forma Financial Data
The following selected historical financial information of Castelle and
Ibex has been derived from their respective historical financial statements, and
should be read in conjunction with such financial statements and the notes
thereto, included elsewhere herein. The selected pro forma combined financial
information is derived from the unaudited pro forma condensed combined financial
statements, which give effect to the Merger as a pooling of interests and should
be read in conjunction with such pro forma statements and the notes thereto
included in this Prospectus. The pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the Merger had been
consummated at the beginning of the periods indicated, nor is it necessarily
indicative of future operating results or financial position. In addition, it
does not incorporate any benefits from cost savings or synergies of operations
of the combined companies.
15
<PAGE>
Castelle Consolidated Selected Financial Data
(in thousands, except per share amounts)
The selected consolidated financial data of Castelle set forth below should
be read in conjunction with the consolidated financial statements of Castelle,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Castelle" included elsewhere
herein. The consolidated statement of operations data for the years ended
December 31, 1991, 1992, 1993, 1994 and 1995 and the consolidated balance sheet
data at December 31, 1991, 1992, 1993, 1994 and 1995 are derived from, and are
qualified by reference to, audited consolidated financial statements contained
in the Prospectus. The consolidated statement of operations data for the six
month periods ended June 30, 1995 and June 28, 1996 and the consolidated balance
sheet data at June 28, 1996 are derived from unaudited consolidated financial
statements that have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations and other information for such period.
These historical results are not necessarily indicative of the results of
operations to be expected for the full fiscal year or any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Castelle."
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
------------------------------------------------------- ----------------
June 30, June 28,
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ------ -----
Historical Consolidated Statement of (unaudited) (unaudited)
Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ..................... $ 9,067 $19,008 $17,787 $19,486 $25,082 $11,874 $13,425
Cost of sales.................. 5,457 10,563 11,346 11,503 13,571 6,385 7,117
------ ------ ------ ------ ------ ------ ------
Gross profit................ 3,610 8,445 6,441 7,983 11,511 5,489 6,308
------ ----- ----- ----- ------ ----- -----
Operating expenses:
Research and development..... 1,632 1,927 2,152 2,179 2,018 996 1,057
Sales and marketing.......... 2,649 4,959 5,628 4,384 5,641 2,785 3,199
General and administrative... 850 1,313 1,977 1,446 1,405 623 718
Restructuring charge......... -- -- 615 -- -- -- --
------ ----- ------ ----- ----- ----- -----
Total operating expenses... 5,131 8,199 10,372 8,009 9,064 4,404 4,974
------ ----- ------ ----- ----- ----- -----
Operating income (loss)......... (1,521) 246 (3,931) (26) 2,447 1,085 1,334
Interest income (expense), net.. (11) (157) (349) (481) (296) (192) 167
Other income (expense), net..... 23 48 (515) 129 (53) -- (75)
------ ----- ------- ----- ----- ----- -----
Income (loss) before provision
for income taxes............. (1,509) 137 (4,795) (378) 2,098 893 1,426
Provision for (benefit from)
income taxes -- 11 -- -- 74 23 64
------ ----- ------- ----- ----- ----- -----
Net income (loss)............... $(1,509) $ 126 $(4,795) $ (378) $2,024 $ 870 $1,362
====== ====== ====== ====== ===== ===== =====
Net income (loss) per share (1). $ (5.80) $ 0.09 $(12.11) $ (0.91) $ 0.77 $ 0.34 $ 0.35
====== ====== ====== ====== ===== ===== =====
Shares used in per share
calculation (1) 260 1,330 396 414 2,673 2,648 3,887
===== ===== ====== ====== ===== ===== =====
Pro forma net loss per share (1) $(0.16)
=====
Pro forma shares used in per share
calculation (1) ................ 2,396
=====
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
As of December 31, June 28,
---------------------------------------------------------- --------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
(unaudited)
Historical Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit)................ $1,872 $ 2,293 $ (765) $ 884 $8,849 $11,241
Total assets............................. 5,144 10,114 8,623 7,124 14,667 15,696
Short-term debt.......................... 507 2,163 4,174 2,670 193 --
Total shareholders' equity (deficit)..... 2,390 3,493 (1,264) 1,355 9,289 11,709
</TABLE>
(1) Computed on the basis described for net income (loss) per share in Note
2 of Notes to Consolidated Financial Statements.
17
<PAGE>
Ibex Selected Financial Data
(in thousands, except per share amounts)
The selected financial data of Ibex set forth below should be read in
conjunction with the financial statements of Ibex, including the notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Ibex" included elsewhere herein. The statement of operations data
for the years ended December 31, 1994 and 1995 and the balance sheet data at
December 31, 1994 and 1995 are derived from, and are qualified by reference to,
audited financial statements contained in this Prospectus. The statement of
operations data for the years ended December 31, 1991, 1992 and 1993 and the six
month periods ended June 30, 1995 and 1996, and the balance sheet data at
December 31, 1991, 1992 and 1993, and at June 30, 1996, are derived from
unaudited financial statements that have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations and other information for such
period. These historical results are not necessarily indicative of the results
of operations to be expected for the full fiscal year or any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Ibex."
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
------------------------------------------------------------ ----------------
June 30, June 30,
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ------ -----
Historical Statement of Operations Data (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ..................... $ 521 $ 1,020 $ 1,791 $ 2,708 $ 3,091 $ 1,393 $ 2,075
Cost of sales.................. 218 290 554 691 732 355 444
-------- --------- --------- --------- --------- ---------- ---------
Gross profit................ 303 730 1,237 2,017 2,359 1,038 1,631
-------- --------- --------- --------- --------- ---------- ---------
Operating expenses:
Research and development..... 95 153 245 432 648 418 342
Sales and marketing.......... 128 368 638 988 1,391 660 760
General and administrative... 68 197 289 256 262 129 153
-------- --------- --------- --------- --------- ---------- ---------
Total operating expenses... 291 718 1,172 1,676 2,301 1,207 1,255
-------- --------- --------- --------- --------- ---------- ---------
Operating income (loss)......... 12 12 65 341 58 (169) 376
Other income (expense), net..... (4) (4) 1 (8) (4) (5) 10
-------- --------- --------- --------- --------- ---------- ---------
Income (loss) before provision
for income taxes............. 8 8 66 333 54 (174) 386
Provision for (benefit
from) income taxes........... 1 1 39 121 (5) (21) 162
-------- --------- --------- --------- --------- ---------- ---------
Net income (loss)............... $ 7 $ 7 $ 27 $ 212 $ 59 $ (153) $ 224
======== ========= ========= ========= ========= ========== =========
Net income (loss) per share (1). $ 0.06 $ 0.05 $ 0.15 $ 1.11 $ 0.30 $ (1.13) $ 1.11
======== ========== ========= ========= ========= ========== =========
Shares used in per
share calculation (1) 116 151 174 191 199 135 201
=== ========== ========== ========= ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, June 30,
----------------------------------------------------------- --------
1991 1992 1993 1994 1995 1996
(unaudited) (unaudited) (unaudited) (unaudited)
Historical Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit)................ $ 11 $ 266 $ 302 $ 499 $ 593 $ 828
Total assets............................. 126 385 517 934 986 1,484
Short-term debt.......................... 68 -- 28 28 75 25
Total shareholders' equity (deficit)..... 32 341 368 608 700 924
</TABLE>
(1) Computed on the basis described for net income (loss) per share in Note 2
of Notes to Consolidated Financial Statements.
18
<PAGE>
Unaudited Selected Pro Forma Combined Financial Data
(in thousands, except per share amounts)
For purposes of the pro forma operating data, Castelle's consolidated
financial statements for the five fiscal years ended December 31, 1995, and for
the six months ended June 28, 1996 have been combined with Ibex's financial
statements for the five fiscal years ended December 31, 1995, and for the six
months ended June 30, 1996. Castelle and Ibex estimate that they will incur
merger-related expenses, consisting primarily of transaction costs for
investment bankers fees, attorneys, accountants, financing printing, and the
costs associated with integrating the two companies and other related charges of
approximately $850,000-$950,000. The pro forma combined balance sheet data gives
effect to such expenses as if they had been incurred as of June 28, 1996, but
the pro forma condensed combined statements of operations do not give effect to
such expenses. No dividends have been declared or paid on Castelle Common Stock
or Ibex Capital Stock.
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
------------------------------------------------------ ----------------
June 30, June 30,
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ------ ------
Pro Forma Condensed Combined (unaudited)(unaudited)(unaudited) (unaudited) (unaudited)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................ $ 9,588 $20,028 $19,578 $22,194 $28,173 $13,267 $15,500
Cost of sales..................... 5,675 10,853 11,900 12,194 14,303 6,740 7,561
------ ------ ------ ------ ------ ------ ------
Gross profit................... 3,913 9,175 7,678 10,000 13,870 6,527 7,939
----- ----- ----- ------ ------ ----- -----
Operating expenses:
Research and development........ 1,727 2,080 2,397 2,611 2,666 1,414 1,399
Sales and marketing............. 2,777 5,327 6,266 5,372 7,032 3,445 3,959
General and administrative...... 918 1,510 2,266 1,702 1,667 752 871
Restructuring charge........ -- -- 615 -- -- -- --
----- ----- ------ ------ ------ ----- -----
Total operating expenses...... 5,422 8,917 11,544 9,685 11,365 5,611 6,229
----- ----- ------ ------ ------ ----- -----
Operating income (loss)............ (1,509) 258 (3,866) 315 2,505 916 1,710
Interest income (expense), net..... (11) (157) (349) (481) (296) (192) 167
Other income (expense), net........ 19 44 (514) 121 (57) (5) (65)
----- ------ ------ ----- ----- ----- -----
Income (loss) before provision for income
taxes............................. (1,501) 145 (4,729) (45) 2,152 719 1,812
Provision for (benefit from)
income taxes 1 12 39 121 69 2 226
----- ------ ------ ----- ----- ------ ------
Net income (loss).................. $ (1,502) $ 133 $(4,768) $ (166) $2,083 $ 717 $ 1,586
======== ======= ======= ====== ====== ======= =======
Net income (loss) per
Castelle share (1) $ (2.06) $ 0.07 $ (5.48) $(0.17) $ 0.59 $ 0.21 $ 0.33
======== ======= ======== ====== ====== ======= =======
Shares used in per
share calculation (1) 728 1,964 870 949 3,519 3,487 4,744
===== ====== ====== ===== ===== ====== ======
Net income (loss) per Ibex share (1) (8.34) 0.28 (22.18) (0.71) 2.42 0.84 1.36
===== ====== ====== ===== ===== ====== ======
Shares used in per share calculation (1) 180 480 215 235 859 851 1,162
===== ====== ====== ===== ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, June 28,
------------------------------------------------ -------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Pro Forma Condensed Combined Balance (unaudited)(unaudited)(unaudited) (unaudited)
Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working capital ...................... $1,883 $2,559 $(463) $1,383 $9,442 $11,119
Total assets ...................... 5,270 10,499 9,140 8,058 15,653 17,180
Short term debt....................... 575 2,163 4,202 2,698 268 25
Shareholders' equity ............. 2,422 3,834 (896) 1,963 9,989 11,683
</TABLE>
See "Pro Forma Combined Condensed Financial Information" and accompanying
notes thereto.
19
<PAGE>
Comparative Per Share Data
The following table sets forth certain historical per share data of
Castelle and Ibex and combined per share data on an unaudited pro forma basis
after giving effect to the Merger on a pooling of interests basis of accounting.
Assuming a designated stock price of $7.00 for each share of Castelle common
stock, 791,541 shares of Castelle Common Stock would be issued in exchange for
Ibex Common Stock and Ibex Preferred Stock in the Merger (and 58,451 shares of
Castelle Common Stock would be reserved for issuance upon exercise of Ibex
Options). This data should be read in conjunction with the selected financial
data, the pro forma combined condensed financial information and the separate
historical financial statements of Castelle and Ibex and notes thereto included
elsewhere in this Prospectus. The pro forma combined financial data are not
necessarily indicative of the operating results that would have been achieved
had the Merger been consummated as of the beginning of the periods presented and
should not be construed as representative of future operations.
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
Year Ended December 31, June 30, June 28,
------------------------------ ---------- ----------
1993 1994 1995 1995 1996
---- ---- ---- ---------- ----------
(unaudited) (unaudited)
Castelle Historical Per Common Share:
<S> <C> <C> <C> <C> <C>
Net income (loss)............................ $(12.11) $ (0.91) $ 0.77 $ 0.34 $ 0.35
Book value (1)............................... $(45.91) $(32.48) $ 2.68 $ 3.23
Pro Forma Combined - Per Castelle Share:
Net income (loss) (2)........................ $ (5.48) $ (0.17) $ 0.59 $ 0.21 $ 0.33
Book value (2)(4)............................ $(13.14) $(11.75) $ 2.27 $ 2.58
Six Months Six Months
Ended Ended
Year Ended December 31, June 30, June 30,
------------------------------ ---------- ----------
1993 1994 1995 1995 1995
---- ---- ---- ---------- ----------
Ibex Historical Per Common Share: (unaudited) (unaudited) (unaudited)
Net income (loss) ........................... $ 0.15 $ 1.11 $ 0.30 $ (1.13) $ 1.11
Book value (1)............................... $ 0.37 $ 1.71 $ 2.15 $ 3.35
Pro Forma Combined - Per Ibex Share:(3)
Net income (loss) (3)........................ $(22.18) $ (0.71) $ 2.42 $ 0.84 $ 1.36
Book value (3)............................... $(53.24) $(47.61) $ 9.20 $ 10.44
</TABLE>
(1) The historical book value per share is computed, in the case of Castelle,
by dividing shareholders' equity by the number of shares of Castelle Common
Stock outstanding at the end of each period and, in the case of Ibex, by
dividing shareholders' equity by the number of shares of Ibex Common Stock
and Ibex Preferred Stock, on an as-converted basis, outstanding at the end
of each period.
(2) Castelle and Ibex estimate they will incur direct transaction costs of
approximately $650,000 associated with the Merger, which will be charged to
operations as incurred. In addition, it is expected that after the Merger,
Castelle will incur additional charges to operations, currently estimated
to be between $200,000 to $300,000, to reflect costs associated with
integrating the two companies. The Pro Forma Combined Book Value Per Share
data give effect to such costs (estimated at $950,000 in total) as if such
costs had been incurred as of June 28, 1996. See "Pro Forma Combined
Condensed Financial Information" and accompanying notes thereto. The pro
forma condensed combined statement of operations do not give effect to such
expenses.
(3) The Pro Forma Combined-Per Ibex Share amounts are calculated by multiplying
the Pro Forma Combined-Per Castelle Share amounts by the conversion rate in
effect assuming a fair market value for Castelle Common Stock of $7 per
share.
(4) The Pro Forma Combined Book Value Per Share is computed by dividing pro
forma shareholders' equity by the pro forma number of shares of common
stock outstanding at the end of each period.
20
<PAGE>
RISK FACTORS
The following risk factors should be considered by holders of Ibex Common
and Ibex Preferred Stock in evaluating whether to approve the Merger Agreement
and thereby become holders of Castelle Common Stock and by holders of Castelle
Common Stock in evaluating whether to approve the issuance of shares of Castelle
Common Stock pursuant to the Merger Agreement. These factors should be
considered in conjunction with the other information included in this Joint
Proxy Statement/Prospectus.
Except for the historical information contained herein, the following
discussion contains forward- looking statements that involve risks and
uncertainties. Castelle'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 "Risk Factors" as well as in
the sections entitled "Summary," "Unaudited Pro Forma Condensed Combined
Financial Information," "Business of Castelle," "Business of Ibex,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Castelle" and "Management's Discussion And Analysis of Financial
Condition And Results of Operations of Ibex."
Castelle: History of Losses; Accumulated Deficit
Castelle has experienced significant operating losses and, as of December
31, 1995, had an accumulated deficit of $12.7 million. The development and
marketing by Castelle of new products will continue to require substantial
product development and other expenditures. Although Castelle has recently been
profitable, there can be no assurance that growth in net sales or profitability
will be sustained. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Castelle."
Fluctuations in Operating Results
Castelle's and Ibex's revenues and operating results have fluctuated in the
past and the combined company's future revenues and operating results are likely
to do so in the future, particularly on a quarterly basis.
Castelle's operating results may vary significantly from quarter to quarter
due to a variety of factors, including changes in Castelle's product and
customer mix, the introduction of new products by Castelle or its competitors,
constraints in Castelle's manufacturing and assembling operations, shortages or
increases in the prices of raw materials and components, changes in pricing
policy by Castelle or its competitors, a slowdown in the growth of the
networking market, seasonality, timing of expenditures and economic conditions
in the United States, Europe and Asia. Castelle's backlog at any given time is
not necessarily indicative of actual sales for any succeeding period. Castelle's
sales will often reflect orders shipped in the same quarter in which they are
received. In addition, a significant portion of Castelle's expenses are
relatively fixed in nature, and planned expenditures are based primarily on
sales forecasts. Therefore, if Castelle inaccurately forecasts demand for its
products, the impact on net income may be magnified by Castelle's inability to
adjust spending quickly enough to compensate for the net sales shortfall. Future
demand for Castelle's products may be stronger during the last quarter of each
year than the first quarter of the succeeding year as the sales personnel of
Castelle's distributors seek to meet their annual sales quotas. Castelle's
performance in any quarter is not necessarily indicative of its performance in
any subsequent quarter. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Castelle."
21
<PAGE>
Ibex's license revenues are difficult to forecast because Ibex's sales
cycle is relatively long and revenues in a particular quarter may be affected by
a relatively few large contracts that are subject to changes in customer budgets
and general economic conditions. Because Ibex's operating expenses are based on
anticipated revenue levels and a high percentage of Ibex's expenses are
relatively fixed, the timing of revenues from a single contract can cause
significant fluctuations in operating results from quarter to quarter and may
adversely affect operating results. In addition, Ibex historically has operated
with little backlog because its software products are generally shipped as
orders are received. As a result, license revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter. Further,
certain contracts may constitute a significant portion of the operating profits
for the quarter in which they are signed. Accordingly, revenues in any quarter
are not indicative of revenues in any future period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Ibex."
The combined company's quarterly operating results may continue to
fluctuate due to numerous other factors. Some of these factors include the
demand for the combined company's products, seasonality, customer order
deferrals in anticipation of new versions of the combined company's products,
the introduction of new products and product enhancements by the combined
company or its competitors, including the effects of filling the distribution
channels following such introductions and of potential delays in availability of
announced or anticipated products, price changes by the combined company or its
competitors, product sales mix, the mix of license and service revenue,
commencement or conclusion of significant development contracts, changes in
foreign currency exchange rates, timing of acquisitions and associated costs,
and timing of significant marketing and sales promotions.
Rapid Technological Change; Risks Associated with New Products
The market for Castelle's and Ibex's products are affected by rapidly
changing networking technology and evolving industry standards. Castelle and
Ibex believe that their future success will depend upon their ability to enhance
their existing products and to develop and introduce new products which conform
to or support emerging network telecommunications standards, are compatible with
a growing array of computer and peripheral devices, support popular computer and
network operating systems and applications, meet a wide range of evolving user
needs and achieve market acceptance. There can be no assurance that Castelle or
Ibex will be successful in these efforts. In order to develop new products
successfully, Castelle and Ibex are dependent upon timely access to information
about new technological developments and standards. There can be no assurance
that Castelle or Ibex will have such access or that they will be able to develop
new products successfully and respond effectively to technological change or new
product announcements by others. Furthermore, Castelle expects that printer and
other peripheral manufacturers will add features to their products that make
them more network- accessible, which may reduce demand for Castelle's network
enhancement devices. There can be no assurance that products or technologies
developed by others will not render the combined company's products
non-competitive or obsolete. Ibex's growth and the fax-on-demand market in
general have been negatively affected by the growth of the World Wide Web and
the Internet. Although Ibex has new web/fax/email products in development, there
can be no assurance Ibex will compete successfully. Castelle began shipping the
most recent version of its FaxPress product in June 1996 and began shipping a
number of enhanced versions of its print servers in the fourth quarter of 1995.
Complex products such as those offered by Castelle or Ibex may contain
undetected or unresolved hardware defects or software errors when they are first
introduced or as new versions are released. Changes in Castelle's or its
suppliers' manufacturing processes or the inadvertent use of defective
components by Castelle or its suppliers could adversely affect Castelle's
ability to achieve acceptable manufacturing yields and product reliability.
Castelle and Ibex have in the past discovered hardware defects and software
errors in certain of their new products and enhancements after their
22
<PAGE>
introduction. Although neither Castelle nor Ibex has not experienced material
adverse effects resulting from any such errors to date, there can be no
assurance that any such errors in the future will not result in adverse product
reviews and a loss of or delay in market acceptance.
Castelle and Ibex have incurred, and the combined company expects to
continue to incur, substantial expenses associated with the introduction and
promotion of new products. There can be no assurance that the expenses incurred
will not exceed development budgets or that new products will achieve market
acceptance and generate sales sufficient to offset development costs. In
addition, programs as complex as those offered by Castelle and Ibex may contain
a number of undetected errors or bugs when they are first introduced or as new
versions are released. There can be no assurance that, despite testing by
Castelle and Ibex and by third-party test sites, errors will not be found in
future releases of the combined company's products, which would negatively
affect market acceptance of these products.
The introduction of new or enhanced products requires Castelle and Ibex to
manage the transition from older products. Ibex must encourage the transition of
customers to new product releases in order to minimize the costs associated with
supporting multiple product versions. Castelle must manage new product
introductions so as to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate supplies
of new products can be delivered to meet customer demands. Castelle and Ibex
have from time to time experienced delays in the shipment of new products. There
can be no assurance that future product transitions will be managed successfully
by the combined company. See "Business of Castelle -- Products," "-- Research
and Development," "-- Sales, Marketing and Distribution" and "-- Competition"
and "Business of Ibex -- Products," "-- Research and Development," "-- Sales,
Marketing and Distribution" and "-- Competition."
Key Personnel
Castelle's and Ibex's success depends to a significant degree upon the
continued contributions of the combined company's key management, marketing,
product development and operational personnel. In the past fifteen months, both
Castelle and Ibex have filled a number of key management positions. The success
of the combined company will depend to a large extent upon its ability to retain
and continue to attract highly skilled personnel. Competition for employees in
the computer industry is intense, and there can be no assurance that the
combined company will be able to attract and retain enough qualified employees.
If the business of the combined company grows, it may become increasingly
difficult for it to hire, train and assimilate the new employees needed. In
addition, it is possible that the business changes or uncertainty brought about
by the Merger may cause key employees to leave Castelle or Ibex prior to the
Merger or to leave the combined company following the Merger. The combined
company's inability to retain and attract key employees could have a material
adverse effect on the combined company's product development and results of
operations. Neither Castelle or Ibex carries any key person life insurance with
respect to any of its personnel. See "Management of Castelle" and "Management of
Ibex."
Product Transition; Risk of Product Returns and Inventory Obsolescence
From time to time, the combined company may announce new products, product
versions, capabilities or technologies that have the potential to replace or
shorten the life cycles of existing products. The combined company has in the
past experienced increased returns of a particular product version following the
announcement of a planned release of a new version of that product. Although
23
<PAGE>
Castelle and Ibex provide allowances for anticipated returns, and believes its
existing policy results in the establishment of allowances that are currently
adequate, there can be no assurance that product returns will not exceed such
allowances in the future. The release of a new product or product version may
also result in the write-down of product in inventory if such inventory becomes
obsolete.
Competition and Price Erosion
The computer software and hardware markets in which both Castelle and Ibex
participate are highly competitive and characterized by rapid change and
improvements in technology along with constant pressure to reduce prices. Many
of the combined company's competitors will have substantially greater financial,
marketing, recruiting and training resources than the combined company.
Ibex's principal competitors include Faxback, Inc. and Copia International,
Inc. and numerous smaller software vendors. Ibex also faces competition from
systems integrators who configure hardware and software into customized systems.
In addition, new companies continue to enter the market. As the market becomes
increasingly competitive, many companies are offering lower priced products
which compete with Ibex products.
The network enhancement products market is highly competitive, and Castelle
believes that such competition will intensify in the future. Castelle currently
competes principally in the market for network print servers and network fax
servers and software. Increased competition, direct and indirect, could
adversely affect Castelle's business and operating results through pricing
pressure, loss of market share and other factors. In particular, Castelle
expects that, over time, average selling prices for its print server products
may decline as the market for these products becomes increasingly competitive.
Any material reduction in the average selling prices of Castelle's products
would require Castelle to increase unit sales in order to avoid a reduction in
net sales and would adversely affect gross margins. There can be no assurance
Castelle will be able to maintain the current average selling prices of its
products or the related gross margins.
The principal competitive factors affecting the market for Castelle's
products include product functionality, performance, quality, reliability, ease
of use, quality of customer training and support, name recognition, price, and
compatibility and conformance with industry standards and changing operating
system environments. Several of Castelle's existing and potential competitors,
most notably the Hewlett-Packard Company ("Hewlett-Packard") and Intel
Corporation ("Intel"), have substantially greater financial, engineering,
manufacturing and marketing resources than does Castelle. Castelle also
experiences competition from a number of other companies. In addition to its
current competitors, Castelle may face substantial competition from new entrants
into the network enhancement market, including established and emerging
computer, computer peripherals, communications and software companies. As
Castelle develops and introduces more software products, it may experience
increasing competition from companies such as Symantec Corp. and Cheyenne
Software Inc. There can be no assurance that competitors will not introduce
products incorporating technology more advanced than that of Castelle. In
addition, certain competing methods of communications such as the Internet or
electronic mail could adversely affect the market for fax products. Certain of
Castelle's existing and potential competitors are manufacturers of printers and
other peripherals, and these competitors may develop closed systems accessible
only through their own proprietary servers. There can be no assurance that
Castelle will be able to compete successfully or that competition will not have
a material adverse effect on Castelle's business and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Castelle" and "Business of Castelle -- Competition."
24
<PAGE>
Combination of the Companies; Possible Adverse Effect on Financial Results
The combination of the two organizations will require the dedication of
management resources, which will temporarily distract attention from the
day-to-day business of the combined company. There can be no assurance that the
combination will be completed without disrupting Castelle's and Ibex's
businesses. Should Castelle and Ibex not be able to combine their businesses in
a timely and coordinated fashion, it could result in a material adverse effect
on operating results. Neither management group has experience in business
combinations of this size. Realization of the anticipated benefits of the Merger
will depend in part upon the successful combination of the senior management of
the two companies. The inability to successfully combine such senior management
or the loss of the services of one or more of these key persons could have a
material adverse effect on the combined companies. The senior management of the
combined companies also must continue to attract and retain key management,
technical, sales and marketing personnel and continue to motivate employees in
light of organizational changes resulting from the Merger will be critical to
the combined company's future operations. In addition, the anticipated
combination of the two companies may cause uncertainties, hesitation and
possible dissatisfaction among customers and potential customers of Castelle and
Ibex.
Castelle and Ibex estimate they will incur direct transaction costs of
approximately $650,000 associated with the Merger. These nonrecurring
transaction costs will be charged to operations upon consummation of the Merger.
In addition, Castelle anticipates incurring an additional charge upon
consummation of the Merger of $200,000 to $300,000 to reflect costs and expenses
relating to integrating the two companies. See "Unaudited Pro Forma Combined
Condensed Financial Information" included elsewhere herein.
Castelle: Concentration of Distributors; Distribution Risks
Castelle sells its products primarily through a two-tier domestic and
international distribution network, with Castelle's distributors selling
Castelle's products to value-added resellers ("VARs"), system integrators and
other resellers. The personal computer and networking products distribution
industry has been characterized by rapid change, including consolidations due to
the financial difficulties of distributors and the emergence of alternative
distribution channels. In addition, an increasing number of companies are
competing for access to these channels. Castelle's five largest distributors
accounted for 77% of its net sales in the first six months of 1996 and
approximately 70% and 67% of Castelle's net sales in 1995 and 1994,
respectively. Macnica Corporation ("Macnica"), Castelle's principal Japanese
distributor, and Ingram Micro, Inc. ("Ingram Micro"), Castelle's largest
domestic distributor, accounted for approximately 38% and 16% of its net sales
in the first six months of 1996, respectively, 29% and 18%, respectively, of
Castelle's net sales in 1995, and 17% and 23%, respectively, of Castelle's net
sales in 1994. Castelle's distributors typically represent other product lines
that are complementary to, or compete with, those of Castelle. While Castelle
attempts to encourage its distributors to focus on its products through
marketing and support programs, these distributors may give higher priority to
products of other suppliers, thereby reducing the efforts they devote to selling
Castelle's products. In particular, certain of its competitors, including
Hewlett-Packard and Intel, sell a substantially higher total dollar volume of
products through several of Castelle's large United States distributors and, as
a result, Castelle believes such distributors give higher priority to products
offered by such competitors. Castelle's distributors are not contractually
committed to future purchases of Castelle's products and could discontinue
carrying Castelle's products at any time for any reason. In addition, because
Castelle is dependent on a small number of distributors for a significant
portion of the sales of its products, the loss of any of Castelle's major
distributors or their inability to satisfy their payment obligations to Castelle
could have a significant adverse effect on Castelle's business and operating
results. Castelle has a stock rotation policy with certain of its distributors
25
<PAGE>
which allows them to return marketable inventory against offsetting orders. In
addition, in the event Castelle reduces its prices, Castelle credits certain of
its distributors for the difference between the purchase price of products
remaining in their inventory and Castelle's reduced price for such products. In
addition, due to industry conditions or the actions of competitors, inventory
levels of Castelle's products held by distributors could become excessive
resulting in product returns and inventory write-downs. In 1993, as a result of
offering extended payment terms and other pricing promotions to certain
distributors, Castelle experienced returns from distributors which had a
material adverse effect on Castelle's operating results. There can be no
assurance that in the future such returns and price protection will not have a
material adverse effect on Castelle's operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Castelle" and "Business of Castelle -- Sales, Marketing and Distribution."
Lack of Product Revenue Diversification
Ibex derives substantially all of its revenues from its fax-on-demand
software. Castelle derived substantially all of its sales from the Fax Server
and Print Server line of products. Castelle expects that these hardware and
software products will continue to account for a majority of the combined
company's sales in the future. A decline in demand for these products as a
result of competition, technological change or other factors would have a
material adverse effect on the combined company's results of operations.
Dependence on Suppliers and Subcontractors
Castelle's and Ibex's products incorporate or require components or
sub-assemblies procured from third-party suppliers. Certain of these components
or sub-assemblies are available only from a single source, and others are
available only from limited sources. Certain key components of Castelle's
products, including Token Ring interface modules from Silcom Manufacturing
Technology Inc., a modem chip set from Rockwell International Corporation and a
microprocessor from Motorola, Inc. ("Motorola"), are currently available from
only single sources. Ibex software requires voice and fax boards available only
from Dialogic Corporation. In addition, Castelle subcontracts a substantial
portion of its manufacturing to third parties, and there can be no assurance
that these subcontractors will be able to support the manufacturing requirements
of Castelle. Castelle does not have long-term supply contracts with these or any
other sole or limited source vendors and subcontractors other than a signed
agreement with a Taiwanese company, and purchases these components and
sub-assemblies on a purchase order basis. Castelle's ability to obtain these
components and sub-assemblies is dependent upon its ability to accurately
forecast customer demand for its products and to anticipate shortages of
critical components or sub-assemblies created by competing demands upon
suppliers. If Castelle or Ibex were unable to obtain a sufficient supply of
high-quality components or sub-assemblies from its current sources, Castelle or
Ibex could experience delays in obtaining such components or sub-assemblies from
other sources. Resulting delays or reductions in product shipments could
adversely affect Castelle's and Ibex's business and operating results and damage
customer relationships. Furthermore, a significant increase in the price of one
or more of these components or sub-assemblies or Castelle's inability to obtain
lower component or sub-assembly prices in response to competitive price
reductions could adversely affect Castelle's operating results.
Castelle augments its product offerings by obtaining access to third-party
products and technologies in areas outside of its core competencies or where
Castelle believes internal development of products and technologies is not cost
effective. Castelle's third-party product supplier is SerComm Corporation
("SerComm") for certain of Castelle's print server products. Although
third-party products have contributed negligible net sales in the past, Castelle
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anticipates that such products will constitute an increasing percentage of net
sales in the future. There can be no assurance that these products will produce
gross margins comparable to those of Castelle's internally-generated products.
Castelle's agreements with its third-party product suppliers have limited terms
of two years, subject to earlier termination upon the occurrence of certain
events. Extensions of the terms of these agreements require the consent of both
Castelle and its supplier. Although, to date, Castelle has not experienced
supply problems that were material to Castelle's business, there can be no
assurance that this third-party will continue to provide the quantities and
quality of products needed by Castelle or that such party will upgrade its
respective products on a timely basis. The termination of Castelle's
relationships with SerComm could result in delays or reductions in product
shipments, which could have a material adverse effect on Castelle's business,
operating results and financial condition. See "Business of Castelle --
Manufacturing."
Castelle: Government Regulation
Certain aspects of the networking industry in which Castelle competes are
regulated both in the United States and in foreign countries. Imposition of
public carrier tariffs, taxation of telecommunications services and the
necessity of incurring substantial costs and expenditure of managerial resources
to obtain regulatory approvals, particularly in foreign countries where
telecommunications standards differ from those in the United States, could
adversely affect Castelle's business and operating results. In addition, if
Castelle is unable to obtain regulatory approvals within a reasonable period of
time, Castelle's operating results could be adversely affected. Castelle's
products must comply with a variety of equipment, interface and installation
standards promulgated by communications regulatory authorities in different
countries. Changes in government policies, regulations and interface standards
could require the redesign of products and result in product shipment delays
which could materially and adversely affect Castelle's operating results.
Ibex: Dependence on Distribution Partners; Distribution Risks
Ibex's sales are made primarily through value-added resellers ("VARs") and
direct-to-end-user sales. Accordingly, the combined company will be dependent
upon the continued viability and financial stability of such VARs, which are not
under the direct control of Ibex. The future growth and success of the combined
company will continue to depend in large part upon its resale channels. If its
resellers were to experience financial difficulties, the combined company's
results of operations could be adversely affected. Additionally, there are
increasing numbers of companies competing for access to these distribution
channels. VARs often carry competing products. Ibex's VARs typically have
limited promotional resources for which there is intense competition. Ibex's
arrangements with its respective VARs may be terminated by either party at any
time without cause. There can be no assurance that VARs will continue to provide
the combined company's products with adequate levels of promotional support and
customer support. Failure to do so would have a material adverse effect on the
combined company's results of operations.
International Sales
Sales to customers located outside Canada and the United States accounted
for approximately 56% of net sales for the six months ended June 30, 1996, and
52% and 42% of Castelle's net sales in 1995 and 1994, respectively. Ibex's
international sales for the same period represented approximately 1%, 16% and 4%
of Ibex's net sales. Castelle sells its products in 39 foreign countries through
approximately 70 international distributors. A total of 12 distributors in
Germany, Japan, the Netherlands and the United Kingdom accounted for
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approximately 44% and 32% of Castelle's international sales in 1995 and 1994,
respectively. Macnica, Castelle's principal Japanese distributor, accounted for
approximately 38% of net sales for the six months ended June 30, 1996, and
approximately 29% and 17% of Castelle's net sales in 1995 and 1994,
respectively. Castelle expects that international sales will continue to
represent a significant portion of the combined company's product revenues and
that the combined company will be subject to the normal risks of international
sales, such as export laws, currency fluctuations, longer payment cycles,
greater difficulties in accounts receivable collections and the requirement of
complying with a wide variety of foreign laws. Although Castelle has not
previously experienced any difficulties under foreign law in exporting its
products to other countries, there can be no assurance that the combined company
will not experience such difficulties in foreign countries in the future. Any
such difficulties would have a material adverse effect on the combined company's
international sales. In addition, because both companies invoice their foreign
sales in U.S. dollars, fluctuations in exchange rates could affect demand for
the combined company's products by causing their prices to be out of line with
products priced in the local currency. See also "Dependence on Proprietary
Rights; Uncertainty of Obtaining Licenses." Castelle may experience fluctuations
in European sales on a quarterly basis because European sales may be weaker
during the third quarter than the second quarter due to extended holiday
shutdowns in July and August. See "Business of Castelle -- Sales, Marketing and
Distribution."
Dependence on Proprietary Rights; Uncertainty of Obtaining Licenses
Castelle's and Ibex's success depends to a certain extent upon their
technological expertise and proprietary software technology. Castelle and Ibex
rely upon a combination of contractual protections and copyright, trademark and
trade secret laws to establish and protect their technologies. Despite the
precautions taken by them, it may be possible for unauthorized third parties to
copy Castelle's and Ibex's products or to reverse engineer or obtain and use
information that Castelle and Ibex regard as proprietary. In addition, the laws
of some foreign countries either do not protect Castelle's and Ibex's
proprietary rights or offer only limited protection. Given the rapid evolution
of technology and uncertainties in intellectual property law in the United
States and internationally, there can be no assurance that Castelle's and Ibex's
current or future products will not be subject to third-party claims of
infringement. Any litigation to determine the validity of any third-party claims
could result in significant expense to Castelle and divert the efforts of
Castelle's technical and management personnel, whether or not such litigation is
determined in favor of Castelle. In the event of an adverse result in any such
litigation, Castelle could be required to expend significant resources to
develop non-infringing technology or to obtain licenses to the technology which
is the subject of the litigation. There can be no assurance that Castelle would
be successful in such development or that any such licenses would be available.
Castelle and Ibex also rely on technology licenses from third parties. There can
be no assurance that these licenses will continue to be available to Castelle
upon reasonable terms, if at all. Any impairment or termination of Castelle's
relationship with third-party licensors could have a material adverse effect on
Castelle's and Ibex's business and operating results. There can be no assurance
that Castelle's and Ibex's precautions will be adequate to deter
misappropriation or infringement of its proprietary technologies. Furthermore,
while Castelle and Ibex have obtained federal registration for many of their
trademarks in the United States, certain of their trademarks have not been
registered in the United States, and neither Castelle nor Ibex has registered
any of their trademarks in foreign jurisdictions. There can be no assurance that
Castelle's and Ibex's use of such unregistered trademarks will not be contested
by third parties in the future. See "Business -- Proprietary Rights" and "--
Research and Development."
Castelle and Ibex have received, and may receive in the future,
communications asserting that their products infringe the proprietary rights of
third parties or seeking indemnification against such infringement. In
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particular, Ibex has received notification that its product name "Fax-It-Back"
potentially infringes the trademark "Faxback" owned by Faxback, Inc. Ibex and
Faxback have entered into settlement negotiations with respect to Ibex's
continued use of the Fax-It-Back name. Castelle and Ibex are not aware that any
of their respective products, trademarks, or other proprietary rights infringe
the property rights of third parties. However, there can be no assurance that
third parties will not assert infringement claims against the combined company
in the future with respect to current or future products or that any such
assertion may not require the combined company to enter into royalty
arrangements or result in costly litigation. As the number of software products
in the industry increases and the functionality of these products further
overlap, Castelle believes that software developers may become increasingly
subject to infringement claims. Any such claims, with or without merit, can be
time consuming and expensive to defend. There can be no assurance that any such
intellectual property litigation that may be brought in the future will not have
a material adverse effect on the combined company's financial position or
results of operations. As a result of such claims or litigation, it may become
necessary or desirable in the future for the combined company to obtain licenses
relating to one or more of its products or relating to current or future
technologies, and there can be no assurance that it would be able to do so on
commercially reasonable terms. See "Business of Castelle -- Proprietary Rights"
and "-- Research and Development" and "Business of Ibex -- Proprietary Rights"
and "-- Research and Development."
Possible Volatility of Castelle Stock Price
The prices for Castelle Common Stock have fluctuated widely in the past.
Sales of substantial amounts of Common Stock, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock. The management of Castelle believes that such fluctuations may have been
caused by announcements of new products, quarterly fluctuations in the results
of operations and other factors, including changes in conditions of the personal
computer industry in general. Stock markets have experienced extreme price
volatility in recent years. This volatility has had a substantial effect on the
market prices of securities issued by Castelle and other high technology
companies, often for reasons unrelated to the operating performance of the
specific companies. Castelle anticipates that prices for Castelle Common Stock
may continue to be volatile following the Merger. Such future stock price
volatility for Castelle Common Stock may provoke the initiation of securities
litigation which may divert substantial management resources and have an adverse
effect on Castelle or the combined company's results of operations. In addition,
the total number of shares issuable in connection with the Merger is fixed and
will not be adjusted based on changes in the relative trading prices of Castelle
Common Stock. The trading price of Castelle Common Stock at the effective time
of the Merger may vary from the price as of the date hereof, or the date on
which shareholders vote on the Merger, as a result of changes in the business,
operations, financial results and prospects of Castelle or Ibex, market
assessments of the likelihood that the Merger will be consummated and the timing
thereof, and other business-specific factors. These fluctuations, as well as
general economic, political and market conditions, such as recessions or
international currency fluctuations, may adversely affect the market price of
the Common Stock. See "The Merger and Related Transactions -- Reasons for the
Merger."
Castelle: Future Capital Requirements
Although Castelle believes that its existing capital resources, expected
cash flow from operations and available lines of credit will be sufficient to
meet its anticipated capital requirements at least through the next 12 months,
Castelle may be required to seek additional equity or debt financing. The timing
and amount of such capital requirements cannot be determined at this time and
will depend on a number of factors, including demand for Castelle's existing and
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new products and changes in technology in the networking industry. There can be
no assurance that such additional financing will be available on satisfactory
terms when needed, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Castelle -- Liquidity and
Capital Resources."
Castelle: Voting Control by Officers, Directors and Affiliates
At August 31, 1996, Castelle's officers and directors and their affiliates
beneficially owned approximately 37.91% of the outstanding shares of Common
Stock. Accordingly, together they had the ability to significantly influence the
election of Castelle's directors and other corporate actions requiring
shareholder approval. Were the Merger to have closed on August 31, 1996,
Castelle's officers, directors and their affiliates would have beneficially
owned approximately 30.70% of the outstanding shares of Common Stock. Such
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of Castelle.
Castelle: Certain Charter Provisions
Castelle's Board of Directors has authority to issue up to 2,000,000 shares
of Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further vote
or action by the shareholders. The rights of the holders of the Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of Castelle, thereby delaying, deferring or preventing
a change in control of Castelle. Furthermore, such Preferred Stock may have
other rights, including economic rights, senior to the Common Stock, and as a
result, the issuance thereof could have a material adverse effect on the market
value of the Common Stock.
Shares Eligible for Future Sale
Castelle will issue up to 850,000 shares of Castelle Common Stock in the
Merger or upon the subsequent exercise of the outstanding Ibex Options which are
being assumed in connection with the Merger. In general, the shares issued in
the Merger, other than to Ibex affiliates, will be freely tradeable following
the Merger, although persons who may be considered affiliates of Ibex have
agreed that they will not transfer, sell, exchange, pledge or otherwise dispose
of any Castelle Common Stock now held by such holders or received by them in the
Merger from 30 days prior to the anticipated effective time of the Merger until
the date Castelle shall have publicly released financial results for a period
that includes at least 30 days of combined operations of Castelle and Ibex (the
"Affiliates Expiration Date"). Immediately after the Affiliates Expiration Date,
these shares of Castelle Common Stock will be eligible for sale in the public
market, subject to compliance with Rules 144 and 145 under the Securities Act.
In addition, holders of Ibex Preferred Stock have been granted the right,
effective upon the Merger, to register the Castelle Common Stock received in
connection with the Merger for resale to the public, subject to certain
restrictions and the approval of such rights by the existing holders of
registration rights. In addition, holders of Ibex Common Stock will receive
limited registration rights in connection with the Merger. The sale of any of
the foregoing shares of Castelle Common Stock may cause substantial fluctuations
in the price of Castelle Common Stock over short time periods.
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RECENT DEVELOPMENTS
Litigation
In March 1995, Ibex commenced an action before the Trademark Trial and
Appeal Board of the United States Patent and Trademark Office to cancel U.S.
Trademark Registration for the FAXBACK mark owned by Faxback, Inc. of Beaverton,
Oregon. Prior to commencing the cancellation action, Ibex had not used the
FAXBACK or FAX-IT-BACK marks. Faxback, Inc., seeking to maintain its
registration, has contested Ibex's petition to cancel and the action is
presently in the discovery stage. Recently (subsequent to the filing of the
cancellation action), Ibex posted notices of the pending release of and
advertisements for its FAX-IT-BACK product on its web site. In response,
Faxback, Inc. has filed an action in federal district court in Oregon for
trademark infringement against Ibex for its use of the FAX-IT-BACK mark.
Faxback, Inc. has not yet served the complaint on Ibex and the parties have
agreed that the complaint will not be served on Ibex pending the outcome of
settlement negotiations being conducted by the parties. Management of Ibex
believes that the resolution of this matter will not have a material adverse
effect on Ibex.
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THE CASTELLE MEETING
Date, Time and Place of Meeting
The Castelle Meeting will be held on Tuesday, November 19, 1996, at 9:00
a.m., local time, at Castelle's offices located at 3255-3 Scott Boulevard, Santa
Clara, California.
Record Date, Voting Rights and Outstanding Shares
Only holders of record of Castelle Common Stock at the close of business on
the Record Date are entitled to vote at the Castelle Meeting. As of the close of
business on the Record Date, there were 3,621,261 shares of Castelle Common
Stock outstanding and entitled to vote, held of record by approximately 156
shareholders. Each Castelle shareholder is entitled to one vote for each share
of Castelle Common Stock held as of the Record Date.
Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon. With respect to the
election of directors, shareholders may exercise cumulative voting rights. Under
cumulative voting, each holder of Common Stock will be entitled to five (5)
votes for each share held. Each shareholder may give one candidate, who has been
nominated prior to voting, all the votes such shareholder is entitled to cast or
may distribute such votes among as many such candidates as such shareholder
chooses. (However, no shareholder will be entitled to cumulate votes unless the
candidate's name has been placed in nomination prior to the voting and at least
one shareholder has given notice at the meeting, prior to the voting, of his or
her intention to cumulate votes.) Unless the proxyholders are otherwise
instructed, shareholders, by means of the accompanying proxy, will grant the
proxyholders discretionary authority to cumulate votes.
All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions and broker non-votes are counted
towards a quorum but are not counted for any purpose in determining whether a
matter is approved.
Voting of Proxies
The Castelle proxy accompanying this Prospectus is solicited on behalf of
the Board of Directors of Castelle for use at the Castelle Meeting. Shareholders
are requested to complete, date and sign the accompanying proxy and promptly
return it in the accompanying envelope or otherwise mail it to Castelle. All
proxies that are properly executed and returned, and that are not revoked, will
be voted at the Castelle Meeting in accordance with the instructions indicated
on the proxies or, if no direction is indicated, to approve the Merger Agreement
and the election of the nominees indicated on the proxy card to the Board of
Directors and the ratification of Coopers & Lybrand L.L.P. as Castelle's
auditors. Castelle's Board of Directors does not presently intend to bring any
business before the Castelle Meeting other than the specific proposals referred
to in this Prospectus and specified in the notice of the Castelle Meeting. So
far as is known to Castelle's Board of Directors, no other matters are to be
brought before the Castelle Meeting. As to any business that may properly come
before the Castelle Meeting, however, it is intended that proxies, in the form
enclosed, will be voted in respect thereof in accordance with the judgment of
the persons voting such proxies. A Castelle shareholder who has given a proxy
may revoke it at any time before it is exercised at the Castelle Meeting, by (i)
delivering to the Secretary of Castelle (by any means, including facsimile) a
written notice, bearing a date later than the date of the proxy, stating that
the proxy is revoked, (ii) signing and so delivering a proxy relating to the
same shares and bearing a later date prior to the vote at the Castelle Meeting,
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or (iii) attending the Castelle Meeting and voting in person (although
attendance at the Castelle Meeting will not, by itself, revoke a proxy).
Vote Required
Approval of the Merger Agreement will require the affirmative vote of a
majority of the outstanding shares of Castelle Common Stock. Directors shall be
elected by a plurality of the votes present in person or represented by proxy
and entitled to vote. Ratification of the selection of Coopers & Lybrand L.L.P.
as Castelle's auditors for the fiscal year ending December 31, 1996 shall
require the affirmative vote of the holders of a majority of the total shares of
Castelle Common Stock present in person or represented by proxy and entitled to
vote therein. See "The Merger Agreement and Related Transactions -- Related
Agreements" and "Additional Matters for Consideration of Castelle Shareholders."
Quorum; Abstentions; Broker Non-Votes
The required quorum for the transaction of business at the Castelle Meeting
is a majority of the shares of Common Stock outstanding on the Record Date.
Abstentions and broker non-votes each will be included in determining whether a
quorum is present. Abstentions will be counted towards the tabulation of votes
cast. Abstentions will have the same effect as a vote against the proposal to
approve the Merger but will have no effect on the election of directors. Broker
non-votes will not be counted for any purpose in determining whether the
proposal to approve the Merger has been approved or to elect directors.
Solicitation of Proxies and Expenses
Castelle will bear the entire cost of the solicitation of proxies,
including preparation, assembly, printing and mailing of this proxy statement,
the proxy and any additional information furnished to its shareholders. Copies
of the solicitation materials will be furnished to banks, brokerage houses,
fiduciaries and custodians holding in their names shares of Castelle's Common
Stock beneficially owned by others to forward to such beneficial owners.
Castelle may reimburse persons representing beneficial owners of Common Stock
for their costs of forwarding solicitation materials to such beneficial owners.
Original solicitation of proxies by mail may be supplemented by telephone,
telegram, letter or personal solicitation by directors, officers, or other
regular employees of Castelle. No additional compensation will be paid to
directors, officers and other regular employees for such services.
Board Recommendations
THE BOARD OF DIRECTORS OF CASTELLE BELIEVES THAT THE MERGER IS FAIR TO AND
IN THE BEST INTERESTS OF CASTELLE AND ITS SHAREHOLDERS AND THEREFORE UNANIMOUSLY
RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS A VOTE IN FAVOR OF EACH NAMED NOMINEE TO THE BOARD OF DIRECTORS AND A
VOTE IN FAVOR OF THE RATIFICATION OF COOPERS & LYBRAND L.L.P. AS CASTELLE'S
AUDITORS.
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THE IBEX MEETING
Date, Time and Place
The Special Meeting of Shareholders of Ibex will be held on Monday,
November 18, 1996, at 10:00 a.m., local time, at Ibex's offices at 4921 R.J.
Mathews Parkway, El Dorado Hills, California.
Solicitation of Proxies
The enclosed proxy is solicited on behalf of the Board of Directors of Ibex
for use at the Ibex Meeting, or at any adjournment thereof. Any proxy given
pursuant to this solicitation may be revoked by the person giving it at any time
before its use by delivering to the corporate Secretary of Ibex a written notice
of revocation or a duly executed proxy bearing a later date or by attending the
Ibex Meeting and voting in person.
Record Date and Outstanding Shares
Only shareholders of record at the close of business on the Ibex Record
Date are entitled to vote at the Ibex Meeting. At the close of business on the
Ibex Record Date, there were 138,016 shares of Ibex Common Stock and 48,035
shares of Ibex Preferred Stock outstanding and entitled to vote. Ibex
shareholders are entitled to one vote for each share of Common Stock and one
vote for each share of Ibex Preferred Stock held on the Record Date.
Vote Required
Approval of the Merger Agreement by Ibex shareholders is required by the
California General Corporation Law and the Ibex Articles. Such approval requires
the affirmative vote of the holders of (i) a majority of the shares of Ibex
Common Stock outstanding on the Ibex Record Date, voting as a separate class;
and (ii) a majority of the shares of Ibex Preferred Stock outstanding on the
Ibex Record Date, voting as a separate class. Certain executive officers,
directors and shareholders of Ibex, who beneficially own on the Ibex Record Date
(i) 97,000 shares of Ibex Common Stock (constituting approximately 70.3% of the
shares of Ibex Common Stock then outstanding); and (ii) 48,035 shares of Ibex
Preferred Stock (constituting 100.0% of the shares of Ibex Preferred Stock then
outstanding) have entered into agreements obligating them to vote in favor of
the Merger Agreement and have executed proxies appointing officers of Castelle
as their attorneys and proxies with full power to vote their shares of Ibex
Capital Stock. Approval of the 1992 Stock Option Plan will require the
affirmative vote of a majority of the outstanding shares of Ibex Common Stock
and Ibex Preferred Stock, voting together as a single class. See "The Merger and
Related Transactions -- Related Agreements." As of the Ibex Record Date and the
date of this Prospectus, Castelle owns no shares of Ibex stock.
Quorum; Abstentions
The required quorum for the transaction of business at the Ibex Meeting is
a majority of the shares of Ibex Common Stock and a majority of the shares of
Ibex Preferred Stock outstanding on the Record Date. Abstentions will be counted
for purposes of determining the presence of a quorum. Abstentions will be
counted towards the tabulation of the votes cast. Abstentions will have the same
effect as a vote against the Merger Agreement and the 1992 Stock Option Plan.
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Voting of Proxies
The Ibex proxy accompanying this Prospectus is solicited on behalf of the
Board of Directors of Ibex for use at the Ibex Meeting. Shareholders are
requested to complete, date and sign the accompanying proxy and promptly return
it in the accompanying envelope or otherwise mail it to Ibex. All proxies that
are properly executed and returned, and that are not revoked, will be voted at
the Ibex Meeting in accordance with the instructions indicated on the proxies
or, if no direction is indicated, to approve the Merger Agreement and the 1992
Option Plan. Ibex's Board of Directors does not presently intend to bring any
business before the Ibex Meeting other than the specific proposals referred to
in this Prospectus and specified in the notice of the Ibex Meeting. So far as is
known to Ibex's Board of Directors, no other matters are to be brought before
the Ibex Meeting. As to any business that may properly come before the Ibex
Meeting, however, it is intended that proxies, in the form enclosed, will be
voted in respect thereof in accordance with the judgment of the persons voting
such proxies. An Ibex shareholder who has given a proxy may revoke it at any
time before it is exercised at the Ibex Meeting, by (i) delivering to the
Secretary of Ibex (by any means, including facsimile) a written notice, bearing
a date later than the date of the proxy, stating that the proxy is revoked, (ii)
signing and so delivering a proxy relating to the same shares and bearing a
later date prior to the vote at the Ibex Meeting, or (iii) attending the Ibex
Meeting and voting in person (although attendance at the Ibex Meeting will not,
by itself, revoke a proxy).
Solicitation of Proxies and Expenses
Ibex will bear the cost of solicitation of proxies in the enclosed form
from its shareholders. In addition to solicitation by mail, the directors,
officers and employees of Ibex may solicit proxies from shareholders by
telephone, telegram, telecopy, letter or in person.
Board Recommendations
THE BOARD OF DIRECTORS OF IBEX BELIEVES THAT THE MERGER IS FAIR TO AND IN
THE BEST INTERESTS OF IBEX AND ITS SHAREHOLDERS AND THEREFORE UNANIMOUSLY
RECOMMENDS A VOTE FOR APPROVAL OF THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS A VOTE FOR APPROVAL OF THE 1992 STOCK OPTION PLAN.
SHAREHOLDERS SHOULD NOT SEND ANY STOCK
CERTIFICATES WITH THEIR PROXY CARDS
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THE MERGER AND RELATED TRANSACTIONS
The description of the Merger and the principal terms of the Merger
Agreement in this Joint Proxy Statement/Prospectus is subject to and qualified
in its entirety by reference to the Merger Agreement, a copy of which is
attached as Appendix A and incorporated herein by reference.
General
The Merger will be consummated promptly after Castelle shareholder and Ibex
shareholder approval and the satisfaction or waiver of the other conditions to
consummation of the Merger. Upon consummation of the Merger, Ibex will merge
into and become a division of Castelle. The shareholders of Ibex will become
shareholders of Castelle (as described below), and their rights will be governed
by Castelle's Articles of Incorporation, as amended, and Bylaws.
Conversion of Shares
Ibex Shares. At the effective time of the Merger, the Merger Shares shall
be available for issuance to holders of Ibex Preferred Stock and Ibex Common
Stock and upon exercise of Ibex Options. In the event the closing price of a
share of Castelle Common Stock on the business day immediately preceding the
effective time of the Merger is $9.42 or greater, each share of Ibex Common
Stock and each share of Ibex Preferred Stock outstanding immediately prior to
the effective time of the Merger shall be converted into the right to receive
4.17731 shares of Castelle Common Stock. In the event the closing price of a
share of Castelle Common Stock on the business day immediately preceding the
effective time of the Merger is less than $9.42, each share of Ibex Preferred
Stock outstanding immediately prior to the effective time of the Merger shall
receive a pro rata allocation of shares of Castelle Common Stock with a fair
market value on the business day immediately preceding the effective time of the
Merger equal to the Preferred Stock Preference. Holders of Ibex Preferred Stock
and Ibex Common Stock shall share in a pro rata distribution, based on the total
number of shares held, of the Merger Shares remaining after allocation of the
Preferred Stock Preference.
If any shares of Ibex Common Stock outstanding immediately prior to the
consummation of the Merger are unvested or are subject to a repurchase option,
risk of forfeiture or other condition under any applicable restricted stock
purchase agreement or other agreement with Ibex, then the shares of Castelle
Common Stock issued in exchange for such shares of Ibex Common Stock will also
be unvested and subject to the same repurchase option, risk of forfeiture or
other condition, and the certificates representing such shares of Castelle
Common Stock may accordingly be marked with appropriate legends.
As of the date of this Prospectus, the Articles of Incorporation of Ibex
entitle the holders of Ibex Preferred Stock to receive $6.25 per share of Ibex
Preferred Stock prior to any other allocations to shareholders in a merger if
the total consideration paid to acquire Ibex is less than $8 million. The
holders of Ibex Preferred Stock have agreed to convert 19,235 (approximately
40%) of the outstanding shares of Ibex Preferred Stock into Ibex Common Stock
immediately prior to the consummation of the Merger. At the time of the Merger,
therefore, assuming the Castelle Common Stock issued in connection with the
Merger has a fair market value of less than $8 million, there will be 28,800
shares of Ibex Preferred Stock outstanding with an aggregate preference due of
$180,000.
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Although the number of shares of Castelle Common Stock to be received in
exchange for each share of Ibex Preferred Stock and Ibex Common Stock cannot be
calculated at this time because the exchange ratios will be determined by the
fair market value of a share of Castelle Common Stock on the business day
preceding the effective time of the Merger, for illustrative purposes only, the
shares of Castelle Common Stock to be received in exchange for Ibex Preferred
Stock and Ibex Common Stock would be as follows as of the date of this
Prospectus at the Designated Castelle Stock Prices shown below:
Shares of Castelle Common Stock
Received for each Share of:
----------------------------------------
Designated Castelle Ibex Preferred Ibex Common
Stock Price Stock Stock
------------------- -------------- -----------
$6.00 5.07155 4.02988
$7.00 4.94378 4.05094
$8.00 4.84798 4.06673
$9.42 or greater 4.17731 4.17731
Utilizing a closing price for a share of Castelle Common Stock on the
business day immediately prior to the Merger of $6.00 as the Designated Castelle
Stock Price, approximately 146,061 shares of Castelle Common Stock would be
issued in the Merger to holders of Ibex Preferred Stock, approximately 645,792
shares of Castelle Common Stock would be issued to holders of Ibex Common Stock
in the Merger, and approximately 58,147 shares of Castelle Common Stock would be
reserved for issuance upon the exercise of Ibex Options.
Utilizing a closing price for a share of Castelle Common Stock on the
business day immediately prior to the Merger of $7.00 as the Designated Castelle
Stock Price, approximately 142,381 shares of Castelle Common Stock would be
issued in the Merger to holders of Ibex Preferred Stock, approximately 649,168
shares of Castelle Common Stock would be issued to holders of Ibex Common Stock
in the Merger, and approximately 58,451 shares of Castelle Common Stock would be
reserved for issuance upon the exercise of Ibex Options.
Utilizing a closing price for a share of Castelle Common Stock on the
business day immediately prior to the Merger of $8.00 as the Designated Castelle
Stock Price, approximately 139,622 shares of Castelle Common Stock would be
issued in the Merger to holders of Ibex Preferred Stock, approximately 651,699
shares of Castelle Common Stock would be issued to holders of Ibex Common Stock
in the Merger, and approximately 58,679 shares of Castelle Common Stock would be
reserved for issuance upon the exercise of Ibex Options.
Utilizing a closing price for a share of Castelle Common Stock on the
business day immediately prior to the Merger of $9.42 or greater results in
approximately 120,307 shares of Castelle Common Stock being issued in the Merger
to holders of Ibex Preferred Stock, approximately 669,419 shares of Castelle
Common Stock being issued to holders of Ibex Common Stock in the Merger and
approximately 60,274 shares of Castelle Common Stock being reserved for issuance
upon the exercise of assumed Ibex Options. The foregoing numbers are subject to
change based upon the granting, exercise, termination or expiration of Ibex
Options at or prior to the Merger Date.
A recent price for Castelle Common Stock is shown on the cover page of this
Prospectus. Holders of Ibex Common Stock may obtain the daily closing prices of
Castelle Common Stock from The Wall Street Journal or by calling Ibex at (916)
939-8888.
Of the total shares of Castelle Common Stock issued in the Merger, 10% will
be retained for a period of time in escrow as security to Castelle against any
breach of representations, warranties or covenants by Ibex and the Designated
Shareholders (as defined below). Such shares shall be contributed out of the
shares to be received as a result of the Merger by the Designated Shareholders.
The Designated Shareholders are Ney Grant, Betsy Gray-Grant, Clovis Mattos and
Curtis Powell. Any shares not required to satisfy such obligations will be
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released from escrow to the Designated Shareholders after termination of the
escrow period. See "The Merger and Related Transactions -- Escrow."
No fractional shares of Castelle Common Stock will be issued in the Merger.
Instead, each Ibex shareholder who would otherwise be entitled to receive a
fraction of a share of Castelle Common Stock will receive an amount of cash
equal to $8.00 multiplied by the fraction of a share of Castelle Common Stock to
which the shareholder would otherwise be entitled. Castelle intends to use its
current cash resources to fund the payments for fractional shares.
Ibex Options. Upon consummation of the Merger, each then outstanding Ibex
Option will automatically be converted into an option to purchase a number of
shares of Castelle Common Stock determined by multiplying the number of shares
of Ibex Common Stock subject to the Ibex Option by the conversion rate utilized
to convert Ibex Common Stock into Castelle Common Stock on the date of the
Merger, at an exercise price per share of Castelle Common Stock equal to the
exercise price per share of the Ibex Option at the time of the Merger divided by
the conversion rate utilized to convert Ibex Common Stock into Castelle Common
Stock on the date of the Merger, rounded up to the nearest cent. To avoid
fractional shares, the number of shares of Castelle Common Stock subject to a
converted Ibex Option will be rounded down to the nearest whole share, with no
cash being payable for such fractional share. The other terms of each Ibex
Option, including status as a "non-statutory stock option" for federal income
tax purposes and vesting schedule, will remain unchanged.
As of the Ibex Record Date, 14,429 shares of Ibex Common Stock were subject
to outstanding Ibex Options. Assuming a fair market value for Castelle Common
Stock on the business day immediately preceding the Merger of $6.00 per share
and that the same number of shares are subject to Ibex Options at the Merger
Date as were outstanding as of the Ibex Record Date, such options will be
converted into options to purchase an aggregate of approximately 58,147 shares
of Castelle Common Stock. Should the fair market value of Castelle Common Stock
on the business day immediately preceding the Merger be $7.00 per share and the
same number of shares be subject to Ibex Options at the Merger Date as were
outstanding as of the Ibex Record Date, such options will be converted into
options to purchase an aggregate of approximately 58,451 shares of Castelle
Common Stock. Should the fair market value of Castelle Common Stock on the
business day immediately preceding the Merger be $8.00 per share and the same
number of shares be subject to Ibex Options at the Merger Date as were
outstanding as of the Ibex Record Date, such options will be converted into
options to purchase an aggregate of approximately 58,679 shares of Castelle
Common Stock. Should the fair market value for Castelle Common Stock on the
business day immediately preceding the Merger be $9.42 per share or greater and
the same number of shares be subject to Ibex Options at the Merger Date as were
outstanding as of the Ibex Record Date, such options will be converted into
options to purchase an aggregate of approximately 60,274 shares of Castelle
Common Stock.
Surrender of Certificates. If the Merger becomes effective, Castelle will
mail a letter of transmittal with instructions to all holders of record of Ibex
Capital Stock as of the effective time of the Merger for use in surrendering
their stock certificates in exchange for certificates representing Castelle
Common Stock and a cash payment in lieu of fractional shares. Certificates
representing shares of Ibex Capital Stock should not be surrendered until the
letter of transmittal is received.
Background of the Merger
On May 23, 1996, Ney Grant, President of Ibex, received from a publicly
traded communications company an solicited offer to acquire Ibex. At the time,
Ibex was considering potential financing and strategic alternatives. Although
Ibex had negotiated terms for a $1.5 million investment from a venture investor,
the Ibex Board of Directors decided to pursue discussions with potential
acquirors based on the relative valuations and strategic advantages. On June 3,
1996, Ney Grant contacted Jerry Burke, Executive Vice President of Castelle, and
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explained that Ibex was in acquisition discussions with another company (the
"Other Company"). Given the discussions between Ibex and Castelle in the past,
Ney Grant believed that Castelle may have an interest in merging with Ibex.
On June 12, 1996, Arthur Bruno, Chairman of the Board of Directors and
Chief Executive Officer of Castelle, and Jerome Burke, Executive Vice President
of Castelle, met with Ney Grant, President of Ibex, to explore the possibility
of a business combination between Castelle and Ibex. To assist in Castelle's
evaluation of a possible transaction with Ibex, Castelle engaged Unterberg
Harris to act as its financial advisor. A representative of Unterberg Harris met
with Ney Grant on June 14 to discuss the possibility of a transaction.
Subsequent to these meetings, Castelle and Ibex decided to exchange further
information to further explore the possibility of a transaction and a series of
discussions and meetings between representatives of Castelle and Ibex occurred.
On June 21, 1996, Ney Grant and Curt Powell visited Castelle and received a
non-binding term sheet describing an acquisition offer from Jerry Burke and a
representative of Unterberg Harris. Later the same day, Ney Grant and Curt
Powell visited the representatives for the Other Company and received a term
sheet describing an acquisition offer from the Other Company.
On June 25, 1996, Castelle submitted to Ibex a revised non-binding term
sheet which outlined the general terms under which Castelle was willing to
negotiate a deal. Ibex management approved these general parameters, subject to
approval by its Board of Directors, and notified the Other Company with which it
had been negotiating that it was rejecting its offer. Ibex management, after
careful consideration, elected to merge with Castelle instead of the other
alternatives for the following reasons: (i) Castelle has an excellent
distribution channel for high volume product sales which would be extremely
difficult and expensive to develop; neither the Other Company nor the investment
would provide easy access to this depth of channel development; (ii) Castelle
was located relatively nearby compared with the Other Company, allowing the
companies to merge more easily; (iii) Ibex management felt that Castelle's stock
price was undervalued and that Ibex could significantly contribute to adding
value to the stock price; (iv) Castelle management took immediate interest in
the new fax/email/Web product, and convinced Ibex management that Castelle and
Ibex could adequately launch and market such a product. The Other Company was
also interested in the new product, but it was unclear whether it would be a
major part of the company's strategy and vision.
On June 28, 1996, representatives of Castelle and Ibex met to discuss the
proposed terms of the transaction and suggested timetable for proceeding. Based
on this timetable, a number of meetings and discussions was held between
representatives of Castelle and Ibex during late June and early July.
On July 16, 1996, a regularly scheduled meeting of Castelle's Board of
Directors was held. In this meeting, Ney Grant was introduced to the Board of
Directors and made a presentation to them regarding Ibex. Included in the
presentation was a history of Ibex, an overview of Ibex's management team,
Ibex's current product offering and how the technology works, new products under
development and Ibex's business strategy for the future. The Board of Directors
then asked specific questions of Ney Grant regarding Ibex. Ney Grant left the
meeting and the Board of Directors discussed the proposed Merger.
After several telephone conversations with Ibex board members in July and
August in which Ney Grant and Ibex counsel presented details of the transaction
and full discussion of the transaction resulted, a written consent to the
transaction was executed by the Ibex Board of Directors on August 12, 1996.
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On August 15, 1996, Castelle held a special Board of Directors meeting to
review the specific terms of the proposed Merger. In this meeting, a summary of
the transaction was presented by Castelle's counsel, Castelle's financial
advisor presented an analysis of the financial terms of the proposed transaction
and Arthur Bruno presented the Board of Directors with an assessment of the Ibex
technology. After full discussion, the Board of Directors unanimously approved
the Merger Agreement as presented and determined that the Merger is in the best
interest of Castelle and its shareholders.
Reasons for the Merger
Castelle's Reasons for the Merger
The Castelle Board of Directors has unanimously approved the Merger
Agreement. The Board believes that the terms of the Merger Agreement are fair
to, and in the best interests of, Castelle and its shareholders, and unanimously
recommends that shareholders of Castelle vote FOR approval of the Merger
Agreement.
The Castelle Board of Directors based its approval of the Merger Agreement
and its determination that the Merger Agreement is in the best interests of
Castelle and its shareholders upon a number of factors, including the following
advantages of the merger:
o Accelerates Castelle Entry into Internet-Based Information Delivery:
Ibex has products under development which will leverage Castelle's fax
expertise and position the combined company as the premier provider of
"information-on-demand" solutions.
o Broadens Castelle's Product Line: Ibex is the leading provider of
fax-on-demand software, a market segment complementary to Castelle's
fax server product line. Ibex's fax-on-demand product broadens the
range of products Castelle is able to offer customers and offers the
potential for Castelle to attain higher gross margins.
o Increases Castelle's Technology Base: Ibex possesses technical
competency in a numbers of key areas including document delivery,
document management and fax processing. Castelle believes that this
technical competence can be leveraged to significantly enhance the
functionality of Castelle's fax server product line.
o Technical and Management Personnel: Ibex has substantial managerial
and development personnel and resources which offer significant
benefit to Castelle.
o Complementary Distribution: Ibex's network of value-added resellers is
a good complement to Castelle's current channel of distributors such
as Tech Data, Ingram Micro and Merisel.
In the course of its deliberations, the Board of Directors of Castelle
reviewed with Castelle's management a number of other factors relevant to the
Merger. In particular, the Castelle Board considered, among other things: (i)
information concerning Castelle's and Ibex's respective businesses, prospects,
financial performances, financial conditions, operations and product development
schedules; (ii) the public stock market price of Castelle Common Stock in the
recent past; (iii) multiples paid in other selected software merger and
acquisition transactions; (iv) an analysis of the respective contributions to
revenues, operating profits and net profits of the combined company; (v) the
compatibility of the managements of Castelle and Ibex; (vi) Castelle's strategic
objectives for participation in the enterprise client-server software market;
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(vii) a financial presentation by Unterberg Harris, including the opinion of
Unterberg Harris to the effect that the consideration to be paid is fair from a
financial point of view to Castelle (as of the date of such presentation); and
(viii) reports from management and legal advisors on the results of Castelle's
due diligence investigation of Ibex.
The Board of Directors of Castelle also considered a variety of potentially
negative factors in its deliberations concerning the Merger, including: (i) the
possible dilutive effect of the issuance of Castelle stock in the Merger (see
"Risk Factors -- Integration of Operations; Possible Adverse Effect on Financial
Results"); (ii) the risk that the public market price of Castelle's stock might
be adversely affected by announcement of the Merger; and (iii) the charges
expected to be incurred in connection with the Merger, primarily in the quarter
in which the Merger is completed, including the transaction costs and costs of
integrating the businesses of the companies to be reflected in a charge
estimated to be between $850,000 and $950,000 (see "Pro Forma Combined Condensed
Financial Information"); (vi) the risk that, despite the efforts of the combined
company, the services of key persons might not be retained; (vii) the risk that
other benefits sought to be obtained by the Merger might not be obtained; and
(viii) other risks described above under "Risk Factors."
In view of the wide variety of factors, both positive and negative,
considered by the Castelle Board of Directors, the Board did not find it
practical to, and did not, quantify or otherwise assign relative weights to the
specific factors considered. After taking into consideration all of the factors
set forth above, the Board of Directors of Castelle determined that the Merger
was in the best interests of Castelle and its shareholders and that Castelle
should proceed with the Merger at this time.
Ibex's Reasons for the Merger
The Board of Directors of Ibex believes that the proposed Merger would
afford Ibex the following additional advantages and a greater opportunity to
accomplish its strategic objectives:
o Improved Sales Performance. As a result of the financial strengths and
stability of the combined company, the Board of Ibex believes that
Ibex will be better positioned to be viewed as a financially stable
provider of mission-critical application solutions to corporate
customers.
o Access to Castelle Distribution Channels. Castelle's broader
distribution channels will facilitate greater sales of Ibex's
products.
o Desktop Capability. Castelle's desktop products and technology will
complement Ibex's current enterprise solutions and improve its ability
to provide a comprehensive solution to its customers.
o Access to Capital. Castelle's current resources and access to public
markets will allow Ibex increased operating flexibility and the
opportunity to pursue development activities.
o Complementary Operations. The businesses of Castelle and Ibex are
complementary on all levels -- strategic, operating, technical and
marketing minimizing the need for the time consuming and potentially
disruptive integration of operations.
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o Employee Recruitment and Retention. In addition to greater stability,
a publicly traded company has greater ability to provide financial
incentives in order to recruit and retain employees.
o Shareholder Liquidity. The Merger will provide Ibex shareholders with
the ability to convert a currently illiquid investment into a liquid
one with the opportunity to realize a future return based on the
potential appreciation of Castelle's Common Stock after the Merger.
The Board of Directors believes that it is in the best interests of the
Ibex shareholders to obtain marketable securities that may be either held or
sold as determined by each individual shareholder. In this regard, the Board of
Directors considered the feasibility and prospects of alternative means to
provide liquidity for Ibex shareholders, including other potential business
combinations and an initial public offering of Ibex Common Stock (an "IPO"). The
Board of Directors considered whether any other potential acquiror might offer
the same or similar benefits to Ibex, and concluded that Castelle offered the
best benefits available. Prior to agreeing to the Merger, Ibex's management
conducted informal discussions with investment bankers, who indicated that an
IPO would not be feasible in the near term. After careful consideration, the
Board of Directors concurred with this assessment.
In evaluating the proposed Merger, the Ibex Board of Directors considered
and discussed a wide variety of factors, including the details of the Merger
Agreement, a description of Castelle's business and the recent trading activity
of its stock. The Board of Directors also discussed each component of the Merger
Agreement in light of its fairness to Ibex's shareholders, the impact of the
Merger on current employees of and lenders to Ibex, the availability of
liquidity to Ibex's shareholders, and the requirements for a tax-free
transaction which could be accounted for as a pooling of interests. In addition,
the Board of Directors considered the advantages and disadvantages that the
Merger would present to Ibex's achievement of its strategic objectives. As part
of the evaluation process, the Board of Directors reviewed information about the
business, operations and future prospects of both Ibex and Castelle, including
Castelle's annual, quarterly and other reports, registration statements and
definitive proxy statements filed by Castelle with the Securities and Exchange
Commission, and Ibex's current business plan.
The Ibex Board also considered the following potentially negative factors:
(i) the potential disruption of Ibex's business that might result from employee
uncertainty and lack of focus following announcement of the Merger and during
the combination of the operations of Castelle and Ibex; (ii) the possibility
that the Merger might not be consummated, and the effects of the public
announcement of the Merger on (A) Ibex's revenues and operating results, and (B)
Ibex's ability to attract and retain key management, marketing and technical
personnel; (iii) the possible effects of the public announcement of the Merger
on the market price of Castelle's Common Stock; (iv) the risk that, despite the
intentions and the efforts of the parties to reassure Ibex's system integrators
and VAR's regarding the combined company's intention to support their future
sales efforts, the announcement of the Merger could result in decisions by such
partners to delay or cancel purchases of Ibex products; (v) the risk that the
anticipated benefits of the Merger will not be realized; and (vi) the other
risks described above under "Risk Factors."
After considering the foregoing factors, the Board of Directors unanimously
approved the Merger Agreement and the transactions contemplated thereby,
including the Merger, and recommended that the shareholders of Ibex approve and
adopt the Merger Agreement. In view of the wide variety of factors considered,
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both positive and negative, Ibex's Board of Directors did not find it
practicable to, and did not, quantify or otherwise assign relative weights to
the specific factors considered.
Board Recommendation
THE BOARD OF DIRECTORS OF CASTELLE HAS DETERMINED THAT THE MERGER IS IN THE
BEST INTERESTS OF CASTELLE AND ITS SHAREHOLDERS AND HAS UNANIMOUSLY RECOMMENDED
A VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
THE BOARD OF DIRECTORS OF IBEX HAS DETERMINED THAT THE MERGER IS IN THE
BEST INTERESTS OF IBEX AND ITS SHAREHOLDERS AND HAS UNANIMOUSLY RECOMMENDED A
VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
Opinion of Financial Advisor to Castelle
At a meeting of Castelle's Board of Directors held on August 15, 1996,
Unterberg Harris delivered its oral opinion that, based on the proposed terms of
the Merger as of that date, the consideration proposed to be offered to the
shareholders of Ibex in the Merger was fair to Castelle from a financial point
of view. In connection with the delivery of its oral opinion to the Board of
Directors of Castelle on August 15, 1996, Unterberg Harris presented to
Castelle's Board of Directors a summary of the material financial analyses
conducted by Unterberg Harris in connection with such oral opinion. Unterberg
Harris was asked to render an opinion that the merger consideration was fair to
Castelle from a financial point of view. Unterberg Harris's opinion is addressed
only to the Board of Directors of Castelle and does not constitute a
recommendation to any shareholder of Castelle as to how such shareholder should
vote at the Castelle Meeting. No limitations were imposed by Castelle with
respect to the opinion rendered by Unterberg Harris.
The full text of Unterberg Harris's written opinion, dated August 22, 1996,
which sets forth certain of the assumptions made and the factors considered by
Unterberg Harris in rendering its opinion, as well as the limitations on the
review undertaken in connection with such opinion, is set forth as Annex B to
this Proxy/Prospectus and should be read in its entirety. The following is a
summary of the text of Unterberg Harris's opinion and, accordingly, the full
text of Unterberg Harris's written opinion should be read in its entirety.
In arriving at its opinion, Unterberg Harris reviewed certain information
relating to Castelle and Ibex including: the Merger Agreement; financial
information with respect to the business operations of Ibex including, but not
limited to, audited financial statements of Ibex for the fiscal years December
31, 1995 and December 31, 1994 and unaudited financial information for Ibex for
the period ended June 30, 1996; financial information with regard to the
business operations of Castelle, including, but not limited to, audited
financial statements of for the fiscal years December 31, 1995, December 31,
1994, and December 31, 1993 and unaudited financial statements for Castelle for
the period ended June 28, 1996; a comparison of operating results and other
financial statement information of Castelle and Ibex with other companies which
Unterberg Harris deemed appropriate; a comparison of the financial terms of the
Merger with the terms of certain other transactions which Unterberg Harris
deemed appropriate; and certain financial projections prepared by the respective
managements of Castelle and Ibex. In addition, Unterberg Harris held discussions
with certain members of Castelle and Ibex senior management concerning their
past and current operations and financial condition and business prospects,
discussed with Castelle management the results of their due diligence of Ibex
and participated in the discussions and negotiations among representatives of
Castelle and Ibex and their legal advisors and independent auditors. Unterberg
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Harris also reviewed other information and performed such other analysis as it
deemed appropriate.
Unterberg Harris has assumed and relied upon, without independent
verification, the accuracy and completeness of the information reviewed by it.
With respect to any financial projections, Unterberg Harris has assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the respective future financial
performances of Castelle and Ibex and the future financial performance of the
Merged Company. Unterberg Harris has also assumed, without independent
verification, that Ibex owns or has adequate legal protection for all material
intellectual property it purports to own, that Ibex owns or has adequate rights
to use all intellectual property material to its business as conducted or
contemplated to be conducted and that the representations and warranties of
Castelle and Ibex in the Merger Agreement are true and correct.
Unterberg Harris has not conducted a physical inspection of the properties
or facilities of Castelle or Ibex or made any independent valuation or appraisal
for the assets, liabilities, patents or intellectual property of Castelle or
Ibex, nor has Unterberg Harris been furnished with any such valuations or
appraisals. Unterberg Harris has assumed that the assessments of management have
been made in good faith and reflect the best currently available management
judgments as to the matters covered. Unterberg Harris's opinion was necessarily
based on economic, market and other conditions as in effect on, and the
information made available to it as of, the date of its opinion.
The following paragraphs provide a brief summary of the material financial
analyses conducted by Unterberg Harris in connection with its opinion. Except as
otherwise noted, analysis of current stock prices of Castelle, comparable
companies and transaction values were based on trading prices as of August 7,
1996.
In considering the financial impact of the Merger on Castelle, Unterberg
Harris analyzed the pro forma effect of the Merger on the projected combined
income of Castelle and Ibex for the fiscal year ending December 31, 1997. The
analysis was based on an assumed issuance of 850,000 shares of Castelle common
stock and on the financial projections and related assumptions as provided by
the management of Castelle and Ibex. The analysis showed an increase in earnings
per share of the Merged Company relative to that of Castelle on a stand-alone
basis for the fiscal year ending December 31, 1997, before giving effect to any
potential revenue and operating synergies.
Unterberg Harris also analyzed the contribution of revenue, gross profit
and operating income to the Merged Company from each of Castelle and Ibex. This
contribution analysis was then compared to the pro forma ownership percentage of
the Castelle shareholders in the pro forma Merged Company. The comparison
indicated that Castelle's pro forma ownership percentage was more than
Castelle's relative contribution to gross profit and operating income for both
the latest twelve months ending June 30, 1996 and for the projected fiscal year
ending December 31, 1997.
Unterberg Harris also compared selected historical and projected operating
and stock market data and operating and financial ratios for Castelle and Ibex
to the corresponding data and ratios of certain other publicly traded companies
as of August 7, 1996, which it deemed comparable to Castelle and Ibex. Such data
and ratios included: multiples of net market value (defined as market value of
equity plus long term debt less cash and equivalents) to last 12 months revenue,
to projected calendar year 1996 revenue and to projected calendar year 1997
revenue; and market value to last twelve months net earnings, to projected
calendar year 1996 net earnings and to projected calendar year 1997 earnings.
For the comparable companies, the multiples of net market value to latest 12
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months revenue ranged from 0.6x to 16.5x with a median of 2.5x. The multiples of
net market value to projected calendar 1996 revenue ranged from 0.6x to 13.0x
with a median of 1.8x. The multiples of net market value to projected calendar
1997 revenue ranged from 0.5x to 9.4x with a median of 1.3x. The multiples of
market price to last twelve months net earnings ranged from 12.6x to 67.6x with
a median of 19.9x. The multiples of market price to projected calendar 1996 net
earnings ranged from 12.6x to 50.4x with a median of 24.8x. The multiples of
market price to projected calendar 1997 net earnings ranged from 9.8x to 39.0x
with a median of 15.5x. Unterberg Harris determined that based on this analysis
of comparable companies, the multiples for Ibex, when calculated based on the
merger consideration, were within or below the range of multiples for the
selected comparable companies.
Unterberg Harris also analyzed data obtained from selected
technology-related merger and acquisition transactions that occurred from
January 15, 1992 through July 22, 1996 or were pending during such period. In
examining these transactions, Unterberg Harris analyzed certain income statement
and balance sheet parameters of the acquired companies relative to the
consideration paid. Multiples analyzed included equity value to latest 12 months
net income, equity value to book value, and enterprise value (defined as equity
value plus debt less cash and equivalents) to latest 12 months revenue and to
latest 12 months operating income. In certain cases, complete financial data was
not publicly available for these transactions and only partial information was
used in such instances. Unterberg Harris determined that, based on this analysis
of merger and acquisition transactions, the multiples for Ibex, based on the
merger consideration, were within the range of multiples for the selected merger
and acquisition transactions.
The summary above does not purport to be a complete description of the
analyses performed by Unterberg Harris in connection with its fairness opinion.
The preparation of a fairness opinion involves various subjective business
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances,
and therefore such an opinion is not readily susceptible to partial analysis or
summary description. Accordingly, notwithstanding the separate factors
summarized above, Unterberg Harris believes that its analyses must be considered
as a whole and that selecting portions of its analyses and considering
individual factors without considering all analyses and factors could create an
incomplete and misleading view of the evaluation process underlying its opinion.
With respect to comparable companies analyses and comparable transaction
analyses, a particular analysis performed by Unterberg Harris is not necessarily
indicative of actual values, which may be significantly higher or lower than
suggested by such analyses. The analyses are not appraisals and do not
necessarily reflect the prices for which businesses actually could be sold or
actual values or future results that might be achieved. Unterberg Harris's
analyses were prepared solely as part of Unterberg Harris's review of the
fairness of the consideration to be paid by Castelle in connection with the
Merger from a financial point of view and were provided to the Castelle Board of
Directors in connection with the delivery of Unterberg Harris's opinion. In
addition, Unterberg Harris's opinion and presentation to the Castelle Board was
only one of many factors taken into consideration by the Castelle Board in
making its determination to approve the Merger.
Pursuant to the terms of the engagement by Castelle of Unterberg Harris as
its financial advisor in connection with the Merger, Unterberg Harris will
receive a fee upon consummation of the Merger. In addition, Unterberg Harris
will be reimbursed for out-of-pocket expenses in connection with the engagement.
Unterberg Harris has provided investment banking services to Castelle in the
past, including acting as managing underwriter in Castelle's initial public
offering in 1995. Unterberg Harris has received customary compensation for its
services. Unterberg Harris is a market maker for Castelle Common Stock.
Unterberg Harris, as part of its investment banking business, is engaged in the
valuation of businesses and their securities in corporate reorganizations and
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for other purposes. The Castelle Board selected Unterberg Harris to act as
financial advisor on the basis of Unterberg Harris's reputation as an investment
bank, Castelle's prior relationship with Unterberg Harris and Unterberg Harris's
familiarity with Castelle.
Related Agreements
Affiliate Agreements
To help ensure that the Merger will be accounted for as a "pooling of
interests," the executive officers and directors of Castelle and Ibex and 10%
shareholders of Ibex will execute agreements that prohibit such persons from
disposing of their shares during the period commencing 30 days prior to the
closing date of the Merger (the "Closing Date") and ending when Castelle first
publicly releases its quarterly financial statements including the combined
financial results of Ibex and Castelle for a period of at least 30 days.
Pursuant to such agreements, Ibex affiliates will also acknowledge the resale
restrictions imposed by Rule 145 promulgated under the Securities Act on shares
received by them in the Merger. In addition, certain shareholders of Ibex will
also sign agreements making certain representations pertaining to the
"continuity of interest" requirements for a tax-free reorganization. See
"Certain Federal Income Tax Matters" below.
Conversion Agreement
As of the date of this Prospectus, the Articles of Incorporation of Ibex
entitle the holders of Ibex Preferred Stock to receive $6.25 per share of Ibex
Preferred Stock prior to any other allocations to shareholders in a merger if
the total consideration paid to acquire Ibex is less than $8 million. The
holders of Ibex Preferred Stock have agreed to convert 19,235 (approximately
40%) of the outstanding shares of Ibex Preferred Stock into Ibex Common Stock
immediately prior to the consummation of the Merger. At the time of the Merger,
therefore, assuming the Castelle Common Stock issued in connection with the
Merger has a fair market value of less than $8 million, there will be 28,800
shares of Ibex Preferred Stock outstanding with an aggregate preference due of
$180,000.
Irrevocable Proxy Agreements
Pursuant to irrevocable proxy agreements executed concurrently with the
execution of the Merger Agreement, directors, executive officers and certain
major shareholders of Ibex holding in the aggregate approximately 100.0% of the
outstanding shares of Ibex Preferred Stock and 70.3% of the outstanding shares
of Ibex Common Stock have agreed to vote in favor of the Merger and have granted
Castelle proxies to vote their shares of Ibex Common Stock and Ibex Preferred
Stock in favor of the Merger.
Benefits to Ibex Executives and Shareholders from Merger
Ney Grant, Director, President and Chief Executive Officer of Ibex, Curtis
Powell, Director and Vice President of Ibex, and three other employees of Ibex
have agreed to execute employment agreements with Castelle in connection with
the Merger. In addition, Ney Grant, Curtis Powell and one other employee have
agreed to execute noncompetition agreements with Castelle in connection with the
Merger. The employment agreements have terms of between one and two years,
include annual salaries of between $40,000 and $125,000 and the payment of
commissions on sales where appropriate, and provide for the payment of stay-on
bonuses of between $3,333 and $11,667 per month for periods varying from 12 to
18 months. Castelle may terminate the employees with or without cause, however
Castelle remains obligated to pay the salary and stay-on bonus obligations
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through the term of the applicable contract if the employee is terminated
without cause. Mr. Grant, Mr. Powell and one other employee have also agreed to
execute Noncompetitive Agreements with Castelle in connection with the Merger.
Under these agreements Castelle shall pay each signatory amounts ranging from
$50,000 to $150,000 in three equal, monthly installments beginning with the date
on which the Merger is effective. In exchange, Messrs. Grant and Powell have
agreed to refrain from providing services, support, products or technology
related to the business of Ibex to any person for a period of two years after
termination of their employment with Castelle. The additional employee has
agreed to such restrictions for a period of one year after termination of his
employment with Castelle.
In addition, holders of Ibex Preferred Stock have been granted the right,
effective upon the Merger, to register the Castelle Common Stock received in
connection with the Merger for resale to the public, subject to certain
restrictions and the approval of such rights by the existing holders of
registration rights. Upon the approval of existing holders of registration
rights, holders of Ibex Common Stock shall receive more limited registration
rights which will be subject to certain restrictions, including the right to
participate in the registration of shares of Castelle stock initiated by either
Castelle or holders of registration rights other than the holders of Ibex
Preferred Stock identified above.
Representations and Covenants
Under the Merger Agreement, Castelle and Ibex made a number of
representations regarding their respective businesses, capital structures,
operations, financial condition and other matters, including their authority to
enter into the Merger Agreement and to consummate the Merger. Ibex covenanted
that, until the consummation of the Merger or the termination of the Merger
Agreement, it will maintain its business, and it will not take certain actions
outside the ordinary course of business without Castelle's consent. Each party
covenants that until the consummation of the Merger or the termination of the
Merger Agreement, it will use its commercially reasonable efforts to consummate
the Merger. Each party has agreed not to initiate or solicit any proposals
relating to the possible acquisition of that party or any material portion of
its capital stock or assets by any person other than Castelle's acquisition of
Ibex, and has further agreed not to enter into any agreement providing for any
such acquisition.
Escrow
The Merger Agreement provides that 10% of the shares of Castelle Common
Stock to be issued to Ibex shareholders will be placed in escrow by the
Designated Shareholders to indemnify Castelle for damages arising from the
following circumstances: (a) an inaccuracy in or breach of a representation or
warranty of Ibex or the Designated Shareholders in the Merger Agreement or any
related agreement; (b) a breach of a covenant or obligation of Ibex or the
Designated Shareholders; or (c) any legal proceeding in connection with clauses
(a) and (b). Representations and warranties which are reviewed in the audit
process shall terminate when Castelle publishes its audited financial statements
for the fiscal year which includes the Merger Date and the escrow will terminate
365 days after the Closing Date. The Escrow Agent is presently expected to be
First Trust of California, National Association. Subject to the retention of
shares in the escrow to cover claims made during the escrow period, any shares
remaining in the escrow after the 365 day period will be distributed pro rata to
the Designated Shareholders. See "The Merger and Related Transactions -- Escrow"
and "-- Benefits to Ibex Executives and Shareholders from the Merger."
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Conditions to the Merger
In addition to the requirement that approval by the Castelle shareholders
and Ibex shareholders be received, the obligations of Castelle and Ibex to
consummate the Merger will be subject to the satisfaction of a number of other
conditions, including the absence of any stop orders or proceedings seeking a
stop order with respect to the Registration Statement filed in connection with
this Prospectus; the absence of any order, decree or ruling by any court or
governmental agency or threat thereof, or any other fact or circumstance, that
would prohibit or render illegal the transactions contemplated by the Merger
Agreement; the absence of the issuance by any federal or state court of any
temporary restraining order, any preliminary or permanent injunction or any
other order preventing the consummation of the Merger; and the receipt of all
permits or authorizations that may be required by regulatory authorities.
Each party's obligations under the Merger Agreement will also be
conditioned upon the accuracy in every material respect of the representations
and warranties made by the other party; the performance in all material respects
by the other party of its covenants; the absence of a material adverse change
with respect to the other party; the receipt of approval of the Merger by the
shareholders of Castelle and the shareholders of Ibex; and the receipt of
certain legal opinions (including an opinion to the effect that the Merger will
be treated for federal income tax purposes as a tax-free reorganization).
Castelle's obligations to consummate the Merger will be further
conditioned, among other things, upon (i) the receipt of a letter from Coopers &
Lybrand L.L.P. that the Merger will be treated as a pooling of interests for
accounting purposes and (ii) no more than 2% of the Ibex Common Stock
outstanding at the time of the Merger being eligible to exercise dissenters'
rights of appraisal under California law. See "The Merger and Related
Transactions -- Dissenters' Rights."
Termination and Termination Fees
Termination
The Merger Agreement may be terminated by mutual agreement of both parties
or by either party (i) as a result of a material breach by the other party of
any covenant or agreement set forth in the Merger Agreement; (ii) if the timely
satisfaction of any of the conditions for closing the Merger has become
impossible; (iii) if any of the closing conditions have not been satisfied prior
to the Closing; or (iv) if the Closing has not taken place before December 30,
1996.
Termination Fees
If, prior to the Closing or the termination of the Merger Agreement, either
Castelle or Ibex enters into negotiations or discussions with a third party
concerning the sale of all or substantially all of the assets, business or stock
of that company, such company shall immediately reimburse the other company for
all expenses and costs incurred in connection with the Merger. Should either
company enter into a letter of intent, understanding or other agreement relating
to the sale of all or substantially all of the assets, business or stock of that
company, such company shall immediately pay the other company a termination fee
in the amount of $250,000.
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Waivers and Amendments
At any time at or prior to the effective time, to the extent legally
allowed, Castelle or Ibex, without approval of the shareholders of each such
company, may waive compliance with any of the agreements or conditions contained
in the Merger Agreement for the benefit of that company. Neither Castelle nor
Ibex currently intends to waive compliance with any such agreements or
conditions.
The Merger Agreement may be amended by Castelle and Ibex at any time before
or after approval of the Castelle shareholders or the Ibex shareholders, except
that, after such approval, no amendment may be made that by law requires the
further approval of the Castelle shareholders or the Ibex shareholders unless
such approval is obtained.
Certain Federal Income Tax Matters
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of Ibex
Capital Stock. This discussion is based on currently existing provisions of the
Code, existing and proposed Treasury Regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
Any such change, which may or may not be retroactive, could alter the tax
consequences to Castelle, Ibex or Ibex's shareholders as described herein.
Ibex shareholders should be aware that this discussion does not deal with
all federal income tax considerations that may be relevant to particular Ibex
shareholders in light of their particular circumstances, such as shareholders
who are dealers in securities, who are subject to the alternative minimum tax
provisions of the Code, who are foreign persons, or who acquired their shares in
connection with stock option or stock purchase plans or in other compensatory
transactions. In addition, the following discussion does not address the tax
consequences of the Merger under foreign, state or local tax laws or the tax
consequences of the exercise of Ibex Options or any other transactions
effectuated prior to or after the Merger (whether or not such transactions are
in connection with the Merger). Accordingly, IBEX OPTIONHOLDERS AND SHAREHOLDERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC CONSEQUENCES OF
THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE MERGER IN THEIR PARTICULAR CIRCUMSTANCES.
Neither Castelle nor Ibex has requested a ruling from the Internal Revenue
Service (the "IRS") with regard to any of the federal income tax consequences of
the Merger. Graham & James LLP, counsel to Ibex, and Cooley Godward LLP, counsel
to Castelle, have each rendered an opinion (collectively, the "Tax Opinions")
that the Merger will constitute a reorganization under Section 368(a) of the
Code (a "Reorganization"). Such opinions are based on certain assumptions as
well as representations received from Castelle and Ibex (including an
assumption, based on representations, concerning the "continuity of interest"
requirement discussed below) and are subject to the limitations discussed below.
Moreover, such opinions will not be binding on the IRS nor preclude the IRS from
adopting a contrary position. The discussion below assumes that the Merger will
qualify as a Reorganization, based upon such opinions.
Subject to the limitations and qualifications referred to herein, and as a
result of the Merger's qualifying as a Reorganization, the following federal
income tax consequences should result:
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19.1 No gain or loss will be recognized by the holders of Ibex Capital
Stock upon the receipt of Castelle Common Stock solely in exchange for
such Ibex Capital Stock in the Merger (except to the extent of cash
received in lieu of fractional shares).
19.2 The aggregate tax basis of the Castelle Common Stock so received by
Ibex shareholders in the Merger (including any fractional share of
Castelle Common Stock not actually received) will be the same as the
aggregate tax basis of the Ibex Capital Stock surrendered in exchange
therefor.
19.3 The holding period of the Castelle Common Stock so received by each
Ibex shareholder in the Merger will include the period for which the
Ibex Capital Stock surrendered in exchange therefor was considered to
be held, provided that the Ibex Capital Stock so surrendered is held
as a capital asset at the effective time of the Merger.
19.4 Cash payments received by holders of Ibex Capital Stock in lieu of a
fractional share will be treated as if such fractional share of
Castelle Common Stock had been issued in the Merger and then redeemed
by Castelle. An Ibex shareholder receiving such cash will recognize
gain or loss upon such payment, measured by the difference (if any)
between the amount of cash received and the basis in such fractional
share. The gain or loss should be capital gain or loss provided that
such share of Ibex Capital Stock was held as a capital asset at the
effective time of the Merger.
19.5 A shareholder of Ibex who exercises dissenters' rights under any
applicable law with respect to a share of Ibex Capital Stock and
receives payments for such stock in cash will recognize capital gain
or loss (if such stock was held as a capital asset at the effective
time of the Merger) measured by the difference between the amount of
cash received and the shareholder's basis in such share, provided such
payment is neither essentially equivalent to a dividend within the
meaning of Section 302 of the Code nor has the effect of a
distribution of a dividend within the meaning of Section 356(a)(2) of
the Code (collectively, a "Dividend Equivalent Transaction"). A sale
of Ibex shares incident to an exercise of dissenters' rights will
generally not be a Dividend Equivalent Transaction if, as a result of
such exercise, the dissenting shareholder owns no shares of Castelle
Common Stock (either actually or constructively within the meaning of
Section 318 of the Code).
19.6 Neither Castelle nor Ibex will recognize gain solely as a result of
the Merger.
The Tax Opinions are subject to certain assumptions and qualifications and
are based on the truth and accuracy of certain representations of Castelle, Ibex
and certain shareholders of Ibex, including representations in certain
certificates delivered to counsel by the respective managements of Castelle and
Ibex and certain shareholders of Ibex. Of particular importance are the
assumptions and representations relating to the "continuity of interest"
requirement.
To satisfy the "continuity of interest" requirement, Ibex shareholders must
not, pursuant to a plan or intent existing at or prior to the effective time of
the Merger, dispose of or transfer so much of either (i) their Ibex Capital
Stock in anticipation of the Merger or (ii) the Castelle Common Stock to be
received in the Merger (collectively, "Planned Dispositions"), such that the
Ibex shareholders, as a group, would no longer have a significant equity
interest in the Ibex business being conducted by Castelle after the Merger. Ibex
shareholders will generally be regarded as having a significant equity interest
as long as the Castelle Common Stock received in the Merger (after taking into
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account Planned Dispositions), in the aggregate, represents a substantial
portion of the entire consideration received by the Ibex shareholders in the
Merger. No assurance can be made that the "continuity of interest" requirement
will be satisfied, and if such requirement is not satisfied, the Merger would
not be treated as a Reorganization.
A successful IRS challenge to the Reorganization status of the Merger (as a
result of a failure of the "continuity of interest" requirement or otherwise)
would result in significant tax consequences. An Ibex shareholder would
recognize gain or loss with respect to each share of Ibex Capital Stock
surrendered equal to the difference between the shareholder's basis in such
share and the fair market value, as of the effective time of the Merger, of the
Castelle Common Stock received in exchange therefor. In such event, a
shareholder's aggregate basis in the Castelle Common Stock so received would
equal its fair market value, and the shareholder's holding period for such stock
would begin the day after the Merger. In addition, the transfer of all of Ibex's
assets to Castelle would be treated as a taxable sale of such assets. The
corporate level gain Ibex would recognize upon such a taxable sale of its assets
would be equal to the difference between Ibex's adjusted tax basis in such
assets and the fair market value of all of the merger consideration transferred
by Castelle as of the effective time of the Merger plus the liabilities of Ibex
assumed by Castelle as a result of the Merger. Ibex's tax liability associated
with such recognized gain would be assumed by Castelle as part of the Merger.
Accounting Treatment
The Merger is structured to qualify as a pooling of interests for
accounting purposes. Under this accounting treatment, the recorded assets and
liabilities and the operating results of both Castelle and Ibex are carried
forward to the combined operations of the surviving corporation at their
recorded amounts. No recognition of goodwill in the combination is required of
either party to the Merger.
To support the treatment of the Merger as a pooling of interests, the
affiliates of Castelle and Ibex have entered into agreements imposing certain
resale limitations on their stock. See "-- Related Agreements -- Affiliate
Agreements" above. It is a condition to each of Castelle's and Ibex's
obligations to consummate the Merger that, among other things, Castelle receive
a letter from Coopers & Lybrand L.L.P., its independent auditors, to the effect
that the Merger will be treated as a pooling of interests for accounting
purposes.
Affiliates' Restrictions on Sale of Castelle Common Stock
The shares of Castelle Common Stock to be issued in the Merger will have
been registered under the Securities Act pursuant to a Registration Statement on
Form S-4, thereby allowing such shares to be traded without restriction by all
former holders of Ibex capital stock who (i) are not deemed to be "affiliates"
of Ibex at the time of the Ibex Special Shareholders Meeting (as "affiliates" is
defined for purposes of Rule 145 under the Securities Act) and (ii) who do not
become "affiliates" of Castelle after the Merger. Ibex shareholders who may be
deemed to be "affiliates" of Ibex will be so advised prior to the Merger.
The Merger Agreement requires Ibex affiliates to enter into agreements not
to make any public sale of any Castelle Common Stock received upon conversion of
Ibex capital stock in the Merger prior to the date Castelle shall have publicly
released financial results for a period that includes at least 30 days of
combined operations of Ibex and Castelle, and thereafter not to make any sale of
Ibex Common Stock received upon conversion of Ibex capital stock in the Merger,
except in compliance with Rule 145 under the Securities Act. See "-- Related
Agreements -- Affiliate Agreements" above. In general, Rule 145, as currently in
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effect, imposes restrictions on the manner in which such affiliates, who remain
affiliates of Castelle after the Merger, may make resales of Castelle Common
Stock and also on the number of shares of Castelle Common Stock that such
affiliates, and others (including persons with whom the affiliates act in
concert), may sell within any three-month period. These restrictions will
generally apply for at least a period of two years after the Merger (or longer
if the person remains an affiliate of Castelle).
Dissenters' Rights
If the Merger Agreement is approved by the required vote of Ibex
shareholders and is not abandoned or terminated, holders of Castelle and Ibex
capital stock who did not vote in favor of the Merger may, by complying with
Sections 1300 through 1312 of the California Law, be entitled to dissenters'
rights as described therein. It should be noted, however, that Castelle's
obligation to consummate the Merger is conditioned on the fact that the holders
of no more than an aggregate of 2% of the outstanding shares of Ibex Common
Stock are eligible to exercise dissenters' rights. The record holders of the
shares of Castelle and Ibex capital stock that are eligible to, and do, exercise
their dissenters' rights with respect to the Merger are referred to herein as
"Dissenting Shareholders," and the shares of stock with respect to which they
exercise dissenters' rights are referred to herein as "Dissenting Shares." If a
Castelle or Ibex shareholder has a beneficial interest in shares of Castelle or
Ibex capital stock, respectively, that are held of record in the name of another
person, such as a broker or nominee, and such shareholder desires to perfect
whatever dissenters' rights such beneficial shareholder may have, such
beneficial shareholder must act promptly to cause the holder of record timely
and properly to follow the steps summarized below.
The following discussion is not a complete statement of the California Law
relating to dissenters' rights, and is qualified in its entirety by reference to
Sections 1300 through 1312 of the California Law attached to this Prospectus as
Appendix C and incorporated herein by reference. This discussion and Sections
1300 through 1312 of the California Law should be reviewed carefully by any
holder who wishes to exercise statutory dissenters' rights or wishes to preserve
the right to do so, since failure to comply with the required procedures will
result in the loss of such rights.
Shares of Castelle or Ibex capital stock must satisfy each of the following
requirements to qualify as Dissenting Shares under the California Law: (i) the
shares of Castelle or Ibex capital stock must have been outstanding on the
Record Date or the Ibex Record Date, as applicable; (ii) the shares of Castelle
or Ibex capital stock must not have been voted in favor of the Merger; (iii) the
holder of such shares of Castelle or Ibex capital stock must make a written
demand that Castelle or Ibex repurchase shares of Castelle or Ibex capital stock
at fair market value (as described below); and (iv) the holder of such shares of
Castelle or Ibex capital stock must submit certificates for endorsement (as
described below). A vote by proxy or in person against the Merger does not in
and of itself constitute a demand for appraisal rights under the California Law.
Additionally, holders of more than 5% of the outstanding shares of Castelle
Common Stock would need to make a written demand that Castelle repurchase their
shares for such shares to qualify as Dissenting Shares under the California Law.
Pursuant to Sections 1300 through 1312 of the California Law, holders of
Dissenting Shares may require Castelle or Ibex to repurchase their Dissenting
Shares at a price equal to the fair market value of such shares determined as of
the day before the first announcement of the terms of the Merger, excluding any
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appreciation or depreciation as a consequence of the proposed Merger, but
adjusted for any stock split, reverse stock split or stock dividend that becomes
effective thereafter.
Within ten days following approval of the Merger by Castelle or Ibex
shareholders, the company whose shareholders have approved the Merger is
required to mail to each holder of shares of that company's capital stock not
voted in favor of the Merger a notice of the approval of the Merger, a statement
of the price determined by that company to represent the fair market value of
Dissenting Shares (which shall constitute an offer by that company to purchase
such Dissenting Shares at such stated price), and a description of the
procedures for such holders to exercise their rights as Dissenting Shareholders.
Within 30 days after the date on which the notice of the approval of the
Merger by the outstanding shares is mailed to Dissenting Shareholders, a
Dissenting Shareholder must demand that such company repurchase such
shareholder's Dissenting Shares in a statement setting forth the number and
class of Dissenting Shares held of record by such Dissenting Shareholder that
the Dissenting Shareholder demands that the company purchase, and a statement of
what the Dissenting Shareholder claims to be the fair market value of the
Dissenting Shares as of the day before the announcement of the proposed Merger.
The statement of fair market value in such demand by the Dissenting Shareholder
constitutes an offer by the Dissenting Shareholder to sell the Dissenting Shares
at such price within such 30-day period. Such holder must also submit to the
company or its transfer agent certificates representing any Dissenting Shares
that the Dissenting Shareholder demands the company purchase, so that such
Dissenting Shares may either be stamped or endorsed with the statement that the
shares are Dissenting Shares or exchanged for certificates of appropriate
denomination so stamped or endorsed.
If, upon the Dissenting Shareholder's surrender of the certificates
representing the Dissenting Shares, the company and a Dissenting Shareholder
agree upon the price to be paid for the Dissenting Shares and agree that such
shares are Dissenting Shares, then the agreed price is required by law to be
paid to the Dissenting Shareholder within the later of 30 days after the date of
such agreement or 30 days after any statutory or contractual conditions to the
consummation of the Merger are satisfied or waived.
If the company and a Dissenting Shareholder disagree as to the price for
such Dissenting Shares or disagree as to whether such shares are entitled to be
classified as Dissenting Shares, such holder has the right to bring an action in
California Superior Court, within six months after the date on which the notice
of the approval of the Merger by the company's shareholders is mailed, to
resolve such dispute. In such action, the court will determine whether the
shares of the company's capital stock held by such shareholder are Dissenting
Shares, the fair market value of such shares of the company's capital stock, or
both. The California Law provides, among other things, that a Dissenting
Shareholder may not withdraw the demand for payment of the fair market value of
Dissenting Shares unless Ibex or Castelle consents to such request for
withdrawal.
Merger Expenses
Castelle and Ibex estimate that they will incur direct transaction costs of
approximately $650,000 associated with the Merger. These nonrecurring
transaction costs will be charged to operations upon consummation of the Merger.
In addition, Castelle anticipates incurring a charge upon consummation of the
Merger of $200,000 to $300,000 to reflect costs and expenses relating to
integrating the two companies. See "Pro Forma Condensed Combined Financial
Information" included elsewhere herein.
Whether or not the Merger is consummated, except as set forth below, each
party will bear its own costs and expenses in connection with the Merger and the
transactions provided for therein.
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Castelle has agreed to reimburse Ibex for the first $25,000 of audit fees,
costs and expenses invoiced by Coopers & Lybrand L.L.P. and incurred by Ibex in
the audit by Coopers & Lybrand L.L.P. of Ibex's fiscal years ended December 31,
1995 and 1994, as well as one-half of any additional audit fees, costs and
expenses invoiced by Coopers & Lybrand L.L.P. Castelle has also agreed to pay
Unterberg Harris a transaction fee of $250,000, which amount has been included
in the direct transaction costs above, if the Merger is consummated. Castelle
will also reimburse Unterberg Harris for the reasonable out-of-pocket expenses
incurred by Unterberg Harris in rendering services to Castelle in connection
with the Merger. See "The Merger and Related Transactions -- Opinion of
Financial Advisor to Castelle."
Regulatory Matters
Castelle and Ibex are not aware of any governmental or regulatory approvals
required for consummation of the Merger, other than compliance with the federal
securities laws and applicable securities and "blue sky" laws of the various
states.
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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements,
including the notes thereto, have been prepared to give effect to the Merger,
using the pooling of interests method of accounting, and are qualified in their
entirety by reference to, and should be read in conjunction with, the historical
financial statements of Castelle and Ibex, including the notes thereto,
incorporated elsewhere herein.
The unaudited pro forma condensed combined financial statements reflect
certain assumptions deemed probable by management regarding the proposed Merger
(e.g., that share information used in the pro forma information approximates
actual share information at the effective date of the Merger). No adjustments to
the unaudited pro forma condensed combined financial information have been made
to account for different possible results in connection with the foregoing, as
management believes that the impact on such information of the varying outcomes,
individually or in the aggregate, would not be materially different.
The unaudited pro forma condensed combined balance sheet as of June 28,
1996 gives effect to the Merger as if it had occurred on June 28, 1996, and
combines the unaudited condensed consolidated balance sheet of Castelle as of
June 28, 1996 and the unaudited condensed balance sheet of Ibex as of June 30,
1996.
The unaudited pro forma condensed combined statements of operations combine
the historical consolidated statements of operations of Castelle and the
historical statements of operations of Ibex for each of the two years in the
period ended December 31, 1995 (audited) and the six months ended June 28, 1996
(unaudited), in each case as if the Merger had occurred at the beginning of the
earliest period presented.
Castelle and Ibex estimate that they will incur direct transaction costs of
approximately $650,000 associated with the Merger, which will be charged to
operations upon consummation of the Merger. In addition, it is expected that
following the Merger, Castelle will incur an additional charge to operations,
currently estimated to be between $200,000 and $300,000 to reflect costs
associated with integrating the two companies. This range is a preliminary
estimate only and is therefore subject to change. There can be no assurance that
Castelle will not incur additional charges to reflect costs associated with the
Merger or that management will be successful in its efforts to integrate the
operations of the two companies.
Such unaudited pro forma condensed combined financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the Merger occurred at the beginning of the periods presented, nor
is it necessarily indicative of a future financial position or results of
operations. These unaudited pro forma condensed combined financial statements
are based upon the historical consolidated financial statements of Castelle and
the historical financial statements of Ibex and should be read in conjunction
with the respective financial statements and notes thereto of Castelle and Ibex,
included elsewhere in this Prospectus and do not incorporate any benefits from
cost savings or synergies of operations of the combined company.
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<TABLE>
<CAPTION>
CASTELLE AND IBEX TECHNOLOGIES, INC.
Unaudited Pro Forma Condensed Combined Balance Sheet
June 28, 1996
(in thousands)
Pro Pro
Forma Forma
Castelle Ibex Adjustments Combined
-------- ---- ----------- --------
(unaudited) (unaudited) (unaudited) (unaudited)
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents............. $ 7,416 $ 279 $ 7,695
Accounts receivable................... 2,266 929 3,195
Inventories........................... 4,988 36 5,024
Prepaid expenses and other current assets 558 114 672
------- ------ -------
Total current assets.............. 15,228 1,358 16,586
Property and equipment, net............... 374 126 500
Other assets, net......................... 94 94
------- ------ -------
Total assets...................... $15,696 $1,484 $17,180
======= ====== =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Notes payable......................... $ -- $ 25 $ 25
Accounts payable...................... 1,869 135 2,004
Deferred revenue -- 145 145
Accrued liabilities................... 2,118 102 2,220
Income taxes payable ................. 123 123
Accrued integration and merger costs.. $950(2) 950
------- ------- ---- -------
Total current liabilities......... 3,987 530 950 5,467
------- ------- ---- -------
Deferred income taxes................. 30 30
------- -------
Shareholders' equity:
Preferred stock....................... 300 (300) --
Common stock.......................... 23,298 90 300 23,688
Shareholder notes receivable.......... (296) -- -- (296)
Accumulated deficit................... (11,293) 534 (950)(2) (11,709)
------- ------- ---- -------
Total shareholders' equity........ 11,709 924 (950) 11,683
------- ------- ---- -------
Total liabilities and
shareholders' equity............ $15,696 $1,484 $ 0 $17,180
======= ====== ====== =======
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
56
<PAGE>
CASTELLE AND IBEX TECHNOLOGIES, INC.
Unaudited Pro Forma Condensed Combined Statements of Operations
Years Ended December 31, 1993, 1994 and 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Castelle Ibex Pro Forma Combined
--------------------------- ------------------------- --------------------------
1993 1994 1995 1993 1994 1995 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $ 17,787 $ 19,486 $ 25,082 $ 1,791 $ 2,708 $ 3,091 $ 19,578 $ 22,194 $ 28,173
Cost of sales................. 11,346 11,503 13,571 554 691 732 11,900 12,194 14,303
--------- --------- --------- --------- -------- --------- --------- --------- ----------
Gross profit.............. 6,441 7,983 11,511 1,237 2,017 2,359 7,678 10,000 13,870
--------- --------- --------- --------- -------- --------- --------- --------- ----------
Operating expenses:
Research and development.... 2,152 2,179 2,018 245 432 648 2,397 2,611 2,666
Sales and marketing......... 5,628 4,384 5,641 638 988 1,391 6,266 5,372 7,032
General and administrative.. 1,977 1,446 1,405 289 256 262 2,266 1,702 1,667
Restructuring charge........ 615 -- -- -- -- -- 615 -- --
--------- --------- --------- --------- -------- --------- --------- --------- ----------
Total operating expenses.. 10,372 8,009 9,064 1,172 1,676 2,301 11,544 9,685 11,365
--------- --------- --------- --------- -------- --------- --------- --------- ----------
Operating income (loss)....... (3,931) (26) 2,447 65 341 58 (3,866) 315 2,505
Interest income (expense)..... (349) (481) (296) -- -- -- (349) (481) (296)
Other income (expense) net.... (515) 129 (53) 1 (8) (4) (514) 121 (57)
--------- --------- --------- --------- -------- --------- --------- --------- ----------
Income (loss) before provision
for income taxes............ (4,795) (378) 2,098 66 333 54 (4,729) (45) 2,152
Provision for (benefit from)
income taxes -- -- 74 39 121 (5) 39 121 69
--------- --------- --------- --------- -------- --------- --------- --------- ----------
Net income (loss)............. $ (4,795) $ (378) $ 2,024 $ 27 $ 212 $ 59 $ (4,768) $ (166) $ 2,083
========= ========= ========= ========= ======== ========== ========= ========= ==========
Net income (loss) per share(1) $ (12.11) $ (0.91) $ 0.77 $ 0.15 $ 1.11 $ 0.30 $ (5.48) $ (0.17) $ $0.59
========= ========= ========= ========= ======== ========== ========= ========= ==========
Shares used in per share
calculation(1) 396 414 2,673 174 191 199 870 949 3,519
========= ========= ========= ========= ======== ========== ========= ========= ==========
Pro Forma net income (loss)
per share(2) $ (0.16)
========
Pro Forma shares used in per share
calculation(2) 2,396
========
</TABLE>
See accompanying notes to pro forma combined condensed financial
statements.
57
<PAGE>
CASTELLE AND IBEX TECHNOLOGIES, INC.
Unaudited Pro Forma Condensed Combined Statements of Operations
Six Months Ended June 30, 1995 and June 28, 1996
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Castelle Ibex Pro Forma Combined
------------------------- ---------------------------- ----------------------------
1995 1996 1995 1996 1995 1996
------ ------ ------ ------ ------ -----
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net sales....................... $ 11,874 $ 13,425 $ 1,393 $ 2,075 $ 13,267 $ 15,500
Cost of sales................... 6,385 7,117 355 444 6,740 7,561
----------- ----------- ------------ ------------- ------------ -------------
Gross profit.................... $ 5,489 $ 6,308 1,038 1,631 6,527 7,939
----------- ----------- ------------ ------------- ------------ -------------
Operating expenses:
Research and development...... $ 996 $ 1,057 418 342 1,414 1,399
Sales and marketing........... 2,785 3,199 660 760 3,445 3,959
General and administrative.... $ 623 $ 718 129 153 752 871
----------- ----------- ------------ ------------- ------------ -------------
Total operating expenses $ 4,404 $ 4,974 1,207 1,255 5,611 6,229
----------- ----------- ------------ ------------- ------------ -------------
Operating income (loss)......... $ 1,085 $ 1,334 (169) 376 916 1,710
Interest income (expense), net.. (192) 167 (192) 167
Other income (expense) net...... -- (75) (5) 10 (5) (65)
----------- ----------- ------------ ------------- ------------- -------------
Income (loss) before provision
for income taxes $ 893 $ 1,426 (174) 386 719 1,812
Provision for (benefit from)
income taxes 23 64 (21) 162 2 226
----------- ----------- ------------ ------------- ------------ -------------
Net income (loss)............... $ 870 $ 1,362 $ (153) $ 224 $ 717 $ 1,586
=========== =========== ============ ============= ============ =============
Net income (loss) per share..... $ 0.34 $ 0.35 $ (1.13) $ 1.11 $ 0.21 $ 0.33
=========== =========== ============ ============= ============ =============
Shares used in per share
calculation.................. 2,648 3,887 135 201 3,487 4,744
=========== =========== ============ ============= ============ =============
</TABLE>
58
<PAGE>
CASTELLE AND IBEX TECHNOLOGIES, INC.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. Pro Forma Basis of Presentation
These unaudited pro forma condensed combined financial statements reflect
the issuance of 791,549 shares of Castelle Common Stock in exchange for an
aggregate of 160,251 shares of Ibex Common Stock and 28,800 shares of Ibex
Preferred Stock in connection with the Merger, assuming the fair market value of
a share of Castelle Common Stock on the business day immediately preceding the
Merger is $7.00.
<TABLE>
<CAPTION>
Preferred Shares Equivalent
to be Converted Shares Number of
Shares to Common Outstanding at Castelle
Outstanding Stock Closing Common Shares
--------------------------------------------------------------
Ibex shares outstanding at June 30, 1996:
<S> <C> <C> <C> <C>
Common..................................... 141,016 19,235 160,251 649,168
Series A Convertible Preferred............. 48,035 (19,235) 28,800 142,381
-------
Castelle Common Shares to be issued:........... 791,549
Castelle Common Shares outstanding at June 28, 1996 3,620,844
---------
Total Castelle Common Shares outstanding after
completion of the Merger................... 4,412,393
=========
</TABLE>
The actual number of shares of Castelle Common Stock to be issued, as well
as the exchange ratios, will be determined at the effective time of the Merger
based on the closing price of Castelle Common Stock on the business day
immediately preceding the Merger Date, and the number of shares of Ibex Common
and Ibex Preferred Stock and Ibex Options outstanding.
2. Pro Forma Combined Balance Sheet
Castelle and Ibex estimate they will incur direct transaction costs of
approximately $650,000 associated with the Merger consisting of transaction fees
for investment bankers, attorneys, accountants, financial printing and other
related charges. These nonrecurring transaction costs will be charged to
operations upon consummation of the Merger. It is expected that following the
Merger, Castelle will incur an additional charge to operations, currently
estimated to be between $200,000 and $300,000 to reflect costs associated with
integrating the two companies. The Pro Forma Condensed Balance Sheet gives
effect to such costs (estimated at $950,000 in total) as if such costs had been
incurred as of June 28, 1996.
The direct transaction costs and additional charge are not reflected in the
Pro Forma Combined Condensed Statements of Operations.
59
<PAGE>
The following table reconciles the numbers of shares used in the pro forma
per share computations to the numbers set forth in Castelle's and Ibex's
historical statements of operations:
<TABLE>
<CAPTION>
Six Months
Ended
Years Ended December 31, June 28,
------------------------ -----------
1994 1995 1996
Shares used in per share calculation (in thousands, ----------- ----------- -----------
except estimated Applicable Fraction):
<S> <C> <C> <C>
Historical - Castelle Common Shares.................................. 414 2,673 3,887
Historical - Ibex Common Shares...................................... 132 137 138
Estimated Applicable Fraction........................................ 4.05094 4.05094 4.05094
----------- ----------- -----------
Castelle Common Shares to be issued in return for Ibex Common Shares. 535 553 558
----------- ----------- -----------
Historical - Ibex Outstanding options (1)............................ 14 15
Estimated Applicable Fraction........................................ 4.05094 4.05094 4.05094
----------- ----------- -----------
Castelle Common Shares to be reserved for Ibex Options............... -- 56 62
----------- ----------- -----------
Historical Ibex Preferred Shares (1)................................. 48 48
----------- ----------- -----------
Estimated Applicable Fraction........................................ 4.94378 4.94378
----------- ----------- -----------
Castelle Common Shares to be issued for Ibex Preferred Shares........ -- 237 237
----------- ----------- -----------
Shares used in proforma per share calculation........................ 949 3,519 4,744
----------- ----------- -----------
</TABLE>
(1) Options and preferred shares not included as they would be anti-dilutive.
60
<PAGE>
BUSINESS OF CASTELLE
General
Castelle designs, develops, markets and supports network enhancement
products, both software and hardware, that improve the productivity, performance
and functionality of local area networks ("LANs") and enhance the LAN user's
ability to communicate. Castelle's current products include FaxPress fax server
systems, JetPress and LANpress print servers and a range of software
enhancements for Castelle's fax and print server product lines. In February
1996, Castelle entered the Small Office/Home Office ("SOHO") market through its
license agreement and joint marketing arrangement with 3Com Corporation ("3Com")
as the supplier of print, fax, and CD-ROM servers for 3Com's Office- Connect
products. Castelle's products are characterized by their ease of use and
installation, reliability, cost-effectiveness and compatibility with leading
network operating systems.
Industry Background
In the mid-1980s, organizations began to interconnect personal computers
into LANs in order to allow work groups to share files and peripherals such as
printers. Originally, these LANs consisted of a dedicated personal computer,
called a file server, on which the network operating system was installed, and
multiple personal computers on which users of the LAN ran their applications.
The network operating system on the file server provided the server
administration and basic file and print sharing. As networks have proliferated
throughout organizations and client/server architectures have gained acceptance,
LANs have become increasingly complex, the size and graphical intensity of files
being transmitted has increased and the applications operating on the LAN have
become more mission-critical. These factors have caused network administrators
to seek network enhancement products which can improve network performance,
enhance the functionality of the current installed base of network hardware and
cost-effectively convert single-user resources such as stand-alone printers and
telephone lines into shared LAN resources. Fax servers and print servers are two
of the primary network enhancement solutions that have emerged to provide
cost-effective improvements in network performance and functionality.
Fax Servers. Fax machines typically used in business environments are
characterized by relatively low quality transmissions, low data transmission
rates and the inability to send and receive faxes simultaneously. Fax machines
also require labor-intensive sorting, copying and routing of faxes in paper
form. Alternatively, a dedicated personal computer with a fax modem, while able
to store incoming faxes electronically and improve fax quality, is not
economical in a LAN environment because each user must have his or her own fax
modem, and dedicated telephone line. Fax servers have emerged as an economical
alternative for providing high performance faxing capability to network users. A
fax server connects a LAN to one or more telephone lines, enabling a large
number of users to share dedicated telephone lines. Users are able to send faxes
directly from their computers or workstations, eliminating the need to print a
document, take it to a stand-alone fax machine and wait for its transmission. In
addition, a fax server can sort incoming faxes and route them electronically and
confidentially directly to the electronic mailboxes of the intended recipients
and store non-urgent outgoing faxes for automatic transmission at an "off-peak"
time when telephone rates are lower.
Print Servers. The sharing of printers, a basic benefit of a LAN, has
traditionally been provided by connecting a printer either to a network file
server or to a dedicated personal computer on the network. However, direct
connection to the file server has several disadvantages, including the risk of
61
<PAGE>
the file server being overburdened by the processing required to print large or
graphically complex files, lower print transfer speeds and location
inflexibility. Similarly, printer connection to a dedicated personal computer,
while providing better location flexibility, is more costly and offers
substantially lower print file transfer speed than a dedicated print server can
provide. A print server directly connects one or more printers to a LAN,
providing a cost-effective, high-speed solution to the demand for shared print
resources on a LAN. In addition to providing location flexibility and
convenience, print servers improve network performance by relieving the burden
on the file server. Furthermore, print servers enable users to access essential
information about the status of the printer and their print files and to select
their desired printer configuration.
Network enhancement solutions, such as fax servers and print servers, have
emerged to gain significant market acceptance due to their ability to improve
network performance and personal productivity, enhance network functionality and
preserve the investment many companies have made in network hardware. Castelle
believes that as the client/server computing paradigm continues to gain
acceptance and mission-critical applications continue to be ported from
mainframes and minicomputers to LANs, corporate processes will become more
dependent on the LAN and the performance enhancement that can be achieved on the
corporate LAN will more directly impact overall productivity. As LAN users and
network managers continue to recognize the benefits of network enhancement
products, and as additional network functionality such as facsimile/document
communication across the Internet, remote access, scanning, electronic mail and
multimedia communications continue to emerge, Castelle believes that the demand
for such network enhancement products will increase.
Castelle Strategy
Castelle's objective is to be a leading worldwide supplier of network
enhancement solutions. Castelle intends to continue to provide innovative
products focused on enhancing the LAN user's ability to communicate. Key
elements of Castelle's strategy include:
Focus on Network Enhancement Products. Castelle focuses exclusively on
providing innovative, reliable, easy-to-use network enhancement products. Since
its inception, Castelle has focused on developing networking products that
utilize advanced software to tightly integrate proprietary hardware systems with
standard computing platforms. As a result, Castelle believes it has developed a
high level of expertise in networking, software development, hardware design and
telephony technology. Castelle plans to capitalize on these attributes by
continuing to focus on providing network enhancement products which enable users
to communicate more effectively.
Broaden Software Offerings. In order to leverage its significant installed
base of fax and print servers, Castelle is developing a range of value-added
software options which increase the functionality of Castelle's products and
enable them to address specialized applications. Examples of applications
currently available include electronic mail gateways, optical character
recognition/image enhancement and billing/analysis and other management utility
software. Utilizing an extensive internal database of over 3,000 corporate
end-users, Castelle is marketing these products through a direct telemarketing
team.
Expand Product Line. Castelle is leveraging its expertise in easy-to-use,
cost-effective enhancement solutions to offer new network and communications
enhancement products. In addition to its recent efforts in the SOHO market,
Castelle continues to expand both its fax server and print server product lines.
62
<PAGE>
Penetrate the Small Office/Home Office Market. As the productivity benefits
of networks have been demonstrated, small offices and businesses which
previously have used stand-alone personal computers are now seeking
cost-effective devices which provide basic printing and faxing functionality and
are easy to use, install and maintain. Castelle is addressing this market
through its licensing and joint marketing agreement with 3Com in which Castelle
provides print and fax workgroup server modules for 3Com's OfficeConnect product
line.
Strengthen and Expand Distribution Channels. Castelle has established a
two-tier domestic and international distribution network of leading national and
regional network product distributors and resellers. Castelle also sells through
leading system integrators such as Electronic Data Systems, Inc. ("EDS") and OEM
vendors such as Ricoh Corporation ("Ricoh") and Fujitsu Ltd. ("Fujitsu").
Castelle is expanding its distribution network in North America, Europe, the
Asia-Pacific and Latin American regions and other markets in order to capitalize
on the rapid growth in LANs in these regions.
Leverage Strategic Relationships. Castelle augments its product offering by
establishing relationships with companies able to provide products in areas
outside of Castelle's core technical competencies or in instances where internal
development of such products is not cost-effective. Castelle also establishes
relationships with numerous leaders in hardware and software technology to
enable it to keep abreast of, and respond quickly to, technological changes that
may affect the network enhancement market.
Products
Castelle develops and markets a broad range of products that enhance
network productivity, performance and functionality. Castelle's current products
include FaxPress fax server systems, JetPress and LANpress print servers and a
range of software enhancements for its fax and print server product lines. In
1996, Castelle entered the SOHO market through its licensing and joint marketing
agreement with 3Com which provides print and fax workgroup server modules for
3Com's OfficeConnect product family.
Fax Servers
Castelle's fax server product line includes FaxPress fax server systems as
well as FaxPress software. Castelle's line of FaxPress software includes client
applications and interfaces for use with the FaxPress system and software
enhancements and options. Castelle's fax server products allow network users to
send, receive, route, print, store, edit and retrieve fax transmissions from
their own personal computers on a LAN. These fax server products enable all
network users to access fax services without requiring a large investment in
stand-alone fax machines, fax modem boards or additional telephone lines.
Network-based fax capability is a logical extension of network printing
capability, enabling users to transmit documents directly to a fax device as
easily as if they were printing to a laser printer or sending an electronic mail
message. Network fax servers redirect fax output from applications running on a
LAN user's personal computer or workstation to a fax queue. The fax server then
converts the file to fax format and sends the fax to the intended recipient.
Castelle's FaxPress products are designed to comply with regulatory standards in
the United States as well as Australia, Canada, Germany, Hong Kong, Japan,
Korea, the Netherlands, Singapore, Switzerland and the United Kingdom. Castelle
is seeking regulatory clearance in a number of other countries. During the first
six months of 1996, fax servers represented approximately 44% of total net
sales. During 1995 and 1994, fax servers represented 44% and 36%, respectively,
of total net sales.
63
<PAGE>
FaxPress Systems. Castelle's FaxPress fax server systems are
high-performance network-based fax solutions. FaxPress is a compact,
self-contained fax server that connects directly to a LAN and is accompanied by
software that is installed from any personal computer or workstation on the LAN.
FaxPress system products are available in configurations that support one, two
or four dedicated telephone lines. In addition, FaxPress system products can
function as parallel and serial port print servers. Key features of the FaxPress
product line (configured with its current software versions) include:
o Ability to send faxes from many applications: Easy faxing from within
any Windows, Windows 95, Windows NT and DOS application and certain
electronic mail applications. Castelle expects to introduce client
software for the Macintosh in the second quarter of 1996.
o Electronic routing of faxes: Electronic routing of faxes enhances
efficiency and confidentiality through electronic delivery direct to
the electronic mailbox of the intended recipient.
o Retention of document formatting: Retention of all text, fonts and
graphics generated by PCL and other leading document format languages.
Any document that can be printed to a Hewlett-Packard laser printer
can be faxed using the FaxPress system.
o Ability to use fax servers in tandem: Load sharing between fax servers
provides the capability to stack up to five fax server units and share
up to 20 modems for outbound faxing.
o No waiting for document conversion: Internal image processing by the
FaxPress provides high image quality and frees the personal computer
for end-user applications. The user does not have to wait for a
document to be converted to a fax image before using the personal
computer for other tasks.
o Group broadcasts/scheduled transmission: Delayed sending feature
allows users to send faxes during "off-peak" hours, facilitating
low-cost communications for group broadcast and other uses.
Castelle offers a family of FaxPress fax server systems ranging from
entry-level products to high-end fax solutions capable of supporting over 500
users. The suggested U.S. list prices for FaxPress fax servers range from $1,695
to $5,795. The following table summarizes Castelle's FaxPress system product
line:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NetWorking Environment
Number Number of ----------------------
of Micro- Memory NetWare, Windows TCP/IP
Product Model Modems processors (Megabytes) Network Topology 3.x, 4.x NT Support
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OfficeConnect Fax 1 1 4 Ethernet x x x
FaxPress 1500 1 or 2 1 4 Ethernet x x
FaxPress 1500-N 1 or 2 1 8 Ethernet x x x
FaxPress 3000 2 or 4 2-3 4 Ethernet/Token Ring x x
FaxPress 3500 2 or 4 2-3 8 Ethernet/Token Ring x x x
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
o FaxPress Software. Castelle's line of FaxPress software includes
client applications and interfaces for use with FaxPress systems and
software enhancements and options.
64
<PAGE>
o Client Applications and Interfaces: Castelle has developed fax
applications, available for both Windows and DOS environments, which
reside on the LAN user's personal computer and are included as part of
Castelle's FaxPress products. For the user who has already installed
other third-party fax application software, Castelle offers software
that enables the user to access the capabilities of Castelle's
FaxPress products through such third-party software. In addition,
Castelle is developing an interface which enables Macintosh clients to
send and receive faxes through FaxPress systems. Castelle has also
developed utilities that permit network and systems administrators to
monitor and control the routing of fax files.
o Software Enhancements and Upgrades: Castelle offers a range of
value-added software options which increase the functionality of
Castelle's FaxPress systems and enable the FaxPress to address
specialized applications. Software upgrades and options are available
to the installed base of FaxPress units at prices ranging from $495 to
$995. The following table describes the available software options:
- --------------------------------------------------------------------------------
Software Option Description
- --------------------------------------------------------------------------------
Lotus cc:Mail Gateway Integrates
the FaxPress into the cc:Mail
environment, enabling users
to send and receive faxes
within cc:Mail.
Novell MHS Mail Gateway Integrates
the FaxPress into any Novell
MHS-compatible electronic
mail application, enabling
users to send and receive
faxes within the electronic
mail package.
Novell GroupWise Gateway Integrates
the FaxPress into GroupWise,
enabling users to send and
receive faxes from GroupWise
in addition to sending
documents in native format as
fax attachments.
Lotus Notes Gateway Integrates the
FaxPress into Lotus Notes,
enabling users to send and
receive faxes from Lotus
Notes.
Embedded Codes Gateway Enables
mainframe computer users to
send faxes using the FaxPress
server.
Optical Character Recognition/ Enables an incoming fax to be
converted into an editable
format.
Image Enhancement Image enhancement capability
enables the electronic
editing of a fax image to
correct visual defects.
Billing and Analysis Software Analyzes and allocates cost
of faxing by user, department
or customer and creates
"ready to print" reports.
FaxPress Print Server Software Enables the FaxPress to act
as a network print server.
- --------------------------------------------------------------------------------
Print Servers
Castelle's print server products perform network printing services
otherwise handled by a file server or a dedicated personal computer. Castelle
offers a family of multi-protocol external and internal print servers that
enhance overall network performance by reducing the burden on the file server or
a dedicated personal computer. During the first six months of 1996, print
servers represented 55% of total net sales. During 1995 and 1996, print servers
represented 56% and 64%, respectively, of total net sales.
Castelle believes its print servers provide a superior method of connecting
printers to a LAN for a number of reasons, including:
65
<PAGE>
o Network performance enhancement: Castelle's print servers enable
substantially higher print file transfer speeds than file servers
while reducing the data transfer and processing burden on file
servers.
o Plug-and-play in a multi-protocol environment: Castelle's print
servers offer easy installation and configuration, with multiple
protocols enabling a seamless integration into a mixed network
environment. This is not possible using either a dedicated personal
computer or a file server.
o Location flexibility: Castelle's print servers are self-contained, can
be located anywhere on a network and can support printer-clustering as
well as single printer connectivity.
o Cost-effectiveness: Castelle's print servers are more cost-effective
than dedicated personal computers or direct file server connections.
o Compatibility: Castelle's print servers are compatible with printers
from virtually all major printer vendors and support leading network
operating systems.
LANpress Product Line. Castelle's LANpress products are external print
servers that are independent nodes on a network. They represent superior methods
of connecting printers to a LAN due to their multi-protocol capabilities. With a
variety of configurations for a single printer or up to 4 printers, and support
for NetWare (true NDS), UNIX, Windows NT and Appletalk, LANpress is compatible
with printers with standard parallel or serial interfaces and is targeted at the
large installed base of stand-alone printers. LANpress has remote management and
configuration features enabling the network administrator to check for print
queues and status, locate sources of problems and reconfigure units within the
network from anywhere on the LAN. LANpress selectively routes to all networked
printers and thereby improves the productivity of all printers across the
network. LANpress products can serve up to 64 print queues on up to 16 file
servers. The suggested U.S. list price for LANpress print servers ranges from
$379 to $719.
The following table summarizes Castelle's line of LANpress external print
servers:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Network Topology Networking Environment
----------------- -------------------------------------------------- Flash
Product Token NetWare UNIX Windows Apple Upgrade
Configuration (1) Ethernet Ring 2.x, 3.x, 4.x TCP/IP NT Ethertalk Capability
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
OfficeConnect Print (1) x x x x x
LanPress Jr. MP (2) x x x x x x
LanPress 1P MP (3) x x x x x x
LanPress 2+1 MP (4) x x x x x x x
LanPress 3+1 MP (4) x x x x x x
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 2 Centronics parallel ports
(2) Connects directly to port on Printer
(3) 1 Centronics parallel port
(4) Numbers refer to the number of parallel and serial port connections,
respectively.
66
<PAGE>
JetPress Product Line. Castelle's JetPress products are easy to install
plug-and-play internal print servers that are inserted into the input/output
expansion slots of a printer and do not require software on a network file
server. The JetPress print servers are compatible with Hewlett-Packard LaserJet
models II, III, IIISi, 4, 4M, 4Si, PaintJet XL300, DesignJet and other
Hewlett-Packard printers with MIO expansion slots. JetPress is considerably
faster than most external network print server devices due to its direct
interface with the printer. JetPress print servers streamline shared printer
operations on a LAN by supporting up to 32 print queues on up to eight different
file servers. Castelle's JetPress works in both Novell Netware (2.x/3.x/4.x) and
UNIX environments allowing printers to be placed anywhere on the LAN. A Novell
user can submit a print job to a LaserJet with a JetPress board, while at the
same time another user can submit a print job from a UNIX system. The family of
JetPress models are available today for both Ethernet and Token Ring topologies.
The suggested U.S. list price for JetPress print servers ranges from $549 to
$749.
The following table summarizes Castelle's line of JetPress internal print
servers:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Networking Environment
Network Topology ---------------------------------------------------
------------------ Netware
Product Token --------------------- UNIX Windows
Configuration (1) Ethernet Ring 2.x 3.x 4.x TCP/IP NT
- --------------------------------------------------------------------------------------------------------
XIO x x x x x
<S> <C> <C> <C> <C> <C> <C> <C>
MIO+ x x x x x x x
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Refers to compatibility with printer input/output expansion slots.
Small Office/Home Office Market: The OfficeConnect Family of Products
Castelle has partnered with 3Com to develop the OfficeConnect product
family to target the SOHO marketplace. Under the agreement between the
companies, each party maintains proprietary rights to the products it develops.
Castelle has been responsible for developing the fax and print server modules,
while 3Com has been responsible for the hub unit and Integrated Services Digital
Network ("ISDN") dial-up router. Castelle and 3Com have engaged in joint
marketing activities to promote the products. The sales and marketing personnel
of each company have been provided with technical training and promotional
literature by the other company and the companies have cooperated in trade shows
and other promotional activities such as advertising and direct mail marketing.
Both the fax server and print server modules have the same look and feel as the
3Com OfficeConnect products. Castelle's fax server module is a low-cost,
single-line, workgroup-based fax sharing device. Castelle's print server module
has two parallel ports and is software upgradeable using flash memory. The
network operating systems supported by the fax server include NetWare and
Windows NT. The print servers also provide support for UNIX and peer-to-peer.
OfficeConnect CD-ROM Server. Castelle is introducing another member to the
OfficeConnect family. The OfficeConnect product line offers integrated
networking solutions focused on the needs of the small office and branch office
environments. The OfficeConnect CD-ROM Server, presently scheduled to be shipped
in the fourth quarter of 1996, will allow multiple users across the LAN to share
information on CD-ROMs simultaneously. The CD-ROM server is a multi-protocol
unit designed to provide simultaneous network access for up to seven attached
CD-ROM drives. It offers many of the key benefits that differentiate the
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OfficeConnect family from the competition, including easy installation, easy
manageability, reliability and advanced technology. Castelle has licensed
certain CD-ROM technology from Compact Devices, Inc., an acknowledged technology
leader in CD Server technology, in order to address key time-to-market
objectives with this new product.
Products Under Development
Hewlett-Packard Scanner Integration. In April 1996, Castelle entered into a
joint marketing and development relationship with Hewlett-Packard's Scanner
division to integrate its FaxPress product line with Hewlett Packard's ScanJet
product family. This integration will allow users on a network to instantly scan
in documents, edit them, and fax them out without the use of standalone fax
machines or scanners. This partnership is designed to provide users the benefit
of increased speed and higher quality.
FaxPress Systems. Castelle is continuing to expand and enhance its FaxPress
product line. Ongoing projects include the development of a new intelligent
modem board that will support up to four 28,800 bps modems. This new board is
being designed to comply with the latest fax standards and to allow a single
FaxPress unit to support up to eight telephone lines.
FaxPress Software. Castelle is currently developing a number of software
enhancements for its FaxPress product line including Microsoft Exchange
compatibility, an Internet browser gateway and an improved user interface.
o Microsoft Exchange Compatibility. Microsoft Exchange compatibility
will enable Microsoft Exchange users to send and receive faxes using
the FaxPress. In addition, this gateway will enable binary file
transfer from a FaxPress client to another FaxPress client or an
Exchange client.
o Internet Browser Gateway. The Castelle Internet Browser Gateway
software will allow the FaxPress server to respond to Hypertext Markup
Language ("HTML") requests. HTML is the predominant language of the
World Wide Web. With this server software, any LAN user, whether
connected to a LAN locally or as a mobile user through a
communications gateway, will be able to use a World Wide Web browser,
such as the popular browser developed by Netscape Communications
Corporation, to access the FaxPress server "home page fax director"
and view incoming faxes or to send a fax. This gateway capability
allows UNIX users with www browser to send and receive faxes, even
though FaxPress does not presently support the UNIX operating system.
o User Interface. Castelle continues to improve its user interface by
adding new functionality such as a more advanced phone book structure,
allowing for additional cover pages, making it easier to attach
documents for transmission and providing a new look and feel for wider
user acceptance.
Research and Development
Castelle was an early entrant into the fax server and print server markets
and has made substantial investments in research and development. Most of
Castelle's product development initiatives during these periods were directed
towards fax server products although much of the resultant technology has
application to the further development of Castelle's print server products. A
significant percentage of Castelle's research and development expenses are
related to software development. Castelle believes that its continued success
will depend in part upon its ability to enhance its existing products, introduce
new products on a timely basis, maintain compatibility with new releases of
network operating systems and other relevant software and continue to develop
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technology that can be incorporated into products that meet changing end-user
requirements. Castelle intends to leverage its proprietary technology and
industry expertise into new product offerings that it believes will further
enhance network users' productivity. In addition, Castelle intends to continue
to expand the software component of its products to enhance functionality and
improve performance.
To facilitate product development, Castelle works closely with its
end-users, VARs, distributors and strategic partners to identify market needs
and define product specifications early in the development process. In order to
develop products successfully, Castelle is dependent on timely access to
information about new developments in the marketplace. There can be no assurance
that Castelle will have such access or that it will be able to develop new
products successfully and respond effectively to technological change or new
product announcements by competitors.
Sales, Marketing and Distribution
Castelle sells its products through multiple channels depending on the
product, market and customer need. Castelle has an established two-tier domestic
and international distribution network of leading national and regional network
product distributors and resellers. Castelle also sells through leading system
integrators such as EDS and OEM vendors such as Ricoh and Fujitsu. Software
enhancements and options that complement the FaxPress product line are primarily
marketed directly by Castelle to registered end-users. The direct sales group
works closely with the distributors and VARs in qualifying sales opportunities
for the fax server and print server product lines. Castelle is expanding its
distribution network in North America, Europe, the Asian-Pacific and Latin
American regions and other markets in order to capitalize on the anticipated
growth in LANs in these regions. Castelle's European headquarters in the
Netherlands provides sales and support services to a distributor network
covering most European countries, with a primary emphasis on Germany and the
United Kingdom.
Demand for Castelle's products is created through targeted and active
participation in industry networking and communication trade shows, as well as
advertising in associated publications. Castelle also increases awareness of
Company products through advertising, generating client leads, instituting
direct mail campaigns, sending Company newsletters, offering seminars, trade
shows and conferences and other forms of public relations efforts. Castelle's
sales and marketing efforts are enhanced by a specific program designed to
encourage VARs and other resellers to promote and sell Castelle's products. Such
promotion is encouraged by providing participants in the program with technical
support on a priority basis, product literature, on-site sales and support
training, sales leads, free software upgrades, and other forms of sales
promotions. In addition to its other activities, Castelle's marketing staff
employs various research methods, gathering information from many sources such
as VARS and other resellers, customers, distribution partners, OEM partners,
strategic partners, and press/publication groups. Product development, sales and
client services/support personnel benefit from the information gathered in
planning future products.
Castelle's five largest distributors accounted for approximately 77% of its
net sales in the first six months of 1996, 70% of its net sales in 1995 and 67%
of its net sales in 1994. Macnica, Castelle's principal Japanese distributor,
and Ingram Micro, Castelle's largest domestic distributor, accounted for
approximately 38% and 16%, respectively, of Castelle's net sales for the first
six months of 1996, 29% and 18%, respectively, of its net sales in 1995, and 17%
and 23%, respectively, of its net sales in 1994. Sales to customers located in
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the Pacific Rim and Europe made up approximately 56%, 52% and 42% of Castelle's
net sales in the first six months of 1996, all of fiscal 1995, and all of fiscal
1994, respectively. The Pacific Rim has been the fastest growing sector for
Castelle primarily due to strong market growth and a relationship with Macnica.
Castelle's distributors typically represent other product lines that are
complementary to or compete with, those of Castelle. While Castelle attempts to
encourage its distributors to focus on its products through marketing and
support programs, these distributors may give higher priority to products of
other suppliers, thereby reducing the efforts they devote to selling Castelle's
products. In particular, certain of its competitors, including Hewlett-Packard
and Intel, sell a substantially higher total dollar volume of products through
several of Castelle's large United States distributors and, as a result,
Castelle believes such distributors give higher priority to products offered by
such competitors. Castelle's distributors are not contractually committed to
future purchases of Castelle's products and could discontinue carrying
Castelle's products at any time for any reason. In addition, because Castelle is
dependent on a small number of distributors for a significant portion of the
sales of its products, the loss of any of Castelle's major distributors or their
inability to satisfy their payment obligations to Castelle could have a
significant adverse effect on Castelle's business and operating results.
Castelle has a stock rotation policy with certain of its distributors which
allows them to return marketable inventory against offsetting orders. In
addition, due to industry conditions or the actions of competitors, inventory
levels of Castelle's products held by distributors could become excessive
resulting in product returns and inventory write downs. In 1993, as a result of
offering extended payment terms and other pricing promotions to certain
distributors, Castelle experienced returns from distributors which had a
material adverse effect on Castelle's operating results.
Customer Service and Support
A major requirement of Castelle's customers is quality support, available
at all times to assist customers with installation, use and operation issues.
Castelle has network engineers at corporate headquarters as well as in the
field. Support is provided under warranty as well as with different extended
software and hardware support agreements sold directly to the customer by
Castelle. An electronic bulletin board is available on a 24-hour basis to assist
customers in obtaining pertinent facts. Castelle is also implementing other
customer support activities, including a World Wide Web site as well as an
internal help desk system. Castelle's technical support is also accessible
through CompuServe.
Competition
The network enhancement products market is highly competitive, and Castelle
believes that such competition will intensify in the future. Increased
competition, direct and indirect, could adversely affect Castelle's business and
operating results through pricing pressure, loss of market share and other
factors. The principal competitive factors affecting the market for Castelle's
products include product functionality, performance, quality, reliability, ease
of use, quality of customer training and support, name recognition, price, and
compatibility and conformance with industry standards and adapting to changing
operating environments. Castelle currently competes principally in the market
for network print servers and network fax servers and software. Several of
Castelle's existing and potential competitors, most notably Hewlett-Packard and
Intel, have substantially greater financial, engineering, manufacturing and
marketing resources than does Castelle. Castelle also experiences competition
from a number of other companies. In addition to its current competitors,
Castelle may face substantial competition from new entrants into the network
enhancement market, including established and emerging computer, computer
peripherals, communications and software companies. As Castelle creates more
software products, it will come into increasing competition with companies such
as Symantec Corp. and Cheyenne Software Inc. who are producing competing
products. There can be no assurance that competitors will not introduce products
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incorporating technology more advanced than that of Castelle. In addition,
certain competing methods of communications such as the Internet or electronic
mail could adversely affect the market for fax products. Certain of Castelle's
existing and potential competitors are manufacturers of printers and other
peripherals, and these competitors may develop closed systems accessible only
through their own proprietary servers. There can be no assurance that Castelle
will be able to compete successfully or that competition will not have a
material adverse effect on Castelle's business and operating results.
Manufacturing
Castelle's current in-house manufacturing operations consist primarily of
material planning, final test and assembly, quality control and service repair.
Certain of Castelle's manufacturing operations are performed by third party
manufacturers that provide customized, integrated manufacturing services,
including procurement, manufacturing and associated printed circuit board
assembly. Castelle also relies on SerComm to provide it with certain of its
print server products. These arrangements enable Castelle to shift certain costs
to such providers, thereby allowing Castelle to focus resources on its product
development efforts. The failure of such manufacturers, particularly SerComm, to
meet their contractual commitments to Castelle could cause delays in product
shipments, thereby potentially adversely affecting Castelle's operating results.
Castelle does not currently have a long-term supply contract with any of
its manufacturing subcontractors or component suppliers except for an agreement
with SerComm relating to the manufacture of print servers. Castelle owns all
engineering and sourcing documentation and functional test equipment and tooling
used in manufacturing its products, except for the products which will be
produced by SerComm, and believes that it could shift product assembly to
alternate suppliers if necessary. Certain key components of Castelle's products,
including Token Ring interface modules from Silcom Manufacturing Technology
Inc., a modem chip set from Rockwell International Corporation, and a
microprocessor from Motorola, are currently available from only single sources.
Other components of Castelle's products are currently available from only a
limited number of sources. In addition, Castelle subcontracts a substantial
portion of its manufacturing to third parties, and there can be no assurance
that these subcontractors will be able to support the manufacturing requirements
of Castelle. Castelle does not have long-term supply contracts with these or any
other sole or limited source vendors and subcontractors other than an agreement
with a Taiwanese company, and purchases these components on a purchase order
basis. Castelle's ability to obtain these components or sub-assemblies is
dependent upon its ability to accurately forecast customer demand for its
products and to anticipate shortages of critical components or sub-assemblies
created by competing demands upon suppliers. If Castelle were unable to obtain a
sufficient supply of high-quality components or sub-assemblies from its current
sources, Castelle could experience delays in obtaining such components or
sub-assemblies from other sources. Resulting delays or reductions in product
shipments could adversely affect Castelle's business and operating results and
damage customer relationships. Furthermore, a significant increase in the price
of one or more of these components or sub-assemblies or Castelle's inability to
lower component or sub-assembly prices in response to competitive price
reductions could adversely affect Castelle's operating results.
Proprietary Rights
Castelle's success depends upon its technological expertise and proprietary
software technology. Castelle relies upon a combination of contractual rights
and copyright, trademark and trade secret laws to establish and protect its
technologies. Additionally, Castelle generally enters into confidentiality
agreements with those employees, distributors, customers and suppliers who have
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access to sensitive information and limits access to and distribution of its
software documentation and other proprietary information. Because of the rapid
pace of technological change in the LAN product industry, Castelle believes that
patent protection for its products is less significant to its success than the
knowledge, ability and experience of its employees, the frequent introduction
and market acceptance of new products and product enhancements, and the
timeliness and quality of support services provided by Castelle. See "Risk
Factors -- Intellectual Property Risks."
Despite the precautions taken by Castelle, it may be possible for
unauthorized third parties to copy certain portions of Castelle's products or to
reverse engineer or obtain and use information that Castelle regards as
proprietary. There can be no assurance that Castelle's precautions will be
adequate to deter misappropriation or infringement of its proprietary
technologies. Furthermore, while Castelle has obtained federal registration for
many of its trademarks in the United States, certain of its trademarks have not
been registered in the United States and Castelle has not registered any of its
trademarks in foreign jurisdictions. There can be no assurance that Castelle's
use of such unregistered trademarks will not be contested by third parties in
the future. In addition, the laws of some foreign countries either do not
protect Castelle's proprietary rights or offer only limited protection. Given
the rapid evolution of technology and uncertainties in intellectual property law
in the United States and internationally, there can be no assurance that
Castelle's current or future products will not be subject to third-party claims
of infringement. Any litigation to determine the validity of any third-party
claims could result in significant expense to Castelle and divert the efforts of
Castelle's technical and management personnel, whether or not such litigation is
determined in favor of Castelle. In the event of an adverse result in any such
litigation, Castelle could be required to expend significant resources to
develop non-infringing technology or to obtain licenses to the technology which
is the subject of the litigation. There can be no assurance that Castelle would
be successful in such development or that any such licenses would be available.
Castelle also relies on technology licenses from third parties. There can be no
assurance that these licenses will continue to be available to Castelle upon
reasonable terms, if at all. Any impairment or termination of Castelle's
relationship with third-party licensors could have a material adverse effect on
Castelle's business and operating results.
Government Regulation
Certain aspects of the networking industry in which Castelle competes are
regulated both in the United States and in foreign countries. Imposition of
public carrier tariffs, taxation of telecommunications services and the
necessity of incurring substantial costs and expenditure of managerial resources
to obtain regulatory approvals, particularly in foreign countries where
telecommunications standards differ from those in the United States, could
adversely affect Castelle's business and operating results. In addition, if
Castelle is unable to obtain regulatory approvals within a reasonable period of
time, Castelle's operating results could be adversely affected. Castelle's
products must comply with a variety of equipment, interface and installation
standards promulgated by communications regulatory authorities in different
countries. Changes in government policies, regulations and interface standards
could require the redesign of products and result in product shipment delays
which could materially and adversely affect Castelle's operating results.
Employees
As of September 18, 1996, Castelle employed a total of 97 full-time
equivalent personnel, 26 in manufacturing, 29 in sales and marketing, 22 in
engineering, 9 in customer service and 11 in finance and administration. In
addition, Castelle employs people on a part-time or contract basis. Castelle
intends to continue to hire additional personnel in connection with the
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expansion of its operations. Castelle has never had a work stoppage, no
employees are represented by a labor organization and Castelle considers its
employee relations to be good.
Castelle has entered into confidentiality agreements with each of its
employees (including its officers) that prohibit disclosure of confidential
information to anyone outside of Castelle both during and subsequent to
employment and require disclosure to Castelle of ideas, discoveries or
inventions relating to or resulting from the employee's work for Castelle and
assignment to Castelle of all proprietary rights to such ideas, discoveries or
inventions.
Properties
Castelle's headquarters, including its executive offices and corporate
administration, development, manufacturing, marketing, sales and technical
services/support facilities, are located in Santa Clara, California with an
aggregate of approximately 21,400 square feet of floor space. Castelle occupies
this facility under a lease, the term of which expires in October 2000. In
addition, Castelle rents office space for sales and customer support offices in
Florida, Illinois, Pennsylvania, Germany and the Netherlands. Castelle believes
its existing facilities will be adequate to meet its requirements for the
foreseeable future.
Legal Proceedings
Castelle is not a party to any material litigation and is not aware of any
pending or threatened litigation against Castelle that could have a material
adverse effect on Castelle's business, operating results or financial condition.
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BUSINESS OF IBEX
General
Based on a 1996 study prepared by International Data Corp. (IDC), Ibex is
the leading supplier of fax-on-demand software. Ibex's fax-on-demand product,
FactsLine, enables users to improve customer service and corporate communication
by sending out fax documents as requested by telephone or e-mail. Selling
through both VARs and directly to end users, Ibex's customers include corporate
users such as Delrina, Pennzoil, Microsoft and IBM, service providers such as
MCI, and government agencies. Leveraging its database expertise, document
management technology and fax processing capabilities, Ibex is developing a
next-generation information-on-demand product which will enable users to quickly
and seamlessly respond to e-mail, telephone and faxed document requests by
sending out information via fax, e-mail or via the Internet. Ibex is located in
El Dorado Hills, California and currently has 26 full-time equivalent personnel.
Industry Background
Fax-on-demand is the ability to use a touch-tone phone and a fax machine to
request and receive information on demand. Although there are a wide variety of
applications installed, the two most common applications are customer support
and literature fulfillment applications. The largest industry using
fax-on-demand is the high-technology sector, with applications also installed in
travel, government, newspapers, manufacturing and non-profit organizations.
Essentially, any company with information to disseminate publicly is a potential
fax-on-demand customer.
The growth of the Internet has impacted the way businesses manage and
distribute information. With the increased use of the Web, many companies are
now looking at using both fax-on-demand and the Web for information access. The
Web is used for information retrieval by those with Internet access, while
fax-on-demand is used by the large percentage of the population that do not have
Web access but do have access to a phone and a fax machine.
TECHNOLOGY USERS
1995 1999
Fax 800 Million 800 Million
Email 50 Million 100 Million
Web 25 Million 75 Million
Source: Fax data - Davidson Consulting
Web and Email data - International Data Corporation
Ibex Strategy
Ibex's strategy includes the following key elements:
o Maintain and Enhance Technology Leadership Position. Ibex is a
recognized market and technology leader and has developed a high level
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of expertise in critical areas such as document delivery, document
management and fax processing. Ibex expects to continue to
aggressively invest in development activity to maintain and enhance
its technology base.
o Provide scalable products which address a broad spectrum of users.
Ibex's products are designed for high performance and scalability, yet
are easy to use in regards to the basic feature set. This allows Ibex
to sell into two different distinct markets.
o Standard Level
The standard product, targeted to small to medium sized companies will
have fairly basic features and is limited in the number of telephone
lines and the volume of messages supported.
o Service Provider / Enterprise Level
Service providers and larger companies will have more service related
features such as billing features, open programming interfaces and
will use networked modules in order to support large numbers of
simultaneous voice/fax/data users
Leverage and Expand Existing VAR Channel. Ibex has developed an attractive
world-wide VAR channel over the past five years that consists of resellers
capable of selling products in the $5-$20K range to high-level management. Ibex
intends on leveraging the existing channel while continuing to expand the
channel via shows, seminars, PR activities and advertising.
Leverage Customer Base. Ibex has a strong customer list with technology
customers such as IBM, Microsoft, Lotus, Symantec, Macromedia, Dell, Compaq,
Ingram Micro, Intuit and others. Ibex also sells to mainstream non-technology
customers such as Coca-Cola, Pacific Bell, Bank of Boston, Bristol Meyers,
Pennzoil, US Navy, the White House, Burlington Northern Railway and others. [In
many cases it is the same decision-makers that purchased their Ibex
fax-on-demand systems that are also involved with Web.] Ibex has a
well-maintained customer database and intends to leverage the installed base
with the new product. Existing Ibex fax-on-demand systems will be able to be
used as the fax-on- demand component of Ibex's new Web/Email/fax product, thus
allowing a smooth upgrade path to this product.
Products
Ibex develops and markets a wide range of fax-on-demand products that
enables a company's information to be requested via telephone and delivered via
fax; and provides a variety of support packages to maintain customer
satisfaction.
Ibex's fax-on-demand product suite consists of its flagship system,
FactsLine for windows, along with optional advanced modules; FactsLine for
Windows NT; RightFAX Edition; Fax-It-Back; Robofax- PRO; and Robofax-PRO Lite.
FactsLine for Windows
Ibex's Windows-based, fax-on-demand software enables the access of
information via a phone and a fax machine and allows the dissemination of
information via "broadcasting" to a select database of fax numbers. With the
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addition of a number of optional advanced modules and features--Intelligent
Menus, Credit Card, Ibex API, Aspect Integration, FactsLine for Notes,
Transaction Manager, Fax Description Language, FactsLine for the Web, Ibex
OpenFax, and Fax Gateways--the management and capabilities of the FactsLine for
Windows systems can be further optimized.
Advanced Companion Modules/Features
Intelligent Menus: expands the branching technique of FactsLine to
include powerful logic and analysis capability.
Credit Card: allows FactsLine to verify, authorize and charge caller's
credit cards.
Ibex Application Programming Interface (API): enables FactsLine to
retrieve information from another computer and then fax or read back
dynamic information to a caller.
Aspect Integration: integrates FactsLine with Aspect to provide
powerful caller queuing, intelligent call routing and convenient fax
retrieval functions.
FactsLine for Notes: merges FactsLine with the document management
capabilities of Lotus Notes.
Transaction Manager: provides sophisticated management features to
achieve the ultimate performance from a FactsLine fax-on-demand
system.
Fax Description Language: provides a scripting language that adds
graphical interest to your faxable documents.
FactsLine for the Web: an add-on to Web servers, which allows native
Web documents to be used as fax-on-demand documents.
Ibex OpenFax: allows native Windows applications files on FactsLine
fax-on-demand systems.
Fax Gateway: allows third party programs to send fax transactions via
the intelligent Ibex fax engine.
FactsLine for Windows NT: RightFAX Edition
Developed for the Windows NT platform, the Right FAX Edition, is the first
fax-on-demand system to tightly integrate with the network capabilities of
RightFAX, to allow the fax-on-demand server and the network fax server to run on
one computer, while sharing the same fax hardware and phone lines.
Fax-It-Back
Ibex's entry-level Windows 95 fax-on-demand system, currently in Beta
testing, was specifically designed for small- to mid-size organizations and
departmental use and provides a professional multi-line (one to four lines)
system sturdy enough for production fax-on-demand, yet affordable and easy for
nontechnical staff to use.
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Robofax-PRO and Robofax-PRO Lite
An entry-level Windows-based fax-on-demand system, soon to be replaced by
Fax-It-Back, also was developed for small- to mid-size organizations.
Robofax-PRO runs up to four lines simultaneously, while Robofax-PRO Lite is a
one-line system.
As a complement to Ibex's product line of enhanced fax solutions, Ibex
offers a suite of support packages developed to provide flexible and helpful
support options on every product Ibex delivers.
Customer Support Packages
Ibex Rapid Response
A support program which provides specific services for 20% of the retail
price of the software purchased and targets a one hour response time.
Ibex Response
A support program which provides specific services for 15% of the retail
price of the software purchased and targets a three hour response time.
Ibex Access
A support program which provides support on a pay-per-call basis only.
Products Under Development
FactsLine for NT. Ibex is currently developing support for the Microsoft
Windows NT operating system for almost all Ibex products. Since the Ibex product
line consists of numerous modules and added-cost options, complete support for
NT across the entire product line will not occur until the second quarter of
1997. However, many modules are complete or are currently at customer sites
under beta test. A substantial portion of the product line will ready for
delivery by the end of 1996.
New Product Line. Ibex is developing a new product which will allow
companies to use one source of documents in an Ibex document library and to
automatically publish the documents using the following methods:
o Fax-on-Demand
o Email-on-Demand
o Web Delivery
Users can update one document, and the information will automatically be
available via the Web, via fax-on-demand, or via an enhanced auto-reply email
feature called Email-on-Demand. Web coding using HTML, Java, or CGI scripting is
not required. Similarly, there is no fax-on-demand or mail-server configuration
needed when documents are added or deleted.
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The new product allows cost effective, automated and immediate information
retrieval using tools that everyone understands. A technically-savvy consumer
can access a document using the Web. Another person can access the same document
via email if they choose. Still another person, perhaps not connected to the
Internet, can use their touch-tone phone to select the same document to be faxed
to their fax machine.
The new product line publishes documents automatically. All document
catalogs, whether they be an interactive Web page, a fax-on-demand index or an
email index, will be updated whenever the user adds, changes, or deletes a
document in the system.
Email-on-demand. Email-on-demand is the ability to use email (local or
Internet) to request and receive information on demand. Auto-reply email exists
today, but is limited to receiving one document, usually in text format.
The main benefits of email-on-demand are:
o Email via Internet is more prevalent than the Web
o Email-on-demand can be done on a "batch" basis. Users can order
documents, which will be delivered to their email inbox. In other
words, there is no waiting to download documents on the Web and no
"surfing" to find documents.
Web Delivery. The product will automatically create and maintain Web sites
for users. Navigation pages with hot links, and content pages with the actual
information content will be automatically created. The new product brings
document management, version control and other management features to Web site
management.
The Web site that this product creates is intended for automatic high
volume management and delivery of documents such as support or product
information. It is not designed to create highly graphical and interactive Web
pages, although the automatically created pages can easily be linked to the
custom created pages.
Product Benefits. This new product line will also introduce a new
"fax-it-to-me" feature for Web and email users. Thus, users of the product can
access the same source of document in the following ways:
o Download documents on World Wide Web direct to Web browser
o Select documents on Web, but choose to fax them (or forward them via
fax)
o Select documents in email message, to be returned via email
o Select documents in email message, to be returned via fax
o Select documents via telephone keypad, to be returned via fax
(fax-on-demand)
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Document-Centric. Ibex's new product will be a document warehouse with
built-in Web, email and fax publishing. Ibex has been in the business of
publishing documents, and brings this approach to the new product. Companies
will use this document-centric product to publish specification sheets, product
fact sheets, technical notes, financial information and other documents.
Competition
Traditional Fax-on-Demand Vendors. FaxBack, Inc., Copia International,
Spectrafax, and Nuntius among other smaller companies directly compete with Ibex
for fax-on-demand business, with FaxBack being the largest competitor. These
companies, although each with a different product offering and business model,
offer fax-on-demand systems that at least offer the basic functionality of the
Ibex product offering. Ibex has been able to maintain a leadership position by
offering advanced features such as Web/fax products, conversion tools, and
document management facilities.
Fax-on-Demand as Add-Ons to Other Products. Some voice mail, interactive
voice response and fax servers have fax-on-demand as an added cost option.
Octel, AVT, Omtool and Edify are examples of companies which offer fax-on-demand
as an option.
Programmer Toolkits. Visual Basic voice response programmer toolkits such
as Stylus Innovation's Visual Voice and Technically Speaking's Show-n-Tell also
compete indirectly with Ibex's products by providing programmer's tools that can
enable a programmer to build a basic fax-on-demand system. Stylus was recently
acquired by Artisoft while Technically Speaking was recently purchased by
Brooktrout.
As Ibex/Castelle move into the Web and email areas, other competitors will
appear. Currently, there are no direct competitors that provide an integrated
fax/email/Web information delivery system as envisioned by the new product line,
although many competitors exist that perform Web delivery of information.
Research and Development
Most of Ibex's research and development expenses are related to software
development. Ibex believes that its continued success will depend in part upon
its ability to enhance its existing products, introduce new products on a timely
basis, maintain compatibility with new releases of network operating systems and
other relevant software and continue to develop technology that can be
incorporated into products that meet changing end-user requirements. Ibex
intends to leverage its proprietary technology and industry expertise into new
product offerings that it believes will further enhance network users'
productivity.
To facilitate product development, Ibex works closely with its end-users,
VARs, distributors and strategic partners to identify market needs and define
product specifications early in the development process. In order to develop
products successfully, Ibex is dependent on timely access to information about
new developments in the marketplace. There can be no assurance that Ibex will
have such access or that it will be able to develop new products successfully
and respond effectively to technological change or new product announcements by
competitors.
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Sales, Marketing and Distribution
Value-Added Resellers. Ibex sells to end-users primarily through value
added resellers via the Ibex Marketing Partner program. The typical Ibex
marketing partner has experience in selling high-end products costing $5-10,000
with a medium to long sales cycle and a consultative sales approach. Since the
typical customer for fax-on-demand is the sales/marketing MIS and customer
support management, the current marketing partner is already familiar with the
same potential customer for Internet/Web products. This is in direct contrast to
the typical computer oriented VAR who is experienced only in short sales cycle
products costing under $5,000. Many of Ibex's VARs specialize in selling
computer fax software and already sell complementary software such as fax server
(often selling a competing system to Castelle), fax enhancement for fax-forms
software.
Ibex recruits VARs via shows, advertisements in industry magazines, and
seminars. For example, Ibex has developed a seminar program that is being
presented at approximately 10 locations in 1996.
Direct Sales. Ibex also sells direct to service providers, national
accounts and strategic accounts. Service providers, also called service bureaus,
base a service on Ibex products. Whereas an end-user may install a four to 24
port fax-on-demand system, the service provider may install systems with over
100 ports, and at the same time demand more functionality and features.
The Web/Internet market mirrors the fax-on-demand market quite closely in
regards to service bureaus. Approximately 50% of the Web sites are actually
maintained by a third party service provider. Ibex currently has fax-on-demand
service providers installing Web servers and Internet service providers
installing fax-on-demand systems. Each type of service provider wishes to offer
their customers the widest range of services, which means offering Web or fax
access if they do not have it.
Demand for Ibex's products is created through targeted and active
participation in industry networking and communication trade shows, as well as
advertising in associated publications. Ibex also increases awareness of Company
products through advertising, generating client leads, instituting direct mail
campaigns, sending Company newsletters, offering seminars, trade shows and
conferences and other forms of public relations efforts. Ibex's sales and
marketing efforts are enhanced by a specific program designed to encourage VARs
and other resellers to promote and sell Ibex's products. Such promotion is
encouraged by providing participants in the program with technical support on a
priority basis, product literature, on-site sales and support training, sales
leads, free software upgrades, and other forms of sales promotions. In addition
to its other activities, Ibex's marketing staff employs various research methods
and gathers information from many sources such as VARS and other resellers,
customers, distribution partners, OEM partners, strategic partners, and
press/publication groups. Product development, sales and client services/support
personnel benefit from the information gathered in planning future products.
Ibex's two largest customers, Ibex Europe and Ibex Canada, cumulatively
accounted for 31% of net sales in the first six months of 1996, 15% of net sales
in 1995 and 15% of net sales in 1994. Ibex Europe is an exclusive distributor
for Europe while Ibex Canada has an exclusive agent agreement for Canada. Both
of these companies sell only Ibex products or products such as voice boards, fax
boards or services that enhance Ibex products. These companies are not
contractually committed to future purchases and their lack of market success or
their inability to satisfy their payment obligations to Ibex could have a
significant adverse effect on Ibex's business and operating results.
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Proprietary Rights
Ibex's success depends upon its technological expertise and proprietary
software technology. Ibex relies upon a combination of contractual rights and
copyright, trademark and trade secret laws to establish and protect its
technologies. Additionally, Ibex generally enters into confidentiality
agreements with those employees, distributors, customers and suppliers who have
access to sensitive information and limits access to and distribution of its
software documentation and other proprietary information. See "Risk
Factors-Intellectual Property Risks."
Despite the precautions taken by Ibex, it may be possible for unauthorized
third parties to copy certain portions of Ibex's products or to reverse engineer
or obtain and use information that Ibex regards as proprietary. There can be no
assurance that Ibex's precautions will be adequate to deter misappropriation or
infringement of its proprietary technologies. Furthermore, while Ibex has
obtained federal registration for many of its trademarks in the United States,
certain of its trademarks have not been registered in the United States and Ibex
has not registered any of its trademarks in foreign jurisdictions. There can be
no assurance that Ibex's use of such unregistered trademarks will not be
contested by third parties in the future. In addition, the laws of some foreign
countries either do not protect Ibex's proprietary rights or offer only limited
protection. Given the rapid evolution of technology and uncertainties in
intellectual property law in the United States and internationally, there can be
no assurance that Ibex's current or future products will not be subject to
third-party claims of infringement. Any litigation to determine the validity of
any third-party claims could result in significant expense to Ibex and divert
the efforts of Ibex's technical and management personnel, whether or not such
litigation is determined in favor of Ibex. In the event of an adverse result in
any such litigation, Ibex could be required to expend significant resources to
develop non-infringing technology or to obtain licenses to the technology which
is the subject of the litigation. There can be no assurance that Ibex would be
successful in such development or that any such licenses would be available.
Ibex also relies on technology licenses from third parties. There can be no
assurance that these licenses will continue to be available to Ibex upon
reasonable terms, if at all. Any impairment or termination of Ibex's
relationship with third-party licensors could have a material adverse effect on
Ibex's business and operating results.
Government Regulation
Certain aspects of the industry in which Ibex competes are regulated both
in the United States and in foreign countries. Imposition of public carrier
tariffs, taxation of telecommunications services and the necessity of incurring
substantial costs and expenditure of managerial resources to obtain regulatory
approvals, particularly in foreign countries could adversely affect Ibex's
business and operating results. Changes in government policies, regulations and
interface standards could require the redesign of products and result in product
shipment delays which could materially and adversely affect Ibex's operating
results.
Employees
As of September 18, 1996, Ibex employed a total of 26 full-time equivalent
personnel, 1 in operations, 11 in sales and marketing, 7 in engineering, 3 in
customer service and 4 in finance and administration. In addition, Ibex employs
people on a part-time or contract basis. Ibex has never had a work stoppage, no
employees are represented by a labor organization and Ibex considers its
employee relations to be good.
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Ibex has entered into confidentiality agreements with each of its employees
(including its officers) that prohibit disclosure of confidential information to
anyone outside of Ibex both during and subsequent to employment and require
disclosure to Ibex of ideas, discoveries or inventions relating to or resulting
from the employee's work for Ibex and assignment to Ibex of all proprietary
rights to such ideas, discoveries or inventions.
Properties
Ibex's headquarters, including its executive offices and corporate
administration, development, manufacturing, marketing, sales and technical
services/support facilities, are located in El Dorado Hills, California with an
aggregate of approximately 5,200 square feet of floor space. Ibex occupies this
facility under a lease, the term of which expires in the year 2000. In addition,
Ibex rents office space for sales and customer support offices in Mill Valley.
Ibex believes its existing facilities will be adequate to meet its requirements
for the foreseeable future.
Legal Proceedings
Ibex is not a party to any material litigation and is not aware of any
pending or threatened litigation against Ibex that could have a material adverse
effect on Ibex's business, operating results or financial condition. See "Recent
Developments -- Litigation."
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<TABLE>
<CAPTION>
MANAGEMENT OF CASTELLE
The executive officers and directors and certain other employees of
Castelle are as follows:
NAME AGE PRINCIPAL OCCUPATION/
POSITION HELD WITH CASTELLE
<S> <C>
Arthur H. Bruno 62 Chairman of the Board, Chief Executive Officer, President
and Director
Jerome J. Burke 55 Executive Vice President
Randall I. Bambrough 41 Chief Financial Officer, Vice President of Finance and
Administration and Secretary
Ariel Bialik 46 Director of Software Development
John Freidenrich (1) 59 General Partner, Bay Management Company
William T. Hambrecht (3) 61 Chairman of Hambrecht & Quist Group
Alan Kessman (2) 50 Chairman of the Board, President and Chief Executive
Officer of Executone Information Systems, Inc.
Donald Masulis 47 Director of Technology
Kanwal S. Rekhi (1) 49 Director
Delbert W. Yocam (2) 52 Director
- ---------------
</TABLE>
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
(3) Hambrecht & Quist Group maintains a policy that persons acting as directors
for private companies withdraw from such positions, within a reasonable
time after the company becomes publicly traded. Accordingly, Mr. Hambrecht
has indicated that he does not wish to be nominated for reelection to
Castelle's Board of Directors and will cease to be a director of the
Company upon the conclusion of the Castelle Meeting.
Arthur H. Bruno has served as Castelle's Chairman, Chief Executive Officer
and President since October 1993. From 1991 to 1993, he was Chairman and Chief
Executive Officer of White Pine Software Inc., a desktop connectivity company.
From 1989 to 1991, he was the Chairman and Chief Executive Officer of Wellsley
Medical Management Corporation, a primary care medical service provider. From
1986 to 1989, he was the Chairman and Chief Executive Officer of Visual
Technology Incorporated, the predecessor to White Pine Software Inc. Mr. Bruno
is also a director of several privately-held companies.
Jerome J. Burke joined Castelle and has served as Castelle's Executive Vice
President since December 1993. From 1988 through November 1993, Mr. Burke was
Executive Vice President of Sales and Marketing of White Pine Software Inc. and
its predecessor, Visual Technology Incorporated.
Randall I. Bambrough joined Castelle in June 1992 and was named to his
current positions in August 1995. From October 1990 until joining Castelle, Mr.
Bambrough was a self-employed financial consultant. Prior to that time, Mr.
Bambrough was employed by Daisy Systems, Inc., an electronic design automation
software company, in various financial management positions.
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Ariel Bialik joined Castelle in January 1990 as Manager of Software
Engineering and has served since 1993 as Director of Software Development. While
at Castelle, Mr. Bialik has managed all software product development and
maintenance activities and assisted in establishing the technology direction of
Castelle. Prior to joining Castelle, Mr. Bialik was a member of the technical
staff at Daisy Systems, Inc. Mr. Bialik holds a B.Sc. degree in Electrical
Engineering from the Technion Israel Institute of Technology.
John Freidenrich has served as a director of Castelle since January 1994.
Since 1981, he has been a general partner of various entities established by Bay
Partners, a venture capital group. Currently, Mr. Freidenrich is a general
partner of Bay Management and Bay Management Company IV, L.P., the general
partner of Bay Partners III, L.P. and Bay Partners IV, L.P., respectively. Mr.
Freidenrich was also a partner in, or of counsel to, the law firms of Ware &
Freidenrich or Gray, Cary, Ware & Freidenrich from January 1987 through December
1991.
Alan Kessman has served as a director of Castelle since April 1992. He has
also served as Chairman of the Board, President, and Chief Executive Officer of
Executone Information Systems, Inc., a telecommunications company, since August
1983.
Donald Masulis, a founder of Castelle, has served as Director of Technology
since October 1993. Mr. Masulis is responsible for the software development of
various versions of the FaxPress and LANpress products and directs Castelle's
product quality assurance program. Mr. Masulis holds a Master of Science degree
in Industrial Engineering and Operations Research from the University of
California at Berkeley and a Bachelor of Science degree in Information and
Computer Science from the University of California at Irvine.
Kanwal S. Rekhi has served as a director of Castelle since April 1995.
Currently retired, Mr. Rekhi served as Executive Vice President of Novell, Inc.
from June 1989 through January 1995. Mr. Rekhi also served as a director of
Novell, Inc. from June 1989 through August 1995 and as a director of Gupta
Corporation from June 1990 through September 1996.
Delbert W. Yocam has been a director of Castelle since April 1995. Mr.
Yocam has been an independent consultant from November 1994 to the present. Mr.
Yocam was President, Chief Operating Officer and a director of Tektronix, Inc.
from September 1992 through November 1994. He was an independent consultant from
November 1989 until September 1992. Mr. Yocam was with Apple Computer, Inc. from
November 1979 through November 1989, serving in a variety of executive
management positions, including Chief Operating Officer from August 1986 through
August 1988 and President of Apple Pacific from August 1988 to November 1989.
Mr. Yocam is also a director of Adobe Systems, Inc., Integrated Measurement
Systems, Inc., Oracle Corporation, Sapiens International Corp., Xircom, Inc. and
several privately-held technology companies.
Directors Not Standing For Re-Election
Hambrecht & Quist Group maintains a policy that persons acting as directors
for private companies withdraw from such positions, within a reasonable time
after the company becomes publicly traded. Accordingly, Mr. Hambrecht has
indicated that he does not wish to be nominated for reelection to Castelle's
Board of Directors and will cease to be a director of the Company upon the
conclusion of the Castelle Meeting.
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William R. Hambrecht has been a director of Castelle since 1988. Mr.
Hambrecht is Chairman of Hambrecht & Quist Group and its principal subsidiary,
Hambrecht & Quist LLC. He has been a Director of RvR Securities Corp., a wholly
owned subsidiary of Hambrecht & Quist Group, since its inception in 1993. He has
continuously served as an officer, director or principal of those entities or
their predecessors since he and the late George Quist co-founded Hambrecht &
Quist in 1968. Mr. Hambrecht also serves on the Board of Directors of Adobe
Systems, Inc. and Vanguard Airlines. He holds a B.A. degree from Princeton
University.
Compensation of Executive Officers
The following table shows for the fiscal years ended December 31, 1994 and
1995, compensation awarded or paid to, or earned by, Castelle's Chief Executive
Officer and its other executive officer whose total annual salary and bonus
exceeded $100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual
Compensation
-------------------------------------------------------------------------------
Other
Name and Principal Salary Bonus Annual Long-Term
Position Year ($) ($) Compensation($) Compensation
- ------------------------------- ------- ----------------- ----------------- --------------- ------------
<S> <C> <C> <C>
Arthur H. Bruno, 1995 180,000 7,500 -- --
Chairman of the Board, 1994 180,000 -0- -- --
President, Chief Executive
Officer and Director
Jerome J. Burke 1995 117,385 60,909 -- --
Executive Vice President 1994 120,000 26,559(1) -- --
</TABLE>
(1) Represents sales commissions paid by the Company for sales made in 1994.
Compensation of Directors
Other than Mr. Yocam, Castelle's directors currently do not receive any
cash compensation for service on the Board of Directors or any committee
thereof, but directors may be reimbursed for certain expenses in connection with
attendance at Board and committee meetings. Mr. Yocam receives $7,500 quarterly
and $1,000 cash compensation for each Board of Directors meeting he attends. In
the fiscal year ended December 31, 1995, the total compensation paid to
non-employee directors was $33,000.
In April 1995, each of Mr. Yocam and Mr. Rekhi was granted an option under
the 1988 Incentive Stock Option Plan to purchase 27,900 shares of Common Stock
at an exercise price of $5.00 per share.
In November 1995, the Board adopted the 1995 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of Common Stock to eligible non-employee directors of
Castelle. Each director of Castelle who is not otherwise employed by Castelle
(or an affiliate of Castelle) is an eligible director under the Directors' Plan.
The Directors' Plan is administered by the Board, unless the Board delegates
administration to a committee of at least two members of the Board.
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The maximum number of shares of Common Stock that may be issued pursuant to
options granted under the Directors' Plan is 120,000. Pursuant to the terms of
the Directors' Plan, each eligible director of Castelle who first joins the
Board after the date of this Prospectus automatically will be granted an option
to purchase 5,000 shares of Common Stock upon the date of his or her initial
election to the Board. In addition, on the first day of April of each year,
commencing on April 1, 1996, each eligible director (including current
non-employee directors of Castelle who are eligible directors) will be granted
an option to purchase 2,000 shares of Common Stock.
No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. Options granted under the
Directors' Plan will vest in equal monthly installments over two years from the
date of grant. In the event of any merger, consolidation or liquidation
involving Castelle, vesting of all outstanding options will be accelerated. The
exercise price of options granted under the Directors' Plan will equal 100% of
the fair market value of the Common Stock on the date of grant. Options granted
under the Directors' Plan are generally non-transferable.
During the last fiscal year, Castelle did not grant options under the
Directors' Plan.
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DESCRIPTION OF CASTELLE COMPENSATION PLANS
On April 29, 1988, Castelle adopted its 1988 Equity Incentive Plan which
was most recently amended on November 15, 1995. On November 15, 1995 Castelle
adopted its 1995 Non-Employee Directors' Stock Option Plan. The essential
features of each of these plans are outlined below.
1988 EQUITY INCENTIVE PLAN
General
The 1988 Equity Incentive Plan (the "Incentive Plan") provides for the
grant or issuance of incentive stock options to employees and nonstatutory stock
options, restricted stock purchase awards, and stock bonuses to consultants,
employees and directors. To date only incentive stock options, nonstatutory
stock options and restricted stock awards have been awarded under the Incentive
Plan. Incentive stock options granted under the Incentive Plan are intended to
qualify as "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Nonstatutory stock
options granted under the Incentive Plan are intended not to qualify as
incentive stock options under the Code. See "Federal Income Tax Information" for
a discussion of the tax treatment of the various awards included in the
Incentive Plan.
Purpose
The Incentive Plan was adopted to provide a means by which selected
officers and employees of and consultants to Castelle and its affiliates could
be given an opportunity to receive stock in Castelle, to assist in retaining the
services of employees holding key positions, to secure and retain the services
of persons capable of filling such positions and to provide incentives for such
persons to exert maximum efforts for the success of Castelle.
Administration
The Incentive Plan is administered by the Board of Directors of Castelle.
The Board has the power to construe and interpret the Incentive Plan and,
subject to the provisions of the Incentive Plan, to determine the persons to
whom and the dates on which awards will be granted, what type of award will be
granted, the number of shares to be subject to each award, the time or times
during the term of each award within which all or a portion of such award may be
exercised, the exercise price, the type of consideration and other terms of the
award. The Board of Directors is authorized to delegate administration of the
Incentive Plan to a committee composed of not fewer than two members of the
Board. The Board has delegated administration of the Incentive Plan to the
Compensation Committee of the Board. As used herein with respect to the
Incentive Plan, the "Board" refers to the Compensation Committee as well as to
the Board of Directors itself.
Eligibility
Incentive stock options may be granted under the Incentive Plan only to
selected key employees (including officers) of Castelle and its affiliates.
Consultants and selected key employees (including officers) are eligible to
receive awards other than incentive stock options under the Incentive Plan.
Directors who are not salaried employees of or consultants to Castelle or to any
affiliate of Castelle are not eligible to participate in the Incentive Plan.
Approximately 78 of Castelle's 97 employees and consultants are eligible to
participate in the Incentive Plan.
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No incentive stock option may be granted under the Incentive Plan to any
person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of Castelle or any
affiliate of Castelle, unless the exercise price is at least 110% of the fair
market value of the stock subject to the incentive stock option on the date of
grant, and the term of the option does not exceed five years from the date of
grant. For incentive stock options granted under the Incentive Plan, the
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which such options are exercisable for the first
time by an optionee during any calendar year (under all such plans of Castelle
and its affiliates) may not exceed $100,000.
Stock Subject to the Incentive Plan
If awards granted under the Incentive Plan expire or otherwise terminate
without being exercised, the Common Stock not purchased pursuant to such awards
again becomes available for issuance under the Incentive Plan.
Terms of Options
The following is a description of the permissible terms of options under
the Incentive Plan. Individual option grants may be more restrictive as to any
or all of the permissible terms described below.
Exercise Price; Payment. The exercise price of an incentive stock option
under the Incentive Plan may not be less than the fair market value of the
Common Stock subject to the option on the date of the option grant, and in some
cases (see "Eligibility" above), may not be less than 110% of such fair market
value. The exercise price of nonstatutory options under the Incentive Plan may
not be less than 85% of such fair market value. At September 30, 1996, the
closing price of Castelle's Common Stock as reported on the Nasdaq Stock Market
National Market was $6.875 per share.
In the event of a decline in the value of Castelle's Common Stock, the
Board has the authority to offer employees the opportunity to replace
outstanding higher priced options, whether incentive or nonstatutory, with new
lower priced options. The Board also has the authority to include as part of an
option agreement a provision entitling the optionee to a further option in the
event that the optionee exercises his or her option by surrendering other shares
of Common Stock as payment of the exercise price.
The exercise price of options granted under the Incentive Plan must be paid
either: (a) in cash at the time the option is exercised; or (b) as determined by
the Board at the time of grant, (i) by delivery of other Common Stock of
Castelle, (ii) pursuant to a deferred payment arrangement or (c) in any other
form of legal consideration acceptable to the Board.
Option Exercise. Options granted under the Incentive Plan may become
exercisable in cumulative increments ("vest") as determined by the Board. Shares
covered by currently outstanding options under the Incentive Plan typically vest
at the rate of 25% on the first anniversary of the vesting date and monthly
vesting (at a cumulative rate of 25% per year) thereafter during the optionee's
employment or services as a consultant. Shares covered by options granted in the
future under the Incentive Plan may be subject to different vesting terms. The
Board has the power to accelerate the time during which an option may be
exercised. In addition, options granted under the Incentive Plan may permit
exercise prior to vesting, but in such event the optionee may be required to
enter into an early exercise stock purchase agreement that allows Castelle to
repurchase shares not yet vested at their exercise price should the optionee
leave the employ of Castelle before such shares have vested. To the extent
provided by the terms of an option, an optionee may satisfy any federal, state
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<PAGE>
or local tax withholding obligation relating to the exercise of such option by a
cash payment upon exercise, by authorizing Castelle to withhold a portion of the
stock otherwise issuable to the optionee, by delivering already-owned stock of
Castelle or by a combination of these means.
Term. The maximum term of options under the Incentive Plan is ten years,
except that in certain cases (see "Eligibility") the maximum term is five years.
Options under the Incentive Plan terminate three months after the optionee
ceases to be employed by Castelle or any affiliate of Castelle, unless (a) the
termination of employment is due to such person's permanent and total disability
(as defined in the Code), in which case the option may, but need not, provide
that it may be exercised at any time within one year of such termination; (b)
the optionee dies while employed by Castelle or any affiliate of Castelle, or
within three months after termination of such employment, in which case the
option may, but need not, provide that it may be exercised (to the extent the
option was exercisable at the time of the optionee's death) within eighteen
months of the optionee's death by the person or persons to whom the rights to
such option pass by will or by the laws of descent and distribution; or (c) the
option by its terms specifically provides otherwise. Individual options by their
terms may provide for exercise within a longer or shorter period of time
following termination of employment or the consulting relationship. The option
term may also be extended in the event that exercise of the option within these
periods is prohibited for specified reasons.
Terms of Stock Bonuses and Purchases of Restricted Stock
Purchase Price; Payment. The purchase price under each stock purchase
agreement will be determined by the Board. The purchase price of stock pursuant
to a stock purchase agreement must be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board, according to a deferred payment
or other arrangement with the person to whom the Common Stock is sold; or (iii)
in any other form of legal consideration that may be acceptable to the Board in
its discretion. Eligible participants may be awarded stock pursuant to a stock
bonus agreement in consideration of past services actually rendered to Castelle
or for its benefit.
Repurchase. Shares of the Common Stock sold or awarded under the Incentive
Plan may, but need not, be subject to a repurchase option in favor of Castelle
in accordance with a vesting schedule determined by the Board. In the event a
person ceases to be an employee of or ceases to serve as a director of or
consultant to Castelle or an affiliate of Castelle, Castelle may repurchase or
otherwise reacquire any or all of the shares of the Common Stock held by that
person that have not vested as of the date of termination under the terms of the
stock bonus or restricted stock purchase agreement between Castelle and such
person.
Adjustment Provisions
If there is any change in the stock subject to the Incentive Plan or
subject to any award granted under the Incentive Plan without the receipt of
consideration (through merger, consolidation, reorganization, recapitalization,
stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or otherwise), the Incentive Plan and awards outstanding thereunder
will be appropriately adjusted as to the class and the maximum number of shares
subject to such plan and the class, number of shares and price per share of
stock subject to such outstanding awards.
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Effect of Certain Corporate Events
The Incentive Plan provides that, in the event of a dissolution or
liquidation of Castelle, specified type of merger or other corporate
reorganization, to the extent permitted by law, any surviving corporation will
be required to either assume awards outstanding under the Incentive Plan or
substitute similar awards for those outstanding under such plan, or such
outstanding awards will continue in full force and effect. In the event that any
surviving corporation declines to assume or continue awards outstanding under
the Incentive Plan, or to substitute similar awards, then the time during which
such awards may be exercised will be accelerated and the awards terminated if
not exercised during such time. The acceleration of an award in the event of an
acquisition or similar corporate event may be viewed as an anti-takeover
provision, which may have the effect of discouraging a proposal to acquire or
otherwise obtain control of Castelle.
Duration, Amendment and Termination
The Board may suspend or terminate the Incentive Plan without stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the Incentive Plan will terminate on November 14, 2005.
The Board may also amend the Incentive Plan at any time or from time to
time. However, no amendment will be effective unless approved by the
stockholders of Castelle within twelve months before or after its adoption by
the Board if the amendment would: (a) modify the requirements as to eligibility
for participation (to the extent such modification requires stockholder approval
in order for the Plan to satisfy Section 422 of the Code, if applicable, or Rule
16b-3 ("Rule 16b-3") of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")); (b) increase the number of shares reserved for issuance upon
exercise of options; or (c) change any other provision of the Plan in any other
way if such modification requires stockholder approval in order to comply with
Rule 16b-3 or satisfy the requirements of Section 422 of the Code. The Board may
submit any other amendment to the Incentive Plan for stockholder approval,
including, but not limited to, amendments intended to satisfy the requirements
of Section 162(m) of the Code regarding the exclusion of performance-based
compensation from the limitation on the deductibility of compensation paid to
certain employees.
Restrictions on Transfer
Under the Incentive Plan, an incentive stock option may not be transferred
by the optionee otherwise than by will or by the laws of descent and
distribution and, during the lifetime of an optionee, an option may be exercised
only by the optionee. A nonstatutory stock option may not be transferred except
by will or by the laws of descent and distribution or pursuant to a "qualified
domestic relations order." In any case, an optionee may designate in writing a
third party who may exercise the option in the event of the optionee's death. No
rights under a stock bonus or restricted stock purchase agreement are
transferable except by will, by the laws of descent and distribution, pursuant
to a "qualified domestic relations order" or where required by law. In addition,
any shares subject to repurchase by Castelle under an early exercise stock
purchase agreement may be subject to restrictions on transfer which the Board
deems appropriate.
Federal Income Tax Information
Incentive Stock Options. Incentive stock options under the Incentive Plan
are intended to be eligible for the favorable federal income tax treatment
accorded "incentive stock options" under the Code.
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There generally are no federal income tax consequences to the optionee or
Castelle by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive stock
option for at least two years from the date on which the option is granted and
at least one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be long-term capital gain or loss. Generally, if the optionee
disposes of the stock before the expiration of either of these holding periods
(a "disqualifying disposition"), at the time of disposition, the optionee will
realize taxable ordinary income equal to the lesser of (a) the excess of the
stock's fair market value on the date of exercise over the exercise price, or
(b) the optionee's actual gain, if any, on the purchase and sale. The optionee's
additional gain, or any loss, upon the disqualifying disposition will be a
capital gain or loss, which will be long-term or short-term depending on whether
the stock was held for more than one year. Capital gains currently are generally
subject to lower tax rates than ordinary income. The maximum long-term capital
gains rate for federal income tax purposes is currently 28% while the maximum
ordinary income rate is effectively 39.6% at the present time. Slightly
different rules may apply to optionees who acquire stock subject to certain
repurchase options or who are subject to Section 16(b) of the Exchange Act.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, Castelle will generally be entitled (subject to the
requirement of reasonableness and the satisfaction of a tax reporting
obligation) to a corresponding business expense deduction in the tax year in
which the disqualifying disposition occurs.
Nonstatutory Stock Options. Nonstatutory stock options granted under the
Incentive Plan generally have the following federal income tax consequences:
There are no tax consequences to the optionee or Castelle by reason of the
grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock
option, the optionee normally will recognize taxable ordinary income equal to
the excess of the stock's fair market value on the date of exercise over the
option exercise price. Generally, with respect to employees, Castelle is
required to withhold from regular wages or supplemental wage payments an amount
based on the ordinary income recognized. Subject to the requirement of
reasonableness and the satisfaction of a reporting obligation, Castelle will
generally be entitled to a business expense deduction equal to the taxable
ordinary income realized by the optionee. Upon disposition of the stock, the
optionee will recognize a capital gain or loss equal to the difference between
the selling price and the sum of the amount paid for such stock plus any amount
recognized as ordinary income upon exercise of the option. Such gain or loss
will be long or short-term depending on whether the stock was held for more than
one year. Slightly different rules may apply to optionees who acquire stock
subject to certain repurchase options or who are subject to Section 16(b) of the
Exchange Act.
Restricted Stock and Stock Bonuses. Restricted stock and stock bonuses
granted under the Incentive Plan generally have the following federal income tax
consequences:
Upon acquisition of stock under a restricted stock or stock bonus award,
the recipient normally will recognize taxable ordinary income equal to the
excess of the stock's fair market value over the purchase price, if any.
However, to the extent the stock is subject to certain types of vesting
restrictions, the taxable event will be delayed until the vesting restrictions
lapse unless the recipient elects to be taxed on receipt of the stock.
Generally, with respect to employees, Castelle is required to withhold from
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regular wages or supplemental wage payments an amount based on the ordinary
income recognized. Subject to the requirement of reasonableness and the
satisfaction of a tax reporting obligation, Castelle will generally be entitled
to a business expense deduction equal to the taxable ordinary income realized by
the recipient. Upon disposition of the stock, the recipient will recognize a
capital gain or loss equal to the difference between the selling price and the
sum of the amount paid for such stock, if any, plus any amount recognized as
ordinary income upon acquisition (or vesting) of the stock. Such gain or loss
will be long or short-term depending on whether the stock was held for more than
one year from the date ordinary income is measured. Slightly different rules may
apply to persons who acquire stock subject to forfeiture under Section 16(b) of
the Exchange Act.
Potential Limitation on Company Deductions. As part of the Omnibus
Budget Reconciliation Act of 1993, the U.S. Congress amended the Code to add
Section 162(m) which denies a deduction to any publicly held corporation for
compensation paid to certain employees in a taxable year to the extent that
compensation exceeds $1 million for a covered employee. It is possible that
compensation attributable to awards granted in the future under the Incentive
Plan, when combined with all other types of compensation received by a covered
employee from Castelle, may cause this limitation to be exceeded in any
particular year.
CASTELLE'S 1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
General
The 1995 Non-Employee Directors' Stock Option Plan (the "Plan") provides
for the non- discretionary grant of nonstatutory stock options to non-employee
directors of Castelle. Nonstatutory stock options granted under the Plan are
intended not to qualify as incentive stock options under the Code. See "Federal
Income Tax Information" for a discussion of the tax treatment of nonstatutory
stock options.
Purpose
The Plan was adopted to provide a means by which each director of Castelle
who is not otherwise an employee of Castelle could be given an opportunity to
benefit from increases in the value of the stock of Castelle, to secure and
retain the services of persons capable of filling such positions and to provide
incentives for such persons to exert maximum efforts for the success of
Castelle. Five of Castelle's current directors are eligible to participate in
the Plan.
Administration
The Plan is administered by the Board of Directors of Castelle. The Board
has the power to construe and interpret the Plan. The Board of Directors is
authorized to delegate administration of the Plan to a committee composed of not
fewer than two members of the Board. The Board does not presently contemplate
delegating administration of the Plan to any committee of the Board.
Eligibility
Options may be granted only to directors who are not employees of or
consultants to Castelle or to any affiliate of Castelle.
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Stock Subject to the Plan
If options granted under the Plan expire or otherwise terminate without
being exercised, the Common Stock not purchased pursuant to such options again
becomes available for issuance under the Plan.
Terms of Options
The following is a description of the permissible terms of options under
the Plan.
Non-Discretionary Grants. Option grants under the Plan are
non-discretionary. Each person serving as a non-employee director on April 1 of
each year beginning with April 1, 1996, receives an option to purchase 2,000
shares of Common Stock of Castelle. Each person who is elected to serve as a
non-employee director will receive, upon his or her initial election, an option
to purchase 5,000 shares of Common Stock of Castelle.
Exercise Price; Payment. The exercise price of options under the Plan shall
be 100% of the fair market value of the Common Stock subject to the option on
the date of the option grant. Payment of the exercise price per share may be
paid in cash or Common Stock of Castelle already owned by the optionee.
Option Exercise. Options granted under the Plan become exercisable in
cumulative increments ("vest"). Shares covered by currently outstanding options
under the Plan vest at the rate of 1/24th per month (50% per year) during the
optionee's employment or services as a director or consultant. In the event of a
Change in Control of Castelle, such as a merger or consolidation in which
Castelle is not the surviving corporation, any unvested portion of an
outstanding option granted under the Plan shall immediately vest and the option
shall terminate if not exercised prior to such Change in Control. The
acceleration of an option in the event of an acquisition or similar corporate
event may be viewed as an anti-takeover provision, which may have the effect of
discouraging a proposal to acquire or otherwise obtain control of Castelle. An
optionee shall arrange to Castelle's satisfaction to meet any federal, state or
local tax withholding obligation relating to the exercise of such option by a
cash payment upon exercise, before Castelle shall be required to issue shares of
stock to the optionee.
Term. The maximum term of options under the Plan is 10 years. Options under
the Plan terminate 12 months after termination of the optionee's employment or
relationship as a consultant or director of Castelle or any affiliate of
Castelle, unless the optionee dies while employed by or serving as a consultant
or director of Castelle or any affiliate of Castelle, in which case the option
may be exercised (to the extent the option was exercisable at the time of the
optionee's death) within eighteen months of the optionee's death by the person
or persons to whom the rights to such option pass by will or by the laws of
descent and distribution.
Adjustment Provisions
If there is any change in the stock subject to the Plan or subject to any
option under the Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or otherwise), the Plan and options outstanding
thereunder will be appropriately adjusted as to the class and the maximum number
of shares subject to such plan, and the class, number of shares and price per
share of stock subject to such outstanding options.
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Duration, Amendment and Termination
The Board may suspend or terminate the Plan without shareholder approval or
ratification at any time.
The Board may also amend the Plan at any time or from time to time except
the Plan shall be amended not more than once every six (6) months. However, no
amendment will be effective unless approved by the shareholders of Castelle
within twelve months before or after its adoption by the Board if the amendment
would: (a) modify the requirements as to eligibility for participation (to the
extent such modification requires shareholder approval in order for the Plan to
satisfy Rule 16b-3 ("Rule 16b-3") of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")); (b) increase the number of shares which may be
issued under the Plan; or (c) change any other provision of the Plan in any
other way if such modification requires shareholder approval in order to comply
with Rule 16b-3.
Restrictions on Transfer
Under the Plan, an option may not be transferred except by will or by the
laws of descent and distribution. In any case, the optionee may, by delivering
written notice to Castelle, designate in writing a third party who may exercise
the option in the event of the optionee's death.
Federal Income Tax Information
Stock options granted under the Plan are subject to federal income tax
treatment pursuant to rules governing options that are not incentive stock
options.
The following is only a summary of the effect of federal income taxation
upon the optionee and Castelle with respect to the grant and exercise of options
under the Plan, does not purport to be complete and does not discuss the income
tax laws of any state or foreign country in which an optionee may reside.
Options granted under the Plan are nonstatutory stock options. There are no
tax consequences to the optionee or Castelle by reason of the grant of a
nonstatutory stock option. Upon exercise of a nonstatutory stock option, the
optionee normally will recognize taxable ordinary income equal to the excess of
the stock's fair market value on the date of exercise over the option exercise
price. Because the optionee is a director of Castelle, under existing laws, the
date of taxation (and the date of measurement of taxable ordinary income) may in
some instances be deferred unless the optionee files an election under Section
83(b) of the Code. The filing of Section 83(b) election with respect to the
exercise of an option may affect the time of taxation and the amount of income
recognized at each such time. Upon disposition of the stock, the optionee will
recognize a capital gain or loss equal to the difference between the selling
price and the sum of the amount paid for such stock plus any amount recognized
as ordinary income upon exercise of such option. Such gain or loss will be long
or short-term depending on whether the stock was held for more than one year.
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MANAGEMENT OF IBEX
The executive officers and directors and certain other employees of Ibex
are as follows:
Name Age Principal Occupation/
Position Held With Ibex
Ney Grant 38 Chairman of the Board,
President and Director
Curtis Powell 40 Vice President of Development
Clovis Mattos 41 Vice President of Sales
Fabio Matsui 31 Senior Software Engineer
Bryan Roe 29 Director of Sales and Marketing
Graeme Plant 38 Director
Teodoro Gimenez 48 Director
Ney Grant is a co-founder of Ibex and has served as Chairman of the Board
and President since 1990. Previous to starting Ibex in 1989, Mr. Grant was
product marketing manager at Genesis Electronics, a voice mail manufacturer with
$10 million in sales. Prior to Genesis, Ney served as general manager at
Heuristics, Inc., a $3 million industrial software company. Mr. Grant holds an
engineering degree from the University of California, Santa Barbara and an MBA
from the University California, Davis.
Curtis Powell is a co-founder of Ibex and has served as Vice President of
Development since 1990. Previous to Ibex, Mr. Powell worked in process control
and industrial automation and as a system analyst at the University of
California, Davis. Mr. Powell holds a Ph.D. and an MBA from the University of
California, Davis.
Clovis Mattos is a co-founder of Ibex and has served as Vice President of
Sales since 1992. Mr. Mattos has a sales background in the computer industry and
from 1987 to 1992 was director of sales operations and international sales
manager at Heuristics, Inc.
Fabio Matsui has served as Senior Software Engineer with Ibex since 1993.
Prior to Ibex, Mr. Matsui worked at Heuristics, Inc. as a principal engineer
from 1989 to 1993 and held a key role on the development team designing
real-time industrial process control systems. As an early adopter of graphical
user interfaces, multi-tasking operating systems, client-server computer and
object oriented systems, he designed and managed the development of advanced
control systems for Fortune 500 companies. Mr. Matsui received his Bachelor of
Science degree at the Universidade Estadual De Campinas in Brasil.
Bryan Roe has served as Director of Sales and Marketing of Ibex since 1992.
From 1989 to 1991 Mr. Roe was regional sales manager for Heuristics, Inc. where
he was responsible for opening new marketing channels in the western United
States and the Pacific Rim. Mr. Roe received his formal business training from
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the University of California, Davis, where he earned a degree in communications
with an emphasis on advertising/public relations and marketing.
Graeme Plant has served as a director of the Company since 1991. Mr. Plant
has been Sales Development Manager for Hewlett Packard since 1993, specializing
in network devices and networking software. From 1990 to 1993, Mr. Plant was a
Product Marketing Manager for network products such as network interface cards
and network hubs.
Teodoro Gimenez has served as a director of the Company since 1991. Mr.
Gimenez is President of Tecom, a Brazilian company specializing in interactive
voice response systems for the banking industry in Brazil and other South
American countries. Tecom is not a reseller or distributor of Ibex products.
Executive Compensation
The following table sets forth certain information regarding compensation
paid by Ibex for services rendered to Ibex during the fiscal year ended December
31, 1995 to the Chief Executive Officer of Ibex. No executive officer of Ibex
received compensation in excess of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation Compensation
Name and ----------------------------------------------------------- ---------------
Principal Position Salary ($) Bonus ($) Other ($) Options (#)
- --------------------------------- ------------------ ------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Ney Grant, President and $85,000 -0- -0- -0-
Chief Executive Officer
</TABLE>
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CASTELLE CONSOLIDATED SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
The selected consolidated financial data of Castelle set forth below should
be read in conjunction with the consolidated financial statements of Castelle,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Castelle" included elsewhere
herein. The consolidated statement of operations data for the years ended
December 31, 1991, 1992, 1993, 1994 and 1995 and the consolidated balance sheet
data at December 31, 1991, 1992, 1993, 1994 and 1995 are derived from and are
qualified by reference to, audited consolidated financial statements contained
in this Prospectus. The consolidated statement of operations data for the six
month periods ended June 30, 1995 and June 28, 1996 and the consolidated balance
sheet data at June 28, 1996 are derived from unaudited consolidated financial
statements that have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations and other information for such period.
These historical results are not necessarily indicative of the results of
operations to be expected for the full fiscal year or any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Castelle."
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<TABLE>
<CAPTION>
Statement of Operations Data:
(in thousands, except per share amounts)
Six Months
Year Ended December 31, Ended
------------------------------------------------------ ---------------------
June 30, June 28,
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ -----
(unaudited) (unaudited)
Historical Consolidated Statement
of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ......................... $ 9,067 $ 19,008 $ 17,787 $ 19,486 $ 25,082 $ 11,874 $ 13,425
Cost of sales...................... 5,457 10,563 11,346 11,503 13,571 6,385 7,117
---------- --------- --------- -------- ---------- -------- -----------
Gross profit................... 3,610 8,445 6,441 7,983 11,511 5,489 6,308
---------- --------- --------- -------- ---------- -------- -----------
Operating expenses:
Research and development....... 1,632 1,927 2,152 2,179 2,018 996 1,057
Sales and marketing............ 2,649 4,959 5,628 4,384 5,641 2,785 3,199
General and administrative..... 850 1,313 1,977 1,446 1,405 623 718
Restructuring charge........... -- -- 615 -- -- -- --
---------- --------- --------- -------- ---------- -------- -----------
Total operating expenses.... 5,131 8,199 10,372 8,009 9,064 4,404 4,974
---------- --------- --------- -------- ---------- -------- -----------
Operating income (loss)............ (1,521) 246 (3,931) (26) 2,447 1,085 1,334
Interest income (expense).......... (11) (157) (349) (481) (296) (192) 167
Other income (expense), net........ 23 48 (515) 129 (53) -- (75)
---------- --------- --------- -------- ---------- -------- -----------
Income (loss) before provision
for income taxes............... (1,509) 137 (4,795) (378) 2,098 893 1,426
Provision for income taxes......... -- 11 -- -- 74 23 64
---------- --------- --------- ------- ---------- -------- -----------
Net income (loss).................. $ (1,509) $ 126 $ (4,795) $ (378) $ 2,024 $ 870 $ 1,362
========== ========= ========= ======== ========== ======== ===========
Net income (loss) per share (1).... $ (5.80) $ 0.09 $ (12.11) $ (0.91) $ 0.77 $ 0.34 $ 0.35
========== ========= ========= ======== ========== ======== ===========
Shares used in per share
calculation (1)................ 260 1,330 396 414 2,673 2,648 3,887
====== ========= ========= ======== ========== ======== ===========
Pro forma net loss per share (1) .. $ (0.16)
========
Pro forma shares used in
per share calculation (1) ..... 2,396
========
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Data as a Percentage of Net Sales:
Six Months
Year Ended December 31, Ended
--------------------------------------------------------- ------------------------
June 30, June 28,
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------ ------ ------
(unaudited)(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 60.2 55.6 63.8 59.0 54.1 53.8 53.0
----- ------ ------ ------ ----- ---- -----
Gross margins.................. 39.8 44.4 36.2 41.0 45.9 46.2 47.0
Operating expenses:
Research and development....... 18.0 10.1 12.1 11.2 8.0 8.4 7.9
Sales and marketing ........... 29.2 26.1 31.6 22.5 22.5 23.5 23.8
General and administrative..... 9.4 6.9 11.1 7.4 5.6 5.2 5.3
Restructuring charge........... -- -- 3.5 -- -- -- --
----- ----- ------ ----- ----- ----- ------
Total operating expense.... 56.6 43.1 58.3 41.1 36.1 37.1 37.0
----- ----- ------ ----- ----- ----- ------
Operating income (loss)............ (16.8) 1.3 (22.1) (0.1) 9.8 9.1 10.0
Interest expense................... (0.1) (0.8) (2.0) (2.5) (1.2) (1.6) 1.2
Other income (expense), net........ 0.3 0.2 (2.9) 0.7 (0.2) -- (0.6)
----- ----- ------ ----- ------ ----- ------
Income (loss) before provision
for income taxes............... (16.6) 0.7 (27.0) (1.9) 8.4 7.5 10.6
Provision for income taxes......... -- -- -- -- 0.3 0.2 0.5
----- ----- ------ ------ ------ ----- ------
Net income (loss).................. (16.6)% 0.7% (27.0)% (1.9)% 8.1% 7.3% 10.1%
===== ===== ====== ====== ====== ===== ======
</TABLE>
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<TABLE>
<CAPTION>
As of December 31, June 28,
----------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
(unaudited)
Historical Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit)................. $1,872 $ 2,293 $ (765) $ 884 $8,849 $11,241
Total assets.............................. 5,144 10,114 8,623 7,124 14,667 15,696
Short-term debt........................... 507 2,163 4,174 2,670 193 --
Total shareholders' equity (deficit)...... 2,390 3,493 (1,264) 1,355 9,289 11,709
</TABLE>
(1) Computed on the basis described for net income (loss) per share in
Note 2 of Notes to Consolidated Financial Statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF CASTELLE
Except for the historical information contained herein, the following
discussion contains forward- looking statements that involve risks and
uncertainties. Castelle'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 in
the sections entitled "Risk Factors," "Summary," "Unaudited Pro Forma Condensed
Combined Financial Information," "Business of Castelle," "Business of Ibex" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Ibex."
Castelle was founded in 1987 to design, manufacture and market network
enhancement products which enhance network users' ability to communicate.
Castelle shipped its first fax server, the FaxPress, in 1989; its first external
print server, the LANpress, in 1990; and its first internal print server, the
JetPress, in 1991. Subsequent to these initial product shipments, Castelle has
developed and shipped enhanced software versions of its fax and print server
products and has expanded the product offerings within each of these product
lines. In addition, Castelle has entered a partnership with 3Com to penetrate
the SOHO market.
During the first half of 1993, Castelle scaled up its marketing and general
and administrative expense levels in anticipation of increased sales. At the
same time, Castelle began offering extended payment terms and other pricing
promotions to certain distributors, which resulted in excessive inventory levels
of Castelle's products held by these distributors and subsequently resulted in
significant product returns from these distributors and associated inventory
write offs in the amount of approximately $729,000. These write-offs applied
principally to print server-related products and parts. In addition, Castelle
wrote down by approximately $213,000 the value of demonstration and evaluation
units associated with Castelle's sales and marketing activities. During the
second half of 1993, Castelle undertook a substantial restructuring effort,
hiring a new senior management team that implemented a number of initiatives
including new marketing activities and distribution policies, a refocusing of
Castelle's research and development efforts and implementation of cost
containment procedures. As a result of the above-described product returns,
Castelle experienced significantly decreased gross margins during 1993. Coupled
with a substantial restructuring charge, this resulted in a substantial net loss
for 1993. Since the restructuring, Castelle has experienced improved operations.
Six Months Ended June 28, 1996 and June 30, 1995
Net Sales. Net sales were $13.4 million for the first half of fiscal 1996,
up 13.1% from the $11.9 million reported for the same period in fiscal 1995. The
increase in net sales resulted primarily from higher sales of the Company's fax
server products. Fax server product sales increased 31.1% to $5.9 million in the
six month period ending June 28, 1996 from $4.5 million during the comparable
period in fiscal 1995. Print server sales were $7.4 million for the first halves
of fiscal 1996 and 1995.
Gross Profit. Gross profit for the first half of fiscal 1996 was 47.0% as
compared with 46.2% for the same period in fiscal 1995. The increase in gross
margin was primarily attributable to increased sales of the Company's fax server
products, which carry higher gross margins.
Research and Development. Research and development expenses were $1.1
million and $1.0 million for the first half of 1996 and 1995, respectively, or
7.9% and 8.4% of net sales each year, respectively, reflecting the Company's
continued emphasis on research and development in order to develop new products,
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as well as to improve product functionality, reduce cost and enhance performance
of existing products.
Sales and Marketing. Sales and marketing expenses were $3.2 million and
$2.8 million for the first half of 1996 and 1995, respectively, or 23.8% and
23.5% of net sales each year, respectively. The dollar increase was primarily a
result of higher expenditures on advertising and marketing materials.
General and Administrative. General and administrative expenses were
$718,000 and $623,000 for the first half of 1996 and 1995, respectively, or 5.3%
and 5.2% of net sales each year, respectively.
Interest Income/(Expense), net. Interest income, net, was $167,000 compared
to interest expense, net, of $192,000 for the first half of 1996 and 1995,
respectively. 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.
Years Ended December 31, 1995, 1994 and 1993
Net Sales. Net sales increased 28.7% to $25.1 million in 1995 from $19.5
million in 1994. This increase was principally due to an increase in sales of
the FaxPress product line, principally the FaxPress 2000 and FaxPress 3000, and
increased demand for print servers in Japan. Net sales increased 9.6% in 1994 to
$19.5 million from $17.8 million in 1993. This increase was principally due to
an increase in sales of fax servers in all regions and an increase in sales of
print servers in Japan, which more than offset a decrease in domestic and
European sales of print servers and a decrease in sales to OEM's of print server
products. International sales were $13.0 million, $8.2 million and $6.4 million
in 1995, 1994 and 1993, respectively, representing 51.8%, 42.1% and 36.0 %
respectively, of net sales in 1995, 1994 and 1993. This increase in sales is due
primarily to growth in the Pacific Rim region. Although all of Castelle's
international sales to date have been denominated in U.S. dollars, such sales
could be adversely affected by changes in demand resulting from fluctuations in
currency exchange rates.
Cost of Sales. Cost of sales includes cost of materials, including
components, manuals, diskettes and their duplication, packaging materials,
assembly and shipping, as well as certain royalties. Cost of sales also includes
compensation costs and overhead related to Castelle's manufacturing operations
and warranty expenses. Cost of sales was $13.6 million, $11.5 million and $11.3
million in 1995, 1994 and 1993, respectively, and represented 54.1%, 59.0% and
63.8% of net sales for those periods. Cost of sales in 1995 increased in
absolute dollars but decreased as a percentage of net sales compared to 1994.
This percentage decrease was primarily attributable to changes in product mix
towards a higher proportion of net sales derived from fax server products as
well as manufacturing and purchasing efficiencies realized from higher volume
operations. The decrease from 1993 to 1994 was due primarily to a reduction in
manufacturing overhead as a percentage of net sales which resulted from
manufacturing efficiencies.
Research and Development. Research and development expenses were $2.0
million, $2.2 million and $2.2 million in 1995, 1994 and 1993, respectively,
which expenditures were relatively constant in absolute dollars but represented
a smaller percentage of net sales each successive year. Most of Castelle's
product development initiatives during these periods were directed towards fax
server products, although much of the resultant technology has application to
the further development of Castelle's print server products. A significant
percentage of Castelle's research and development expenses are related to
software development. During 1995, research and development expenses continued
to decrease as a percentage of net sales as a result of a more focused product
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development program and, to a lesser extent, increased reliance in 1995 on
products developed and manufactured by third parties. Castelle anticipates that
the dollar amount of research and development expenses will increase in the
future as a result of its continuing commitment to the development of new
products.
Sales and Marketing. Sales and marketing expenses were $5.6 million, $4.4
million and $5.6 million in 1995, 1994 and 1993, respectively. Sales and
marketing expenses increased in absolute dollars in 1995 primarily due to an
increase in the number of sales and marketing personnel, additional advertising
and sales promotional expense, higher travel costs and facilities-related
expenses needed to address sales opportunities and better support customers
using Castelle's products. Sales and marketing expenses decreased from 1993 to
1994 primarily due to decreases in salary expenses as a result of reduced sales
and marketing personnel, lower advertising and sales promotional expenses and
lower depreciation expenses related to a write down of demonstration and
evaluation units in 1993, all of which resulted from cost containment policies
instituted by new management in late 1993.
General and Administrative. General and administrative expenses remained
relatively constant in absolute dollars at $1.4 million in both 1995 and 1994
and decreased 26.9% in 1994 to $1.4 million from $2.0 million in 1993. The
decrease from 1993 to 1994 was due to lower expenses resulting from cost
containment measures implemented by new management.
Restructuring Charge. Castelle recorded a restructuring charge of $615,000
in 1993 primarily related to severance payments and facilities consolidation
costs.
Interest Expense. Castelle incurred interest expense of $296,000, $481,000,
and $349,000 in 1995, 1994 and 1993, respectively. The decrease in interest
expense in 1995 was due to lower outstanding bank borrowings and long-term debt.
The increase in interest expense in 1994 was principally attributable to
interest paid on a long-term note payable that resulted from the conversion in
March 1994 of $2.1 million of accounts payable due to a vendor.
Other Income (Expense), Net. Castelle recorded other expense of $515,000 in
1993, primarily related to legal, accounting and printing costs associated with
a proposed initial public offering of its Common Stock. The 1993 expense
included certain accruals, of which $129,000 was recognized as other income in
1994 following favorable settlements of the related obligations.
Provision for Income Taxes. See Note 8 of Notes to Consolidated Financial
Statements for a discussion of Castelle's provision for income taxes.
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<PAGE>
Selected Quarterly Operating Results
The following table presents unaudited quarterly financial information for
the ten quarters in the period ended June 28, 1996. Management believes this
information has been prepared on the same basis as the audited consolidated
financial statements appearing elsewhere in this Prospectus and includes all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the unaudited quarterly operating results when read in
conjunction with the audited consolidated financial statements of Castelle and
the notes thereto appearing elsewhere in this Prospectus. These operating
results are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------------------
April 1, July 1, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 29, Dec. 31, Mar. 29, June 28,
1994 1994 1994 1994 1995 1995 1995 1995 1996 1996
------- ------ -------- ------- ------- ------- -------- ------- ------- -------
(dollars in thousands)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $4,199 $4,548 $5,103 $5,636 $5,684 $6,190 $6,763 $6,445 $6,200 $7,225
Cost of sales.............. 2,618 2,697 2,949 3,239 2,979 3,406 3,674 3,512 3,339 3,778
------ ------ ------ ------ ------ ------ ------ ----- ----- -----
Gross profit............. 1,581 1,851 2,154 2,397 2,705 2,784 3,089 2,933 2,861 3,447
Operating expenses:
Research and
development............. 459 519 608 593 499 497 554 468 533 524
Sales and marketing..... 1,097 1,163 1,048 1,076 1,363 1,422 1,449 1,407 1,493 1,706
General and
administrative.......... 320 374 348 404 314 309 407 375 291 427
------ ------ ------ ------ ------ ----- ----- ----- ----- -----
Total operating
expenses............. 1,876 2,056 2,004 2,073 2,176 2,228 2,410 2,250 2,317 2,657
------ ------ ------ ------ ------ ------ ----- ----- ----- -----
Operating income (loss).... (295) (205) 150 324 529 556 679 683 544 790
Interest income
(expense), net............. (107) (77) (99) (198) (119) (73) (73) (31) 73 94
Other income (expense),
net........................ -- 129 -- -- -- -- (10) (43) (20) (55)
------- ------ ------- ------ ------ ------ ------ ------- ------ -------
Income (loss) before
provision for income taxes.. (402) (153) 51 126 410 483 596 609 597 829
Provision for income taxes.. -- -- -- -- 5 18 24 27 28 36
------- ------ ------- ------ ------ ------ ------ ------- ------ -------
Net income (loss).......... $ (402) $ (153) $ 51 $ 126 $ 405 $ 465 $ 572 $ 582 $ 569 $ 793
======= ====== ======= ====== ====== ====== ====== ======= ====== ======
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------------------
April 1, July 1, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 29, Dec. 31, Mar. 29, June 28,
1994 1994 1994 1994 1995 1995 1995 1995 1996 1996
------- ------ -------- ------- ------- ------- -------- ------- ------- -------
As a Percentage of Net Sales:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............... 62.3 59.3 57.8 57.5 52.4 55.0 54.3 54.5 53.9 52.3
----- ----- ----- ----- ------ ----- ---- ---- ---- -----
Gross margin............. 37.7 40.7 42.2 42.5 47.6 45.0 45.7 45.5 46.1 47.7
Operating expenses..........
Research and
development.............. 11.0 11.4 11.9 10.5 8.8 8.0 8.2 7.3 8.6 7.3
Sales and marketing...... 26.1 25.6 20.6 19.1 24.0 23.0 21.4 21.8 24.1 23.6
General and
administrative........... 7.6 8.2 6.8 7.2 5.5 5.0 5.9 5.8 4.7 5.9
----- ----- ----- ----- ----- ----- ----- ----- ---- -----
Total operating
expenses............... 44.7 45.2 39.3 36.8 38.3 36.0 35.5 34.9 37.4 36.8
----- ----- ----- ----- ----- ----- ----- ----- ---- -----
Operating Income (loss)..... (7.0) (4.5) 2.9 5.7 9.3 9.0 10.2 10.6 8.7 10.9
Interest expense............ (2.6) (1.7) (1.9) (3.5) (2.1) (1.2) (1.1) (0.5) 1.2 1.3
Other income (expense),
net......................... -- 2.8 -- -- -- -- (0.2) (0.7) (0.3) (0.7)
----- ---- ----- ---- ---- ---- ---- ----- ---- ----
Income (loss) before
provision for income taxes.. (9.6) (3.4) 1.0 2.2 7.2 7.8 8.9 9.4 9.6 11.5
Provision for income taxes.. -- -- -- -- 0.1 0.3 0.4 0.4 0.4 0.5
----- ---- ----- ---- ---- ---- ---- ---- ---- ----
Net income (loss)........... (9.6)% (3.4)% 1.0% 2.2% 7.1% 7.5% 8.5% 9.0% 9.2% 11.0%
===== ==== ===== ==== ==== ==== ==== ==== ==== ====
</TABLE>
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<PAGE>
Quarterly Fluctuations
Castelle's operating results may vary significantly from quarter to quarter
due to a variety of factors, including changes in Castelle's product and
customer mix, the introduction of new products by Castelle or its competitors,
constraints in Castelle's manufacturing and assembling operations, shortages or
increases in the prices of raw materials and components, changes in pricing
policy by Castelle or its competitors, a slowdown in the growth of the
networking market, seasonality, timing of expenditures and economic conditions
in the United States, Europe and Asia. Although on a quarterly basis, Castelle
was profitable in each of the last eight quarters, there can be no assurance
that profitability on a quarterly or annual basis will be sustained. Castelle's
backlog at any given time is not necessarily indicative of actual sales for any
succeeding period. Castelle's sales will often reflect orders shipped in the
same quarter in which they are received. In addition, a significant portion of
Castelle's expenses are relatively fixed in nature, and planned expenditures are
based primarily on sales forecasts. Therefore, if Castelle inaccurately
forecasts demand for Castelle's products, the impact on net income may be
magnified by Castelle's inability to adjust spending quickly enough to
compensate for the sales shortfall. Future demand for Castelle's products may be
stronger during the last quarter of each year than the first quarter of the
succeeding year as the sales personnel of Castelle's distributors seek to meet
their year-end sales quotas. Castelle's performance in any quarter is not
necessarily indicative of its performance in any subsequent quarter.
Liquidity and Capital Resources
Since its inception in 1987, Castelle has funded its operations primarily
through issuances of capital stock and bank borrowings. Cash flows from (used
in) operations were approximately ($514,000), $3.0 million ($116,000), and
$836,000, in the first six months of 1996, all of fiscal 1995, all of fiscal
1994 and all of fiscal 1993, respectively. Castelle acquired capital equipment
of approximately $176,000, $195,000, $392,000 and $446,000 in the first six
months of fiscal 1996, all of fiscal 1995, all of fiscal 1994 and all of fiscal
1993, respectively.
As of June 28, 1996, Castelle had $7.4 million of cash and cash
equivalents. Working capital increased to $11.2 million at June 28, 1996 from
$8.8 million at December 31, 1995. Castelle has a $6.0 million secured revolving
line of credit with a bank which expires in June 1997, pursuant to which
Castelle may borrow 75% of eligible domestic accounts receivable at the bank's
prime rate. In addition, Castelle has a $3.0 million foreign accounts receivable
and inventory line which is part of the overall $6.0 million commitment.
Castelle may borrow 90% of eligible accounts receivable and 40% of eligible
inventory. Under the terms of the agreement, Castelle 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 $15.0
million without the bank's approval. Castelle is in compliance with these
covenants and at June 28, 1996, the line of credit had a zero balance. The line
of credit prohibits the payment of cash dividends and contains certain
restrictions on Castelle's ability to loan money or assets or purchase interest
in other entities without the prior written consent of the lender. In addition,
Castelle has a $500,000 equipment term loan credit facility with a bank that
allows Castelle 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 June 28, 1996.
The interest rate for this loan is prime plus 1.5% per annum.
105
<PAGE>
Castelle believes that existing sources of liquidity, capital resources and
funds from operations will satisfy Castelle's anticipated cash needs for the
next 12 months. There can be no assurance, however, that Castelle's actual needs
will not exceed anticipated levels, or that Castelle 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 Castelle.
CASTELLE STOCK, OPTIONS AND DIVIDENDS
Castelle is a publicly-held company; its stock is traded on the Nasdaq
National Market System under the symbol "CSTL." As of the Record Date, there
were a total of 156 shareholders of record holding shares of Castelle capital
stock, all of whom held Common Stock. As of the Record Date, there were options
outstanding to purchase an aggregate of 295,903 shares of Castelle Common Stock.
Castelle has never declared or paid any dividends on its Common Stock and
has no plans to do so in the foreseeable future. Castelle's bank line of credit
prohibits the payment of cash dividends.
106
<PAGE>
IBEX SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
The selected financial data of Ibex set forth below should be read in
conjunction with the financial statements of Ibex, including the notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Ibex" included elsewhere herein. The statement of operations data
for the years ended December 31, 1994 and 1995 and the balance sheet data at
December 31, 1994 and 1995 are derived from, and are qualified by reference to,
audited financial statements contained in this Prospectus. The statement of
operations data for the years ended December 31, 1991, 1992 and 1993 and the six
month periods ended June 30, 1995 and 1996, and the balance sheet data at
December 31, 1991, 1992 and 1993 and at June 30, 1996, are derived from
unaudited financial statements that have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations and other information for such
period. These historical results are not necessarily indicative of the results
of operations to be expected for the full fiscal year or any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Ibex."
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
--------------------------------------------------------- ----------------------
June 30, June 30,
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ------ -----
Historical Statement of Operations Data(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ..................... $ 521 $ 1,020 $ 1,791 $ 2,708 $ 3,091 $ 1,393 $ 2,075
Cost of sales.................. 218 290 554 691 732 355 444
--------- ---------- ---------- --------- --------- ---------- ---------
Gross profit................ 303 730 1,237 2,017 2,359 1,038 1,631
--------- ---------- ---------- --------- --------- ---------- ---------
Operating expenses:
Research and development..... 95 153 245 432 648 418 342
Sales and marketing.......... 128 368 638 988 1,391 660 760
General and administrative... 68 197 289 256 262 129 153
--------- ---------- ---------- --------- --------- ---------- ---------
Total operating expenses... 291 718 1,172 1,676 2,301 1,207 1,255
--------- ---------- ---------- --------- --------- ---------- ---------
Operating income (loss)......... 12 12 65 341 58 (169) 376
Other income (expense), net..... (4) (4) 1 (8) (4) (5) 10
--------- ---------- ---------- --------- --------- ---------- ---------
Income (loss) before provision
for income taxes............. 8 8 66 333 54 (174) 386
Provision for (benefit
from) income taxes........... 1 1 39 121 (5) (21) 162
--------- ---------- ---------- --------- --------- ---------- ---------
Net income (loss)............... $ 7 $ 7 $ 27 $ 212 $ 59 $ (153) $ 224
========= ========== ========== ========= ========= ========== =========
Net income (loss) per share (1). $ 0.06 $ 0.05 $ 0.15 $ 1.11 $ 0.30 $ (1.13) $ 1.11
========= ========== ========== ========= ========= ========== =========
Shares used in per share
calculation (1).............. 116 151 174 191 199 135 201
=== ========== ========== ========= ========= ========== =========
</TABLE>
(1)Computed on the basis described for net income (loss) per share in Note
2 of Notes to Consolidated Financial Statements.
107
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
----------------------------------------------------- ---------------------
June 30, June 30,
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ------ -----
Historical Statement of Operations Data(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................. 41.8 28.4 30.9 25.5 23.7 25.5 21.4
---- ---- ---- ---- ---- ---- ----
Gross profit................ 58.2 71.6 69.1 74.5 76.3 74.5 78.6
---- ---- ---- ---- ---- ---- ----
Operating expenses:
Research and development..... 18.2 15.0 13.7 16.0 21.0 30.0 16.5
Sales and marketing.......... 24.6 36.1 35.6 36.5 45.0 47.4 36.6
General and administrative... 13.1 19.3 16.2 9.4 8.4 9.2 7.4
---- ---- ---- ---- ---- ---- ----
Total operating expenses... 55.9 70.4 65.5 61.9 74.4 86.6 60.5
---- ---- ---- ---- ---- ---- ----
Operating income (loss)......... 2.3 1.2 3.6 12.6 1.9 (12.1) 18.1
Other income (expense), net..... (0.8) (0.4) 0.1 (0.3) (0.1) (0.4) 0.5
---- ---- --- ---- ---- ---- ---
Income (loss) before provision
for income taxes............. 1.5 0.8 3.7 12.3 1.8 (12.5) 18.6
Provision for (benefit
from) income taxes........... 0.2 0.1 2.2 4.5 (0.1) (1.5) 7.8
--- --- --- --- --- ---- ---
Net income (loss)............... 1.3% 0.7% 1.5% 7.8% 1.9% (11.0%) 10.8%
==== ==== ==== ==== ==== ======= =====
</TABLE>
<TABLE>
<CAPTION>
As of December 31, June 30,
---------------------------------------------------------- ---------
1991 1992 1993 1994 1995 1996
(unaudited) (unaudited) (unaudited) (unaudited)
Historical Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit)................ $ 11 $ 266 $ 302 $ 499 $ 593 $ 828
Total assets............................. 126 385 517 934 986 1,484
Short-term debt.......................... 68 -- 28 28 75 25
Total shareholders' equity .............. 32 341 368 608 700 924
</TABLE>
108
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF IBEX
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Ibex'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 in
the sections entitled "Risk Factors," "Summary," "Unaudited Pro Forma Condensed
Combined Financial Information," "Business of Castelle," "Business of Castelle"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Castelle."
Ibex was founded in 1990 and is the leading supplier of fax-on-demand
software, both at the enterprise level and for larger systems installed at
service providers. Companies such as Delrina, Pennzoil, IBM and various
government agencies are among those relying on Ibex's FactsLine product to
automatically fulfill document requests via fax. Ibex is the market leader with
more fax-on-demand telephone lines installed and more fax-on-demand revenue than
any other company in the industry. Ibex sells mainly to end users (usually via
VARs) which operate their own systems, but Ibex also sells to service providers
(usually direct) which base a service business on Ibex equipment.
Six Months Ended June 30, 1996 and June 30, 1995
Net Sales. Net Sales include gross sales of products less discounts and
sales returns and allowances. Net sales increased 49.0% to $2.1 million for the
six months ended June 30, 1996 from $1.4 million in the comparable period of
1995. The increase was primarily attributable to new Ibex products such as
FactsLine for the Web (an HTML to fax conversion tool) and Ibex OpenFax (a Word
document and Adobe Acrobat conversion tool) as well as several large system
orders from enhanced fax service providers domestically and internationally.
During the first six months of 1996, sales to Ibex Europe, Ibex's principal
foreign distributor, and Ibex Canada, Ibex's largest domestic distributor,
accounted for 5.9% and 25.4%, respectively, of Ibex's net sales.
Cost of Sales. Cost of sales includes cost of materials, manuals, diskettes
and their duplication, packaging materials, assembly and shipping, as well as
certain royalties. Cost of sales also includes voice and fax boards manufactured
by third parties. Cost of sales decreased as a percentage of net sales to 21.4%
in the 1996 period from 25.5% in the 1995 period. This percentage decrease was
primarily attributable to increased hardware pricing, decrease in hardware costs
and increased sales to end users at higher margins.
Research and Development. Research and development expenses include
compensation costs for software, hardware and quality assurance personnel as
well as expenses related to the development of product prototypes. Research and
development expenses decreased 18.2% to $342,000 for the first six months of
1996 from $418,000 in the comparable period of 1995. During 1996, research and
development expenses decreased as a percentage of net sales as a result of a
first quarter charge in 1995 of approximately $183,000 relating to the
acquisition of the Robofax product line. Relative spending amounts not including
the Robofax acquisition would have been approximately $235,000 in 1995, or a
45.5% increase in research and development spending from the first six months of
1995 relative to the first six months of 1996. The relative increase in research
and development spending can be attributed to increased research and development
effort in developing the new fax/email/Web product line. Ibex anticipates the
dollar amount of research and development will continue to increase
significantly over the next two quarters in order to finish development of the
new products. Ibex also anticipates that the dollar amount of research and
109
<PAGE>
development expenses will increase in the future as a result of its continuing
commitment to the development of new products.
Sales and Marketing. Sales and marketing expenses include compensation
costs (including sales commissions) for sales, marketing and customer service
personnel, as well as costs associated with sales facilities, trade shows,
advertising and promotional materials. Sales and marketing expenses for the
first six months of 1996 were $760,000, compared to $660,000 in the first six
months of 1995, an increase of 15.2% over the comparable 1995 period. The
increase in sales and marketing expenses was primarily attributable to new
marketing efforts such as a seven city seminar series that was planned and
implemented in four cities in the first six months of 1996. However, sales and
marketing expenses as a percentage of net sales decreased to 36.6% in the first
six months of 1996, from 47.4% in 1995 and 36.5% in 1994. This relative decrease
can be attributed to a higher than normal sales compensation expense in the
first six months of 1995 due to the acquisition of the Robofax product line from
Applied System Engineering and the hiring of the existing Robofax sales team
that had been working for Applied System Engineering. Ibex management later
decided to reduce the number of salespeople selling the Robofax product.
General and Administrative. General and administrative expenses include
compensation for administrative, finance and general management personnel, as
well as other administrative expenses, such as legal and accounting fees.
General and administrative expenses increased 18.6% to $153,000 for the first
six months of 1996 from $129,000 in the comparable period in 1995. The dollar
increase resulted from a move into larger facilities in May of 1995 and an
increase by one in the number of employees generating general and administrative
expenses. General and administrative expenses, as a percentage of net sales
remained relatively the same, decreasing slightly from 9.2% in 1995 to 7.4% in
1996.
Provision for Income Taxes. The provision for income taxes for the first
half of 1996 was $162,000 and ($21,000) for the same period of 1995. The benefit
from income taxes in 1995 was a result of the net loss realized during the
period.
Years Ended December 31, 1995, 1994 and 1993
Net Sales. Net sales increased 14.1% to $3.1 million in 1995 from $2.7
million in 1994. This increase was principally due to increased marketing and
public relations efforts, including press tours and expanded trade show
schedule. Net sales increased 51.2% in 1994 to $2.7 million from $1.8 million in
1993. This increase was primarily due to increased awareness of fax-on-demand in
the market, the introduction of the FactsLine for Lotus Notes product, and a
relatively large sale to Lotus Development Corp. During 1995, 1994 and 1993,
sales to Ibex Europe, Ibex's principal foreign distributor, accounted for 11.7%,
4.1%, and 7.9%, respectively, of Ibex's net sales, and sales to Ibex Canada,
Ibex's largest domestic distributor, accounted for 14.2%, 21.1%, and 3.8%,
respectively, of Ibex's net sales.
Cost of Sales. Cost of sales as a percentage of net sales was 23.7%, 25.5%,
and 30.9%, respectively in 1995, 1994 and 1993. The decrease from 1994 to 1995
was due primarily to a reduction in overhead as a percentage of net sales. The
decrease from 1993 through 1995 has been primarily attributed to increased
volume purchase discounts from Dialogic Corporation, one of Ibex's main
suppliers of components; increased sales of add-on products which have a high
gross margin, and increased sales of software-only products which do not have a
hardware component included with the product and thus have a high gross margin.
110
<PAGE>
Research and Development. Research and development expenses were $648,000,
$432,000 and $245,000 in 1995, 1994 and 1993, respectively, and represented
21.0%, 16.0% and 13.7% of net sales for those period. During 1995, research and
development expenses increased as a percentage of net sales as a result of a
$183,000 charge relating to the acquisition of the Robofax product line. Without
this charge, research and development would have been $465,000 or 15.0% of net
sales in 1995. The increase from 1993 to 1994 was primarily attributable to an
increase in headcount.
Sales and Marketing. Sales and marketing expenses were $1.4 million, $1.0
million, and $638,000 in 1995, 1994, 1993, respectively, and represented 45.0%,
36.5% and 35.6% of net sales for those periods. The increase from 1994 to 1995
was primarily due to an increase in the sales force, both via hire and via the
acquisition of the Robofax product line and the subsequent hire of the Robofax
sales team. The trade show schedule and trade show expenses were also expanded
in 1995.
General and Administrative. General and administrative expenses were
$262,000, $256,000 and $289,000 in 1995, 1994, and 1993, respectively, and
represented 8.4%, 9.4% and 16.2% of net sales for those periods.
Provision for Income Taxes. See Note 9 of Notes to Financial Statements for
a discussion of Ibex's provision for income taxes.
Liquidity and Capital Resources
Since its inception in 1990, Ibex has funded its operations primarily
through private issuances of capital stock and bank borrowings. Net cash flows
from operations were approximately $192,000 and 119,000 in 1995 and 1994,
respectively, and $221,000 for the first six months of 1996. Ibex acquired
capital equipment with an aggregate purchase price of $46,000 and $54,000 in
1995 and 1994, respectively, and $30,000 in the first six months of 1996.
IBEX STOCK, OPTIONS AND DIVIDENDS
Ibex is a privately-held company; there is no public trading market for its
stock. There are a total of 29 holders of Ibex Capital Stock, of which 28 hold
shares of Ibex Common Stock. The Castelle Common Stock issued to the holders of
Ibex capital stock in the Merger will be registered pursuant to the Registration
Statement on Form S-4 of which this Prospectus/Joint Proxy Statement is a part.
In addition, as of the Ibex Record Date, there were options outstanding to
purchase an aggregate of 14,429 shares of Ibex Common Stock.
Ibex has never declared or paid any dividends on its Common Stock and has
no plans to do so in the foreseeable future. Ibex's bank line of credit
prohibits the payment of cash dividends.
111
<PAGE>
CASTELLE SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of Castelle's Common Stock as of August 31, 1996 by: (i) each director and
nominee for director; (ii) each of the executive officers named in the Summary
Compensation Table employed by Castelle in that capacity on August 31, 1996;
(iii) all executive officers and directors of Castelle as a group; and (iv) all
those known by Castelle to be beneficial owners of more than five percent of its
Common Stock.
Beneficial Ownership
(1)
Number Percent
Beneficial Owner of Shares of Total
- ----------------- --------- -------
Entities Affiliated with 959,348 26.49%
Hambrecht & Quist Group (2)
One Bush Street
18th Floor
San Francisco, CA 94104
Entities Affiliated with 386,454 10.67%
Bay Partners (3)
10600 North DeAnza Blvd.
Suite 100
Cupertino, CA 95014
Entities Affiliated with 352,568 9.74%
J.F. Shea Co, Inc. (4)
655 Brea Canyon Road
Walnut, CA 91789
Entities Affiliated with 211,543 5.84%
Asset Management Associates 1984 (5)
2275 East Bayshore Road
Suite 150
Palo Alto, CA 94303
Arthur H. Bruno (6) 137,250 3.79%
c/o Castelle
3255-3 Scott Boulevard
Santa Clara, CA 95054
Randall I. Bambrough (7) 9,668 *
Jerome J. Burke (8) 76,565 2.03%
John Freidenrich (9) 396,953 10.96%
William R. Hambrecht (2) 959,348 26.49%
Alan Kessman (10) 5,058 *
Kanwal S. Rekhi (11) 10,691 *
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<PAGE>
Delbert W. Yocam (12) 10,692 *
All directors and executive officers as a group 1,603,765 43.91%
(8 persons) (2)(3)(6)(7)(8)(9)(10)(11)(12)
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal shareholders and Schedules 13D and 13G filed with the Securities
and Exchange Commission (the "SEC"). Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, Castelle believes that each of the shareholders named in this
table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based on
3,620,907 shares outstanding on August 31, 1996, adjusted as required by
rules promulgated by the SEC.
(2) Includes 60,835 shares held by each of H & Q Ventures International C.V.
and H & Q Ventures IV, 338,480 shares (and warrants exercisable within 60
days for 16,666 shares) held by H & Q London Ventures, 1,250 shares held by
Hamquist, 832 shares held by Hambrecht & Quist Venture Partners, a
California Limited Partnership, 182,517 shares held by Ivory & Sime
Enterprise Capital PLC, 85,536 shares (and warrants exercisable within 60
days for 16,666 shares) held by Hambrecht & Quist Group, 11,893 shares held
by Hamco Capital Corporation, 33,339 shares held by the Hambrecht 1980
Revocable Trust, and 499 shares of Common stock subject to options
exercisable within 60 days of August 31, 1996 by William Hambrecht,
warrants exercisable within 60 days for 70,000 shares held by Hambrecht &
Quist Liquidating Trust, warrants exercisable within 60 days for 30,000
shares held by Guaranty Finance Management Corp. and warrants exercisable
within 60 days for 50,000 shares held by RVR Securities. Each of H & Q
London Ventures and Ivory & Sime Enterprise Capital plc owns 5% or more of
the outstanding shares of Common Stock. William R. Hambrecht, a director of
Castelle, is Chairman of Hambrecht & Quist Group, the parent company of
Hambrecht & Quist LLC. and RvR Securities Corp., one of the Underwriters of
this offering. Mr. Hambrecht disclaims beneficial ownership of the shares
held by entities affiliated with Hambrecht & Quist Group, except to the
extent of his proportionate beneficial interest therein.
(3) Includes 15,453 shares held by California BPIV, L.P., 193,231 shares held
by Bay Partners III and 177,770 shares held by Bay Partners IV. Each of Bay
Partners III and Bay Partners IV owns 5% or more of the outstanding shares
of Castelle's Common Stock. John Freidenrich, a director of Castelle, and
John Bosch are general partners of California BPIV, L.P., and of Bay
Management Company, L.P. and Bay Management Company IV, L.P., the general
partners of Bay Partners III and Bay Partners IV. Neal Dempsey is a general
partner of California BPIV, L.P. and Bay Management Company IV, L.P. In
such capacities, Messrs. Bosch, Dempsey and Freidenrich have shared voting
and investment power over shares of Castelle's Common Stock held by
California BP IV, L.P., Bay Partners III and Bay Partners IV. They disclaim
beneficial ownership as to these shares, except to the extent of their
respective pecuniary interests therein.
(4) The shareholders of J.F. Shea Co., Inc. are Edmund H. Shea, Jr., John F.
Shea and Peter O. Shea, who disclaim beneficial ownership of Castelle's
shares except to the extent of each individual's proportionate interest
therein. Also includes 50,000 held by Edmund M. Shea, Jr. and Mary S. Shea
as trustees for the E&M RP Trust.
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(5) Includes 108,633 shares held by Asset Management Associates 1984, L.P. and
102,910 shares held by Asset Management Associates 1989, L.P., which are
beneficially owned by John Shoch, Franklin P. Johnson, Jr. and Craig C.
Taylor, the general partners of AMC Partners 84 and AMC Partners 89 L.P.,
the general partners, respectively, of Asset Management Associates 1984 and
Asset Management Associates 1989, L.P. Messrs. Shoch, Johnson and Taylor
disclaim such beneficial ownership except to the extent of each person's
proportionate beneficial interest therein.
(6) Chairman of the Board, Chief Executive Officer, President and a Director of
Castelle. Includes 5,000 shares of Common Stock held by Mr. Bruno's wife.
(7) Includes 7,968 shares of Common stock subject to options exercisable within
60 days of August 30, 1996 and 200 shares held by Randall I. Bambrough's
daughter. Mr. Bambrough is the Chief Financial Officer, Vice President of
Finance and Administration, and Secretary of Castelle.
(8) Executive Vice President of Castelle. Includes 500 shares held by Mr.
Burke's spouse.
(9) Includes 15,453 shares held by California BP IV, L.P., 193,231 shares held
by Bay Partners III and 177,770 shares held by Bay Partners IV. Each of Bay
Partners III and Bay Partners IV owns 5% or more of the outstanding shares
of Castelle's Common Stock. John Freidenrich, a director of Castelle, and
general partner of California BP IV, L.P. and of Bay Management Company,
L.P. and Bay Management Company IV, L.P., the general partners of Bay
Partners III and Bay Partners IV. Mr. Friedenrich disclaims beneficial
ownership as to these shares, except to the extent of their respective
pecuniary interests therein. Also includes 10,000 shares held by the
Friedenrich Family Trust and 499 shares of Common Stock subject to options
exercisable within 60 days of August 31, 1996.
(10) Includes 499 shares of Common stock subject to options exercisable within
60 days of August 31, 1996.
(11) Includes 10,961 shares of Common stock subject to options exercisable
within 60 days of August 31, 1996.
(12) Includes 10,962 shares of Common stock subject to options exercisable
within 60 days of August 31, 1996.
Compliance with the Reporting Requirements of Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires Castelle's directors and executive officers, and persons who own more
than ten percent of a registered class of Castelle's equity securities, to file
with the SEC initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of Castelle. Officers, directors and
greater than ten percent shareholders are required by SEC regulation to furnish
Castelle with copies of all Section 16(a) forms they file.
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To Castelle's knowledge, based solely on a review of the copies of such
reports furnished to Castelle and written representations that no other reports
were required, during the fiscal year ended December 31, 1995, all Section 16(a)
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were complied with except that an initial report of
ownership was filed late by J.F. Shea Co., Inc.
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IBEX SECURITY OWNERSHIP OF
PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Ibex Common Stock and Ibex Series A Convertible Preferred Stock as
of August 30, 1996 (i) by each person known by Ibex to own beneficially more
than 5% of the outstanding shares of Ibex Common Stock or more than 5% of the
outstanding shares of Ibex Series A Convertible Preferred Stock, (ii) by each of
the directors and executive officers of Ibex, and (iii) all of Ibex's directors
and executive officers as a group.
<TABLE>
<CAPTION>
Beneficial Ownership
Class of Number of Percent of Percent of
Name of Person or Identity of Group(1) Securities Shares(2) Class(3) Total Shares
---------- --------- -------- ------------
<S> <C> <C> <C> <C>
Tucha Limited (4) Preferred 24,017 50.0% 12.7%
c/o Tecom Sistemas Common 1,000 0.7% 0.5%
Rua Jeronimo de Lemos 162 or 152
Rio de Janeiro, RJ
20560-090 Brazil
Newark Holding, S.A. (4) Preferred 24,018 50.0% 12.7%
c/o Tecom Sistemas
Rua Jeronimo de Lemos 162 or 152
Rio de Janeiro, RJ
20560-090 Brazil
Grant Family 1990 Revocable Trust Common 7,600 5.5% 4.0%
1242 Hagan Road
Napa, CA 94558
Clovis Mattos Common 11,000 8.0% 5.8%
1775 Rehrman Drive
Dixon, CA 95620
Ney Grant (5) Common 55,000 39.9% 29.1%
Curtis Powell (6) Common 30,000 21.3% 15.9%
Graeme Plant (7) Common 2,086 1.5% 1.1%
Teodoro Gimenez (8) Preferred 48,035 100.0% 25.8%
Common 1,000 0.7% 0.5%
All Current Directors and Preferred 48,035 100.0% 25.4%
Executive Officers Common 88,086 62.5% 46.6%
(7 persons)
</TABLE>
(1) Except as indicated by footnote, and subject to community property laws
where applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock and Preferred
Stock shown as beneficially owned by them.
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(2) Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to
options, warrants and convertible notes currently exercisable or
convertible, or exercisable or convertible within 60 days, are deemed
outstanding including for purposes of computing the percentage of the
person holding such option, but not for purposes of computing the
percentage of any other holder.
(3) Computed on the basis of 141,016 shares of Ibex Common Stock and 48,035
shares of Ibex Series A Preferred Stock outstanding or for which Ibex is
contractually obligated to issue.
(4) Teodoro Gimenez, a director of Ibex, is Managing Director of Tucha Limited
and Managing Director of Newark Holding, S.A. Mr. Gimenez disclaims
beneficial ownership except to the extent of his proportionate beneficial
interest therein.
(5) Chairman of the Board and President.
(6) Vice President of Development and Director.
(7) Director.
(8) Teodoro Gimenez, a director of Ibex, is Managing Director of Tucha Limited
and Managing Director of Newark Holding, S.A. Mr. Gimenez disclaims
beneficial ownership except to the extent of his proportionate beneficial
interest therein.
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CERTAIN TRANSACTIONS
Stock Purchase by Executive Officers of Castelle
Arthur H. Bruno, Chairman of the Board, Chief Executive Officer, President
and a director of Castelle, purchased 97,250 shares of Castelle's Common Stock
at $0.20 per share in October 1994 and purchased 35,000 shares at $5.00 per
share in April 1995. The shares are subject to a right of repurchase in favor of
Castelle which expires ratably over four years and which are exercisable if Mr.
Bruno's relationship with Castelle terminates.
Jerome J. Burke, Executive Vice President of Castelle, purchased 55,565
shares of Castelle's Common Stock at $0.20 per share in October 1994 and
purchased 17,500 shares at $5.00 per share in April 1995. The shares are subject
to a right of repurchase in favor of Castelle which expires ratably over four
years and which are exercisable if Mr. Burke's relationship with Castelle
terminates.
Castelle Director and Shareholder Affiliations with Underwriter
RvR Securities Corp., a wholly-owned subsidiary of Hambrecht & Quist Group,
was one of the underwriters in Castelle's initial public offering, which
occurred in December 1995. Persons affiliated and associated with RvR Securities
Corp. beneficially own an aggregate of approximately 908,847 shares of
Castelle's Common Stock. In addition, William R. Hambrecht, a Director of
Castelle, is Chairman of Hambrecht & Quist Group.
Because of these affiliations, Castelle's initial public offering was
conducted in accordance with the applicable provisions of Schedule E to the
By-Laws of the National Association of Securities Dealers Inc. In accordance
with those provisions, Unterberg Harris (the "Independent Underwriter") served
as a "qualified independent underwriter" and recommended the maximum offering
price for the shares of Common Stock sold in the offering. The initial public
offering price of the shares of Common Stock was not higher than the maximum
public offering price recommended by the Independent Underwriter which performed
due diligence with respect to the information contained in the prospectus and
participated in the preparation of the registration statement of which the
prospectus was a part.
Castelle sold RvR Securities Corp. warrants to purchase from Castelle up to
50,000 shares of Common Stock at an exercise price per share of $8.40. The
warrant is exercisable for a period of five years beginning on December 20,
1995. The warrant is transferable, subject to compliance with applicable
securities laws, provided that until December 21, 1996 the warrants are
transferable only to another underwriter in the initial public offering or to
officers or partners of an underwriter in the initial public offering. The
warrant contains provisions for appropriate adjustments in the event of stock
splits, stock dividends, combinations, reorganizations or recapitalizations. In
addition, Castelle granted certain rights to the holder of the warrant to
register the underlying Common Stock.
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COMPARISON OF RIGHTS OF SHAREHOLDERS OF CASTELLE AND IBEX
Castelle and Ibex are incorporated in the State of California. Pursuant to
the Merger, Ibex will be merged with and into Castelle and Castelle will
continue to be governed by the California Law. The rights of Castelle's
shareholders are governed by its Articles of Incorporation, as amended and
restated (the "Castelle Articles"), its Bylaws, as amended and restated
("Castelle Bylaws"), and the California Law. The rights of Ibex's shareholders
are governed by the Ibex Articles of Incorporation (the "Ibex Articles") its
Bylaws ("Ibex ByLaws") and the California Law. After the effective time of the
Merger, the rights of Ibex shareholders who become Castelle shareholders will be
governed by the Castelle Articles, Castelle Bylaws and the California Law. The
following is a summary comparison of certain differences between the rights of
Castelle shareholders under the Castelle Articles and Castelle Bylaws and the
rights of Ibex shareholders under the Ibex Articles and Ibex Bylaws. This
summary does not purport to be complete and is qualified in its entirety by
reference to the corporate statute of California, and the corporate charters and
bylaws of Castelle and Ibex.
Rights under the Castelle and Ibex Articles. The rights of holders of
common stock under the Castelle and Ibex Articles are substantially similar.
Both the Castelle Articles and the Ibex Articles provide that the liability
of directors for monetary damages be eliminated to the fullest extent
permissible under California law and that agents be indemnified for breach of
duty to the company, subject to the limits on such indemnification set forth in
Section 204 of the California Corporations Code.
The Castelle Articles provide for the issuance by the Board of Directors of
up to 2,000,000 shares of Preferred Stock in one or more series, and authorize
the Board of Directors to determine the rights of holders of such series of
Preferred Stock.
Holders of Ibex Preferred Stock are entitled to separate rights under the
Ibex Articles, however such rights shall expire as of the effective time of the
Merger.
Rights Under the Castelle and Ibex Bylaws. The rights of holders of
Castelle and Ibex stock are substantially similar under the Castelle and Ibex
Bylaws and include the right to one vote per share of Common Stock held on
matters brought before the shareholders, other than the election of directors,
in which shareholders may cumulate votes. Among the differences in the Castelle
and Ibex Bylaws are the provisions relating to the size of the Board of
Directors. The Castelle Board of Directors is comprised of between four and
seven individuals and the Ibex Board of Directors is comprised of three to five
individuals. In each case the actual number of directors is fixed by approval of
either a vote of the Board of Directors or the shareholders.
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ADDITIONAL MATTERS FOR CONSIDERATION OF CASTELLE SHAREHOLDERS
PROPOSAL 2
Election of Directors
There are five (5) nominees for the five (5) Board positions presently
authorized in Castelle's Bylaws. Each director to be elected will hold office
until the next annual meeting of shareholders and until his successor is elected
and has qualified, or until such director's earlier death, resignation or
removal. Each nominee listed below is currently a director of Castelle, and five
directors, Messrs. Bruno, Freidenrich, Kessman, Rekhi and Yocam, having been
elected by the Board.
Shares represented by executed proxies will be voted, if authority to do so
is not withhold, for the election of the five (5) nominees named below, subject
to the discretionary power to cumulate votes. In the event that any nominee
should be unavailable for election as a result of an unexpected occurrence, such
shares will be voted for the election of such substitute nominee as management
may propose. Each person nominated for election has agreed to serve if elected
and management has no reason to believe that any nominee will be unable to
serve.
The five candidates receiving the highest number of affirmative votes cast
at the meeting will be elected directors of Castelle.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE
Nominees
The names of the nominees and certain information about them are set forth
below:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION/
POSITION HELD WITH CASTELLE
<S> <C>
Arthur H. Bruno 61 Chairman of the Board, Chief Executive Officer,
President and Director
John Freidenrich (1) 59 General Partner, Bay Management Company
Alan Kessman (2) 49 Chairman of the Board, President and Chief Execu-
tive Officer of Executone Information Systems, Inc.
Kanwal S. Rekhi (1) 49 Director
Delbert W. Yocam (2) 52 Director
</TABLE>
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
Arthur H. Bruno has served as Castelle's Chairman, Chief Executive Officer
and President since October 1993. From 1991 to 1993, he was Chairman and Chief
Executive Officer of White Pine Software Inc., a desktop connectivity company.
From 1989 to 1991, he was the Chairman and Chief Executive Officer of Wellsley
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Medical Management Corporation, a primary care medical service provider. From
1986 to 1989, he was the Chairman and Chief Executive Officer of Visual
Technology Incorporated, the predecessor to White Pine Software Inc.
John Freidenrich has served as a director of Castelle since January 1994.
Since 1981, he has been a general partner of various entities established by Bay
Partners, a venture capital group. Currently, Mr. Freidenrich is a general
partner of Bay Management and Bay Management Company IV, L.P., the general
partner of Bay Partners III, L.P. and Bay Partners IV, L.P., respectively. Mr.
Freidenrich was also a partner in, or of counsel to, the law firms of Ware &
Freidenrich or Gray, Cary, Ware & Freidenrich from January 1987 through December
1991.
Alan Kessman has served as a director of Castelle since April 1992. He has
also served as Chairman of the Board, President, and Chief Executive Officer of
Executone Information Systems, Inc., a telecommunications company, since August
1983.
Kanwal S. Rekhi has served as a director of Castelle since April 1995.
Currently retired, Mr. Rekhi served as Executive Vice President of Novell, Inc.
from June 1989 through January 1995. Mr. Rekhi currently serves as a director of
Gupta Corporation.
Delbert W. Yocam has been a director of Castelle since April 1995. Mr.
Yocam has been an independent consultant from November 1994 to the present. Mr.
Yocam was President, Chief Operating Officer and a director of Tektronix, Inc.
from September 1992 through November 1994. He was an independent consultant from
November 1989 until September 1992. Mr. Yocam was with Apple Computer, Inc. from
November 1979 through November 1989, serving in a variety of executive
management positions, including Chief Operating Officer from August 1986 through
August 1988 and President of Apple Pacific from August 1988 to November 1989.
Mr. Yocam is also a director of Adobe Systems, Inc., Integrated Measurement
Systems, Inc., Oracle Corporation, Sapiens International Corp., and several
privately-held technology companies.
Retiring Director
Hambrecht & Quist Group maintains a policy that persons acting as directors
for private companies withdraw from such positions, within a reasonable time
after the company becomes publicly traded. Accordingly, Mr. Hambrecht has
indicated that he does not wish to be nominated for reelection to Castelle's
Board of Directors and will cease to be a director of the Company upon the
conclusion of the Castelle Meeting.
Board Committees and Meetings
During the fiscal year ended December 31, 1995, the Board of Directors held
six meetings. The Board has an Audit Committee and a Compensation Committee.
The Audit Committee meets with Castelle's independent auditors at least
annually to review the results of the annual audit and discuss the financial
statements; recommends to the Board the independent auditors to be retained; and
receives and considers the accountants' comments as to controls, adequacy of
staff and management performance and procedures in connection with audit and
financial controls. The Audit Committee is composed of two non-employee
directors: Messrs. Kessman and Yocam. The Audit Committee was formed in November
1995 in anticipation of Castelle's initial public offering and did not meet
during 1995.
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The Compensation Committee makes recommendations concerning salaries and
incentive compensation, awards stock options to employees and consultants under
Castelle's stock option plans and otherwise determines compensation levels and
performs such other functions regarding compensation as the Board may delegate.
The Compensation Committee is composed of three non-employee directors: Messrs.
Freidenrich, Hambrecht and Rekhi. The Compensation Committee was formed in
November 1995 in anticipation of Castelle's initial public offering and did not
meet during 1995.
During the fiscal year ended December 31, 1995, each of the directors
except Alan Kessman attended at least 75% of the aggregate of the meetings of
the Board held during the period for which he was a director.
PROPOSAL 3
Ratification of Selection of Independent Auditors
The Board of Directors has selected Coopers & Lybrand L.L.P. as Castelle's
independent auditors for the fiscal year ending December 31, 1996 and has
further directed that management submit the selection of independent auditors
for ratification by the shareholders at the Annual Meeting. Coopers & Lybrand
L.L.P. has audited Castelle's financial statements since its inception in 1987.
Representatives of Coopers & Lybrand L.L.P. are expected to be present at the
Annual Meeting, will have an opportunity to make a statement if they so desire
and will be available to respond to appropriate questions.
Shareholder ratification of the selection of Coopers & Lybrand L.L.P. as
Castelle's independent auditors is not required by Castelle's Bylaws or
otherwise. However, the Board is submitting the selection of Coopers & Lybrand
L.L.P. to the shareholders for ratification as a matter of good corporate
practice. If the shareholders fail to ratify the selection, the Audit Committee
and the Board will reconsider whether or not to retain that firm. Even if the
selection is ratified, the Audit Committee and the Board in their discretion may
direct the appointment of different independent auditors at any time during the
year if they determine that such a change would be in the best interests of
Castelle and its shareholders.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and voting at the Annual Meeting will be required
to ratify the selection of Coopers & Lybrand L.L.P.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF THIS PROPOSAL
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ADDITIONAL MATTER FOR CONSIDERATION OF IBEX SHAREHOLDERS
PROPOSAL 2
Approval of the 1992 Stock Option Plan
In July 1996, the Board of Directors adopted and ratified the Ibex 1992
Stock Option Plan (the "1992 Option Plan"). There are 20,000 shares of Ibex's
common Stock authorized for issuance under the 1992 Option Plan. At August 31,
1996, options (net of canceled or expired options) covering an aggregate of
14,429 shares of Ibex's Common Stock were outstanding under the 1992 Option
Plan.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2
The essential features of the 1992 Option Plan are outlined below:
General
The 1992 Option Plan provides for the grant of both incentive and
nonstatutory stock options. Incentive stock options granted under the 1992
Option Plan are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). Nonstatutory stock options granted under the 1992 Option Plan are not
intended to qualify as incentive stock options under the Code.
Purpose
The 1992 Option Plan was adopted to provide a means by which selected
officers, directors and employees of and consultants to Ibex and its affiliates
could be given an opportunity to purchase stock in Ibex, to assist in retaining
the services of employees holding key positions, to secure and retain the
services of persons capable of filling such positions and to promote the success
of Ibex's business.
Administration
The 1992 Option Plan is administered by the Board of Directors of Ibex. The
Board has the power to construe and interpret the 1992 Option Plan subject to
the provisions of the 1992 Option Plan and determine the persons to whom and the
dates on which options will be granted, the number of shares to be subject to
each option, the time or times during the term of each option within which all
or a portion of such options may be exercised, the exercise price, the type of
consideration and other terms of the option. The Board of Directors is
authorized to delegate administration of the 1992 Option Plan to a committee
composed of not fewer than three members of the Board.
Eligibility
Incentive stock options may be granted under the 1992 Option Plan only to
employees (including officers and employee-directors) of Ibex. Employees
(including officers and non-employee directors), consultants are also eligible
to receive nonstatutory stock options under the 1992 Option Plan.
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No option may be granted under the 1992 Option Plan to any person who, at
the time of the grant, owns (or is deemed to own) stock possessing more than 10%
of the total combined voting power of Ibex or any affiliate of Ibex, unless the
option exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of grant, and the term of the option does not
exceed five years from the date of grant. For incentive stock options granted
under the 1992 Option Plan, the aggregate fair market value, determined at the
time of grant, of the shares of Common Stock with respect to which such options
are exercisable for the first time by an optionee during any calendar year
(under all such plans of Ibex and its affiliates) may not exceed $100,000.
Terms of Options
The following is a description of the permissible terms of options granted
under the 1992 Option Plan. Individual option grants may be more restrictive as
to any or all of the permissible terms described below.
Exercise Price; Payment. The exercises price of incentive stock options
under the 1992 Option Plan may not be less than the fair market value of the
Common Stock subject to the option on the date of the option grant, and in some
cases (see "Eligibility" above), may not be less than 110% of such fair market
value. The exercise price of nonstatutory options under the 1992 Option Plan may
not be less than 85% of the fair market value of the Common Stock subject to the
option on the date of the option grant. The exercise price of options granted
under the 1992 Option Plan must be paid in cash at the time the option is
exercised, unless payment in some other manner is authorized by the Board at the
time of grant of the stock option.
Option Exercise. Options granted under the 1992 Option Plan may vest in
cumulative increments as determined by the Board. Shares covered by currently
outstanding options under the 1992 Option Plan typically vest at the rate of 1/3
of the shares subject to the option at the end of the first year after the grant
and 1/3 per year thereafter during the optionee's continued employment or
service as a consultant.
Term. The maximum term of options under the 1992 Option Plan is 10 years,
except that in certain cases (see "Eligibility") the maximum term is five years.
Exercise of Option. If the optionee's employment with Ibex is terminated
for any reason (other than death or total and permanent disability), options may
be exercised within 90 days after such termination as to all or part of the
shares as to which the optionee was entitled at the date of such termination. If
an optionee is unable to continue his or her employment with Ibex as a result of
death, his or her options may be exercised at any time prior to the expiration
of the option by the optionee's estate or by a person who acquired the right to
exercise the option by bequest or inheritance, but only to the extent of the
accrued right to exercise at the time of death. If an optionee is unable to
continue his or her employment with Ibex as a result of total and permanent
disability, his or her options may be exercised at any time within twelve months
after termination to the extent the option was exercisable on the date of
termination.
Adjustment Provisions
If there is any change in the Common Stock subject to the 1992 Option Plan
or subject to any option granted under the 1992 Option Plan (through merger,
consolidation, reorganization, recapitalization, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or otherwise), the
1992 Option Plan and options outstanding thereunder will be appropriately
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adjusted as to the class and the maximum number of shares subject to the 1992
Option Plan and the class, number of shares and exercise price per share of
Common Stock subject to such outstanding options.
Effect of Certain Corporate Events
Unless otherwise determined by the Board, upon the dissolution or
liquidation of Ibex the options granted under the 1992 Option Plan shall
terminate and thereupon become null and void. Each optionee shall be given not
less than ten (10) days notice of such event and the opportunity to exercise
each outstanding option before such event is effected. Upon any merger or
consolidation, if Ibex is not the surviving corporation, the options granted
under the 1992 Option Plan shall either be assumed by the new entity or shall
terminate as set forth above.
Duration, Amendment and Termination
The Board may suspend or terminate the 1992 Option Plan without stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the 1992 Option Plan will terminate ten years from its adoption by
the Board. The Board may amend or terminate the 1992 Option Plan from time to
time in such respects as the Board may deem advisable, except that, without
approval of the holders of a majority of the outstanding capital stock no such
revision or amendment shall change the number of shares subject to the 1992
Option Plan, change the designation of the class of employees eligible to
receive options or add any material benefit to optionees under the 1992 Option
Plan. Any such amendment or termination of the 1992 Option Plan shall not affect
options already granted, and such options shall remain in full force and effect
as if the 1992 Option Plan had not been amended or terminated.
Restrictions on Transfer
Under the 1992 Option Plan, an option may not be transferred by the
optionee otherwise than by will or by the laws of descent and distribution.
During the lifetime of an optionee, an option may be exercised only by the
optionee.
Tax Consequences
Nonstatutory Stock Options. All options granted under the 1992 Stock Option
Plan, to date have been nonstatutory stock options and generally have the
following federal income tax consequences.
There are no tax consequences to the optionee or Ibex by reason of the
grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock
option, the optionee normally will recognize taxable ordinary income equal to
the excess of the fair market value of Ibex Common Stock on the date of exercise
over the option exercise price. Generally, with respect to employees, Ibex is
required to withhold from regular wages or supplemental wage payments an amount
based on the ordinary income so recognized. Ibex will generally be entitled to a
business expense deduction equal to the taxable ordinary income realized by the
optionee. Upon disposition of the shares, the optionee will recognize a gain or
loss equal to the difference between the sales price and the purchase price of
the shares (plus any compensation income recognized with respect to such
shares).
125
<PAGE>
SHAREHOLDER PROPOSALS
Shareholder proposals for inclusion in the Castelle proxy statement and
form of proxy relating to the Castelle 1997 Annual Meeting of Shareholders must
be received by Castelle at its principal executive offices by June 9, 1997 in
order that they may be considered for inclusion in the proxy statement and form
of proxy relating to that meeting.
EXPERTS
The consolidated financial statements of Castelle as of December 31, 1994
and 1995, and for each of the three years in the period ended December 31, 1995
included elsewhere in this Prospectus have been included herein, in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, which report is
given upon the authority of that firm as experts in accounting and auditing.
The financial statements of Ibex as of December 31, 1994 and 1995, and for
each of the two years in the period ended December 31, 1995, included elsewhere
in this Prospectus have been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, which report is given upon
the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for Castelle by Cooley Godward LLP, San Francisco, California. Certain
legal matters in connection with the Merger will be passed upon for Ibex by
Graham & James LLP, Sacramento, California. Gilles S. Attia, a partner of the
law firm of Graham & James LLP, holds the office of Secretary of Ibex.
126
<PAGE>
OTHER MATTERS
Castelle
The Castelle Board of Directors knows of no other matters that will be
presented for consideration at the Annual Meeting. If any other matters are
properly brought before the meeting, it is the intention of the persons named in
the accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors
Randall I. Bambrough
Secretary
November 7, 1996
A copy of the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K for the fiscal year ended December 31, 1996 is available
without charge upon written request to: Corporate Secretary, Castelle, 3255-3
Scott Boulevard, Santa Clara, CA 95054.
Ibex
The Ibex Board of Directors knows of no other matters that will be
presented for consideration at the Annual Meeting. If any other matters are
properly brought before the meeting, it is the intention of the persons named in
the accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors
Gilles A. Attia
Secretary
November 7, 1996
127
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Castelle Financial Statements for the three years ended December 31, 1993, 1994
and 1995:
Report of Independent Accountants..........................................F-2
Consolidated Financial Statements..........................................F-3
Notes to Consolidated Financial Statements.................................F-7
Castelle Financial Statements for the six months ended June 28, 1995 and 1996:
Consolidated Financial Statements..........................................F-20
Notes to Consolidated Financial Statements.................................F-24
Ibex Technologies, Inc. Financial Statements for the two years ended December
31, 1994 and 1995:
Report of Independent Accountants..........................................F-25
Consolidated Financial Statements..........................................F-26
Notes to Consolidated Financial Statements.................................F-30
Ibex Technologies, Inc. Financial Statements for the six months ended June 30,
1994 and 1995:
Consolidated Financial Statements..........................................F-40
Notes to Consolidated Financial Statements.................................F-43
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Castelle:
We have audited the accompanying consolidated balance sheets of Castelle and
subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Castelle and subsidiaries as of December 31, 1994 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 9, 1996
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED BALANCE SHEETS
(in thousands)
-----
December 31,
-----------------------
ASSETS 1995 1994
--------- ---------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 7,268 $ 907
Restricted cash 426
Accounts receivable, net of allowance for doubtful accounts of $406
in 1994, and $414 in 1995
2,837 1,873
Inventories 3,637 2,735
Prepaid expenses and other current assets 471 297
Deferred income taxes 61
-------- ---------
Total current assets 14,213 6,299
Property and equipment, net 334 667
Other, net 120 158
-------- ---------
Total assets $ 14,667 $ 7,124
======== =========
LIABILITIES
Current liabilities:
Bank borrowings $ 1,576
Long-term debt, current portion $ 193 1,094
Accounts payable 2,723 1,097
Accrued liabilities 2,448 1,648
-------- ---------
Total current liabilities 5,364 5,415
Long-term debt, less current portion 4 270
Deferred income taxes 61
Other long-term liabilities 10 23
-------- ---------
Total liabilities 5,378 5,769
-------- ---------
Commitments (Note 4).
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 30,000 shares in 1994 and 2,000 shares in 1995 and 1996
Issued and outstanding: 22,349 shares in 1994 and no shares in 1995
and 1996
15,860
Common stock, no par value:
Authorized: 25,000 shares
Issued and outstanding: 453 shares in 1994, 3,469 shares in 1995
and 3,621 shares in 1996
22,323 304
Notes receivable for purchase of common stock (379) (130)
Accumulated deficit (12,655) (14,679)
-------- ---------
Total shareholders' equity 9,289 1,355
-------- ---------
Total liabilities and shareholders' equity $ 14,667 $ 7,124
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31,
------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 25,082 $ 19,486 $ 17,787
Cost of sales 13,571 11,503 11,346
--------- --------- ---------
ross profit 11,511 7,983 6,441
--------- --------- ---------
Operating expenses:
Research and development 2,018 2,179 2,152
Sales and marketing 5,641 4,384 5,628
General and administrative 1,405 1,446 1,977
Restructuring charge 615
-------- --------- --------
9,064 8,009 10,372
-------- --------- --------
Operating income (loss) 2,447 (26) (3,931)
Interest expense (296) (481) (349)
Other income (expense), net (53) 129 (515)
-------- --------- --------
Income (loss) before provision for
income taxes
2,098 (378) (4,795)
Provision for income taxes (74)
-------- --------- --------
Net income (loss) $ 2,024 $ (378) (4,795)
======== ========= ========
Net income (loss) per share $ 0.77 $ (0.91) $ (12.11)
======== ========= ========
Shares used in per share calculation 2,673 414 396
======== ========= ========
Pro forma net loss per share $ ( 0.16)
=========
Pro forma shares used in per share
calculation
2,396
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
-----
Notes
Receivable
for
Preferred Stock Common Stock Purchase of
----------------- ----------------- Common Accumulated
Shares Amount Shares Amount Stock Deficit Total
------ ------- ------ -------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1992 19,339 $ 12,911 330 $ 237 $ (149) $(9,506) $3,493
Issuance of common stock through
exercise of purchase rights
39 39 (31) 8
Other 24 24
Repurchase of common stock (57) (63) 56 (7)
Payment of note receivable 13 13
Net loss (4,795) (4,795)
------ ------- ------ -------- ------- -------- -------
Balances, December 31, 1993 19,339 12,911 312 237 (111) (14,301) (1,264)
Issuance of Series E preferred 3,010 2,949 2,949
stock, net of issuance costs
Issuance of common stock warrants 20 20
Issuance of common stock through
exercise of purchase rights
154 31 (31)
Other 28 28
Repurchase of common stock (13) (12) 12
Net loss (378) (378)
------ ------- ------ -------- ------- -------- -------
Balances, December 31, 1994 22,349 15,860 453 304 (130) (14,679) 1,355
Issuance of common stock through:
Exercise of stock options 2 1 1
Exercise of purchase rights 52 263 (263) -
Initial public offering, net of
issuance costs
1,000 5,886 5,886
Exercise of warrants 7 7 7
Conversion of preferred shares (22,349) (15,860) 1,970 15,860 -
Other 17 17
Repurchase of common stock (15) (15) 14 (1)
Net income 2,024 2,024
------ ------- ------ -------- ------- -------- -------
Balances, December 31, 1995 - $ - 3,469 $ 22,323 $ (379) $(12,655) $ 9,289
====== ======= ====== ======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
------------------------------------
1995 1994 1993
-------- --------- ----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 2,024 $ (378) $(4,795)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 594 893 734
Provision for doubtful accounts 75 222 152
Provision for excess and obsolete inventory 323 279 729
Changes in assets and liabilities:
Accounts receivable (1,039) (361) 3,017
Inventories (1,225) (167) (546)
Prepaid expenses and other current assets (174) (120)
Accounts payable 1,626 (357) 296
Accrued liabilities and other long-term liabilities 800 (247) 1,369
---------- --------- --------
Net cash provided by (used in) operating activities 3,004 (116) 836
---------- --------- --------
Cash flows from investing activities:
Acquisition of property and equipment (195) (392) (321)
Capitalization of software development costs (12) (281)
Acquisition of intangible assets (59) (506)
(Increase) decrease in other assets (24) 35 (32)
---------- --------- --------
Net cash used in investing activities (219) (428) (1,140)
---------- --------- --------
Cash flows from financing activities:
(Increase) decrease in restricted cash 426 (426)
Repayment of notes payable (1,123) (1,036)
Proceeds from bank borrowings 18,933 15,784 1,100
Repayment of bank borrowings (20,509) (17,292) (84)
Principal payments on capitalized leases (44) (47) (40)
Proceeds from borrowings under notes payable to shareholders, net of 500
issuance costs
Proceeds from issuance of preferred stock, net of issuance costs 2,566
Proceeds from collection of note receivable for stock 13
Proceeds from issuance of common stock and warrants, net of 20 1
repurchases
5,893
---------- --------- --------
Net cash provided by (used in) financing activities 3,576 (431) 1,490
---------- --------- --------
Net increase (decrease) in cash and cash equivalents 6,361 (975) 1,186
Cash and cash equivalents at beginning of period 907 1,882 696
---------- --------- --------
Cash and cash equivalents at end of period $ 7,268 $ 907 $ 1,882
========== ========= ========
Supplemental information:
Cash paid during the period for:
Interest $ 217 $ 474 $ 293
Income taxes $ 57
Noncash investing and financing activities:
Acquisition of property and equipment under capitalized leases 125
Conversion of notes payable to shareholders to preferred stock 383
Issuance of common stock in exchange for notes receivable 263 31 31
Repurchase of common stock in exchange for notes receivable 14 12 56
Accounts payable replaced with a note 2,121
Cancellation of license prepayment and related accrued liability 500
Issuance of common stock on conversion of preferred stock 15,860
</TABLE>
F-6
<PAGE>
- --------------------------------------------------------------------------------
1. Business and Organization of the Company:
- --------------------------------------------------------------------------------
Castelle (the Company) designs, develops, markets and supports
network enhancement products, both software and hardware, that
improve the productivity, performance and functionality of local area
networks (LANs) and enhance the LAN user's ability to communicate.
The Company's current products include FaxPress fax server systems
and a software-only fax server, JetPress and LANpress print servers
and a range of software enhancements for the Company's fax and print
server product lines. The Company distributes its products primarily
through a two-tier, domestic and international distribution network,
with its distributors selling Castelle's products to value-added
resellers, system integrators, retailers and other resellers in the
United States, Europe and the Pacific Rim. The Company also has
relationships with selected original equipment manufacturers and
system integrators and sells software enhancements and upgrades
directly to end users.
2. Summary of Significant Accounting Policies:
Basis of Consolidation:
The Company has a wholly owned subsidiary in the State of
Delaware, Castelle International, Inc., which has a wholly owned
subsidiary in the Netherlands, Castelle Europe BV. The
consolidated financial statements include the accounts of these
wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-7
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
Financial Instruments:
Cash equivalents comprise highly liquid investments with original
maturities at the date of purchase of three months or less.
2. Summary of Significant Accounting Policies, continued:
Financial Instruments, continued:
Amounts reported for cash equivalents, receivables and other
financial instruments are considered to approximate fair values
based upon comparable market information available at the
respective balance sheet dates.
Financial instruments that potentially subject the Company to
concentrations of credit risks comprise, principally, cash, notes
receivable and trade accounts receivable. The Company maintains
its cash balances at a variety of financial institutions and has
not experienced any losses relating to any of its money market
funds or bank deposits.
Certain Risks and Concentrations:
Ongoing customer credit evaluations are performed by the Company,
and collateral is not required. The Company maintains allowances
for potential returns and credit losses, and such returns and
losses have generally been within management's expectations. Two
customers accounted for 41% and 23% of accounts receivable at
December 31, 1995 and 1994, respectively. One other customer
accounted for an additional 18% of accounts receivable at
December 31, 1994.
F-8
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Continued
The Company's products include components subject to rapid
technological change. Significant technological change could
adversely affect the Company's operating results and subject the
Company to returns of product and inventory losses. While the
Company has ongoing programs to minimize the adverse effect of
such changes and consider technological change in estimating its
allowances, such estimates could change in the future. In
addition, one of the Company's recently introduced print server
products is currently manufactured by a single supplier and
certain key components are currently available from only single
sources.
Inventories:
Inventories are stated at the lower of standard cost (which
approximates cost on a first-in, first-out basis) or market.
F-9
<PAGE>
2. Summary of Significant Accounting Policies, continued:
Property and Equipment:
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is provided using the
straight-line method over the estimated useful lives of the
respective assets, generally three to seven years. Amortization
of leasehold improvements is provided on a straight-line basis
over the life of the related asset or the lease term, if shorter.
Software Production Costs:
Costs related to the conceptual formulation and design of
software products are expensed as research and development while
costs incurred subsequent to establishing technological
feasibility of software products are capitalized until general
release of the product. Generally, technological feasibility is
established upon completion of a working model. Costs incurred
subsequent to such point have not been significant in 1995, and
all such costs have been expensed.
Revenue Recognition:
Product revenue is recognized upon shipment provided no
significant vendor obligations remain and collection of the
resulting receivable is deemed probable by management. The
Company enters into agreements with certain of its distributors
which permit limited stock rotation rights. These stock rotation
rights allow the distributor to return products for credit but
require the purchase of additional products of equal value.
Revenues subject to stock rotation rights are reduced by
management's estimates of anticipated exchanges. Provisions for
estimated warranty costs, insignificant vendor obligations and
anticipated retroactive price adjustments are recorded at the
time products are shipped.
Advertising Costs:
Advertising costs, included in sales and marketing expenses, are
expensed as incurred and were $914,000, $723,000 and $985,000 in
1995, 1994 and 1993, respectively.
Foreign Currency Translation:
The functional currency of the Company's foreign subsidiary is
the U.S. dollar. Foreign currency gains and losses, which have
not been material, are reported in the statement of operations.
F-10
<PAGE>
2. Summary of Significant Accounting Policies, continued:
Net Income (Loss) Per Share:
Net income (loss) 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 calculations where the effect of their inclusion would be
dilutive. Pro forma net loss per share has been presented for the
year ended December 31, 1994 to depict what the net loss per
share would have been had the common shares issuable upon
conversion of the outstanding convertible preferred stock been
outstanding during such period.
Reclassifications:
Certain reclassifications have been made to the 1993 and 1994
statements of cash flows presentations to conform with the 1995
presentation.
Recent Pronouncements:
During March 1995, the Financial Accounting Standards Board
issued Statement No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which requires the Company to review for impairment
of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in
circumstances indicate that the carrying amount of an asset might
not be recoverable. In certain situations, an impairment loss
would be recognized. SFAS 121 will become effective for the
Company's year ending December 31, 1996. The Company has studied
the implications of SFAS 121 and, based on its initial
evaluation, does not expect it to have a material impact on the
Company's financial condition or results of operations.
During October 1995, the Financial Accounting Standards Board
issued Statement No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" which establishes a fair value based method of
accounting for stock-based compensation plans and requires
additional disclosures for those companies who elect not to adopt
the new method of accounting. The Company intends to continue to
account for employee purchase rights and stock options under APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and
will be required to provide additional disclosures in the
financial statements for the year ended December 31, 1996.
F-11
<PAGE>
3. Balance Sheet Detail, (in thousands):
Inventories:
December 31,
-----------------------
1995 1994
---------- ---------
Raw material $ 2,320 $ 661
Work in process 419 66
Finished goods 898 2,008
---------- ---------
$ 3,637 $ 2,735
========== =========
Property and Equipment:
December 31,
-----------------------
1995 1994
--------- ---------
Production, test and demonstration equipment $ 524 $ 525
Computer equipment 1,744 1,678
Office equipment 267 287
Leasehold improvements 102 91
-------- --------
2,637 2,581
Less accumulated depreciation and amortization (2,303) (1,914)
-------- --------
$ 334 $ 667
======== ========
Equipment acquired under capital leases
included in property and equipment
above comprise:
December 31,
-------------------
1995 1994
------- -------
Equipment $ 151 $ 161
Less accumulated amortization (133) (93)
------- ------
$ 18 $ 68
======= ======
F-12
<PAGE>
3. Balance Sheet Detail, (in thousands), continued:
Accrued Liabilities:
December 31,
-----------------------
1995 1994
---------- ---------
Accrued compensation $ 620 $ 279
Accrued sales and marketing 698 666
Deferred revenue 263
Accrued professional fees 332 45
Other 798 395
---------- ---------
$ 2,448 $ 1,648
========== =========
4. Commitments:
The Company leases its facilities under a noncancelable operating
lease that expires in October 2000. The Company is responsible for
certain maintenance costs, taxes and insurance under the lease.
Future minimum payments under noncancelable operating leases are as
follows:
1996 $ 270
1997 283
1998 296
1999 309
2000 268
Rent expense, including the facility lease and equipment rental, was
$367,000, $313,000 and $299,000 for 1995, 1994 and 1993,respectively.
F-13
<PAGE>
5. Bank Borrowings:
The Company has a $3.5 million line of credit which expires on March
31, 1996. Borrowings under this line of credit agreement are limited
to a percentage of eligible accounts receivable and inventory
($1,805,000 at December 31, 1995), are collateralized by all assets
of the Company and bear interest at the bank's prime rate plus 2%
falling to prime plus 1.75% when a certain financial ratio is met
(10.25 % at December 31, 1995). The weighted average interest rate
during 1995 was 10.83%. As of December 31, 1995, there are no
borrowings under the line of credit agreement. In addition, the
Company maintains a $500,000 equipment term loan credit facility
("equipment facility") with the same bank which expires on August 11,
1999. Borrowings under this equipment facility are also
collateralized by all assets of the Company and bear interest at the
bank's prime rate plus 1.50% (10.00% at December 31, 1995). As of
December 31, 1995, there are no borrowings under the equipment
facility. Under the terms of the line of credit and the equipment
facility agreements, the Company is prohibited from paying dividends
and the bank has the right of set-off against certain cash balances
maintained by the Company at the bank which totaled $426,000 at
December 31, 1994 and $0 at December 31, 1995. The line of credit and
equipment facility agreements contain certain financial covenants
including a requirement for the Company to maintain minimum monthly
tangible net worth and remain profitable on a quarterly basis.
6. Long-Term Debt:
December 31,
------------------------
1995 1994
---------- ---------
Bank note payable $ 7 $ 83
Vendor note payable 159 1,206
Capital lease obligations 31 75
--------- ---------
197 1,364
Less current maturities (193) (1,094)
--------- ---------
$ 4 $ 270
========= =========
The bank note payable bears interest at 12% per annum and is repayable in
monthly installments of principal and interest. The note is subject to the same
conditions as the Company's line of credit (see Note 5) and was repaid in full
in January 1996.
The long-term vendor note payable, which resulted from the conversion of
$2,121,000 of accounts payable due to a single vendor at December 31, 1993,
bears interest at 7% per annum and was repaid in full in January 1996.
F-14
<PAGE>
7. Common Stock:
In 1995, the Company's Board of Directors authorized a one-for-twenty
reverse stock split of its common shares, subject to shareholders'
approval. All references in the accompanying consolidated financial
statements to the number of common shares and per share amounts have
been retroactively restated to reflect the reverse stock split.
In connection with the sale of common stock to two executives
(152,815 shares at $0.20 per share in October 1994 and 52,500 shares
at $5.00 per share in April 1995), the Company has the right to
repurchase the 205,315 shares at cost in the event of termination of
service. These rights lapse ratably through 1999. At December 31,
1995, 157,560 such shares were subject to the Company's repurchase
right.
Non-Employee Directors' Stock Option Plan:
In November 1995, the Company's Board of Directors adopted the
1995 Non-Employee Directors' Stock Option Plan (Directors Plan)
subject to shareholders' approval. As of December 31, 1995,
120,000 shares of the Company's common stock have been reserved
for issuance under the Directors Plan, and no shares have been
issued.
1988 Incentive Stock Plan:
Under the 1988 Incentive Stock Plan (1988 Plan), the Board of
Directors may grant either the right to purchase shares or
options to purchase shares of the Company's common stock at
prices not less than the fair market value at the date of grant
for qualified options and 85% of the fair market value for
non-qualified options and purchase rights. Options granted under
the 1988 Plan generally become exercisable, and the Company's
right to repurchase shares issued and sold pursuant to stock
purchase rights lapses, at a rate of one-quarter of the shares
under option or purchased under stock purchase rights at the end
of the first year and thereafter ratably over the next three
years and generally expire seven years from the date of grant. As
of December 31, 1995, there were no stock purchase rights
outstanding, and 1,217 shares purchased pursuant to stock
purchase rights were subject to repurchase by the Company.
The Company has reserved 945,579 shares for issuance under the
1988 Plan of which 399,995 shares were available for future
grants at December 31, 1995.
F-15
<PAGE>
7. Common Stock, continued:
1988 Incentive Stock Plan, continued
Option activity under the 1988 Plan is as follows (in thousands):
Stock Options Outstanding
----------------------------------------
Number of Exercise
Shares Price Total
---------- ------------- --------
Balances, December 31, 1992 29 $5.00 $ 144
Options granted 31 $5.00-$25.00 546
Options canceled (3) $15.00 (41)
---------- --------
Balances, December 31, 1993 57 $5.00-$25.00 649
Options granted 116 $.20 24
Options canceled (73) $.20-$20.00 (267)
---------- --------
Balances, December 31, 1994 100 $.20-$20.00 406
Options granted 191 $.20-$6.00 853
Options canceled (27) $.20-$25.00 (133)
Options exercised (2) $.20-$18.00 (1)
---------- --------
Balances, December 31, 1995 262 $.20-$6.00 $ 1,125
========== ========
At December 31, 1995, 37,058 options outstanding were exercisable.
In February 1995, the Board of Directors gave certain employees the right to
cancel certain outstanding stock options and receive new options with an
exercise price of $0.20 per share. Options for 6,635 shares of common stock at
original exercise prices ranging from $5.00 to $25.00 per share were canceled,
and new options for a like number of shares were issued in fiscal 1995. The new
options retained the vesting of the canceled options.
Warrants:
The Company has outstanding fully exercisable warrants at December 31, 1995 as
follows (in thousands):
Stock Under Exercise Number
Expiration Date Warrant Price of Shares
- ---------------------- ------------------------ --------- ---------
December 2000 Common $8.40 100
March 2000 Common $1.00 133
March 1999 Common $0.15 300
F-16
<PAGE>
7. Common Stock, continued:
Warrants, continued:
The warrant holders have certain demand and registration rights
as specified in the warrant agreement. During 1995, 6,916
warrants were exercised.
At December 31, 1995, the Company held notes receivable of
$379,000, which bear interest between 6.3% and 7.01% per annum,
from three executive officers or directors and four former
employees, issued in connection with the purchase of common stock
under restricted stock purchase agreements. The principal and
accrued interest on these notes are due at various dates from
December 1996 through September 2000.
8. Income Taxes:
The Company's tax provision differs from the provision computed using
statutory income tax rates as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
---------- -------- ---------
<S> <C> <C> <C>
Federal tax at statutory rate $ 713 $ (129) $ (1,630)
Permanent difference due to non-deductible expenses 12 (5) 142
State taxes, net of federal benefit 98 (12) (147)
Utilization of net operating loss carryforwards (823)
Net operating losses not benefited 146 1,635
Other 74
---------- -------- ---------
$ 74 $ - $ -
---------- -------- ---------
</TABLE>
F-17
<PAGE>
8. Income Taxes, continued:
The components of the net deferred tax assets and liabilities are as
follows (in thousands):
December 31,
-----------------------
1995 1994
--------- ---------
Inventory allowances and adjustments $ 323 $ 266
Accounts receivable allowances 511 496
Other liabilities and allowances 619 399
State income taxes 260 358
Net operating loss carryforwards 3,027 3,752
Valuation allowance (4,740) (5,210)
-------- --------
Total deferred tax assets - $ 61
======== ========
Capitalized software - (61)
-------- --------
Total deferred tax liabilities $ - $ (61)
-------- --------
AtDecember 31, 1995, the Company had federal net operating loss carryforwards of
approximately $8,900,000 available to offset future regular and alternative
minimum taxable income. Additionally, at December 31, 1995, the Company had
state net operating loss carryforwards of approximately $3,400,000 available to
reduce taxable income in future years. These loss carryforwards expire in the
years from 1998 through 2009.
The Tax Reform Act of 1986 substantially changed the rules relative to net
operating loss carryforwards in the event of an "ownership change" of a
corporation. Future changes in ownership may result in limitations on the annual
utilization of net operating loss carryforwards.
The Company's income before provision for income taxes is substantially all from
its domestic operations.
9. Retirement Plan:
The Company has a voluntary 401(k) plan covering substantially all
employees. The plan provides for employer contributions at the
discretion of the Board of Directors. In 1993, 1994 and 1995, the
Company made no contributions to the plan.
F-18
<PAGE>
10. Major Customers and Segment Information:
The Company operates in one industry segment and develops, markets
and supports network enhancement products.
The Company's export revenues are all denominated in U.S. dollars,
and are summarized as follows (in thousands):
Years Ended December 31,
--------------------------------------
1995 1994 1993
----------- ---------- ---------
Europe $ 4,700 $ 4,400 $ 4,300
Pacific Rim 8,300 3,800 2,100
----------- ---------- ---------
$ 13,000 $ 8,200 $ 6,400
----------- ---------- ---------
Customers that individually accounted for greater than 10% of net sales are as
follows (in thousands):
Years Ended December 31,
------------------------------------------------------------------
Customer 1995 1994 1993
- --------
------------------ ------------------ ----------------
A $ 2,761 11% $ 2,549 13% $ 3,388 19%
B 4,514 18% 4,465 23% 2,733 15%
C 7,300 29% 3,296 17% 1,127 6%
F-19
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS June 28, December 31,
1996 1995
(unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 7,416 $ 7,268
Accounts receivable, net of allowance for
doubtful accounts of $414 in 1996 and 1995 2,266 2,837
Inventories 4,988 3,637
Prepaid expenses and other current assets 558 471
-------------- ---------------
Total current assets 15,228 14,213
Property plant and equipment, net 374 334
Other assets, net 94 120
-------------- ---------------
Total assets $ 15,696 $ 14,667
============== ===============
LIABILITIES
Current liabilities:
Long-term debt, current portion $ 193
Accounts payable $ 1,869 2,723
Accrued liabilities 2,118 2,448
-------------- ---------------
Total current liabilities 3,987 5,364
Long-term debt, less current portion 4
Other long-term liabilities 10
-------------- ---------------
Total liabilities 3,987 5,378
SHAREHOLDERS' EQUITY
Common stock, no par value:
Authorized: 25,000 shares
Issued and outstanding: 3,621 shares
in 1996 and 3,469 shares in 1995 23,298 22,322
Notes receivable for purchase of common stock (296) (379)
Accumulated deficit (11,293) (12,655)
-------------- ---------------
Total shareholders' equity 11,709 9,289
-------------- ---------------
Total liabilities and shareholders' equity $ 15,696 $ 14,667
============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-20
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
3 MONTHS ENDED 3 MONTHS ENDED
JUNE 28, 1996 JUNE 30, 1995
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 7,225 $ 6,190
Cost of sales 3,778 3,406
----------------------------- ------------------------------
Gross profit 3,447 2,784
----------------------------- ------------------------------
Operating expenses:
Research and development 524 497
Sales and marketing 1,706 1,422
General and administrative 427 309
----------------------------- ------------------------------
Total operating expenses 2,657 2,228
----------------------------- ------------------------------
Operating income 790 556
Interest income (expense), net 94 (73)
Other expense , net (55)
----------------------------- ------------------------------
Income before provision for income taxes 829 483
Provision for income taxes (36) (18)
----------------------------- ------------------------------
Net income $ 793 $ 465
============================= ==============================
Net income per share $ 0.20 $ 0.18
============================= ==============================
Shares used in per share calculation 3,943 2,646
============================= ==============================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-21
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
6 MONTHS ENDED JUNE 28, 6 MONTHS ENDED JUNE 30,
1996 1995
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 13,425 $ 11,874
Cost of sales 7,117 6,385
------------------------------ --------------------------------
Gross profit 6,308 5,489
------------------------------ --------------------------------
Operating expenses:
Research and development 1,057 996
Sales and marketing 3,199 2,785
General and administrative 718 623
------------------------------ --------------------------------
Total operating expenses 4,974 4,404
------------------------------ --------------------------------
Operating income 1,334 1,085
Interest income (expense), net 167 (192)
Other expense, net (75) 0
------------------------------ --------------------------------
Income before provision for income taxes 1,426 893
Provision for income taxes (64) (23)
------------------------------ --------------------------------
Net income $ 1,362 $ 870
============================== ================================
Net income per share $ 0.35 $ 0.34
============================== ================================
Shares used in per share calculation 3,887 2,648
============================== ================================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-22
<PAGE>
<TABLE>
<CAPTION>
CASTELLE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
6 MONTHS ENDED JUNE 6 MONTHS ENDED JUNE 30,
28, 1996 1995
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,362 $ 870
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 174 354
Write off of other assets and property and equipment 11
Provision for doubtful accounts 2
Provision for excess and obsolete inventory and used
equipment (248) 45
Changes in assets and liabilities:
Accounts receivable 571 930
Inventories (1,103) (676)
Prepaid expenses and other assets (87) 31
Accounts payable (854) 29
Accrued liabilities and other long-term liabilities (340) 209
------------------------ --------------------------
Net cash provided by (used in) operating activities (514) 1,794
------------------------ --------------------------
Cash flows from investing activities:
Acquisition of property and equipment (176) (108)
Acquisition of intangible assets (23) (25)
------------------------ --------------------------
Net cash used in investing activities (199) (133)
------------------------ --------------------------
Cash flows from financing activities:
Decrease in restricted cash 152
Repayment of notes payable (166) (526)
Proceeds from bank borrowings 4,586
Repayment of bank borrowings (5,124)
Principal payments on capitalized leases (31) (22)
Proceeds from issuance of common stock 975
Proceeds from collection of notes receivable for
stock 83
------------------------ --------------------------
Net cash provided by (used in) financing activities 861 (934)
------------------------ --------------------------
Net increase in cash and cash equivalents 148 727
Cash and cash equivalents at beginning of period 7,268 907
------------------------ --------------------------
Cash and cash equivalents at end of period $ 7,416 $ 1,634
======================== ==========================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-23
<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 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 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. 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.
JUNE 28, DECEMBER 31,
1996 1995
Raw material $ 2,801 $ 2,320
Work in process 768 419
Finished goods 1,419 898
---------------- -------------------
$ 4,988 $ 3,637
================ ===================
F-24
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-28-1996
<CASH> 7,416
<SECURITIES> 0
<RECEIVABLES> 2,680
<ALLOWANCES> 414
<INVENTORY> 4,988
<CURRENT-ASSETS> 15,228
<PP&E> 2,812
<DEPRECIATION> 2,438
<TOTAL-ASSETS> 15,696
<CURRENT-LIABILITIES> 3,987
<BONDS> 0
0
0
<COMMON> 23,298
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,696
<SALES> 13,425
<TOTAL-REVENUES> 13,425
<CGS> 7,117
<TOTAL-COSTS> 7,117
<OTHER-EXPENSES> 5,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (167)
<INCOME-PRETAX> 1,426
<INCOME-TAX> 64
<INCOME-CONTINUING> 1,362
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,362
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
<PAGE>
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Ibex Technologies, Inc.
We have audited the accompanying balance sheets of Ibex Technologies, Inc. as of
December 31, 1995 and 1994, and the related statements of operations, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ibex Technologies, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Sacramento, California
July 31, 1996, except as to Note 14,
which the date is August 16, 1996
F-25
<PAGE>
<TABLE>
<CAPTION>
IBEX TECHNOLOGIES, INC.
BALANCE SHEETS
as of December 31, 1995 and 1994
1995 1994
---- ----
ASSETS
Current assets:
<S> <C> <C>
Cash $ 138,194 $ 89,815
Accounts receivable, net of allowance for doubtful accounts of $14,603 and
$21,527 in 1995 and 1994, respectively, and allowance for sales returns
of $30,000 and $45,158 in 1995 and 1994, respectively
542,757 583,501
Inventories 41,030 43,835
Prepaid income taxes 44,657
Prepaid expenses and other current assets 34,346 25,840
Deferred income taxes 71,086 74,007
--------- ---------
Total current assets 872,070 816,998
Property and equipment, net 114,027 116,991
--------- ---------
Total assets $ 986,097 $ 933,989
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank line of credit $ -- $ 27,700
Notes payable 75,000 --
Accounts payable 49,237 39,327
Accrued liabilities 14,052 15,501
Income taxes payable -- 108,682
Accrued wages -- 23,776
Accrued vacation 43,499 32,581
Deferred revenue 97,387 70,374
--------- ---------
Total current liabilities 279,175 317,941
Deferred income taxes 6,580 8,161
--------- ---------
Total liabilities 285,755 326,102
--------- ---------
Commitments (Note 4)
Preferred stock, no par value:
Authorized: 5,000,000 shares
Issued and outstanding: 48,035 shares in 1995 and 1994
(liquidation preference of $300,219) 300,219 300,219
Common stock, no par value:
Authorized: 10,000,000 shares
Issued and outstanding: 138,016 in 1995 and 132,150 shares in 1994 89,574 56,250
Retained earnings 310,549 251,418
--------- ---------
Total shareholders' equity 700,342 607,887
--------- ---------
Total liabilities and shareholders' equity $ 986,097 $ 933,989
========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-26
<PAGE>
IBEX TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
for the years ended December 31, 1995 and 1994
1995 1994
Net sales $ 3,091,397 $ 2,707,822
Cost of sales 731,904 691,058
-------------- --------------
Gross profit 2,359,493 2,016,764
-------------- --------------
Operating expenses:
Research and development 647,654 431,782
Sales and marketing 1,391,073 988,295
General and administrative 262,297 255,734
-------------- --------------
Total operating expenses 2,301,024 1,675,811
-------------- --------------
Operating income 58,469 340,953
Other income (expense), net (4,276) (8,322)
-------------- --------------
Income before provision for income taxes 54,193 332,631
Provision (benefit) for income taxes (4,938) 120,798
-------------- --------------
Net income $ 59,131 $ 211,833
============== ==============
F-27
<PAGE>
<TABLE>
<CAPTION>
IBEX TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1995 and 1994
The accompanying notes are an integral part of these financial statements.
Preferred Stock Common Stock
----------------------- ----------------------
Retained
Shares Amount Shares Amount Earnings Total
-------- ---------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 48,035 $ 300,219 132,150 $ 56,250 $ 39,585 $ 396,054
Net income -- -- -- -- 211,833 211,833
-------- --------- -------- -------- -------- ---------
Balances, December 31, 1994 48,035 300,219 132,150 56,250 251,418 607,887
Issuance of common stock -- -- 5,866 33,324 -- 33,324
Net income -- -- -- -- 59,131 59,131
-------- --------- -------- -------- -------- ---------
Balances, December 31, 1995 48,035 $ 300,219 138,016 $ 89,574 $310,549 $ 700,342
-------- --------- -------- -------- -------- ---------
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
IBEX TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995 and 1994
The accompanying notes are an integral part of these financial statements.
Year Ended December 31,
-----------------------------
1995 1994
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 59,131 $ 211,833
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 36,596 25,591
Deferred tax provision 1,340 (17,964)
Loss on disposition of property and equipment 12,488 --
Allowance for doubtful accounts and sales returns (22,082) 36,675
Research and development expenses paid by issuance of stock and a note 177,969 --
Changes in assets and liabilities:
Accounts receivable 62,826 (281,876)
Inventories 2,805 (29,587)
Prepaid taxes (44,657) 150
Prepaid expenses and other current assets (8,506) (12,957)
Accounts payable 9,910 (13,166)
Income tax payable (108,682) 100,038
Accrued liabilities (1,449) 14,129
Accrued wages (23,776) 23,776
Accrued vacation 10,918 11,936
Deferred revenue 27,013 50,560
------------ -----------
Net cash provided by operating activities 191,844 119,138
------------ -----------
Cash flows from investing activities:
Acquisition of property and equipment (46,120) (53,661)
------------ -----------
Net cash used in investing activities (46,120) (53,661)
------------ -----------
Cash flows from financing activities:
Repayment of notes payable (75,000) --
Proceeds from bank lines of credit 102,000 --
Repayment of bank line of credit (129,700) --
Proceeds from issuance of common stock 5,355 --
------------ -----------
Net cash provided by (used in) financing activities (97,345) --
------------ -----------
Net increase in cash 48,379 65,477
Cash at beginning of period 89,815 24,338
------------ -----------
Cash at end of period $ 138,194 $ 89,815
============ ===========
Supplemental information:
Cash paid during the period for:
Interest $ 7,721 $ 3,682
Income taxes 147,071 38,724
Noncash activities:
Issuance of a note and common stock for purchase of development rights
for a software product 177,969
Sales of software products in exchange for computer software,
marketing, advertising and telephone services 59,054 23,531
</TABLE>
F-29
<PAGE>
IBEX TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Business and Organization of the Company:
Ibex Technologies, Inc. (the Company) designs, develops, and markets
fax-on-demand software systems. The Company distributes its products
primarily through its direct sales force, master distributors and various
value-added resellers to end users and service providers in North America,
Europe and Asia.
2. Summary of Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain Risks and Concentrations
Financial instruments that potentially subject the Company to
concentrations of credit risks comprise, principally, cash and trade
accounts receivable. At December 31, 1995, the Company had on deposit
approximately $222,000, including amounts representing outstanding checks,
at an established financial institution and has not experienced any losses
relating to its bank deposits. These deposits are federally insured to the
extent of $100,000.
Ongoing customer credit evaluations are performed by the Company, and
collateral is not required. The Company maintains allowances for potential
returns and credit losses, and such returns and losses have generally been
within management's expectations. One customer accounted for 42% and 12% of
accounts receivable and sales at December 31, 1995. Two customers accounted
for 39% of accounts receivable at December 31, 1994.
F-30
<PAGE>
IBEX TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
The Company's products include components subject to rapid technological
change. Significant technological change could adversely affect the
Company's operating results and subject the Company to returns of product
and inventory losses. While the Company has ongoing programs to minimize
the adverse effect of such changes and consider technological change in
estimating its allowances, such estimates could change in the future.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over
the estimated useful lives of the respective assets, generally five to ten
years.
Software Production Costs
Costs related to the conceptual formulation and design of software products
are expensed as research and development while costs incurred subsequent to
establishing technological feasibility of software products are capitalized
until general release of the product. Generally, technological feasibility
is established upon completion of a working model. Costs incurred
subsequent to such point have not been significant in 1995 or 1994, and all
such costs have been expensed.
Revenue Recognition
Product revenue is recognized upon shipment provided no significant vendor
obligations remain and collection of the resulting receivable is deemed
probable by management. Provisions for estimated product returns are
recorded at the time products are shipped. Revenue earned on service
contracts is recognized proratably over the term of the contract.
Advertising Costs
Advertising costs, included in sales and marketing expenses, are expensed
as incurred and were $223,630 and $178,291 in 1995 and 1994, respectively.
F-31
<PAGE>
2. Summary of Significant Accounting Policies, continued:
Foreign Currency Translation
Foreign currency gains and losses related to international sales, which
have not been material, are reported in the statement of operations.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Deferred income taxes are recorded based on the difference between
financial statement and income tax bases of assets and liabilities and
available loss or credit carry forwards.
Recent Pronouncements
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," which requires the
Company to review for impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets whenever events or
changes in circumstances indicate that the carrying amount of an asset
might not be recoverable. In certain situations, an impairment loss would
be recognized. SFAS 121 will become effective for the Company's year ending
December 31, 1996. The Company has studied the implications of SFAS 121
and, based on its initial evaluation, does not expect it to have a material
impact on the Company's financial condition or results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock-Based Compensation"
which establishes a fair value based method of accounting for stock-based
compensation plans and requires additional disclosures for those companies
who elect not to adopt the new method of accounting. The Company intends to
continue to account for employee purchase rights and stock options under
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and will be
required to provide additional disclosures in the financial statements for
the year ended December 31, 1996.
F-32
<PAGE>
IBEX TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
3. Property and Equipment:
December 31,
-----------------------------
1995 1994
---- ----
Purchased software $ 9,592 $ 36,887
Computer equipment 131,873 119,240
Office equipment 41,586 20,911
------------ -----------
183,051 177,038
Less accumulated depreciation 69,024 60,047
------------ -----------
$ 114,027 $ 116,991
============ ===========
4. Commitments
The Company leases its facilities and office equipment under operating
leases with initial or remaining noncancelable lease terms in excess of one
year. Future minimum payments under noncancelable operating leases as of
December 31, 1995, are as follows:
1996 $ 70,680
1997 33,416
1998 4,236
1999 503
Rent expense, including the facility lease and equipment rental, was
approximately $51,000 and $35,000 for 1995 and 1994, respectively.
5. Bank Line of Credit:
The Company has a $250,000 line of credit which expired on July 26, 1996.
Borrowings under this line of credit agreement are collateralized by all
inventory of the Company and bear interest at the bank's prime rate plus 2%
(10.50% at December 31, 1995). As of and during the year ended December 31,
1995, there were no borrowings under this line of credit agreement. The
line of credit agreement contains certain financial covenants including
minimum levels of tangible net worth, working capital and debt service
ratios.
F-33
<PAGE>
6. Notes Payable:
In 1995, the Company purchased exclusive license and development rights for
a software product, in exchange for 4,475 shares of its common stock at an
estimated fair value of $27,969 and a non-interest bearing note payable for
$150,000. The note, which is not collateralized, is payable in installments
of $25,000, with the first payment due on March 17, 1995, the second
payment due July 1, 1995 and quarterly thereafter.
7. Preferred Stock:
The Company has 5,000,000 shares of no par value preferred stock
authorized. As of December 31, 1995 and 1994, 48,035 shares are issued and
outstanding. The preferred stock is convertible into common stock (by
formula) (i) at the option of the preferred stockholder at any time after
the date of issuance, or (ii) automatically in the case of a public
offering of not less than $8,000,000. The preferred stock provides for
non-cumulative preferential dividends of $.50 per year, and additional
dividends may be declared by the Board of Directors. The holders of
preferred stock are entitled to vote, and have the number of votes equal to
the number of common shares into which their shares are convertible. The
preferred shares have liquidation preference for $6.25 per share, and are
entitled to participate in the distribution of the remaining assets of the
Company.
8. Stock Option Plan:
In August 1996, the Board of Directors and the shareholders of the Company
ratified the 1992 Stock Option Plan which reserves a maximum of 20,000
shares of authorized but unissued common stock for the issuance upon
exercise of nonstatutory stock options granted to employees, non-employee
directors and consultants of the Company. The options are issued at fair
market value as determined by the Board of Directors. The vesting period
and exercise term are determined by the Board of Directors at the time the
options are granted. The options outstanding at December 31, 1995 vest over
a three-year period, have an exercise term of ten years, and exercise
prices between $3.85 and $13.75 per share.
F-34
<PAGE>
8. Stock Option Plan, continued:
The following options were granted and exercised during the years ended
December 31, 1995 and 1994:
Balance at January 1, 1994 8,563
Granted:
Exercise price of $6.25 3,200
----------
Balance at December 31, 1994 11,763
Granted:
Exercise price of $6.25 2,500
Exercise price of $13.75 300
Exercised at $3.85 per share (1,391)
----------
Balance at December 31, 1995 13,172
=========
The following options were outstanding at December 31, 1995 and 1994:
1995 1994
---- ----
Vested:
Exercise price of $3.85 4,172 5,563
Exercise price of $6.25 3,398 1,332
Nonvested:
Exercise price of $6.25 5,302 4,868
Exercise price of $13.75 300
---------- ----------
Total options outstanding at
December 31 13,172 11,763
========== ==========
F-35
<PAGE>
9. Income Taxes:
The income tax provision consists of the following:
Year ended December 31,
-----------------------
1995 1994
---- ----
Current tax expense (benefit):
Federal $ (4,113) $ 109,204
State (2,165) 29,558
Deferred tax expense (benefit) 1,340 (17,964)
----------- ------------
$ (4,938) $ 120,798
=========== ============
A reconciliation between the Company's effective rate and the federal
statutory rate is as follows:
Year ended December 31,
-----------------------------
1995 1994
---- ----
Federal tax at statutory rate 34.0 % 34.0 %
Permanent difference due to non-
deductible expenses 9.9 1.3
State taxes, net of federal benefit (6.1) 6.1
Research and development credits (29.1) (6.8)
Other 1.2 1.7
Effect of graduated tax rates (19.0) --
---------- -----------
(9.1) % 36.3 %
========== ===========
F-36
<PAGE>
9. Income Taxes, continued:
The components of the net deferred tax assets and liabilities are as
follows:
1995 1994
---- ----
Accounts receivable allowances $ 19,313 $ 28,871
Deferred revenue 42,169 30,472
Other liabilities 14,393 10,525
State income taxes -- 4,139
----------- ------------
Total deferred tax assets $ 75,875 $ 74,007
=========== ============
Depreciation $ 6,580 $ 8,161
State income taxes 4,789 --
----------- ------------
Total deferred tax liabilities $ 11,369 $ 8,161
=========== ============
It is management's opinion that the deferred tax assets will be realized
through operations and that no valuation allowance is necessary.
10. Major Customers and Segment Information:
The Company operates in one industry segment and develops, markets and
supports network enhancement products.
The Company's export revenues are all denominated in U.S. dollars, and are
summarized as follows:
Year ended December 31,
-----------------------------
1995 1994
---- ----
Europe $ 361,953 $ 110,649
Asia 117,474 --
Canada 438,290 570,698
----------- ------------
$ 917,717 $ 681,347
=========== ============
F-37
<PAGE>
11. Contingency:
The Company is a defendant in a legal action. While the outcome cannot be
determined at this time, management is of the opinion that the liability,
if any, resulting from this legal action will not have a material effect on
the Company's financial position, results of operations or cash flows.
12. Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash
The carrying amount approximates fair value.
Accounts Receivable
The carrying value of the Company's receivables is assumed to approximate
fair value due to their short-term maturities.
Notes Payable
The Company's notes payable consists of a non-interest bearing note payable
to another software company. There is no established market and it is not
practicable to estimate the fair value of this financial instrument.
13. Non-Monetary Transactions:
The Company supplies its software at the current list price to customers in
exchange for computer software, marketing, advertising and telephone
services. Total revenue recorded in exchange for a corresponding value of
services received during the years amounted to $59,054 and $23,531 in 1995
and 1994, respectively.
F-38
<PAGE>
14. Subsequent Events:
On August 12, 1996, the Company entered into an agreement to merge with
another company. Pursuant to the terms of the merger agreement, each share
of common and preferred stock of the Company will be converted into common
stock of Castelle, a manufacturer of fax and print server devices, based
upon a formula using the market price for Castelle at the date of closing.
F-39
<PAGE>
IBEX TECHNOLOGIES, INC.
BALANCE SHEETS
(in thousands)
-----
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1996 1995
(unaudited)
Current assets:
<S> <C> <C>
Cash $ 279 $ 138
Accounts receivable, net of allowance for doubtful accounts of 929 543
$15 in 1996 and 1995
Inventories 36 41
Prepaid income taxes 44 45
Deferred income taxes 65 71
Prepaid expenses and other current assets 5 34
-------------- ----------------
Total current assets 1,358 872
Property plant and equipment, net 126 114
-------------- ----------------
Total assets $ 1,484 $ 986
============== ================
LIABILITIES
Current liabilities:
Notes payable $ 25 $ 75
Accounts payable 135 49
Accrued liabilities 58 14
Income taxes payable 123
Accrued vacation 44 44
Deferred revenue 145 97
-------------- ----------------
Total current liabilities 530 279
Deferred income taxes 30 7
-------------- ----------------
Total liabilities 560 286
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 5,000
Issued and outstanding: 48 in 1996 and 1995 300 300
Common stock, no par value:
Authorized: 10,000 shares
Issued and outstanding: 138 shares in 1996 and 1995 90 90
Retained earnings 534 310
-------------- ----------------
Total shareholders' equity 924 700
-------------- ----------------
Total liabilities and shareholders' equity $ 1,484 $ 986
============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-40
<PAGE>
IBEX TECHNOLOGIES, INC.
STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
6 MONTHS ENDED JUNE 30, 6 MONTHS ENDED JUNE 30,
1996 1995
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 2,075 $ 1,393
Cost of sales 444 355
------------------------------ --------------------------------
Gross profit 1,631 1,038
------------------------------ --------------------------------
Operating expenses:
Research and development 342 418
Sales and marketing 760 660
General and administrative 153 129
------------------------------ --------------------------------
Total operating expenses 1,255 1,207
------------------------------ --------------------------------
Operating income (loss) 376 (169)
Other income (expense), net 10 (5)
------------------------------ --------------------------------
Income (loss)before provision for income taxes 386 (174)
Provision for (benefit from) income taxes 162 (21)
------------------------------ --------------------------------
Net income $ 224 $ (153)
============================== ================================
Net income per share $ 1.11 $ (1.13)
============================== ================================
Shares used in per share calculation 201 135
============================== ================================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-41
<PAGE>
IBEX TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
6 MONTHS ENDED JUNE 30, 6 MONTHS ENDED JUNE 30,
1996 1995
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 224 $ (153)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 18 18
Deferred tax provision 29
Allowance for doubtful accounts and sales returns (30)
Research and development expenses paid by issuance of 178
stock and a note
Changes in assets and liabilities:
Accounts receivable (386) 156
Inventories 5 23
Prepaid income taxes 1
Prepaid expenses and other current assets 29 (58)
Accounts payable 86 2
Accrued liabilities 44 5
Accrued vacation 6
Income taxes payable 123 (109)
Deferred revenue 48 5
------------------------ --------------------------
Net cash provided by operating activities 221 43
------------------------ --------------------------
Cash flows from investing activities:
Acquisition of property and equipment (30) (29)
Cash flows from financing activities:
Repayment of notes payable (50) (25)
Bank line of credit, net 42
Proceeds from issuance of common stock 6
------------------------ --------------------------
Net cash provided by (used in) financing activities (50) 23
------------------------ --------------------------
Net increase in cash and cash equivalents 141 37
Cash and cash equivalents at beginning of period 138 90
------------------------ --------------------------
Cash and cash equivalents at end of period $ 279 $ 127
======================== ==========================
</TABLE>
The accompanying notes are an integral part of these financial statements
F-42
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements include the accounts of the
Company and have been prepared in accordance with generally accepted
accounting principles. 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 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.
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 and
options 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 cost (which approximates cost on a
first-in, first-out basis) or market.
JUNE 30, DECEMBER 31,
1996 1995
Finished goods $ 36 $ 41
=============== ===================
F-43
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 279
<SECURITIES> 0
<RECEIVABLES> 944
<ALLOWANCES> 15
<INVENTORY> 36
<CURRENT-ASSETS> 1,358
<PP&E> 213
<DEPRECIATION> 87
<TOTAL-ASSETS> 1,484
<CURRENT-LIABILITIES> 530
<BONDS> 0
0
300
<COMMON> 90
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,484
<SALES> 2,075
<TOTAL-REVENUES> 2,075
<CGS> 444
<TOTAL-COSTS> 444
<OTHER-EXPENSES> 1,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 386
<INCOME-TAX> 162
<INCOME-CONTINUING> 224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 224
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.11
<PAGE>
</TABLE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
<PAGE>
On August 22, 1996, Castelle ("Castelle"), Ibex Technologies, Inc.
("Ibex") and certain shareholders of Ibex executed an Agreement and Plan of
Merger, dated as of August 22, 1996, pursuant to which Ibex will be merged with
and into Castelle (the "Acquisition"). Upon the Acquisition, approximately
790,000 shares of Castelle Common Stock will be issued to the former
shareholders of Ibex and approximately 60,000 shares of Castelle Common Stock
will be reserved for issuance upon the exercise of Ibex options assumed by
Castelle. The transaction is intended to be tax-free under Section 368 of the
Internal Revenue Code of 1986, as amended, and to be accounted for as a
pooling-of-interests. The transaction remains subject to Castelle and Ibex
shareholder approval and other closing conditions.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) The following exhibits are furnished in accordance with the provisions
of Item 601 of Regulation S-K:
Exhibit Number Exhibit
2.1 Agreement and Plan of Merger, dated as of August
22, 1996, among Castelle, Ibex Technologies, Inc.
and Certain Shareholders of Ibex Technologies, Inc.
20.1 Press Release issued August 23, 1996
2
<PAGE>
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.
CASTELLE
Dated: August 30, 1996 By: /s/ Randall I. Bambrough
------------------------
Randall I. Bambrough
Vice President of Finance
and Chief Financial Officer
3
<PAGE>
INDEX TO EXHIBITS
Page number in
sequentially
Exhibit No. Description numbered version
2.1 Agreement and Plan of Reorganization 5
dated as of August 22, 1996 among Castelle,
Ibex Technologies, Inc. and Certain
Shareholders of Ibex Technologies, Inc.
(incorporated herein by reference to Exhibit
2.01 to the Registrant's Registration
Statement on Form S-4, File No. 33-85840).
20.1 Press Release dated August 23, 1996 139
4
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
among:
CASTELLE,
a California corporation;
IBEX TECHNOLOGIES, INC.,
a California corporation;
and
CERTAIN SHAREHOLDERS OF IBEX TECHNOLOGIES, INC.
---------------------------
Dated as of August 22, 1996
---------------------------
5
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
SECTION 1. DESCRIPTION OF TRANSACTION.................................................................... 11
1.1 Merger of Ibex into Castelle.................................................................. 11
1.2 Effect of the Merger.......................................................................... 12
1.3 Closing; Effective Time....................................................................... 12
1.4 Articles of Incorporation and Bylaws; Directors and Officers.................................. 12
1.5 Conversion of Shares.......................................................................... 12
1.6 Employee Stock Options........................................................................ 13
1.7 Closing of Ibex's Transfer Books.............................................................. 14
1.8 Exchange of Certificates...................................................................... 14
1.9 Dissenting Shares............................................................................. 15
1.10 Tax Consequences.............................................................................. 16
1.11 Accounting Treatment.......................................................................... 16
1.12 Further Action................................................................................ 16
SECTION 2. REPRESENTATIONS AND WARRANTIES OF IBEX AND THE DESIGNATED SHAREHOLDERS........................ 16
2.1 Due Organization; No Subsidiaries; Etc........................................................ 16
2.2 Articles of Incorporation and Bylaws; Records................................................. 17
2.3 Capitalization, Etc........................................................................... 17
2.4 Financial Statements.......................................................................... 18
2.5 Absence of Changes............................................................................ 19
2.6 Title to Assets............................................................................... 20
2.7 Bank Accounts; Receivables.................................................................... 21
2.8 Equipment; Leasehold.......................................................................... 21
2.9 Proprietary Assets............................................................................ 21
2.10 Contracts..................................................................................... 23
2.11 Liabilities................................................................................... 25
2.12 Compliance with Legal Requirements............................................................ 26
2.13 Governmental Authorizations................................................................... 26
2.14 Tax Matters................................................................................... 26
2.15 Employee and Labor Matters; Benefit Plans..................................................... 27
2.16 Environmental Matters......................................................................... 30
2.17 Insurance..................................................................................... 30
2.18 Related Party Transactions.................................................................... 31
2.19 Legal Proceedings; Orders..................................................................... 31
2.20 Authority; Binding Nature of Agreement........................................................ 32
2.21 Non-Contravention; Consents................................................................... 32
2.22 Full Disclosure............................................................................... 33
SECTION 3. REPRESENTATIONS AND WARRANTIES OF CASTELLE.................................................... 33
3.1 Due Organization; No Subsidiaries; Etc........................................................ 34
6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(continued)
<S> <C> <C>
3.2 SEC Filings; Financial Statements............................................................. 34
3.3 Capitalization, Etc........................................................................... 35
3.4 Authority; Binding Nature of Agreement........................................................ 36
3.5 Absence of Changes............................................................................ 36
3.6 Title to Assets............................................................................... 38
3.7 Proprietary Assets............................................................................ 38
3.8 Liabilities................................................................................... 39
3.9 Compliance with Legal Requirements............................................................ 39
3.10 Governmental Authorizations................................................................... 40
3.11 Tax Matters................................................................................... 40
3.12 Employee and Labor Matters; Benefit Plans..................................................... 41
3.13 Environmental Matters......................................................................... 41
3.14 Legal Proceedings; Orders..................................................................... 41
3.15 Non-Contravention; Consents................................................................... 42
3.16 Full Disclosure............................................................................... 43
3.17 Valid Issuance................................................................................ 43
SECTION 4. CERTAIN COVENANTS OF IBEX AND THE DESIGNATED SHAREHOLDERS..................................... 44
4.1 Access and Investigation...................................................................... 44
4.2 Operation of Ibex's Business.................................................................. 44
4.3 Notification; Updates to Disclosure Schedule.................................................. 46
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES........................................................... 47
5.1 Filings and Consents.......................................................................... 47
5.2 California Permit; Fairness Hearing........................................................... 47
5.3 Ibex Shareholders' Meeting.................................................................... 47
5.4 Public Announcements.......................................................................... 47
5.5 Pooling of Interests.......................................................................... 48
5.6 Affiliate Agreements.......................................................................... 48
5.7 Best Efforts.................................................................................. 48
5.8 Tax Matters................................................................................... 48
5.9 Employment and Noncompetition Agreements...................................................... 48
5.10 FIRPTA Matters................................................................................ 48
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF CASTELLE............................................... 49
6.1 Satisfactory Completion of Pre-Acquisition Review............................................. 49
6.2 Accuracy of Representations................................................................... 50
6.3 Performance of Covenants...................................................................... 50
6.4 Shareholder Approval.......................................................................... 50
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(continued)
<S> <C> <C>
6.5 Consents...................................................................................... 50
6.6 Agreements and Documents...................................................................... 50
6.7 FIRPTA Compliance............................................................................. 51
6.8 Securities Compliance......................................................................... 51
6.9 No Restraints................................................................................. 52
6.10 Comfort Letter................................................................................ 52
6.11 No Legal Proceedings.......................................................................... 52
6.12 Amendment of Fourth Amended and Restated Registration......................................... 52
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF IBEX................................................... 52
7.1 Accuracy of Representations................................................................... 52
7.2 Performance of Covenants...................................................................... 53
7.3 Documents..................................................................................... 53
7.4 Shareholder Approval.......................................................................... 53
7.5 No Restraints................................................................................. 53
7.6 Consents...................................................................................... 53
7.7 Securities Compliance......................................................................... 53
7.8 No Legal Proceedings.......................................................................... 54
SECTION 8. TERMINATION................................................................................... 54
8.1 Termination Events............................................................................ 54
8.2 Termination Procedures........................................................................ 55
8.3 Effect of Termination......................................................................... 55
SECTION 9. INDEMNIFICATION, ETC.......................................................................... 55
9.1 Survival of Representations, Etc.............................................................. 55
9.2 Indemnification by Designated Shareholders.................................................... 56
9.3 Threshold; Ceiling............................................................................ 56
9.4 Escrow Fund................................................................................... 56
9.5 No Contribution............................................................................... 57
9.6 Interest...................................................................................... 57
9.7 Defense of Third Party Claims................................................................. 57
9.8 Exercise of Remedies by Indemnitees Other Than Castelle....................................... 58
9.9 Claims Against Consideration.................................................................. 58
9.10 Objections to Claims.......................................................................... 58
9.11 Resolution of Conflicts; Arbitration.......................................................... 58
SECTION 10. MISCELLANEOUS PROVISIONS...................................................................... 61
8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(continued)
<S> <C> <C>
10.1 Designated Shareholders' Agent................................................................ 61
10.2 Further Assurances............................................................................ 62
10.3 Fees and Expenses............................................................................. 62
10.4 Attorneys' Fees............................................................................... 62
10.5 Notices....................................................................................... 62
10.6 Confidentiality............................................................................... 64
10.7 Time of the Essence........................................................................... 64
10.8 Headings...................................................................................... 64
10.9 Counterparts.................................................................................. 64
10.10 Governing Law................................................................................. 64
10.11 Successors and Assigns........................................................................ 64
10.12 Remedies Cumulative; Specific Performance..................................................... 64
10.13 Waiver........................................................................................ 65
10.14 Amendments.................................................................................... 65
10.15 Severability.................................................................................. 65
10.16 Parties in Interest............................................................................65
10.17 Entire Agreement.............................................................................. 65
10.18 Construction.................................................................................. 65
9
</TABLE>
<PAGE>
EXHIBITS
Exhibit A-1 - Designated Shareholders
Exhibit A-2 - Signing Shareholders
Exhibit B - Certain Definitions
Exhibit C-1 - Form of Affiliate Agreement
Exhibit C-2 - Persons to Execute Affiliate Agreements
Exhibit D - Forms of Tax Representation Letters
Exhibit E - Form of Continuity of Interest Certificate
Exhibit F - Persons to Sign Employment and Noncompetition Agreements
Exhibit G - Forms of Employment Agreements
Exhibit H - Forms of Noncompetition Agreements
Exhibit I - Form of Legal Opinion of Graham & James LLP
Exhibit J - Form of Legal Opinion of Cooley Godward Castro Huddleson & Tatum
Exhibit K - Not Used
Exhibit L - Escrow Agreement
Exhibit M - Form of Irrevocable Proxy
10
<PAGE>
AGREEMENT AND
PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and
entered into as of August 22, 1996, by and among: CASTELLE, a California
corporation ("Castelle"); IBEX TECHNOLOGIES, INC., a California corporation (the
"Ibex"); the parties identified on Exhibit A-1 (which are referred to herein as
the "Designated Shareholders") and the parties identified on Exhibit A-2
(collectively, the parties identified on Exhibit A-1 and on Exhibit A-2 are
referred to herein as the "Signing Shareholders"). Certain other capitalized
terms used in this Agreement are defined in Exhibit B.
RECITALS
A. Castelle and Ibex intend to effect a merger of Ibex into Castelle in
accordance with this Agreement and the California General Corporation Law
("CGCL") (the "Merger").
B. It is intended that the Merger qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"). For accounting purposes, it is intended that the Merger be
treated as a "pooling of interests."
C. This Agreement has been approved by the respective boards of directors
of Castelle and Ibex.
D. The Designated Shareholders own a total of 96,000 shares of the Common
Stock (with no par value) of Ibex ("Ibex Common Stock"); and the Signing
Shareholders own a total of 96,000 shares of Ibex Common Stock and a total of
48,035 shares of the Series A Convertible Preferred Stock of Ibex ("Series A
Preferred Stock"), constituting all of the outstanding preferred stock of Ibex.
Contemporaneously with the execution and delivery of this Agreement, each
Signing Shareholder is executing and delivering to Castelle a Proxy of even date
herewith.
AGREEMENT
The parties to this Agreement agree as follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 Merger of Ibex into Castelle. Upon the terms and subject to the
conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.3), Ibex shall be merged with and into Castelle, and the separate
existence of Ibex shall cease. Castelle will continue as the surviving
corporation in the Merger (the "Surviving Corporation").
11
<PAGE>
1.2 Effect of the Merger. The Merger shall have the effects set forth in
this Agreement and in the applicable provisions of the California General
Corporation Law.
1.3 Closing; Effective Time. The consummation of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Cooley Godward Castro Huddleson & Tatum, One Maritime Plaza, San Francisco,
California 94111 at 10:00 a.m. on September __, 1996, or at such other time and
date during the period from August 15, 1996 through December 30, 1996 as
Castelle may designate upon not less than five days' prior notice to Ibex (the
"Scheduled Closing Time"). (The date on which the Closing actually takes place
is referred to in this Agreement as the "Closing Date.") Contemporaneously with
or as promptly as practicable after the Closing, a properly executed agreement
of merger conforming to the requirements of Chapter 11 of the California General
Corporation Law shall be filed with the Secretary of State of the State of
California. The Merger shall become effective at the time such agreement of
merger is filed with and accepted by the Secretary of State of the State of
California (the "Effective Time").
1.4 Articles of Incorporation and Bylaws; Directors and Officers. Unless
otherwise determined by Castelle prior to the Effective Time:
(a) the Articles of Incorporation of the Surviving Corporation shall be
those of Castelle;
(b) the Bylaws of the Surviving Corporation shall be those of Castelle; and
(c) the directors and officers of the Surviving Corporation immediately
after the Effective Time shall be those of Castelle with the addition of
Ney Grant as President of the Ibex Division of Castelle.
1.5 Conversion of Shares.
(a) Subject to Sections 1.8(c) and 1.9, at the Effective Time, by virtue of
the Merger and without any further action on the part of Castelle, Ibex or
any shareholder of Ibex:
(i) If the closing market price of a share of the common stock (no par
value per share) of Castelle ("Castelle Common Stock") on the business
day immediately prior to the Closing (the "Preference Price") is $9.42
or greater, each share of Ibex Common Stock and each share of Series A
Preferred Stock outstanding immediately prior to the Effective Time
shall be converted into the right to receive 4.17731 shares of
Castelle Common Stock.
(ii) If the Preference Price is less than $9.42, (i) the aggregate
shares of Series A Preferred Stock outstanding immediately prior to
the Effective Time shall be converted into a number of shares of
Castelle Common Stock equal to $180,000 divided by the Preference
Price (the "Preferred Bonus Shares"), and (ii) each share of Ibex
Common Stock and each share of Series A Preferred Stock outstanding
immediately prior to the Effective Time shall be converted into a
number of shares of Castelle Common Stock equal to (x) 850,000 less
12
<PAGE>
the number of Preferred Bonus Shares divided by (y) the aggregate
number of shares of Ibex Common Stock and Series A Preferred Stock
outstanding, on a fully diluted basis, immediately prior to the
Effective Time.
(b) If any shares of Ibex Common Stock outstanding immediately prior to the
Effective Time are unvested or are subject to a repurchase option, risk of
forfeiture or other condition under any applicable restricted stock
purchase agreement or other agreement with Ibex, then the shares of
Castelle Common Stock issued in exchange for such shares of Ibex Common
Stock will also be unvested and subject to the same repurchase option, risk
of forfeiture or other condition, and the certificates representing such
shares of Castelle Common Stock may accordingly be marked with appropriate
legends.
1.6 Employee Stock Options. At the Effective Time, each stock option that
is then outstanding under Ibex's 1992 Stock Option Plan, whether vested or
unvested (a "Ibex Option"), shall be assumed by Castelle in accordance with the
terms (as in effect as of the date of this Agreement) of Ibex's 1992 Stock
Option Plan and the stock option agreement by which such Ibex Option is
evidenced. All rights with respect to Ibex Common Stock under outstanding Ibex
Options shall thereupon be converted into rights with respect to Castelle Common
Stock. Accordingly, from and after the Effective Time, (a) each Ibex Option
assumed by Castelle may be exercised solely for shares of Castelle Common Stock,
(b) the number of shares of Castelle Common Stock subject to each such assumed
Ibex Option shall be equal to the number of shares of Ibex Common Stock that
were subject to such Ibex Option immediately prior to the Effective Time
multiplied by the Applicable Fraction (as hereinafter defined), rounded down to
the nearest whole number of shares of Castelle Common Stock, (c) the per share
exercise price for the Castelle Common Stock issuable upon exercise of each such
assumed Ibex Option shall be determined by dividing the exercise price per share
of Ibex Common Stock subject to such Ibex Option, as in effect immediately prior
to the Effective Time, by the Applicable Fraction (as hereinafter defined), and
rounding the resulting exercise price up to the nearest whole cent, and (d) all
restrictions on the exercise of each such assumed Ibex Option shall continue in
full force and effect, and the term, exercisability, vesting schedule and other
provisions of such Ibex Option shall otherwise remain unchanged; provided,
however, that each such assumed Ibex Option shall, in accordance with its terms,
be subject to further adjustment as appropriate to reflect any stock split,
reverse stock split, stock dividend, recapitalization or other similar
transaction effected by Castelle after the Effective Time. Ibex and Castelle
shall take all action that may be necessary (under Ibex's 1992 Stock Option Plan
and otherwise) to effectuate the provisions of this Section 1.6. Following the
Closing, Castelle will send to each holder of an assumed Ibex Option a written
notice setting forth (i) the number of shares of Castelle Common Stock subject
to such assumed Ibex Option, and (ii) the exercise price per share of Castelle
Common Stock issuable upon exercise of such assumed Ibex Option. For purposes of
this Section 1.6, the "Applicable Fraction" shall mean the exchange ratio
identified in Section 1.5 which is utilized to convert each share of Ibex Common
Stock outstanding immediately prior to the Merger into Castelle Common Stock.
13
<PAGE>
1.7 Closing of Ibex's Transfer Books. At the Effective Time, holders of
certificates representing shares of Ibex's capital stock that were outstanding
immediately prior to the Effective Time shall cease to have any rights as
shareholders of Ibex, and the stock transfer books of Ibex shall be closed with
respect to all shares of such capital stock outstanding immediately prior to the
Effective Time. No further transfer of any such shares of Ibex's capital stock
shall be made on such stock transfer books after the Effective Time. If, after
the Effective Time, a valid certificate previously representing any of such
shares of Ibex's capital stock (a "Ibex Stock Certificate") is presented to the
Surviving Corporation, such Ibex Stock Certificate shall be canceled and shall
be exchanged as provided in Section 1.8.
1.8 Exchange of Certificates.
(a) At or as soon as practicable after the Effective Time, Castelle will
send to the holders of Ibex Stock Certificates (i) a letter of transmittal
in customary form and containing such provisions as Castelle may reasonably
specify, and (ii) instructions for use in effecting the surrender of Ibex
Stock Certificates in exchange for certificates representing Castelle
Common Stock. Upon surrender of a Ibex Stock Certificate to Castelle for
exchange, together with a duly executed letter of transmittal and such
other documents as may be reasonably required by Castelle, the holder of
such Ibex Stock Certificate shall be entitled to receive in exchange
therefor a certificate representing the number of whole shares of Castelle
Common Stock that such holder has the right to receive pursuant to the
provisions of this Section 1, and Ibex Stock Certificate so surrendered
shall be canceled. Until surrendered as contemplated by this Section 1.8,
each Ibex Stock Certificate shall be deemed, from and after the Effective
Time, to represent only the right to receive upon such surrender a
certificate representing shares of Castelle Common Stock (and cash in lieu
of any fractional share of Castelle Common Stock) as contemplated by this
Section 1.8. If any Ibex Stock Certificate shall have been lost, stolen or
destroyed, Castelle may, in its discretion and as a condition precedent to
the issuance of any certificate representing Castelle Common Stock, require
the owner of such lost, stolen or destroyed Ibex Stock Certificate to
provide an appropriate affidavit and to deliver a bond (in such sum as
Castelle may reasonably direct) as indemnity against any claim that may be
made against the Surviving Corporation with respect to such Ibex Stock
Certificate.
(b) No dividends or other distributions declared or made with respect to
Castelle Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered Ibex Stock Certificate with respect
to the shares of Castelle Common Stock represented thereby, and no cash
payment in lieu of any fractional share shall be paid to any such holder,
until such holder surrenders such Ibex Stock Certificate in accordance with
this Section 1.8 (at which time such holder shall be entitled to receive
all such dividends and distributions and such cash payment).
(c) No fractional shares of Castelle Common Stock shall be issued in
connection with the Merger, and no certificates for any such fractional
shares shall be issued. In lieu of such fractional shares, any holder of
capital stock of Ibex who would otherwise be entitled to receive a fraction
of a share of Castelle Common Stock (after aggregating all fractional
shares of Castelle Common Stock issuable to such holder) shall, upon
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surrender of such holder's Ibex Stock Certificate(s), be paid in cash the
dollar amount (rounded to the nearest whole cent), without interest,
determined by multiplying such fraction by the Designated Castelle Stock
Price. For purposes of this paragraph, the "Designated Castelle Stock
Price" shall be eight dollars ($8.00) per share of Castelle Common Stock.
(d) The Surviving Corporation shall be entitled to deduct and withhold from
any consideration payable or otherwise deliverable to any holder or former
holder of capital stock of Ibex pursuant to this Agreement such amounts as
the Surviving Corporation may be required to deduct or withhold therefrom
under the Code or under any provision of state, local or foreign tax law.
To the extent such amounts are so deducted or withheld, such amounts shall
be treated for all purposes under this Agreement as having been paid to the
Person to whom such amounts would otherwise have been paid.
(e) The Surviving Corporation shall not be liable to any holder or former
holder of capital stock of Ibex for any shares of Castelle Common Stock (or
dividends or distributions with respect thereto), or for any cash amounts,
delivered to any public official pursuant to any applicable abandoned
property, escheat or similar law.
1.9 Dissenting Shares.
(a) Notwithstanding anything to the contrary contained in this Agreement,
any shares of capital stock of Ibex that, as of the Effective Time, are or
may become "dissenting shares" within the meaning of Section 1300(b) of the
California Corporations Code shall not be converted into or represent the
right to receive Castelle Common Stock in accordance with Section 1.5 (or
cash in lieu of fractional shares in accordance with Section 1.8(c)), and
the holder or holders of such shares shall be entitled only to such rights
as may be granted to such holder or holders in Chapter 13 of the California
General Corporation Law; provided, however, that if the status of any such
shares as "dissenting shares" shall not be perfected, or if any such shares
shall lose their status as "dissenting shares," then, as of the later of
the Effective Time or the time of the failure to perfect such status or the
loss of such status, such shares shall automatically be converted into and
shall represent only the right to receive (upon the surrender of the
certificate or certificates representing such shares) Castelle Common Stock
in accordance with Section 1.5 (and cash in lieu of fractional shares in
accordance with Section 1.8(c)).
(b) Ibex shall give Castelle (i) prompt notice of any written demand
received by Ibex prior to the Effective Time to require Ibex to purchase
shares of capital stock of Ibex pursuant to Chapter 13 of the California
General Corporation Law and of any other demand, notice or instrument
delivered to Ibex prior to the Effective Time pursuant to the California
General Corporation Law, and (ii) the opportunity to participate in all
negotiations and proceedings with respect to any such demand, notice or
instrument. Ibex shall not make any payment or settlement offer prior to
the Effective Time with respect to any such demand unless Castelle shall
have consented in writing to such payment or settlement offer.
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1.10 Tax Consequences. For federal income tax purposes, the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Code. The parties to this Agreement hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
1.11 Accounting Treatment. For accounting purposes, the Merger is intended
to be treated as a "pooling of interests."
1.12 Further Action. If, at any time after the Effective Time, any further
action is determined by Castelle to be necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full right,
title and possession of and to all rights and property of Ibex, the officers and
directors of the Surviving Corporation shall be fully authorized (in the name of
Ibex and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF IBEX AND THE DESIGNATED
SHAREHOLDERS
Ibex and the Designated Shareholders severally represent and warrant, to
and for the benefit of the Indemnitees, as follows:
2.1 Due Organization; No Subsidiaries; Etc.
(a) Ibex is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has all necessary
power and authority: (i) to conduct its business in the manner in which its
business is currently being conducted; (ii) to own and use its assets in
the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Ibex Contracts.
(b) Except as set forth in Part 2.1 of the Disclosure Schedule, Ibex has
not conducted any business under or otherwise used, for any purpose or in
any jurisdiction, any fictitious name, assumed name, trade name or other
name, other than the name "Ibex Technologies, Inc."
(c) Ibex is not and has not been required to be qualified, authorized,
registered or licensed to do business as a foreign corporation in any
jurisdiction other than the jurisdictions identified in Part 2.1 of the
Disclosure Schedule, except where the failure to be so qualified,
authorized, registered or licensed has not had and will not have a Material
Adverse Effect on Ibex. Ibex is in good standing as a foreign corporation
in each of the jurisdictions identified in Part 2.1 of the Disclosure
Schedule.
(d) Part 2.1 of the Disclosure Schedule accurately sets forth (i) the names
of the members of Ibex's board of directors, (ii) the names of the members
of each committee of Ibex's board of directors, and (iii) the names and
titles of Ibex's officers.
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(e) Ibex does not own any controlling interest in any Entity and, except
for the equity interests identified in Part 2.1 of the Disclosure Schedule,
Ibex has never owned, beneficially or otherwise, any shares or other
securities of, or any direct or indirect equity interest in, any Entity.
Ibex has not agreed and is not obligated to make any future investment in
or capital contribution to any Entity. Ibex has not guaranteed and is not
responsible or liable for any obligation of any of the Entities in which it
owns or has owned any equity interest.
2.2 Articles of Incorporation and Bylaws; Records. Ibex has delivered to
Castelle accurate and complete copies of: (1) Ibex's articles of incorporation
and bylaws, including all amendments thereto; (2) the stock records of Ibex; and
(3) except as set forth in Part 2.2 of the Disclosure Schedule, the minutes and
other records of the meetings and other proceedings (including any actions taken
by written consent or otherwise without a meeting) of the shareholders of Ibex,
the board of directors of Ibex and all committees of the board of directors of
Ibex. There have been no formal meetings or other proceedings of the
shareholders of Ibex, the board of directors of Ibex or any committee of the
board of directors of Ibex that are not fully reflected in such minutes or other
records. There has not been any violation of any of the provisions of Ibex's
articles of incorporation or bylaws, and Ibex has not taken any action that is
inconsistent in any material respect with any resolution adopted by Ibex's
shareholders, Ibex's board of directors or any committee of Ibex's board of
directors. The books of account, stock records, minute books and other records
of Ibex are accurate, up-to-date and complete in all material respects, and have
been maintained in accordance with prudent business practices.
2.3 Capitalization, Etc.
(a) The authorized capital stock of Ibex consists of: (i) ten million
(10,000,000) shares of Common Stock (with no par value), of which one
hundred forty-one thousand sixteen (141,016) shares have been issued and
are outstanding as of the date of this Agreement; and (ii) five million
(5,000,000) shares of Preferred Stock (with no par value), forty-eight
thousand thirty-five (48,035) of which have been designated "Series A
Preferred Stock," of which all of such shares have been issued and are
outstanding as of the date of this Agreement. Each outstanding share of
Series A Preferred Stock is convertible into one share of Ibex Common
Stock. All of the outstanding shares of Ibex Common Stock and Series A
Preferred Stock have been duly authorized and validly issued, and are fully
paid and non-assessable. Part 2.3 of the Disclosure Schedule provides an
accurate and complete description of the terms of each repurchase option
which is held by Ibex and to which any of such shares is subject.
(b) Ibex has reserved 20,000 shares of Ibex Common Stock for issuance under
its 1992 Stock Option Plan, of which options to purchase 14,731 shares are
outstanding as of the date of this Agreement. Part 2.3 of the Disclosure
Schedule accurately sets forth, with respect to each Ibex Option that is
outstanding as of the date of this Agreement: (i) the name of the holder of
such Ibex Option; (ii) the total number of shares of Ibex Common Stock that
are subject to such Ibex Option and the number of shares of Ibex Common
Stock with respect to which such Ibex Option is immediately exercisable;
(iii) the date on which such Ibex Option was granted and the term of such
Ibex Option; (iv) the vesting schedule for such Ibex Option; (v) the
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exercise price per share of Ibex Common Stock purchasable under such Ibex
Option; and (vi) whether such Ibex Option has been designated an "incentive
stock option" as defined in Section 422 of the Code. Except as set forth in
Part 2.3 of the Disclosure Schedule, there is no: (i) outstanding
subscription, option, call, warrant or right (whether or not currently
exercisable) to acquire any shares of the capital stock or other securities
of Ibex; (ii) outstanding security, instrument or obligation that is or may
become convertible into or exchangeable for any shares of the capital stock
or other securities of Ibex; (iii) Contract under which Ibex is or may
become obligated to sell or otherwise issue any shares of its capital stock
or any other securities; or (iv) to the best of the knowledge of Ibex and
the Designated Shareholders, condition or circumstance that may give rise
to or provide a basis for the assertion of a claim by any Person to the
effect that such Person is entitled to acquire or receive any shares of
capital stock or other securities of Ibex.
(c) All outstanding shares of Ibex Common Stock and Series A Preferred
Stock, and all outstanding Ibex Options, have been issued and granted in
compliance with (i) all applicable securities laws and other applicable
Legal Requirements, and (ii) all requirements set forth in applicable
Contracts.
(d) Except as set forth in Part 2.3 of the Disclosure Schedule, Ibex has
never repurchased, redeemed or otherwise reacquired any shares of capital
stock or other securities of Ibex. All securities so reacquired by Ibex
were reacquired in compliance with (i) the applicable provisions of the
California General Corporation Law and all other applicable Legal
Requirements, and (ii) all requirements set forth in applicable restricted
stock purchase agreements and other applicable Contracts.
2.4 Financial Statements.
(a) Ibex has delivered to Castelle the following financial statements and
notes (collectively, the "Ibex Financial Statements"):
(i) The audited balance sheets of Ibex as of December 31, 1995 and
1994, and the related audited income statements, statements of
shareholders' equity and statements of cash flows of Ibex for the
years then ended, together with the notes thereto and the unqualified
report and opinion of Coopers & Lybrand LLP relating thereto; and
(ii) the unaudited balance sheet of Ibex as of June 30, 1996 (the
"Unaudited Interim Balance Sheet"), and the related unaudited income
statement of Ibex for the six months then ended.
(b) Ibex Financial Statements are accurate and complete in all material
respects and present fairly the financial position of Ibex as of the
respective dates thereof and the results of operations and (in the case of
the financial statements referred to in Section 2.4(a)(i)) cash flows of
Ibex for the periods covered thereby. Ibex Financial Statements have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods covered (except that
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the financial statements referred to in Section 2.4(a)(ii) do not contain
footnotes and are subject to normal and recurring year-end audit
adjustments, which will not, individually or in the aggregate, be material
in magnitude).
2.5 Absence of Changes. Except as set forth in Part 2.5 of the Disclosure
Schedule, since June 30, 1996:
(a) there has not been any material adverse change in Ibex's business,
condition, assets, liabilities, operations, financial performance or
prospects, and, to the best of the knowledge of Ibex and the Designated
Shareholders, no event has occurred that will, or could reasonably be
expected to, have a Material Adverse Effect on Ibex;
(b) there has not been any material loss, damage or destruction to, or any
material interruption in the use of, any of Ibex's assets (whether or not
covered by insurance);
(c) Ibex has not declared, accrued, set aside or paid any dividend or made
any other distribution in respect of any shares of capital stock, and has
not repurchased, redeemed or otherwise reacquired any shares of capital
stock or other securities;
(d) Ibex has not sold, issued or authorized the issuance of (i) any capital
stock or other security (except for Ibex Common Stock issued upon the
exercise of outstanding Ibex Options), (ii) any option or right to acquire
any capital stock or any other security (except for Ibex Options described
in Part 2.3 of the Disclosure Schedule), or (iii) any instrument
convertible into or exchangeable for any capital stock or other security;
(e) Ibex has not amended or waived any of its rights under, or permitted
the acceleration of vesting under, (i) any provision of its 1992 Stock
Option Plan, (ii) any provision of any agreement evidencing any outstanding
Ibex Option, or (iii) any restricted stock purchase agreement;
(f) there has been no amendment to Ibex's articles of incorporation or
bylaws, and Ibex has not effected or been a party to any Acquisition
Transaction, recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction;
(g) Ibex has not formed any subsidiary or acquired any equity interest or
other interest in any other Entity;
(h) Ibex has not made any capital expenditure which, when added to all
other capital expenditures made on behalf of Ibex since June 30, 1996,
exceeds $10,000;
(i) Ibex has not (i) entered into or permitted any of the assets owned or
used by it to become bound by any Contract that is or would constitute a
Material Contract (as defined in Section 2.10(a)), or (ii) amended or
prematurely terminated, or waived any material right or remedy under, any
such Contract;
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(j) Ibex has not (i) acquired, leased or licensed any right or other asset
from any other Person, (ii) sold or otherwise disposed of, or leased or
licensed, any right or other asset to any other Person, or (iii) waived or
relinquished any right, except for immaterial rights or other immaterial
assets acquired, leased, licensed or disposed of in the ordinary course of
business and consistent with Ibex's past practices;
(k) Ibex has not written off as uncollectible, or established any
extraordinary reserve with respect to, any account receivable or other
indebtedness;
(l) Ibex has not made any pledge of any of its assets or otherwise
permitted any of its assets to become subject to any Encumbrance, except
for pledges of immaterial assets made in the ordinary course of business
and consistent with Ibex's past practices;
(m) Ibex has not (i) lent money to any Person (other than pursuant to
routine travel advances made to employees in the ordinary course of
business), or (ii) incurred or guaranteed any indebtedness for borrowed
money;
(n) Ibex has not (i) established or adopted any Employee Benefit Plan, (ii)
paid any bonus or made any profit-sharing or similar payment to, or
increased the amount of the wages, salary, commissions, fringe benefits or
other compensation or remuneration payable to, any of its directors,
officers or employees, or (iii) hired any new employee;
(o) Ibex has not changed any of its methods of accounting or accounting
practices in any respect;
(p) Ibex has not made any Tax election;
(q) Ibex has not commenced or settled any Legal Proceeding;
(r) Ibex has not entered into any material transaction or taken any other
material action outside the ordinary course of business or inconsistent
with its past practices; and
(s) Ibex has not agreed or committed to take any of the actions referred to
in clauses "(c)" through "(r)" above.
2.6 Title to Assets.
(a) Ibex owns, and has good, valid and marketable title to, all assets
purported to be owned by it, including: (i) all assets reflected on the
Unaudited Interim Balance Sheet; (ii) all assets referred to in Parts 2.1,
2.7, 2.8 and 2.9 of the Disclosure Schedule and all of Ibex's rights under
the Contracts identified in Part 2.10 of the Disclosure Schedule; and (iii)
all other assets reflected in Ibex's books and records as being owned by
Ibex. Except as set forth in Part 2.6 of the Disclosure Schedule, all of
said assets are owned by Ibex free and clear of any liens or other
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Encumbrances, except for (x) any lien for current taxes not yet due and
payable, and (y) minor liens that have arisen in the ordinary course of
business and that do not (in any case or in the aggregate) materially
detract from the value of the assets subject thereto or materially impair
the operations of Ibex.
(b) Part 2.6 of the Disclosure Schedule identifies all assets that are
material to the business of Ibex and that are being leased or licensed to
Ibex.
2.7 Bank Accounts; Receivables.
(a) Part 2.7(a) of the Disclosure Schedule provides accurate information
with respect to each account maintained by or for the benefit of Ibex at
any bank or other financial institution.
(b) Part 2.7(b) of the Disclosure Schedule provides an accurate and
complete breakdown and aging of all accounts receivable, notes receivable
and other receivables of Ibex as of June 30, 1996. Except as set forth in
Part 2.7(b) of the Disclosure Schedule, all existing accounts receivable of
Ibex (including those accounts receivable reflected on the Unaudited
Interim Balance Sheet that have not yet been collected and those accounts
receivable that have arisen since June 30, 1996 and have not yet been
collected) (i) represent valid obligations of customers of Ibex arising
from bona fide transactions entered into in the ordinary course of
business, (ii) are current and to the best of the knowledge of Ibex and the
Designated Shareholders will be collected in full when due, without any
counterclaim or set off (net of an allowance for doubtful accounts as set
forth in the Ibex Financial Statements).
2.8 Equipment; Leasehold.
(a) All material items of equipment and other tangible assets owned by or
leased to Ibex are adequate for the uses to which they are being put, are
in good condition and repair (ordinary wear and tear excepted) and are
adequate for the conduct of Ibex's business in the manner in which such
business is currently being conducted.
(b) Ibex does not own any real property or any interest in real property,
except for the leasehold created under the real property lease identified
in Part 2.10 of the Disclosure Schedule.
2.9 Proprietary Assets.
(a) Part 2.9(a)(i) of the Disclosure Schedule sets forth, with respect to
each Ibex Proprietary Asset registered with any Governmental Body or for
which an application has been filed with any Governmental Body, (i) a brief
description of such Proprietary Asset, and (ii) the names of the
jurisdictions covered by the applicable registration or application. Part
2.9(a)(ii) of the Disclosure Schedule identifies and provides a brief
description of all other Ibex Proprietary Assets owned by Ibex. Part
2.9(a)(iii) of the Disclosure Schedule identifies and provides a brief
description of each Proprietary Asset licensed to Ibex by any Person
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(except for any Proprietary Asset that is licensed to Ibex under any third
party software license generally available to the public at a cost of less
than $10,000), and identifies the license agreement under which such
Proprietary Asset is being licensed to Ibex. Except as set forth in Part
2.9(a)(iv) of the Disclosure Schedule, Ibex has good, valid and marketable
title to all of Ibex Proprietary Assets identified in Parts 2.9(a)(i) and
2.9(a)(ii) of the Disclosure Schedule, free and clear of all liens and
other Encumbrances, and has a valid right to use all Proprietary Assets
identified in Part 2.9(a)(iii) of the Disclosure Schedule. Except as set
forth in Part 2.9(a)(v) of the Disclosure Schedule, Ibex is not obligated
to make any payment to any Person for the use of any Ibex Proprietary
Asset. Except as set forth in Part 2.9(a)(vi) of the Disclosure Schedule,
Ibex has not developed jointly with any other Person any Ibex Proprietary
Asset with respect to which such other Person has any rights.
(b) Ibex has taken all reasonable measures and precautions necessary to
protect and maintain the confidentiality and secrecy of all Ibex
Proprietary Assets (except Ibex Proprietary Assets whose value would be
unimpaired by public disclosure) and otherwise to maintain and protect the
value of all Ibex Proprietary Assets. Except as set forth in Part 2.9(b) of
the Disclosure Schedule, to the best of the knowledge of Ibex and the
Designated Shareholders after inquiry of Ibex's officers, directors and
advisors, Ibex has not (other than pursuant to license agreements
identified in Part 2.10 of the Disclosure Schedule) disclosed or delivered
to any Person, or permitted the disclosure or delivery to any Person of,
(i) the source code, or any portion or aspect of the source code, of any
Ibex Proprietary Asset, or (ii) the object code, or any portion or aspect
of the object code, of any Ibex Proprietary Asset.
(c) To the best of the knowledge of Ibex and the Designated Shareholders
after inquiry of Ibex's officers, directors and advisors, none of Ibex
Proprietary Assets infringes or conflicts with any Proprietary Asset owned
or used by any other Person. To the best of the knowledge of Ibex and the
Designated Shareholders after inquiry of Ibex's officers, directors and
advisors, Ibex is not infringing, misappropriating or making any unlawful
use of, and Ibex has not at any time infringed, misappropriated or made any
unlawful use of, or received any notice or other communication (in writing
or otherwise) of any actual, alleged, possible or potential infringement,
misappropriation or unlawful use of, any Proprietary Asset owned or used by
any other Person. To the best of the knowledge of Ibex and the Designated
Shareholders, no other Person is infringing, misappropriating or making any
unlawful use of, and no Proprietary Asset owned or used by any other Person
infringes or conflicts with, any Ibex Proprietary Asset.
(d) Except as set forth in Part 2.9(d) of the Disclosure Schedule: (i) each
Ibex Proprietary Asset conforms in all material respects with any
specification, documentation, performance standard, representation or
statement made or provided with respect thereto by or on behalf of Ibex;
and (ii) there has not been any claim by any customer or other Person
alleging that any Ibex Proprietary Asset (including each version thereof
that has ever been licensed or otherwise made available by Ibex to any
Person) does not conform in all material respects with any specification,
documentation, performance standard, representation or statement made or
provided by or on behalf of Ibex, and, to the best of the knowledge of Ibex
and the Designated Shareholders, there is no basis for any such claim. Ibex
has established adequate reserves on the Unaudited Interim Balance Sheet to
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cover all costs associated with any obligations that Ibex may have with
respect to the correction or repair of programming errors or other defects
in Ibex Proprietary Assets.
(e) Ibex Proprietary Assets constitute all the Proprietary Assets necessary
to enable Ibex to conduct its business in the manner in which such business
has been and is being conducted. Except as set forth in Part 2.9(e) of the
Disclosure Schedule, (i) Ibex has not licensed any of Ibex Proprietary
Assets to any Person on an exclusive basis, and (ii) Ibex has not entered
into any covenant not to compete or Contract limiting its ability to
exploit fully any of its Proprietary Assets or to transact business in any
market or geographical area or with any Person.
(f) Except as set forth in Part 2.9(f) of the Disclosure Schedule, (i) all
current and former employees of Ibex have executed and delivered to Ibex an
agreement (containing no exceptions to or exclusions from the scope of its
coverage) that is substantially identical to the form of Confidential
Information and Invention Assignment Agreement previously delivered to
Castelle, and (ii) all current and former consultants and independent
contractors to Ibex have executed and delivered to Ibex an agreement
(containing no exceptions to or exclusions from the scope of its coverage)
that is substantially identical to the standard form of proprietary rights
agreement previously delivered to Castelle.
2.10 Contracts.
(a) Part 2.10 of the Disclosure Schedule identifies:
(i) each Ibex Contract relating to the employment of, or the
performance of services by, any employee, consultant or independent
contractor;
(ii) each Ibex Contract relating to the acquisition, transfer, use,
development, sharing or license of any technology or any Proprietary
Asset;
(iii) each Ibex Contract imposing any restriction on Ibex's right or
ability (A) to compete with any other Person, (B) to acquire any
product or other asset or any services from any other Person, to sell
any product or other asset to or perform any services for any other
Person or to transact business or deal in any other manner with any
other Person, or (C) develop or distribute any technology;
(iv) each Ibex Contract creating or involving any agency relationship,
distribution arrangement or franchise relationship;
(v) each Ibex Contract relating to the acquisition, issuance or
transfer of any securities;
(vi) each Ibex Contract relating to the creation of any Encumbrance
with respect to any asset of Ibex;
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(vii) each Ibex Contract involving or incorporating any guaranty, any
pledge, any performance or completion bond, any indemnity or any
surety arrangement;
(viii) each Ibex Contract creating or relating to any partnership or
joint venture or any sharing of revenues, profits, losses, costs or
liabilities;
(ix) each Ibex Contract relating to the purchase or sale of any
product or other asset by or to, or the performance of any services by
or for, any Related Party (as defined in Section 2.18);
(x) each Ibex Contract constituting or relating to a Government
Contract or Government Bid;
(xi) any other Ibex Contract that was entered into outside the
ordinary course of business or was inconsistent with Ibex's past
practices;
(xii) any other Ibex Contract that has a term of more than 60 days and
that may not be terminated by Ibex (without penalty) within 60 days
after the delivery of a termination notice by Ibex; and
(xiii) any other Ibex Contract that contemplates or involves (A) the
payment or delivery of cash or other consideration in an amount or
having a value in excess of $10,000 in the aggregate, or (B) the
performance of services having a value in excess of $10,000 in the
aggregate.
(Contracts in the respective categories described in clauses "(i)" through
"(xiii)" above are referred to in this Agreement as "Material Contracts.")
(b) Ibex has delivered to Castelle accurate and complete copies of all
written Contracts identified in Part 2.10 of the Disclosure Schedule,
including all amendments thereto. Part 2.10 of the Disclosure Schedule
provides an accurate description of the terms of each Ibex Contract that is
not in written form. Each Contract identified in Part 2.10 of the
Disclosure Schedule is valid and in full force and effect, and, to the best
of the knowledge of Ibex and the Designated Shareholders, is enforceable by
Ibex in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors,
and (ii) rules of law governing specific performance, injunctive relief and
other equitable remedies.
(c) Except as set forth in Part 2.10 of the Disclosure Schedule:
(i) Ibex has not violated or breached, or committed any default under,
any Ibex Contract, and, to the best of the knowledge of Ibex and the
Designated Shareholders, no other Person has violated or breached, or
committed any default under, any Ibex Contract;
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(ii) to the best of the knowledge of Ibex and the Designated
Shareholders, no event has occurred, and no circumstance or condition
exists, that (with or without notice or lapse of time) will, or could
reasonably be expected to, (A) result in a violation or breach of any
of the provisions of any Ibex Contract, (B) give any Person the right
to declare a default or exercise any remedy under any Ibex Contract,
(C) give any Person the right to accelerate the maturity or
performance of any Ibex Contract, or (D) give any Person the right to
cancel, terminate or modify any Ibex Contract;
(iii) since December 31, 1992, Ibex has not received any notice or
other communication regarding any actual or possible violation or
breach of, or default under, any Ibex Contract; and
(iv) Ibex has not waived any of its material rights under any Material
Contract.
(d) No Person is renegotiating, or has a right pursuant to the terms of any
Ibex Contract to renegotiate, any amount paid or payable to Ibex under any
Material Contract or any other material term or provision of any Material
Contract.
(e) The Contracts identified in Part 2.10 of the Disclosure Schedule
collectively constitute all of the Contracts necessary to enable Ibex to
conduct its business in the manner in which its business is currently being
conducted.
(f) Part 2.10 of the Disclosure Schedule identifies and provides a brief
description of each proposed Contract as to which any bid, offer, award,
written proposal, term sheet or similar document has been submitted or
received by Ibex since January 1, 1996.
(g) Part 2.10 of the Disclosure Schedule provides an accurate description
and breakdown of Ibex's backlog under Ibex Contracts.
(h) Except as set forth in Part 2.10(h) of the Disclosure Schedule, Ibex
has not entered into and is not negotiating any Government Contract or
Government Bid, and Ibex is not and will not be required to make any filing
with or give any notice to, or to obtain any Consent from, any Governmental
Body under or in connection with any Government Contract or Government Bid
as a result of or by virtue of (A) the execution, delivery of performance
of this Agreement or any of the other agreements referred to in this
Agreement, or (B) the consummation of the Merger or any of the other
transactions contemplated by this Agreement.
2.11 Liabilities. Ibex has no accrued, contingent or other liabilities of
any nature, either matured or unmatured (whether or not required to be reflected
in financial statements in accordance with generally accepted accounting
principles, and whether due or to become due), except for: (a) liabilities
identified as such in the "liabilities" column of the Unaudited Interim Balance
Sheet; (b) accounts payable or accrued salaries that have been incurred by Ibex
since June 30, 1996 in the ordinary course of business and consistent with
Ibex's past practices; (c) liabilities under Ibex Contracts identified in Part
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2.10 of the Disclosure Schedule, to the extent the nature and magnitude of such
liabilities can be specifically ascertained by reference to the text of such
Ibex Contracts; and (d) the liabilities identified in Part 2.11 of the
Disclosure Schedule.
2.12 Compliance with Legal Requirements. To the best of the knowledge of
Ibex and the Designated Shareholders, Ibex is, and has at all times since
December 31, 1992 been, in compliance with all applicable Legal Requirements,
except where the failure to comply with such Legal Requirements has not had and
will not have a Material Adverse Effect on Ibex. Except as set forth in Part
2.12 of the Disclosure Schedule, since December 31, 1992, Ibex has not received
any notice or other communication from any Governmental Body regarding any
actual or possible violation of, or failure to comply with, any Legal
Requirement.
2.13 Governmental Authorizations. Part 2.13 of the Disclosure Schedule
identifies each material Governmental Authorization held by Ibex, and Ibex has
delivered to Castelle accurate and complete copies of all Governmental
Authorizations identified in Part 2.13 of the Disclosure Schedule. The
Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule
are valid and in full force and effect, and collectively constitute all
Governmental Authorizations necessary to enable Ibex to conduct its business in
the manner in which its business is currently being conducted. Ibex is, and at
all times since December 31, 1992 has been, in substantial compliance with the
material terms and requirements of the respective Governmental Authorizations
identified in Part 2.13 of the Disclosure Schedule. Since December 31, 1992,
Ibex has not received any notice or other communication from any Governmental
Body regarding (a) any actual or possible violation of or failure to comply with
any term or requirement of any Governmental Authorization, or (b) any actual or
possible revocation, withdrawal, suspension, cancellation, termination or
modification of any Governmental Authorization.
2.14 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of Ibex with any
Governmental Body with respect to any taxable period ending on or before
the Closing Date (the "Ibex Returns") (i) have been or will be filed on or
before the applicable due date (including any extensions of such due date),
and (ii) have been, or will be when filed, accurately and completely
prepared in all material respects in compliance with all applicable Legal
Requirements. All amounts shown on Ibex Returns to be due on or before the
Closing Date have been or will be paid on or before the Closing Date. Ibex
has delivered to Castelle accurate and complete copies of all Ibex Returns
filed since December 31, 1992 which have been requested by Castelle.
(b) Ibex Financial Statements fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates thereof
in accordance with generally accepted accounting principles. Ibex will
establish, in the ordinary course of business and consistent with its past
practices, reserves adequate for the payment of all Taxes for the period
from June 30, 1996 through the Closing Date, and Ibex will disclose the
dollar amount of such reserves to Castelle on or prior to the Closing Date.
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(c) No Ibex Return relating to income Taxes has ever been examined or
audited by any Governmental Body. Except as set forth in Part 2.14 of the
Disclosure Schedule, there have been no examinations or audits of any Ibex
Return. Ibex has delivered to Castelle accurate and complete copies of all
audit reports and similar documents (to which Ibex has access) relating to
Ibex Returns. Except as set forth in Part 2.14 of the Disclosure Schedule,
no extension or waiver of the limitation period applicable to any of Ibex
Returns has been granted (by Ibex or any other Person), and no such
extension or waiver has been requested from Ibex.
(d) Except as set forth in Part 2.14 of the Disclosure Schedule, no claim
or Proceeding is pending or has been threatened against or with respect to
Ibex in respect of any Tax. There are no unsatisfied liabilities for Taxes
(including liabilities for interest, additions to tax and penalties thereon
and related expenses) with respect to any notice of deficiency or similar
document received by Ibex with respect to any Tax (other than liabilities
for Taxes asserted under any such notice of deficiency or similar document
which are being contested in good faith by Ibex and with respect to which
adequate reserves for payment have been established). There are no liens
for Taxes upon any of the assets of Ibex except liens for current Taxes not
yet due and payable. Ibex has not entered into or become bound by any
agreement or consent pursuant to Section 341(f) of the Code. Ibex has not
been, and Ibex will not be, required to include any adjustment in taxable
income for any tax period (or portion thereof) pursuant to Section 481 or
263A of the Code or any comparable provision under state or foreign Tax
laws as a result of transactions or events occurring, or accounting methods
employed, prior to the Closing.
(e) There is no agreement, plan, arrangement or other Contract covering any
employee or independent contractor or former employee or independent
contractor of Ibex that, considered individually or considered collectively
with any other such Contracts, will, or could reasonably be expected to,
give rise directly or indirectly to the payment of any amount that would
not be deductible pursuant to Section 280G or Section 162 of the Code. Ibex
is not, and has never been, a party to or bound by any tax indemnity
agreement, tax sharing agreement, tax allocation agreement or similar
Contract.
2.15 Employee and Labor Matters; Benefit Plans.
(a) Part 2.15(a) of the Disclosure Schedule identifies each salary, bonus,
deferred compensation, incentive compensation, stock purchase, stock
option, severance pay, termination pay, hospitalization, medical, life or
other insurance, supplemental unemployment benefits, profit-sharing,
pension or retirement plan, program or agreement (collectively, the
"Plans") sponsored, maintained, contributed to or required to be
contributed to by Ibex for the benefit of any employee of Ibex
("Employee"), except for Plans which would not require Ibex to make
payments or provide benefits having a value in excess of $10,000 in the
aggregate.
(b) Except as set forth in Part 2.15(a) of the Disclosure Schedule, Ibex
does not maintain, sponsor or contribute to, and, to the best of the
knowledge of Ibex and the Designated Shareholders, has not at any time in
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the past maintained, sponsored or contributed to, any employee pension
benefit plan (as defined in Section 3(2) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), whether or not excluded from
coverage under specific Titles or Merger Subtitles of ERISA) for the
benefit of Employees or former Employees (a "Pension Plan").
(c) Ibex maintains, sponsors or contributes only to those employee welfare
benefit plans (as defined in Section 3(1) of ERISA, whether or not excluded
from coverage under specific Titles or Merger Subtitles of ERISA) for the
benefit of Employees or former Employees which are described in Part
2.15(c) of the Disclosure Schedule (the "Welfare Plans"), none of which is
a multiemployer plan (within the meaning of Section 3(37) of ERISA).
(d) With respect to each Plan, Ibex has delivered to Castelle:
(i) an accurate and complete copy of such Plan (including all
amendments thereto);
(ii) an accurate and complete copy of the annual report, if required
under ERISA, with respect to such Plan for the last two years;
(iii) an accurate and complete copy of the most recent summary plan
description, together with each Summary of Material Modifications, if
required under ERISA, with respect to such Plan, and all material
employee communications relating to such Plan;
(iv) if such Plan is funded through a trust or any third party funding
vehicle, an accurate and complete copy of the trust or other funding
agreement (including all amendments thereto) and accurate and complete
copies the most recent financial statements thereof;
(v) accurate and complete copies of all Contracts relating to such
Plan, including service provider agreements, insurance contracts,
minimum premium contracts, stop-loss agreements, investment management
agreements, subscription and participation agreements and
recordkeeping agreements; and
(vi) an accurate and complete copy of the most recent determination
letter received from the Internal Revenue Service with respect to such
Plan (if such Plan is intended to be qualified under Section 401(a) of
the Code).
(e) Ibex is not required to be, and, to the best of the knowledge of Ibex
and the Designated Shareholders, has never been required to be, treated as
a single employer with any other Person under Section 4001(b)(1) of ERISA
or Section 414(b), (c), (m) or (o) of the Code. Ibex has never been a
member of an "affiliated service group" within the meaning of Section
414(m) of the Code. To the best of the knowledge of Ibex and the Designated
Shareholders, Ibex has never made a complete or partial withdrawal from a
multiemployer plan, as such term is defined in Section 3(37) of ERISA,
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resulting in "withdrawal liability," as such term is defined in Section
4201 of ERISA (without regard to subsequent reduction or waiver of such
liability under either Section 4207 or 4208 of ERISA).
(f) Ibex does not have any plan or commitment to create any additional
Welfare Plan or any Pension Plan, or to modify or change any existing
Welfare Plan or Pension Plan (other than to comply with applicable law) in
a manner that would affect any Employee.
(g) Except as set forth in Part 2.15(g) of the Disclosure Schedule, no
Welfare Plan provides death, medical or health benefits (whether or not
insured) with respect to any current or former Employee after any such
Employee's termination of service (other than (i) benefit coverage mandated
by applicable law, including coverage provided pursuant to Section 4980B of
the Code, (ii) deferred compensation benefits accrued as liabilities on the
Unaudited Interim Balance Sheet, and (iii) benefits the full cost of which
are borne by current or former Employees (or the Employees'
beneficiaries)).
(h) With respect to each of the Welfare Plans constituting a group health
plan within the meaning of Section 4980B(g)(2) of the Code, the provisions
of Section 4980B of the Code ("COBRA") have been complied with in all
material respects.
(i) Each of the Plans has been operated and administered in all material
respects in accordance with applicable Legal Requirements, including but
not limited to ERISA and the Code.
(j) Each of the Plans intended to be qualified under Section 401(a) of the
Code has received a favorable determination from the Internal Revenue
Service, and neither Ibex nor any of the Designated Shareholders is aware
of any reason why any such determination letter should be revoked.
(k) Except as set forth in Part 2.15(k) of the Disclosure Schedule, neither
the execution, delivery or performance of this Agreement, nor the
consummation of the Merger or any of the other transactions contemplated by
this Agreement, will result in any payment (including any bonus, golden
parachute or severance payment) to any current or former Employee or
director of Ibex (whether or not under any Plan), or materially increase
the benefits payable under any Plan, or result in any acceleration of the
time of payment or vesting of any such benefits.
(l) Part 2.15(l) of the Disclosure Schedule contains a list of all salaried
employees of Ibex as of the date of this Agreement, and correctly reflects,
in all material respects, their salaries, any other compensation payable to
them (including compensation payable pursuant to bonus, deferred
compensation or commission arrangements), their dates of employment and
their positions. Ibex is not a party to any collective bargaining contract
or other Contract with a labor union involving any of its Employees. All of
Ibex's employees are "at will" employees.
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(m) Part 2.15(m) of the Disclosure Schedule identifies each Employee who is
not fully available to perform work because of disability or other leave
and sets forth the basis of such leave and the anticipated date of return
to full service.
(n) Ibex is in compliance in all material respects with all applicable
Legal Requirements and Contracts relating to employment, employment
practices, wages, bonuses and terms and conditions of employment, including
employee compensation matters.
(o) Except as set forth in Part 2.15(o) of the Disclosure Schedule, Ibex
has good labor relations, and none of the Designated Shareholders has any
reason to believe that (i) the consummation of the Merger or any of the
other transactions contemplated by this Agreement will have a material
adverse effect on Ibex's labor relations, or (ii) any of Ibex's employees
intends to terminate his or her employment with Ibex.
2.16 Environmental Matters. Ibex is in compliance in all material respects
with all applicable Environmental Laws, which compliance includes the possession
by Ibex of all permits and other Governmental Authorizations required under
applicable Environmental Laws, and compliance with the terms and conditions
thereof. Ibex has not received any notice or other communication (in writing or
otherwise), whether from a Governmental Body, citizens group, employee or
otherwise, that alleges that Ibex is not in compliance with any Environmental
Law, and, to the best of the knowledge of Ibex and Designated Shareholders,
there are no circumstances that may prevent or interfere with Ibex's compliance
with any Environmental Law in the future. To the best of the knowledge of Ibex
and the Designated Shareholders, no current or prior owner of any property
leased or controlled by Ibex has received any notice or other communication (in
writing or otherwise), whether from a Government Body, citizens group, employee
or otherwise, that alleges that such current or prior owner or Ibex is not in
compliance with any Environmental Law. All Governmental Authorizations currently
held by Ibex pursuant to Environmental Laws are identified in Part 2.16 of the
Disclosure Schedule. (For purposes of this Section 2.16: (i) "Environmental Law"
means any federal, state, local or foreign Legal Requirement relating to
pollution or protection of human health or the environment (including ambient
air, surface water, ground water, land surface or subsurface strata), including
any law or regulation relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern; and (ii) "Materials
of Environmental Concern" include chemicals, pollutants, contaminants, wastes,
toxic substances, petroleum and petroleum products and any other substance that
is now regulated by any Environmental Law or that is otherwise a danger to
health, reproduction or the environment.)
2.17 Insurance. Part 2.17 of the Disclosure Schedule identifies all
insurance policies maintained by, at the expense of or for the benefit of Ibex
and identifies any material claims made thereunder, and Ibex has delivered to
Castelle accurate and complete copies of the insurance policies identified on
Part 2.17 of the Disclosure Schedule. Each of the insurance policies identified
in Part 2.17 of the Disclosure Schedule is in full force and effect. Since
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December 31, 1992, Ibex has not received any notice or other communication
regarding any actual or possible (a) cancellation or invalidation of any
insurance policy, (b) refusal of any coverage or rejection of any claim under
any insurance policy, or (c) material adjustment in the amount of the premiums
payable with respect to any insurance policy.
2.18 Related Party Transactions. Except as set forth in Part 2.18 of the
Disclosure Schedule: (a) no Related Party has, and no Related Party has at any
time since December 31, 1992 had, any direct or indirect interest in any
material asset used in or otherwise relating to the business of Ibex; (b) no
Related Party is, or has at any time since December 31, 1992 been, indebted to
Ibex; (c) since December 31, 1992, no Related Party has entered into, or has had
any direct or indirect financial interest in, any material Contract, transaction
or business dealing involving Ibex; (d) no Related Party is competing, or has at
any time since December 31, 1992 competed, directly or indirectly, with Ibex;
and (e) no Related Party has any claim or right against Ibex (other than rights
under company Options and rights to receive compensation for services performed
as an employee of Ibex). (For purposes of the Section 2.18 each of the following
shall be deemed to be a "Related Party": (i) each of the Designated
Shareholders; (ii) each individual who is, or who has at any time since December
31, 1992 been, an officer of Ibex; (iii) each member of the immediate family of
each of the individuals referred to in clauses "(i)" and "(ii)" above; and (iv)
any trust or other Entity (other than Ibex) in which any one of the individuals
referred to in clauses "(i)", "(ii)" and "(iii)" above holds (or in which more
than one of such individuals collectively hold), beneficially or otherwise, a
material voting, proprietary or equity interest.)
2.19 Legal Proceedings; Orders.
(a) Except as set forth in Part 2.19 of the Disclosure Schedule, there is
no pending Legal Proceeding, and (to the best of the knowledge of Ibex and
the Designated Shareholders) no Person has threatened to commence any Legal
Proceeding: (i) that involves Ibex or any of the assets owned or used by
Ibex or any Person whose liability Ibex has or may have retained or
assumed, either contractually or by operation of law; or (ii) that
challenges, or that may have the effect of preventing, delaying, making
illegal or otherwise interfering with, the Merger or any of the other
transactions contemplated by this Agreement. To the best of the knowledge
of Ibex and the Designated Shareholders, except as set forth in Part 2.19
of the Disclosure Schedule, no event has occurred, and no claim, dispute or
other condition or circumstance exists, that will, or that could reasonably
be expected to, give rise to or serve as a basis for the commencement of
any such Legal Proceeding.
(b) Except as set forth in Part 2.19 of the Disclosure Schedule, no Legal
Proceeding has ever been commenced by or has ever been pending against
Ibex.
(c) There is no order, writ, injunction, judgment or decree to which Ibex,
or any of the assets owned or used by Ibex, is subject. None of the
Designated Shareholders is subject to any order, writ, injunction, judgment
or decree that relates to Ibex's business or to any of the assets owned or
used by Ibex. To the best of the knowledge of Ibex and the Designated
Shareholders, no officer or other employee of Ibex is subject to any order,
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writ, injunction, judgment or decree that prohibits such officer or other
employee from engaging in or continuing any conduct, activity or practice
relating to Ibex's business.
2.20 Authority; Binding Nature of Agreement. Ibex has the right, power and
authority to enter into and to perform its obligations under this Agreement; and
the execution, delivery and performance by Ibex of this Agreement have been duly
authorized by all necessary action on the part of Ibex and its board of
directors. This Agreement constitutes the legal, valid and binding obligation of
Ibex, enforceable against Ibex in accordance with its terms, subject to (i) laws
of general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies.
2.21 Non-Contravention; Consents. Except as set forth in Part 2.21 of the
Disclosure Schedule, neither (1) the execution, delivery or performance of this
Agreement or any of the other agreements referred to in this Agreement, nor (2)
the consummation of the Merger or any of the other transactions contemplated by
this Agreement, will directly or indirectly (with or without notice or lapse of
time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of Ibex's articles of incorporation or bylaws, or (ii) any
resolution adopted by Ibex's shareholders, Ibex's board of directors or any
committee of Ibex's board of directors;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the
transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which Ibex, or any of the assets owned or
used by Ibex, is subject;
(c) contravene, conflict with or result in a violation of any of the terms
or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by Ibex or that otherwise relates to Ibex's
business or to any of the assets owned or used by Ibex;
(d) contravene, conflict with or result in a violation or breach of, or
result in a material default under, any provision of any Ibex Contract that
is or would constitute a Material Contract, or give any Person the right to
(i) declare a default or exercise any remedy under any such Ibex Contract,
(ii) accelerate the maturity or performance of any such Ibex Contract, or
(iii) cancel, terminate or modify any such Ibex Contract; or
(e) result in the imposition or creation of any lien or other Encumbrance
upon or with respect to any asset owned or used by Ibex (except for minor
liens that will not, in any case or in the aggregate, materially detract
from the value of the assets subject thereto or materially impair the
operations of Ibex).
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Except as set forth in Part 2.21 of the Disclosure Schedule, Ibex is not and
will not be required to make any filing with or give any notice to, or to obtain
any Consent from, any Person in connection with (x) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in this
Agreement, or (y) the consummation of the Merger or any of the other
transactions contemplated by this Agreement.
2.22 Full Disclosure.
(a) This Agreement (including the Disclosure Schedule) does not, and the
Designated Shareholders' Closing Certificate will not, (i) contain any
representation, warranty or information that is false or misleading with
respect to any material fact, or (ii) omit to state any material fact
necessary in order to make the representations, warranties and information
contained and to be contained herein and therein (in the light of the
circumstances under which such representations, warranties and information
were or will be made or provided) not false or misleading.
(b) Should Castelle elect to file a permit application under Section 25121
of the California Corporations Code, including an Information Statement (as
defined in Section 5.2), the information supplied by Ibex for inclusion in
the Information Statement will not, as of the date of the Information
Statement or as of the date of the Ibex Shareholders' Meeting (as defined
in Section 5.3), (i) contain any statement that is inaccurate or misleading
with respect to any material fact, or (ii) omit to state any material fact
necessary in order to make such information (in the light of the
circumstances under which it is provided) not false or misleading.
(c) Should Castelle elect to prepare and file a registration statement on
Form S-4 to be filed with the SEC by Castelle in connection with the
issuance of the Castelle Common Stock in the Merger (the "S-4 Registration
Statement"), none of the information supplied or to be supplied by Ibex for
inclusion or incorporation by reference in the S-4 Registration Statement
will, at the time the S-4 Registration Statement is filed with the SEC or
at the time the S-4 Registration Statement becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they are made, not misleading. None of the information supplied or to be
supplied by Ibex for inclusion or incorporation by reference in the
Prospectus/Proxy Statement filed as a part of the S-4 Registration
Statement (the "Prospectus/Proxy Statement"), will, at the time mailed to
the shareholders of Castelle and Ibex, and as of the Effective Time,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF CASTELLE
Castelle represents and warrants to Ibex and the Designated Shareholders as
follows:
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3.1 Due Organization; No Subsidiaries; Etc.
(a) Castelle is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has all necessary
power and authority: (i) to conduct its business in the manner in which its
business is currently being conducted; (ii) to own and use its assets in
the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Castelle Contracts.
(b) Except as set forth in Part 3.1 of the Castelle Disclosure Schedule,
Castelle has not conducted any business under or otherwise used, for any
purpose or in any jurisdiction, any fictitious name, assumed name, trade
name or other name, other than the name "Castelle."
(c) Castelle is not and has not been required to be qualified, authorized,
registered or licensed to do business as a foreign corporation in any
jurisdiction where the failure to be so qualified, authorized, registered
or licensed has not had and will not have a Material Adverse Effect on
Castelle.
(d) Castelle's Form 10-KSB filed with the Securities and Exchange
Commission (the "SEC") on April 1, 1996 and its Form 10-KSB/A filed with
the SEC on April 29, 1996 accurately sets forth (i) the names of the
members of Castelle's board of directors, (ii) the names of the members of
each committee of Castelle's board of directors, and (iii) the names and
titles of Castelle's officers.
(e) Castelle does not own any controlling interest in any Entity and,
except for the equity interests identified in Part 3.1 of the Castelle
Disclosure Schedule, Castelle has never owned, beneficially or otherwise,
any shares or other securities of, or any direct or indirect equity
interest in, any Entity. Castelle has not agreed and is not obligated to
make any future investment in or capital contribution to any Entity.
Castelle has not guaranteed and is not responsible or liable for any
obligation of any of the Entities in which it owns or has owned any equity
interest.
3.2 SEC Filings; Financial Statements.
(a) Castelle has delivered to Ibex accurate and complete copies (excluding
copies of exhibits) of each report, registration statement (on a form other
than Form S-8) and definitive proxy statement filed by Castelle with the
SEC between November 16, 1995 and the date of this Agreement (the "Castelle
SEC Documents"). As of the time it was filed with the SEC (or, if amended
or superseded by a filing prior to the date of this Agreement, then on the
date of such filing): (i) each of the Castelle SEC Documents complied in
all material respects with the applicable requirements of the Securities
Act or the Exchange Act (as the case may be); and (ii) none of the Castelle
SEC Documents contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
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(b) The consolidated financial statements contained in the Castelle SEC
Documents: (i) complied as to form in all material respects with the
published rules and regulations of the SEC applicable thereto; (ii) were
prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods covered, except as may
be indicated in the notes to such financial statements and (in the case of
unaudited statements) as permitted by Form 10-QSB of the SEC, and except
that unaudited financial statements may not contain footnotes and are
subject to year-end audit adjustments; and (iii) fairly present the
consolidated financial position of Castelle and its subsidiaries as of the
respective dates thereof and the consolidated results of operations of
Castelle and its subsidiaries for the periods covered thereby.
3.3 Capitalization, Etc.
(a) The authorized capital stock of Castelle consists of: (i) twenty-five
million (25,000,000) shares of Common Stock (with no par value), of which
three million six hundred twenty thousand eight hundred forty-four
(3,620,844) shares have been issued and are outstanding as of August 7,
1996; and (ii) two million (2,000,000) shares of Preferred Stock (with no
par value), none of which such shares have been issued as of the date of
this Agreement. All of the outstanding shares of Castelle Common Stock have
been duly authorized and validly issued, and are fully paid and
non-assessable.
(b) Castelle has reserved nine hundred forty-five thousand five hundred
eighty-three (945,583) shares of Castelle Common Stock for issuance under
its 1988 Incentive Stock Plan, of which options to purchase three hundred
sixty thousand four hundred twelve (360,412) shares are outstanding as of
August 13, 1996. In addition, the Company has reserved one hundred twenty
thousand (120,000) shares of Common Stock for issuance under the 1995
Outside Directors' Stock Option Plan, of which options to purchase ten
thousand (10,000) shares are outstanding as of the date of this Agreement.
The Company also has outstanding warrants for the purchase of two hundred
forty-eight thousand three hundred thirty-two (248,332) shares of the
Company's Common Stock. Except as set forth in Part 3.3 of the Castelle
Disclosure Schedule, there is no: (i) outstanding subscription, option,
call, warrant or right (whether or not currently exercisable) to acquire
any shares of the capital stock or other securities of Castelle; (ii)
outstanding security, instrument or obligation that is or may become
convertible into or exchangeable for any shares of the capital stock or
other securities of Castelle; (iii) Contract under which Castelle is or may
become obligated to sell or otherwise issue any shares of its capital stock
or any other securities; or (iv) to the best of the knowledge of Castelle,
condition or circumstance that may give rise to or provide a basis for the
assertion of a claim by any Person to the effect that such Person is
entitled to acquire or receive any shares of capital stock or other
securities of Castelle.
(c) All outstanding shares of Castelle Common Stock, and all outstanding
Castelle Options, have been issued and granted in compliance with (i) all
applicable securities laws and other applicable Legal Requirements, and
(ii) all requirements set forth in applicable Contracts.
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3.4 Authority; Binding Nature of Agreement. Castelle has the absolute and
unrestricted right, power and authority to perform their obligations under this
Agreement; and the execution, delivery and performance by Castelle of this
Agreement (including the contemplated issuance of Castelle Common Stock in the
Merger in accordance with this Agreement) have been duly authorized by all
necessary action on the part of Castelle and its respective boards of directors.
This Agreement constitutes the legal, valid and binding obligation of Castelle,
enforceable against it in accordance with its terms, subject to (i) laws of
general application relating to bankruptcy, insolvency and the relief of
debtors, and (ii) rules of law governing specific performance, injunctive relief
and other equitable remedies.
3.5 Absence of Changes. Except as set forth in Part 3.5 of the Castelle
Disclosure Schedule, since June 28, 1996:
(a) there has not been any material adverse change in Castelle's business,
condition, assets, liabilities, operations, financial performance or
prospects, and, to the best of the knowledge of Castelle, no event has
occurred that will, or could reasonably be expected to, have a Material
Adverse Effect on Castelle;
(b) there has not been any material loss, damage or destruction to, or any
material interruption in the use of, any of Castelle's assets (whether or
not covered by insurance);
(c) Castelle has not declared, accrued, set aside or paid any dividend or
made any other distribution in respect of any shares of capital stock, and
has not repurchased, redeemed or otherwise reacquired any shares of capital
stock or other securities;
(d) Castelle has not sold, issued or authorized the issuance of (i) any
capital stock or other security (except for Castelle Common Stock issued
upon the exercise of outstanding Castelle Options), (ii) any option or
right to acquire any capital stock or any other security (except for
Castelle Options identified in Section 3.3 of the Agreement), or (iii) any
instrument convertible into or exchangeable for any capital stock or other
security;
(e) Castelle has not amended or waived any of its rights under, or
permitted the acceleration of vesting under, (i) any provision of its 1988
Incentive Stock Plan or 1995 Outside Directors' Stock Option Plan, (ii) any
provision of any agreement evidencing any outstanding Castelle Option, or
(iii) any restricted stock purchase agreement;
(f) there has been no amendment to Castelle's articles of incorporation or
bylaws, and Castelle has not effected or been a party to any Acquisition
Transaction, recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction;
(g) Castelle has not formed any subsidiary or acquired any equity interest
or other interest in any other Entity;
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(h) Castelle has not made any capital expenditure which, when added to all
other capital expenditures made on behalf of Castelle since June 30, 1996,
exceeds $50,000;
(i) Castelle has not (i) entered into or permitted any of the assets owned
or used by it to become bound by any Contract that is or would constitute a
Material Contract (as defined in Section 2.10(a)), or (ii) amended or
prematurely terminated, or waived any material right or remedy under, any
such Contract;
(j) Castelle has not (i) acquired, leased or licensed any right or other
asset from any other Person, (ii) sold or otherwise disposed of, or leased
or licensed, any right or other asset to any other Person, or (iii) waived
or relinquished any right, except for immaterial rights or other immaterial
assets acquired, leased, licensed or disposed of in the ordinary course of
business and consistent with Castelle's past practices;
(k) Castelle has not written off as uncollectible, or established any
extraordinary reserve with respect to, any account receivable or other
indebtedness;
(l) Castelle has not made any pledge of any of its assets or otherwise
permitted any of its assets to become subject to any Encumbrance, except
for pledges of immaterial assets made in the ordinary course of business
and consistent with Castelle's past practices;
(m) Castelle has not (i) lent money to any Person (other than pursuant to
routine travel advances made to employees in the ordinary course of
business), or (ii) incurred or guaranteed any indebtedness for borrowed
money;
(n) Castelle has not (i) established or adopted any Employee Benefit Plan,
(ii) paid any bonus or made any profit-sharing or similar payment to, or
increased the amount of the wages, salary, commissions, fringe benefits or
other compensation or remuneration payable to, any of its directors,
officers or employees, or (iii) hired any new employee;
(o) Castelle has not changed any of its methods of accounting or accounting
practices in any respect;
(p) Castelle has not made any Tax election;
(q) Castelle has not commenced or settled any Legal Proceeding;
(r) Castelle has not entered into any material transaction or taken any
other material action outside the ordinary course of business or
inconsistent with its past practices; and
(s) Castelle has not agreed or committed to take any of the actions
referred to in clauses "(c)" through "(r)" above.
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3.6 Title to Assets. Castelle owns, and has good, valid and marketable
title to, all assets purported to be owned by it, including: (i) all assets
reflected in the financial statements included in the Castelle SEC Documents;
(ii) all assets referred to in Sections 3.1 and 3.7 of the Castelle Disclosure
Schedule; and (iii) all other assets reflected in Castelle's books and records
as being owned by Castelle. Except as set forth in Part 3.6 of the Castelle
Disclosure Schedule, all of said assets are owned by Castelle free and clear of
any liens or other Encumbrances, except for (x) any lien for current taxes not
yet due and payable, and (y) minor liens that have arisen in the ordinary course
of business and that do not (in any case or in the aggregate) materially detract
from the value of the assets subject thereto or materially impair the operations
of Castelle.
3.7 Proprietary Assets.
(a) Except as set forth in Part 3.7(a) of the Castelle Disclosure Schedule,
Castelle has good, valid and marketable title to all of Castelle
Proprietary Assets, free and clear of all liens and other Encumbrances, and
has a valid right to use all such Proprietary Assets. Except as set forth
in Part 3.7(a) of the Castelle Disclosure Schedule, Castelle is not
obligated to make any payment to any Person for the use of any Castelle
Proprietary Asset. Except as set forth in Part 3.7(a) of the Castelle
Disclosure Schedule, Castelle has not developed jointly with any other
Person any Castelle Proprietary Asset with respect to which such other
Person has any rights.
(b) Castelle has taken all reasonable measures and precautions necessary to
protect and maintain the confidentiality and secrecy of all Castelle
Proprietary Assets (except Castelle Proprietary Assets whose value would be
unimpaired by public disclosure) and otherwise to maintain and protect the
value of all Castelle Proprietary Assets. Except as set forth in Part
3.7(b) of the Castelle Disclosure Schedule, to the best of the knowledge of
Castelle after due inquiry of its officers, directors and advisors,
Castelle has not (other than pursuant to license agreements) disclosed or
delivered to any Person, or permitted the disclosure or delivery to any
Person of, (i) the source code, or any portion or aspect of the source
code, of any Castelle Proprietary Asset, or (ii) the object code, or any
portion or aspect of the object code, of any Castelle Proprietary Asset.
(c) To the best of the knowledge of Castelle after due inquiry of its
officers, directors and advisors, none of the Castelle Proprietary Assets
infringes or conflicts with any Proprietary Asset owned or used by any
other Person. To the best of the knowledge of Castelle after due inquiry of
its officers, directors and advisors, Castelle is not infringing,
misappropriating or making any unlawful use of, and Castelle has not at any
time infringed, misappropriated or made any unlawful use of, or received
any notice or other communication (in writing or otherwise) of any actual,
alleged, possible or potential infringement, misappropriation or unlawful
use of, any Proprietary Asset owned or used by any other Person. To the
best of the knowledge of Castelle, no other Person is infringing,
misappropriating or making any unlawful use of, and no Proprietary Asset
owned or used by any other Person infringes or conflicts with, any Castelle
Proprietary Asset.
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(d) Except as set forth in Part 3.7(d) of the Castelle Disclosure Schedule:
(i) each Castelle Proprietary Asset conforms in all material respects with
any specification, documentation, performance standard, representation or
statement made or provided with respect thereto by or on behalf of
Castelle; and (ii) there has not been any claim by any customer or other
Person alleging that any Castelle Proprietary Asset (including each version
thereof that has ever been licensed or otherwise made available by Castelle
to any Person) does not conform in all material respects with any
specification, documentation, performance standard, representation or
statement made or provided by or on behalf of Castelle, and, to the best of
the knowledge of Castelle, there is no basis for any such claim. Castelle
has established adequate reserves on its consolidated financial statements
contained in the Castelle SEC Documents to cover all costs associated with
any obligations that Castelle may have with respect to the correction or
repair of programming errors or other defects in Castelle Proprietary
Assets.
(e) Castelle Proprietary Assets constitute all the Proprietary Assets
necessary to enable Castelle to conduct its business in the manner in which
such business has been and is being conducted. Except as set forth in Part
3.7(e) of the Castelle Disclosure Schedule, (i) Castelle has not licensed
any of Castelle Proprietary Assets to any Person on an exclusive basis, and
(ii) Castelle has not entered into any covenant not to compete or Contract
limiting its ability to exploit fully any of its Proprietary Assets or to
transact business in any market or geographical area or with any Person.
(f) Except as set forth in Part 3.7(f) of the Castelle Disclosure Schedule,
(i) all current and former employees of Castelle have executed and
delivered to Castelle an agreement (containing no exceptions to or
exclusions from the scope of its coverage) that is substantially identical
to the form of Castelle Employee Agreement Concerning Inventions, Trade
Secrets and Confidential Information previously delivered to Ibex, and (ii)
all current and former consultants and independent contractors to Castelle
have executed and delivered to Castelle an agreement (containing no
exceptions to or exclusions from the scope of its coverage) that is
substantially identical to the form of Consultant Confidential Information
and Invention Assignment Agreements previously delivered to Ibex.
3.8 Liabilities. Castelle has no accrued, contingent or other liabilities
of any nature, either matured or unmatured (whether or not required to be
reflected in financial statements in accordance with generally accepted
accounting principles, and whether due or to become due), except for: (a)
liabilities identified as such in the "liabilities" column of the consolidated
financial statements contained in the Castelle SEC Documents; (b) accounts
payable or accrued salaries that have been incurred by Castelle since June 30,
1996 in the ordinary course of business and consistent with Castelle's past
practices; and (c) the liabilities identified in Part 3.8 of the Castelle
Disclosure Schedule.
3.9 Compliance with Legal Requirements. To the best of Castelle's
knowledge, Castelle is, and has at all times since December 31, 1992 been, in
compliance with all applicable Legal Requirements, except where the failure to
comply with such Legal Requirements has not had and will not have a Material
Adverse Effect on Castelle. Except as set forth in Part 3.9 of the Castelle
Disclosure Schedule, since December 31, 1992, Castelle has not received any
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notice or other communication from any Governmental Body regarding any actual or
possible violation of, or failure to comply with, any Legal Requirement.
3.10 Governmental Authorizations. Castelle holds all Governmental
Authorizations necessary to enable Castelle to conduct its business in the
manner in which its business is currently being conducted. Castelle is, and at
all times since December 31, 1992 has been, in substantial compliance with the
material terms and requirements of the respective Governmental Authorizations
necessary for its business. Since December 31, 1992, Castelle has not received
any notice or other communication from any Governmental Body regarding (a) any
actual or possible violation of or failure to comply with any term or
requirement of any Governmental Authorization necessary for its business, or (b)
any actual or possible revocation, withdrawal, suspension, cancellation,
termination or modification of any Governmental Authorization necessary for its
business.
3.11 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of Castelle with
any Governmental Body with respect to any taxable period ending on or
before the Closing Date (the "Castelle Returns") (i) have been or will be
filed on or before the applicable due date (including any extensions of
such due date), and (ii) have been, or will be when filed, accurately and
completely prepared in all material respects in compliance with all
applicable Legal Requirements. All amounts shown on Castelle Returns to be
due on or before the Closing Date have been or will be paid on or before
the Closing Date.
(b) Castelle Financial Statements fully accrue all actual and contingent
liabilities for Taxes with respect to all periods through the dates thereof
in accordance with generally accepted accounting principles. Castelle will
establish, in the ordinary course of business and consistent with its past
practices, reserves adequate for the payment of all Taxes for the period
from June 30, 1996 through the Closing Date.
(c) No Castelle Return relating to income Taxes has ever been examined or
audited by any Governmental Body. Except as set forth in Part 3.11 of the
Castelle Disclosure Schedule, there have been no examinations or audits of
any Castelle Return.
(d) Except as set forth in Part 3.11 of the Castelle Disclosure Schedule,
no claim or Proceeding is pending or has been threatened against or with
respect to Castelle in respect of any Tax. There are no unsatisfied
liabilities for Taxes (including liabilities for interest, additions to tax
and penalties thereon and related expenses) with respect to any notice of
deficiency or similar document received by Castelle with respect to any Tax
(other than liabilities for Taxes asserted under any such notice of
deficiency or similar document which are being contested in good faith by
Castelle and with respect to which adequate reserves for payment have been
established). There are no liens for Taxes upon any of the assets of
Castelle except liens for current Taxes not yet due and payable. Castelle
has not entered into or become bound by any agreement or consent pursuant
to Section 341(f) of the Code. Castelle has not been, and Castelle will not
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be, required to include any adjustment in taxable income for any tax period
(or portion thereof) pursuant to Section 481 or 263A of the Code or any
comparable provision under state or foreign Tax laws as a result of
transactions or events occurring, or accounting methods employed, prior to
the Closing.
(e) There is no agreement, plan, arrangement or other Contract covering any
employee or independent contractor or former employee or independent
contractor of Castelle that, considered individually or considered
collectively with any other such Contracts, will, or could reasonably be
expected to, give rise directly or indirectly to the payment of any amount
that would not be deductible pursuant to Section 280G or Section 162 of the
Code. Castelle is not, and has never been, a party to or bound by any tax
indemnity agreement, tax sharing agreement, tax allocation agreement or
similar Contract.
3.12 Employee and Labor Matters; Benefit Plans. Each of Castelle's Plans
has been operated and administered in all material respects in accordance with
applicable Legal Requirements, including but not limited to ERISA and the Code.
3.13 Environmental Matters. Castelle is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes the
possession by Castelle of all permits and other Governmental Authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof. Castelle has not received any notice or other communication
(in writing or otherwise), whether from a Governmental Body, citizens group,
employee or otherwise, that alleges that Castelle is not in compliance with any
Environmental Law, and, to the best of the knowledge of Castelle, there are no
circumstances that may prevent or interfere with Castelle's compliance with any
Environmental Law in the future. To the best of the knowledge of Castelle, no
current or prior owner of any property leased or controlled by Castelle has
received any notice or other communication (in writing or otherwise), whether
from a Government Body, citizens group, employee or otherwise, that alleges that
such current or prior owner or Castelle is not in compliance with any
Environmental Law. (For purposes of this Section 3.13: (i) "Environmental Law"
means any federal, state, local or foreign Legal Requirement relating to
pollution or protection of human health or the environment (including ambient
air, surface water, ground water, land surface or subsurface strata), including
any law or regulation relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern; and (ii) "Materials
of Environmental Concern" include chemicals, pollutants, contaminants, wastes,
toxic substances, petroleum and petroleum products and any other substance that
is now regulated by any Environmental Law or that is otherwise a danger to
health, reproduction or the environment.)
3.14 Legal Proceedings; Orders.
(a) Except as set forth in Part 3.14 of the Castelle Disclosure Schedule,
there is no pending Legal Proceeding, and (to the best of the knowledge of
Castelle) no Person has threatened to commence any Legal Proceeding: (i)
that involves Castelle or any of the assets owned or used by Castelle or
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any Person whose liability Castelle has or may have retained or assumed,
either contractually or by operation of law; or (ii) that challenges, or
that may have the effect of preventing, delaying, making illegal or
otherwise interfering with, the Merger or any of the other transactions
contemplated by this Agreement. To the best of the knowledge of Castelle,
except as set forth in Part 3.14 of the Castelle Disclosure Schedule, no
event has occurred, and no claim, dispute or other condition or
circumstance exists, that will, or that could reasonably be expected to,
give rise to or serve as a basis for the commencement of any such Legal
Proceeding.
(b) There is no order, writ, injunction, judgment or decree to which
Castelle, or any of the assets owned or used by Castelle, is subject. To
the best of the knowledge of Castelle, no officer or other employee of
Castelle is subject to any order, writ, injunction, judgment or decree that
prohibits such officer or other employee from engaging in or continuing any
conduct, activity or practice relating to Castelle's business.
3.15 Non-Contravention; Consents. Except as set forth in Part 3.15 of the
Castelle Disclosure Schedule, neither (1) the execution, delivery or performance
of this Agreement or any of the other agreements referred to in this Agreement,
nor (2) the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will directly or indirectly (with or without
notice or lapse of time):
(a) contravene, conflict with or result in a violation of (i) any of the
provisions of Castelle's articles of incorporation or bylaws, or (ii) any
resolution adopted by Castelle's shareholders, Castelle's board of
directors or any committee of Castelle's board of directors;
(b) contravene, conflict with or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the
transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any Legal Requirement or any order, writ,
injunction, judgment or decree to which Castelle, or any of the assets
owned or used by Castelle, is subject;
(c) contravene, conflict with or result in a violation of any of the terms
or requirements of, or give any Governmental Body the right to revoke,
withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by Castelle or that otherwise relates to
Castelle's business or to any of the assets owned or used by Castelle;
(d) contravene, conflict with or result in a violation or breach of, or
result in a material default under, any provision of any Castelle Contract
that is or would constitute a Material Contract, or give any Person the
right to (i) declare a default or exercise any remedy under any such
Castelle Contract, (ii) accelerate the maturity or performance of any such
Castelle Contract, or (iii) cancel, terminate or modify any such Castelle
Contract; or
(e) result in the imposition or creation of any lien or other Encumbrance
upon or with respect to any asset owned or used by Castelle (except for
minor liens that will not, in any case or in the aggregate, materially
detract from the value of the assets subject thereto or materially impair
the operations of Castelle).
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Except as set forth in Part 3.15 of the Castelle Disclosure Schedule or as may
be required by the Exchange Act, Securities Act, state securities or blue sky
laws, the CGCL and the NASD Bylaws (as they relate to the S-4 Registration
Statement and the Prospectus/Proxy Statement, or the Information Statement),
Castelle is not and will not be required to make any filing with or give any
notice to, or to obtain any Consent from, any Person in connection with (x) the
execution, delivery or performance of this Agreement or any of the other
agreements referred to in this Agreement, or (y) the consummation of the Merger
or any of the other transactions contemplated by this Agreement.
3.16 Full Disclosure.
(a) This Agreement (including the Castelle Disclosure Schedule) does not
(i) contain any representation, warranty or information that is false or
misleading with respect to any material fact, or (ii) omit to state any
material fact necessary in order to make the representations, warranties
and information contained and to be contained herein and therein (in the
light of the circumstances under which such representations, warranties and
information were or will be made or provided) not false or misleading.
(b) Should Castelle elect to file a permit application under Section 25121
of the California Corporations Code, including an Information Statement (as
defined in Section 5.2), the information supplied by Castelle for inclusion
in the Information Statement (as defined in Section 5.2) will not, as of
the date of the Information Statement or as of the date of Ibex
Shareholders' Meeting (as defined in Section 5.3), (i) contain any
statement that is inaccurate or misleading with respect to any material
fact, or (ii) omit to state any material fact necessary in order to make
such information (in the light of the circumstances under which it is
provided) not false or misleading.
(c) Should Castelle elect to prepare and file an S-4 Registration
Statement, none of the information supplied or to be supplied by Castelle
for inclusion or incorporation by reference in the S-4 Registration
Statement will, at the time the S-4 Registration Statement is filed with
the SEC or at the time the S-4 Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. None of the
information supplied or to be supplied by Castelle for inclusion or
incorporation by reference in the Prospectus/Proxy Statement will, at the
dates mailed to the shareholders of Castelle and Ibex, and as of the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they are made, not misleading.
3.17 Valid Issuance. Subject to Section 1.5(b), the Castelle Common Stock
to be issued in the Merger will, when issued in accordance with the provisions
of this Agreement, be validly issued, fully paid and nonassessable.
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SECTION 4. CERTAIN COVENANTS OF IBEX AND THE DESIGNATED SHAREHOLDERS
4.1 Access and Investigation. During the period from the date of this
Agreement through the Effective Time (the "Pre-Closing Period"), Ibex shall, and
shall cause its Representatives to: (a) provide Castelle and Castelle's
Representatives with reasonable access to Ibex's Representatives, personnel and
assets and to all existing books, records, Tax Returns, work papers and other
documents and information relating to Ibex; and (b) provide Castelle and
Castelle's Representatives with copies of such existing books, records, Tax
Returns, work papers and other documents and information relating to Ibex, and
with such additional financial, operating and other data and information
regarding Ibex, as Castelle may reasonably request.
4.2 Operation of Ibex's Business. During the Pre-Closing Period:
(a) Ibex shall conduct its business and operations in the ordinary course
and in substantially the same manner as such business and operations have
been conducted prior to the date of this Agreement;
(b) Ibex shall use reasonable efforts to preserve intact its current
business organization, keep available the services of its current officers
and employees and maintain its relations and good will with all suppliers,
customers, landlords, creditors, employees and other Persons having
business relationships with Ibex;
(c) Ibex shall keep in full force all insurance policies identified in Part
2.17 of the Disclosure Schedule;
(d) Ibex shall cause its officers to report regularly (but in no event less
frequently than weekly) to Castelle concerning the status of Ibex's
business;
(e) Ibex shall not declare, accrue, set aside or pay any dividend or make
any other distribution in respect of any shares of capital stock, and shall
not repurchase, redeem or otherwise reacquire any shares of capital stock
or other securities (except that Ibex may repurchase Ibex Common Stock from
former employees pursuant to the terms of existing restricted stock
purchase agreements);
(f) Ibex shall not sell, issue or authorize the issuance of (i) any capital
stock or other security, (ii) any option or right to acquire any capital
stock or other security, or (iii) any instrument convertible into or
exchangeable for any capital stock or other security (except that Ibex
shall be permitted, (x) to issue Ibex Common Stock to employees upon the
exercise of outstanding Ibex Options, and (y) to issue shares of Ibex
Common Stock upon the conversion of shares of Series A Preferred Stock);
(g) Ibex shall not amend or waive any of its rights under, or permit the
acceleration of vesting under, (i) any provision of its 1992 Stock Option
Plan, (ii) any provision of any agreement evidencing any outstanding Ibex
Option, or (iii) any provision of any restricted stock purchase agreement;
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(h) neither Ibex nor any of the Designated Shareholders shall amend or
permit the adoption of any amendment to Ibex's articles of incorporation or
bylaws, or effect or permit Ibex to become a party to any Acquisition
Transaction, recapitalization, reclassification of shares, stock split,
reverse stock split or similar transaction (except that Ibex may issue
shares of Ibex Common Stock upon the conversion of shares of Series A
Preferred Stock);
(i) Ibex shall not form any subsidiary or acquire any equity interest or
other interest in any other Entity;
(j) Ibex shall not make any capital expenditure, except for capital
expenditures that, when added to all other capital expenditures made on
behalf of Ibex during the Pre-Closing Period, do not exceed $5,000 per
month;
(k) Ibex shall not (i) enter into, or permit any of the assets owned or
used by it to become bound by, any Contract that is or would constitute a
Material Contract, or (ii) amend or prematurely terminate, or waive any
material right or remedy under, any such Contract;
(l) Ibex shall not (i) acquire, lease or license any right or other asset
from any other Person, (ii) sell or otherwise dispose of, or lease or
license, any right or other asset to any other Person, or (iii) waive or
relinquish any right, except for assets acquired, leased, licensed or
disposed of by Ibex pursuant to Contracts that are not Material Contracts;
(m) Ibex shall not (i) lend money to any Person (except that Ibex may make
routine travel advances to employees in the ordinary course of business and
may, consistent with its past practices, allow employees to acquire Ibex
Common Stock in exchange for promissory notes upon exercise of Ibex
Options), or (ii) incur or guarantee any indebtedness for borrowed money;
(n) Ibex shall not (i) establish, adopt or amend any Employee Benefit Plan,
(ii) pay any bonus or make any profit-sharing payment, cash incentive
payment or similar payment to, or increase the amount of the wages, salary,
commissions, fringe benefits or other compensation or remuneration payable
to, any of its directors, officers or employees, or (iii) hire any new
employee;
(o) Ibex shall not change any of its methods of accounting or accounting
practices in any material respect;
(p) Ibex shall not make any Tax election;
(q) Ibex shall not commence or settle any material Legal Proceeding;
(r) Ibex shall not agree or commit to take any of the actions described in
clauses "(e)" through "(q)" above.
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Notwithstanding the foregoing, Ibex may take any action described in clauses
"(e)" through "(r)" above if Castelle gives its prior written consent to the
taking of such action by Ibex, which consent will not be unreasonably withheld
(it being understood that Castelle's withholding of consent to any action will
not be deemed unreasonable if Castelle determines in good faith that the taking
of such action would not be in the best interests of Castelle or would not be in
the best interests of Ibex).
4.3 Notification; Updates to Disclosure Schedule.
(a) During the Pre-Closing Period, Ibex shall promptly notify Castelle in
writing of:
(i) the discovery by Ibex of any event, condition, fact or
circumstance that occurred or existed on or prior to the date of this
Agreement and that caused or constitutes a material inaccuracy in or
breach of any representation or warranty made by Ibex or any of the
Designated Shareholders in this Agreement;
(ii) any event, condition, fact or circumstance that occurs, arises or
exists after the date of this Agreement and that would cause or
constitute a material inaccuracy in or breach of any representation or
warranty made by Ibex or any of the Designated Shareholders in this
Agreement if (A) such representation or warranty had been made as of
the time of the occurrence, existence or discovery of such event,
condition, fact or circumstance, or (B) such event, condition, fact or
circumstance had occurred, arisen or existed on or prior to the date
of this Agreement;
(iii) any breach of any covenant or obligation of Ibex or any of the
Designated Shareholders; and
(iv) any event, condition, fact or circumstance that would make the
timely satisfaction of any of the conditions set forth in Section 6 or
Section 7 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is required to be
disclosed pursuant to Section 4.3(a) requires any change in the Disclosure
Schedule, or if any such event, condition, fact or circumstance would
require such a change assuming the Disclosure Schedule were dated as of the
date of the occurrence, existence or discovery of such event, condition,
fact or circumstance, then Ibex shall promptly deliver to Castelle an
update to the Disclosure Schedule specifying such change. No such update
shall be deemed to supplement or amend the Disclosure Schedule for the
purpose of determining whether any of the conditions set forth in Section 6
has been satisfied.
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SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 Filings and Consents. As promptly as practicable after the execution of
this Agreement, each party to this Agreement (a) shall make all filings (if any)
and give all notices (if any) required to be made and given by such party in
connection with the Merger and the other transactions contemplated by this
Agreement, and (b) shall use all commercially reasonable efforts to obtain all
Consents (if any) required to be obtained (pursuant to any applicable Legal
Requirement or Contract, or otherwise) by such party in connection with the
Merger and the other transactions contemplated by this Agreement. Ibex shall
(upon request) promptly deliver to Castelle a copy of each such filing made,
each such notice given and each such Consent obtained by Ibex during the
Pre-Closing Period.
5.2 California Permit; Fairness Hearing. Promptly after the execution of
this Agreement, Ibex and Castelle shall prepare and cause to be filed with the
California Commissioner of Corporations (the "California Commissioner") a permit
application under Section 25121 of the California Corporations Code, and a
related information statement or other disclosure document (the "Information
Statement"), and shall request a hearing on the fairness of the terms and
conditions of the Merger pursuant to Section 25142 of the California
Corporations Code. The parties to this Agreement shall use all commercially
reasonable efforts to cause the California Commissioner to approve the fairness
of the terms and conditions of the Merger at such a hearing; provided, however,
that Castelle shall not be required to modify any of the terms of the Merger in
order to cause the California Commissioner to approve the fairness of such terms
and conditions. Ibex shall provide and include in the Information Statement such
information relating to Ibex as may be required pursuant to the rules of the
California Commissioner. The Information Statement shall include the
recommendation of the board of directors of Ibex in favor of the Merger.
5.3 Ibex Shareholders' Meeting. Ibex shall, in accordance with its articles
of incorporation and bylaws and the applicable requirements of the CGCL, call
and hold a special meeting of its shareholders as promptly as practicable for
the purpose of permitting them to consider and to vote upon and approve the
Merger and this Agreement (the "Ibex Shareholders' Meeting"). As soon as
permissible under the rules of the California Commissioner or the SEC (as
applicable), Ibex shall cause a copy of the Information Statement or the
Prospectus/Proxy Statement (as applicable) to be delivered to each shareholder
of Ibex who is entitled to vote at the Ibex Shareholders' Meeting. Each Signing
Shareholder shall cause all shares of the capital stock of Ibex that are owned,
beneficially or of record, by such Signing Shareholder on the record date for
Ibex Shareholders' Meeting to be voted in favor of the Merger and this Agreement
at such meeting.
5.4 Public Announcements. During the Pre-Closing Period, (a) neither Ibex
nor any of the Designated Shareholders shall (and Ibex shall not permit any of
its Representatives to) issue any press release or make any public statement
regarding this Agreement or the Merger, or regarding any of the other
transactions contemplated by this Agreement, without Castelle's prior written
consent, and (b) Castelle will use reasonable efforts to consult with Ibex prior
to issuing any press release or making any public statement regarding the
Merger.
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5.5 Pooling of Interests. During the Pre-Closing Period, no party to this
Agreement shall take any action that could reasonably be expected to have an
adverse effect on the ability of Castelle to account for the Merger as a
"pooling of interests."
5.6 Affiliate Agreements. Each Signing Shareholder shall execute and
deliver to Castelle, and Ibex shall use all commercially reasonable efforts to
cause each other Person identified on Exhibit C-2 (and any other Person that
could reasonably be deemed to be an "affiliate" of Ibex for purposes of the
Securities Act), to execute and deliver to Castelle, as promptly as practicable
after the execution of this Agreement, an Affiliate Agreement in the form of
Exhibit C-1 and a Proxy in the form of Exhibit M.
5.7 Best Efforts. During the Pre-Closing Period, (a) Ibex and the
Designated Shareholders shall use their best efforts to cause the conditions set
forth in Section 6 to be satisfied on a timely basis, and (b) Castelle shall use
its best efforts to cause the conditions set forth in Section 7 to be satisfied
on a timely basis.
5.8 Tax Matters. Prior to the Closing, (a) Castelle and Ibex shall execute
and deliver, to Cooley Godward Castro Huddleson & Tatum and to Graham & James
LLP, tax representation letters in substantially the form of Exhibit D (which
will be used in connection with the legal opinions contemplated by Sections
6.6(j) and 7.3(b), and (b) shareholders of Ibex receiving: (i) fifty percent
(50%) or more of the Castelle Common Stock issued in the Merger, and (ii) shares
of Castelle Common Stock with a fair market value greater than or equal to fifty
percent (50%) of the aggregate cash payments due under the Employment Agreements
and the Noncompetition Agreements executed by the persons identified on Exhibit
F (the "Continuity of Interest Shareholders") shall execute and deliver to
Cooley Godward Castro Huddleson & Tatum and Graham & James LLP, Continuity of
Interest Certificates in the form of Exhibit E with respect to such shares. For
purposes of this Section, the fair market value of Castelle Common Stock shall
be the closing price on the Nasdaq National System on the business day
immediately preceding the Closing Date.
5.9 Employment and Noncompetition Agreements. At or prior to the Closing,
each of the persons identified on Exhibit F shall execute and deliver to
Castelle an Employment Agreement in the form of Exhibit G (an "Employment
Agreement") and (if indicated on Exhibit F) a Noncompetition Agreement in the
form of Exhibit H (a "Noncompetition Agreement").
5.10 FIRPTA Matters. At the Closing, (a) Ibex shall deliver to Castelle a
statement (in such form as may be reasonably requested by counsel to Castelle)
conforming to the requirements of Section 1.897 - 2(h)(1)(i) of the United
States Treasure Regulations, and (b) Ibex shall deliver to the Internal Revenue
Service the notification required under Section 1.897-2(h)(2) of the United
States Treasury Regulations.
5.11 Acquisition Proposals. From the date hereof until the earlier of the
termination of this Agreement or the consummation of the Merger, Castelle and
Ibex will not, and will cause their respective officers, directors, employees,
agents and representatives not to, directly or indirectly, encourage, solicit,
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accept, initiate or conduct discussions or negotiations with, provide any
information to, or enter into any agreement with, any corporation, partnership,
limited liability company, person or other entity or group concerning the
acquisition of all or a substantial part of the assets, business or capital
stock of Castelle or Ibex, whether through purchase, merger, consolidation,
exchange or any other business combination (each of the foregoing, an
"Acquisition Proposal"). Notwithstanding anything to the contrary in the
preceding sentence, nothing herein shall prevent Castelle or Ibex and its
officers and directors, from responding to and considering unsolicited firm
offers for any such transaction from other persons if and to the extent that, in
the written opinion of Castelle or Ibex outside counsel, respectively, failure
to do so would be reasonably likely to constitute a violation of applicable law
or a breach of the fiduciary duties of that company's directors to its
shareholders. Each company shall immediately provide written notice to the other
company of the terms and other details of any such unsolicited inquiry or
proposal relating to an Acquisition Proposal. In the event that Castelle or Ibex
or any of their officers or directors enters into any such negotiations or
discussions for any reason which thereby constitute a breach of this Section
5.11, such company shall immediately reimburse the other company for all
expenses and costs incurred by that company in connection with the transactions
contemplated by this Agreement. In the event that Castelle or Ibex any of their
officers or directors shall enter into any letter of intent, understanding or
other agreement with another party relating to the acquisition of all or a
substantial part of the assets, business or capital stock of Castelle or Ibex,
as, applicable, whether through purchase, merger, consolidation, exchange or any
other business combination, either in violation of the no-shop agreement set
forth in this Section or within nine (9) months after termination of this
Agreement for any reason, then immediately upon entering into such letter of
intent, understanding or other agreement, such company shall pay to Castelle or
Ibex, as applicable, a termination fee in the amount of $250,000 (the
"Termination Fee"); provided, however, that such Termination Fee shall not be
payable if, prior to the entry by such company into such letter of intent,
understanding or other agreement, Castelle or Ibex, as applicable has
unilaterally declined to close the Merger. The parties acknowledge and agree
that the expense reimbursement obligation and Termination Fee described in this
Section shall not be the exclusive remedy to the injured party in the event of a
breach of this Agreement, and, in any such event, the injured party shall be
entitled, in addition to receiving such payments, to equitable remedies,
including, without limitation, specific performance and enjoining of any actions
determined to be in breach of this Agreement.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF CASTELLE
The obligations of Castelle to effect the Merger and otherwise consummate
the transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of each of the following conditions:
6.1 Satisfactory Completion of Pre-Acquisition Review. Castelle shall have
satisfactorily completed its pre-acquisition investigation and review of Ibex'
business, condition, assets, liabilities, operations, financial performance, net
income and prospects and shall be satisfied with the results of that
investigation and review.
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6.2 Accuracy of Representations. Each of the representations and warranties
made by Ibex and the Designated Shareholders in this Agreement and in each of
the other agreements and instruments delivered to Castelle in connection with
the transactions contemplated by this Agreement shall have been accurate in all
material respects as of the date of this Agreement, and shall be accurate in all
material respects as of the Scheduled Closing Time as if made at the Scheduled
Closing Time (without giving effect to any update to the Disclosure Schedule).
6.3 Performance of Covenants. All of the covenants and obligations that
Ibex and the Designated Shareholders are required to comply with or to perform
at or prior to the Closing shall have been complied with and performed in all
respects.
6.4 Shareholder Approval. The principal terms of the Merger shall have been
duly approved by the affirmative vote of at least (a) 98% of the shares of Ibex
Common Stock entitled to vote with respect thereto, (b) all of the shares of
Series A Preferred Stock entitled to vote with respect thereto, and 51% of the
shares of Castelle Common Stock entitled to vote with respect thereto.
6.5 Consents. All Consents required to be obtained in connection with the
Merger and the other transactions contemplated by this Agreement (including the
Consents identified in Part 2.21 of the Disclosure Schedule) shall have been
obtained and shall be in full force and effect.
6.6 Agreements and Documents. Castelle shall have received the following
agreements and documents (referred to herein as the "Transactional Documents"),
each of which shall be in full force and effect:
(a) Affiliate Agreements in the form of Exhibit C-1 and Proxies in the form
of Exhibit M, executed by the Persons identified on Exhibit C-2 and by any
other Person who could reasonably be deemed to be an "affiliate" of Ibex
for purposes of the Securities Act;
(b) Employment Agreements in the form of Exhibit G, executed by the
individuals identified on Exhibit F;
(c) Noncompetition Agreements in the form of Exhibit H, executed by the
individuals identified on Exhibit F;
(d) confidential invention and assignment agreements, reasonably
satisfactory in form and content to Castelle, executed by all current
employees of Ibex and by all current consultants and independent
contractors to Ibex who have not already signed such agreements (including
the current employees, consultants and independent contractors identified
in Part 2.9(f) of the Disclosure Schedule);
(e) the statement referred to in Section 5.10(a), executed by Ibex;
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(f) Continuity of Interest Certificates in the form of Exhibit E, executed
by the Continuity of Interest Shareholders;
(g) an estoppel certificate, dated as of a date not more than five days
prior to the Closing Date and satisfactory in form and content to Castelle,
executed by Cameron & Associates, 629 J Street, Sacramento, California
95812 and Shelter Bay Company, 655 Redwood Highway, Suite 177, Mill Valley,
California 94941.
(h) a legal opinion of Graham & James LLP, dated as of the Closing Date, in
the form of Exhibit I;
(i) a legal opinion of Cooley Godward Castro Huddleson & Tatum, dated as of
the Closing Date, in the form of Exhibit J;
(j) a legal opinion of Cooley Godward Castro Huddleson & Tatum, dated as of
the Closing Date and reasonably satisfactory to Ibex and its counsel, to
the effect that the Merger will constitute a reorganization within the
meaning of Section 368 of the Code (it being understood that, in rendering
such opinion, such counsel may rely upon the tax representation letters
referred to in Section 5.8(a) and the Continuity of Interest Certificates
referred to in Section 5.8(b));
(k) a letter from Coopers & Lybrand LLP, dated as of the Closing Date,
confirming that (a) Castelle may account for the Merger as a "pooling of
interests" in accordance with generally accepted accounting principles,
Accounting Principles Board Opinion No. 16 and all published rules,
regulations and policies of the SEC, and (b) confirming that no transaction
entered into by Ibex, and no other fact or circumstance relating to Ibex,
will prevent Castelle from accounting for the Merger as a "pooling of
interests" in accordance with generally accepted principles, Accounting
Principles Board Opinion No. 16 and all published rules, regulations and
policies of the SEC; and
(l) a certificate executed by the Designated Shareholders and containing
the representation and warranty of each Designated Shareholder that each of
the representations and warranties set forth in Section 2 is accurate in
all respects as of the Closing Date as if made on the Closing Date and that
the conditions set forth in Sections 6.2, 6.3, 6.4 and 6.5 have been duly
satisfied (the "Designated Shareholders' Closing Certificate").
6.7 FIRPTA Compliance. Ibex shall have filed with the Internal Revenue
Service the notification referred to in Section 5.10(b).
6.8 Securities Compliance. Either:
(a) the California Commissioner shall have issued a permit under Section
25121 of the California Corporations Code (following a hearing upon the
fairness of the terms and conditions of the Merger, conducted pursuant to
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Section 25142 of the California Corporations Code) for the issuance of the
Castelle Common Stock to be issued in the Merger, and all applicable
requirements of Section 3(a)(10) of the Securities Act shall have been
satisfied, or
(b) a registration statement on Form S-4 covering the Castelle Common Stock
to be issued in the Merger shall have been declared effective in accordance
with the provisions of the Securities Act, and no stop order shall have
been issued by the SEC with respect to the S-4 Registration Statement.
6.9 No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall have
been issued by any court of competent jurisdiction and remain in effect, and
there shall not be any Legal Requirement enacted or deemed applicable to the
Merger that makes consummation of the Merger illegal.
6.10 Comfort Letter. Should Castelle elect to file an S-4 Registration
Statement, Castelle shall have received a letter from Coopers & Lybrand LLP,
dated no more than two business days before the date on which the S-4
Registration Statement became effective (and reasonably satisfactory in form and
substance to Castelle), that is customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the S-4 Registration Statement.
6.11 No Legal Proceedings. No Person shall have commenced or threatened to
commence any Legal Proceeding challenging or seeking the recovery of a material
amount of damages in connection with the Merger or seeking to prohibit or limit
the exercise by Castelle of any material right pertaining to its acquisition of
Ibex.
6.12 Amendment of Fourth Amended and Restated Registration Rights
Agreement. Amendment of the Fourth Amended and Restated Registration Rights
Agreement to include the registration rights granted the Signing Shareholders
shall have been approved by Silicon Valley Bank and the holders of a majority of
the shares necessary to cause such amendment.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF IBEX
The obligations of Ibex to effect the Merger and otherwise consummate the
transactions contemplated by this Agreement are subject to the satisfaction, at
or prior to the Closing, of the following conditions:
7.1 Accuracy of Representations. Each of the representations and warranties
made by Castelle in this Agreement shall have been accurate in all material
respects as of the date of this Agreement (without giving effect to any
materiality or similar qualifications contained in such representations and
warranties), and shall be accurate in all material respects as of the Scheduled
Closing Time as if made at the Scheduled Closing Time (without giving effect to
any materiality or similar qualifications contained in such representations and
warranties).
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7.2 Performance of Covenants. All of the covenants and obligations that
Castelle is required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all respects.
7.3 Documents. Ibex shall have received:
(a) a legal opinion of Cooley Godward Castro Huddleson & Tatum, dated as of
the Closing Date, in the form of Exhibit J;
(b) a legal opinion of Graham & James LLC, dated as of the Closing Date and
reasonably satisfactory to Castelle and its counsel, to the effect that the
Merger will constitute a reorganization within the meaning of Section 368
of the Code (it being understood that, in rendering such opinion, such
counsel may rely upon the tax representation letters referred to in Section
5.8(a) and the Continuity of Interest Certificates referred to in Section
5.8(b);
(c) Continuity of Interest Certificates in the form of Exhibit E, executed
by the Continuity of Interest Shareholders.
7.4 Shareholder Approval. The principal terms of the Merger shall have been
duly approved by the affirmative vote of at least (a) 98% of the shares of Ibex
Common Stock entitled to vote with respect thereto, (b) all of the shares of
Series A Preferred Stock entitled to vote with respect thereto, and 51% of the
shares of Castelle Common Stock entitled to vote with respect thereto.
7.5 No Restraints. No temporary restraining order, preliminary or permanent
injunction or other order preventing the consummation of the Merger shall have
been issued by any court of competent jurisdiction and remain in effect, and
there shall not be any Legal Requirement enacted or deemed applicable to the
Merger that makes consummation of the Merger illegal.
7.6 Consents. All Consents required to be obtained in connection with the
Merger and the other transactions contemplated by this Agreement (including the
Consents identified in Part 3.15 of the Disclosure Schedule) shall have been
obtained and shall be in full force and effect.
7.7 Securities Compliance. Either:
(a) the California Commissioner shall have issued a permit under Section
25121 of the California Corporations Code (following a hearing upon the
fairness of the terms and conditions of the Merger, conducted pursuant to
Section 25142 of the California Corporations Code) for the issuance of the
Castelle Common Stock to be issued in the Merger, and all applicable
requirements of Section 3(a)(10) of the Securities Act have been satisfied,
or
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(b) a registration statement on Form S-4 covering the Castelle Common Stock
to be issued in the Merger shall have been declared effective in accordance
with the provisions of the Securities Act, and no stop order shall have
been issued by the SEC with respect to the S-4 Registration Statement.
7.8 No Legal Proceedings. No Person shall have commenced or threatened to
commence any Legal Proceeding challenging or seeking the recovery of a material
amount of damages in connection with the Merger or seeking to prohibit or limit
the exercise by Castelle of any material right pertaining to its acquisition of
Ibex.
SECTION 8. TERMINATION
8.1 Termination Events. This Agreement may be terminated prior to the
Closing:
(a) by Castelle if Castelle reasonably determines that the timely
satisfaction of any condition set forth in Section 6 has become impossible
(other than as a result of any failure on the part of Castelle to comply
with or perform any covenant or obligation of Castelle set forth in this
Agreement);
(b) by Ibex if Ibex reasonably determines that the timely satisfaction of
any condition set forth in Section 7 has become impossible (other than as a
result of any failure on the part of Ibex or any of the Designated
Shareholders to comply with or perform any covenant or obligation set forth
in this Agreement or in any other agreement or instrument delivered to
Castelle);
(c) by Castelle at or after the Scheduled Closing Time if any condition set
forth in Section 6 has not been satisfied by the Scheduled Closing Time;
(d) by Ibex at or after the Scheduled Closing Time if any condition set
forth in Section 7 has not been satisfied by the Scheduled Closing Time;
(e) by Castelle if the Closing has not taken place on or before December
30, 1996 (other than as a result of any failure on the part of Castelle to
comply with or perform any covenant or obligation of Castelle set forth in
this Agreement);
(f) by Ibex if the Closing has not taken place on or before December 30,
1996 (other than as a result of the failure on the part of Ibex or any of
the Designated Shareholders to comply with or perform any covenant or
obligation set forth in this Agreement or in any other agreement or
instrument delivered to Castelle); or
(g) by the mutual consent of Castelle and Ibex.
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8.2 Termination Procedures. If Castelle wishes to terminate this Agreement
pursuant to Section 8.1(a), Section 8.1(c) or Section 8.1(e), Castelle shall
deliver to Ibex a written notice stating that Castelle is terminating this
Agreement and setting forth a brief description of the basis on which Castelle
is terminating this Agreement. If Ibex wishes to terminate this Agreement
pursuant to Section 8.1(b), Section 8.1(d) or Section 8.1(f), Ibex shall deliver
to Castelle a written notice stating that Ibex is terminating this Agreement and
setting forth a brief description of the basis on which Ibex is terminating this
Agreement.
8.3 Effect of Termination. If this Agreement is terminated pursuant to
Section 8.1, all further obligations of the parties under this Agreement shall
terminate; provided, however, that: (a) neither Ibex nor Castelle shall be
relieved of any obligation or liability arising from any prior breach by such
party of any provision of this Agreement; (b) the parties shall, in all events,
remain bound by and continue to be subject to the provisions set forth in
Sections 5.11 and 10; and (c) Castelle and Ibex shall, in all events, remain
bound by and continue to be subject to Section 5.4.
SECTION 9. INDEMNIFICATION, ETC.
9.1 Survival of Representations, Etc.
(a) The representations and warranties made by the Designated Shareholders
(including the representations and warranties set forth in Section 2 and
the representations and warranties set forth in the Designated
Shareholders' Closing Certificate) shall survive the Closing and shall
expire on the first anniversary of the Closing Date; provided, however,
that the representations and warranties as to all items expected to be
encountered in the audit process shall terminate when Castelle publishes
its audited financial statements for its fiscal year which includes the
Closing Date, and further provided, however, that if, at any time prior to
the termination of a specific representation or warranty, any Indemnitee
(acting in good faith) delivers to Designated Shareholders a written notice
alleging the existence of an inaccuracy in or a breach of such
representation or warranty made by the Designated Shareholders (and setting
forth in reasonable detail the basis for such Indemnitee's belief that such
an inaccuracy or breach may exist) and asserting a claim for recovery under
Section 9.2 based on such alleged inaccuracy or breach, then the claim
asserted in such notice shall survive the termination of such specific
representation or warranty until such time as such claim is fully and
finally resolved. All representations and warranties made by Castelle shall
terminate and expire as of the Effective Time, and any liability of
Castelle with respect to such representations and warranties shall
thereupon cease.
(b) The representations, warranties, covenants and obligations of Ibex and
the Designated Shareholders, and the rights and remedies that may be
exercised by the Indemnitees, shall not be limited or otherwise affected by
or as a result of any information furnished to, or any investigation made
by or knowledge of, any of the Indemnitees or any of their Representatives.
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(c) For purposes of this Agreement, each statement or other item of
information set forth in the Disclosure Schedule or in any update to the
Disclosure Schedule shall be deemed to be a representation and warranty
made by Ibex and the Designated Shareholders in this Agreement.
9.2 Indemnification by Designated Shareholders. From and after the
Effective Time (but subject to Section 9.1(a)), the Designated Shareholders,
severally, to the extent of each such shareholder's pro rata interest in the
Escrowed Shares, shall hold harmless and indemnify each of the Indemnitees from
and against, and shall compensate and reimburse each of the Indemnitees for, any
Damages which are directly or indirectly suffered or incurred by any of the
Indemnitees or to which any of the Indemnitees may otherwise become subject
(regardless of whether or not such Damages relate to any third-party claim) and
which arise from or as a result of, or are directly or indirectly connected
with: (i) any inaccuracy in or breach of any representation or warranty set
forth in Section 2 or in the Designated Shareholders' Closing Certificate
(without giving effect to any "Material Adverse Effect" or other materiality
qualification or any similar qualification contained or incorporated directly or
indirectly in such representation or warranty, but giving effect to any update
to the Disclosure Schedule delivered by Ibex to Castelle prior to the Closing);
(ii) any breach of any covenant or obligation of Ibex or any of the Designated
Shareholders (including the covenants set forth in Sections 4 and 5); or (iii)
any Legal Proceeding relating to any inaccuracy or breach of the type referred
to in clause "(i)" or "(ii)" above (including any Legal Proceeding commenced by
any Indemnitee for the purpose of enforcing any of its rights under this Section
9).
9.3 Threshold; Ceiling. The Designated Shareholders shall not be required
to make any indemnification payment pursuant to Section 9.2(a) for any
inaccuracy in or breach of any of their representations and warranties set forth
in Section 2 until such time as the total amount of all Damages (including the
Damages arising from such inaccuracy or breach and all other Damages arising
from any other inaccuracies in or breaches of any representations or warranties)
that have been directly or indirectly suffered or incurred by any one or more of
the Indemnitees, or to which any one or more of the Indemnitees has or have
otherwise become subject, exceeds $25,000 in the aggregate. (If the total amount
of such Damages exceeds $25,000, then the Indemnitees shall be entitled to be
indemnified against and compensated and reimbursed for the aggregate amount of
Damages, including the initial $25,000.)
9.4 Escrow Fund. Notwithstanding Section 1.9 of this Agreement and in
accordance with the provisions of the Escrow Agreement attached hereto as
Exhibit L (the "Escrow Agreement), the Designated Shareholders shall deposit
Castelle Common Stock equal to ten percent (10%) of the shares of Castelle
Common Stock to be received by the Ibex shareholders as a result of the
transactions contemplated by the Agreement (the "Escrowed Shares") with the
Escrow Agent to be held pursuant to the terms of the Escrow Agreement for a
period of one year from the date of the Closing. Upon compliance with the terms
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of Section 9 of this Agreement and the Escrow Agreement, and subject to Section
9.3 above, the Indemnitees shall be entitled to obtain indemnity from the Escrow
Fund for Damages covered by Section 9.
9.5 No Contribution. Each Designated Shareholder waives, and acknowledges
and agrees that he shall not have and shall not exercise or assert (or attempt
to exercise or assert), any right of contribution, right of indemnity or other
right or remedy against the Surviving Corporation in connection with any
indemnification obligation or any other liability to which he may become subject
under or in connection with this Agreement or the Designated Shareholders'
Closing Certificate.
9.6 Interest. Any Designated Shareholder who is required to hold harmless,
indemnify, compensate or reimburse any Indemnitee pursuant to this Section 9
with respect to any Damages shall also be liable to such Indemnitee for interest
on the amount of such Damages (for the period commencing as of the date on which
such Designated Shareholder first received notice of a claim for recovery by
such Indemnitee and ending on the date on which the liability of such Designated
Shareholder to such Indemnitee is fully satisfied by such Designated
Shareholder) at a floating rate equal to the rate of interest publicly announced
by Bank of America, N.T. & S.A. from time to time as its prime, base or
reference rate.
9.7 Defense of Third Party Claims. In the event of the assertion or
commencement by any Person of any claim or Legal Proceeding (whether against
Castelle or against any other Person) with respect to which any of the
Designated Shareholders may become obligated to hold harmless, indemnify,
compensate or reimburse any Indemnitee pursuant to this Section 9, Castelle
shall have the right, at its election, to proceed with the defense of such claim
or Legal Proceeding on its own. If Castelle so proceeds with the defense of any
such claim or Legal Proceeding:
(a) all reasonable expenses relating to the defense of such claim or Legal
Proceeding shall be borne and paid exclusively by the Designated
Shareholders;
(b) each Designated Shareholder shall make available to Castelle any
documents and materials in his possession or control that may be necessary
to the defense of such claim or Legal Proceeding; and
(c) Castelle shall have the right to settle, adjust or compromise such
claim or Legal Proceeding with the consent of the Designated Shareholders'
Agent (as defined in Section 10.1); provided, however, that such consent
shall not be unreasonably withheld.
Castelle shall give the Designated Shareholders' Agent prompt notice of the
commencement of any such Legal Proceeding against Castelle; provided, however,
that any failure on the part of Castelle to so notify the Designated
Shareholders' Agent shall not limit any of the obligations of the Designed
Shareholders under this Section 9 (except to the extent such failure materially
prejudices the defense of such Legal Proceeding).
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9.8 Exercise of Remedies by Indemnitees Other Than Castelle. No Indemnitee
(other than Castelle or any successor thereto or assign thereof) shall be
permitted to assert any indemnification claim or exercise any other remedy under
this Agreement unless Castelle (or any successor thereto or assign thereof)
shall have consented to the assertion of such indemnification claim or the
exercise of such other remedy. Such consent shall be evidenced by the submission
by Castelle of such claim to the Designated Shareholders' Representative.
9.9 Claims Against Consideration. Upon delivery to the Designated
Shareholders' Agent (with a copy to Escrow Agent, as such term is defined in the
form of Escrow Agreement attached hereto as Exhibit L) of a certificate signed
by any officer of Castelle (an "Officer's Certificate"):
(a) stating that an Indemnitee has paid or properly accrued or reasonably
anticipates that it will have to pay or accrue Damages in an aggregate
stated amount to which an Indemnitee is entitled to indemnity pursuant to
this Agreement (the "Claim Amount"); and
(b) specifying in reasonable detail the individual items of Damages
included in the amount so stated, the date each such item was paid or
properly accrued, or the basis for such anticipated liability, and the
nature of the misrepresentation, breach of warranty, legal proceeding or
claim to which such item is related, the Indemnitee shall be entitled to
indemnification for such Damages.
(c) Castelle and the Indemnitees shall use reasonable efforts to provide
such Officer's Certificate within a reasonable time following the date of
payment, accrual or reasonable anticipation of liability, as the case may
be.
9.10 Objections to Claims. For a period of twenty (20) business days after
delivery of any Officer's Certificate to the Designated Shareholders' Agent, the
Indemnitees shall not take further actions to seek indemnification. After the
expiration of such twenty (20 business day period, the Indemnitees shall become
irrevocably entitled to seek indemnification under the terms of this Agreement,
if the Designated Shareholders' Agent shall not have objected in writing to the
claim made in the Officer's Certificate, and shall not have delivered such
written objection to Castelle prior to the expiration of such ten day period.
9.11 Resolution of Conflicts; Arbitration
(a) In case the Designated Shareholders' Agent so objects in writing to the
indemnity of the Indemnitees in respect of any claim or claims made in any
Officer's Certificate, the Designated Shareholders' Agent and the
Indemnitees shall attempt in good faith to agree upon the rights of the
respective parties with respect to each of such claims. If the Designated
Shareholders' Agent and the Indemnitees so agree, a memorandum setting
forth such agreement shall be prepared and signed by the Indemnitees and
the Designated Shareholders' Agent, which agreement shall be binding and
conclusive on the Indemnitees and the Designated Shareholders (a "Response
Notice").
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(b) If no such agreement can be reached after good faith negotiation,
either the Indemnitees or the Designated Shareholders' Agent may demand
arbitration of the matter by serving a written demand for arbitration on
the other (the "Demand for Arbitration"); provided, however, that if the
amount of the Damages is at issue in pending litigation with a third party,
arbitration shall not be commenced until such amount is ascertained or both
parties agree to arbitration. The decision of the arbitrator so selected as
to the validity and amount of any claim in such Officer's Certificate shall
be binding and conclusive upon the Indemnitees and the Designated
Shareholders.
(c) Any such arbitration shall be held in San Francisco, California before
the single arbitrator under the commercial arbitration rules then in effect
of the American Arbitration Association ("AAA"), except as modified herein.
(i) Selection. The single arbitrator shall have at least five years of
experience in commercial dispute resolution. The arbitrator shall be
selected by mutual agreement between the Indemnitees and the
Designated Shareholders' Agent, but if they cannot agree upon the
selection within ten days after Demand for Arbitration is given, the
selection shall occur as follows: (a) the party initiating arbitration
shall obtain a list of seven arbitrators, each of whom shall have the
requisite experience described above, from the San Francisco office of
the AAA and simultaneously give a copy thereof to the other party; (b)
each party alternately shall strike three names from the list, with
the other party striking first; and (c) the last remaining arbitrator
shall be deemed selected by the parties as a single arbitrator. If a
party refuses for ten or more days to complete this selection, the
other party shall select a name from the list to be the arbitrator at
the end of such ten day period.
(ii) Procedure. Arbitration shall be conducted in the following
manner:
(a) If the responding party desires to file a response and/or
counterclaim to the Demand for Arbitration, it must do so within
ten calendar days after service of the Demand for Arbitration.
Any response to a counterclaim shall be filed and served within
ten calendar days after service of the counterclaim, but no such
response shall be required. A failure to file a counterclaim or
response will not operate to delay the arbitration proceedings.
(b) After the filing of the Demand for Arbitration, any
counterclaim and any responses thereto, no further claims or
counterclaims may be made except by order of the arbitrator made
on a duly noticed motion to the arbitrator.
(c) The arbitration shall commence as soon as possible but in no
event earlier than ten days after selection of the arbitrator and
in no event later than 30 days following the filing of the last
response under (b) above, or if there is none, following the
Demand for Arbitration.
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(d) the Indemnitees and the Designated Shareholders'
Representative (acting on behalf of the Designated Shareholders
and being entitled to reimbursement under Section 10.1) shall
each pay an equal share of the fees and expenses of any person
serving as an arbitrator. The arbitrator, in his or her
discretion, shall be authorized to determine whether a party is
the prevailing party, and if so, to award that prevailing party
reimbursement for its share of the costs and fees of the
arbitrator, and reimbursement for its reasonable attorneys' fees,
disbursements and costs incurred in such arbitration.
(e) The arbitrator, upon application of any party, shall hold a
pre-hearing conference with the parties for the purpose of
narrowing the issues, establishing a discovery schedule,
arranging an acceptable procedure for any law and motion
proceedings and in all respects arranging for the most
expeditious hearing possible of the matters in dispute. Such
conference shall be held as soon as possible following selection
of the arbitrator, any counterclaim thereto and any response to
such counterclaim (if any), but in no event later than 20 days
following the filing of the last response under (b) above, or if
there is none, following the Demand for Arbitration.
(f) Discovery shall be conducted in accordance with Part 3, Title
9, Chapter 3 of the California Code of Civil Procedure, as
amended from time to time.
(g) Except as expressly provided in this Section 9.11.3, the
arbitration hearing shall be conducted according to the
discretion of the arbitrator. Judicial rules relating to the
order of proof, the conduct of the hearing and the presentation
and admissibility of evidence need not be followed. Any relevant
information, including hearsay, may be admitted by the arbitrator
regardless of its admissibility as evidence in court, but the
arbitrator also shall be authorized to exclude evidence. The
parties shall have the power to subpoena witnesses to attend the
arbitration hearing pursuant to California Code of Civil
Procedure Section 1282.6. The arbitrator shall have full power to
give such directions and to make such orders in the conduct of
the arbitration, including setting pre-arbitration procedures and
scheduling any motions to correct or amend the arbitration award,
as he or she deems just and appropriate, including specifically
the right to make such reasonable extensions of time as the
arbitrator determines are necessary to accommodate discovery,
prearbitration procedures, motions, settlement discussions, and
other such matters, but not in any event to exceed 30 days in the
aggregate, from the date the arbitration was otherwise scheduled
to commence as provided above.
(h) The arbitrator shall, within five days after the conclusion
of the arbitration hearing, issue a written decision and a brief
written statement of decision describing the reasons for the
decision, including the calculation of any compensatory damages
awarded.
(i) Absent the filing of an application to correct or vacate the
arbitration award as provided in section (j) below, each party
shall fully perform and satisfy the terms of the arbitration
decision within 15 days of the service of the decision.
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(j) The decision of the arbitrator shall be final and binding
upon the parties without appeal or review except as permitted by
California law; provided, however, that either party may, within
ten days of the service of the decision, file an application to
correct or vacate the arbitration award or an application for de
novo review on all questions of law based on the arbitrator's
finding of fact (which are deemed for such purpose to be
stipulated by the parties), in either case under California Code
of Civil Procedure Section 1285 et seq. Any party may apply to
any court of competent jurisdiction for confirmation and entry of
judgment based on said award. In connection with any application
to review questions of law or to confirm, correct or vacate the
arbitration award, any appeal of any order rendered pursuant to
any such application, or any other action required to enforce the
arbitration award, the prevailing party shall be entitled to
recover its reasonable attorneys' fees, disbursements and costs
incurred in such post-award activities.
(d) The arbitrator shall not have the power to vary the provisions of this
Agreement. The parties hereby irrevocably waive, and the arbitrator shall
have no power to award, any damages for pain and suffering or punitive
damages.
(e) By signing below, each party acknowledges that (a) the arbitration
provisions of this Agreement require the party to give up rights to have
the dispute litigated in a court or jury trial, and to give up rights to
discovery and most grounds for appeal, and (b) the party may be compelled
to arbitrate if the party refuses to do so.
SECTION 10. MISCELLANEOUS PROVISIONS
10.1 Designated Shareholders' Agent. The Designated Shareholders hereby
irrevocably appoint Ney Grant as their agent for purposes of Section 9 (the
"Designated Shareholders' Agent"), and Ney Grant hereby accepts his appointment
as the Designated Shareholders' Agent. Castelle shall be entitled to deal
exclusively with the Designated Shareholders' Agent on all matters relating to
Section 9, and shall be entitled to rely conclusively (without further evidence
of any kind whatsoever) on any document executed or purported to be executed on
behalf of any Designated Shareholder by the Designated Shareholders' Agent, and
on any other action taken or purported to be taken on behalf of any Designated
Shareholder by the Designated Shareholders' Agent, as fully binding upon such
Designated Shareholder. If the Designated Shareholders' Agent shall die, become
disabled or otherwise be unable to fulfill his responsibilities as agent of the
Designated Shareholders, then the Designated Shareholders shall, within ten days
after such death or disability, appoint a successor agent and, promptly
thereafter, shall notify Castelle of the identity of such successor. Any such
successor shall become the "Designated Shareholders' Agent" for purposes of
Section 9 and this Section 10.1. The Designated Shareholders' Agent shall
receive no compensation for his services, but shall be reimbursed for his
reasonable out-of-pocket expenses by the Designated Shareholders in proportion
to the number of shares of Castelle Common Stock received by each of them
pursuant to this Agreement. If for any reason there is no Designated
Shareholders' Agent at any time, all references herein to the Designated
Shareholders' Agent shall be deemed to refer to the Designated Shareholders.
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10.2 Further Assurances. Each party hereto shall execute and cause to be
delivered to each other party hereto such instruments and other documents, and
shall take such other actions, as such other party may reasonably request (prior
to, at or after the Closing) for the purpose of carrying out or evidencing any
of the transactions contemplated by this Agreement.
10.3 Fees and Expenses. Each party to this Agreement shall bear and pay all
fees, costs and expenses (including legal fees and accounting fees) that have
been incurred or that are incurred by such party in connection with the
transactions contemplated by this Agreement, including all fees, costs and
expenses incurred by such party in connection with or by virtue of (a) the
investigation and review conducted by Castelle and its Representatives with
respect to Ibex's business (and the furnishing of information to Castelle and
its Representatives in connection with such investigation and review), (b) the
negotiation, preparation and review of this Agreement (including the Disclosure
Schedule) and all agreements, certificates, opinions and other instruments and
documents delivered or to be delivered in connection with the transactions
contemplated by this Agreement, (c) the preparation and submission of any filing
or notice required to be made or given in connection with any of the
transactions contemplated by this Agreement, and the obtaining of any Consent
required to be obtained in connection with any of such transactions, and (d) the
consummation of the Merger; provided, however, that Castelle shall reimburse
Ibex for the first $25,000 of audit fees, costs and expenses invoiced by Coopers
& Lybrand LLP and incurred by Ibex in the audit by Coopers & Lybrand LLP of
Ibex's fiscal years ended December 31, 1995 and 1994, as well as one-half of any
additional audit fees, costs and expenses invoiced by Coopers & Lybrand LLP.
10.4 Attorneys' Fees. If any action or proceeding relating to this
Agreement or the enforcement of any provision of this Agreement is brought
against any party hereto, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
10.5 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
if to Castelle:
Attention: President
Castelle
3255-3 Scott Boulevard
Santa Clara, California 95054
Facsimile #: (408) 654-4699
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with a copy to:
Samuel M. Livermore
Cooley Godward Castro Huddleson & Tatum
One Maritime Plaza, Suite 2000
San Francisco, California 94111
Facsimile #: (415) 951-3698
if to Ibex:
Attention: President
Ibex Technologies, Inc.
4921 R.J. Mathews Pkwy.
El Dorado Hills, California 95762
Facsimile #: (916) 939-8899
with a copy to:
Gilles S. Attia
Graham & James LLP
400 Capitol Mall, 24th Floor
Sacramento, California 95814
Facsimile #: (916) 441-6700
if to any of the Designated Shareholders:
Ney Grant
2725 Romer Boulevard
Pollock Pines, California 95726
Facsimile #: (916) 647-2055
if to Teodoro Gimenez, Tucha Limited, or Newark Holding S.A.:
Teodoro Ramos Gimenez
Tecom Sistemas
Rua Jeronimo de Lemos, 162
Rio de Janeiro, RJ
20560-090 Brazil
Facsimile #: 011-55-21-577-1125
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with a copy to:
Peter N. Barnes-Brown
Morse, Barnes-Brown & Pendleton, P.C.
Reservoir Place
1601 Trapelo Road
Waltham, Massachusetts 02154
Facsimile #: (617) 622-5933
10.6 Confidentiality. Without limiting the generality of anything contained
in Section 5.4, on and at all times after the Closing Date, each Designated
Shareholder shall keep confidential, and shall not use or disclose to any other
Person, any non-public document or other non-public information in such
Designated Shareholder's possession that relates to the business of Ibex or
Castelle.
10.7 Time of the Essence. Time is of the essence of this Agreement.
10.8 Headings. The underlined headings contained in this Agreement are for
convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
10.9 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
10.10 Governing Law. This Agreement shall be construed in accordance with,
and governed in all respects by, the internal laws of the State of California
(without giving effect to principles of conflicts of laws).
10.11 Successors and Assigns. This Agreement shall be binding upon: Ibex
and its successors and assigns (if any); the Designated Shareholders and their
respective personal representatives, executors, administrators, estates, heirs,
successors and assigns (if any); and Castelle and its successors and assigns (if
any). This Agreement shall inure to the benefit of: Ibex; Ibex's shareholders
(to the extent set forth in Section 1.5); the holders of assumed Ibex Options
(to the extent set forth in Section 1.6); Castelle; the other Indemnitees
(subject to Section 9.8); and the respective successors and assigns (if any) of
the foregoing. Subsequent to the Closing Date, Castelle may freely assign any or
all of its rights under this Agreement (including its indemnification rights
under Section 9), in whole or in part, to any other Person without obtaining the
consent or approval of any other party hereto or of any other Person.
10.12 Remedies Cumulative; Specific Performance. The rights and remedies of
the parties hereto shall be cumulative (and not alternative). The parties to
this Agreement agree that, in the event of any breach or threatened breach by
any party to this Agreement of any covenant, obligation or other provision set
forth in this Agreement for the benefit of any other party to this Agreement,
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such other party shall be entitled (in addition to any other remedy that may be
available to it) to (a) a decree or order of specific performance or mandamus to
enforce the observance and performance of such covenant, obligation or other
provision, and (b) an injunction restraining such breach or threatened breach.
10.13 Waiver.
(a) No failure on the part of any Person to exercise any power, right,
privilege or remedy under this Agreement, and no delay on the part of any
Person in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right,
privilege or remedy shall preclude any other or further exercise thereof or
of any other power, right, privilege or remedy.
(b) No Person shall be deemed to have waived any claim arising out of this
Agreement, or any power, right, privilege or remedy under this Agreement,
unless the waiver of such claim, power, right, privilege or remedy is
expressly set forth in a written instrument duly executed and delivered on
behalf of such Person; and any such waiver shall not be applicable or have
any effect except in the specific instance in which it is given.
10.14 Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of all of the parties hereto.
10.15 Severability. In the event that any provision of this Agreement, or
the application of any such provision to any Person or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to Persons or circumstances other than those as to which it is determined to be
invalid, unlawful, void or unenforceable, shall not be impaired or otherwise
affected and shall continue to be valid and enforceable to the fullest extent
permitted by law.
10.16 Parties in Interest. Except for the provisions of Sections 1.5, 1.6
and 9, none of the provisions of this Agreement is intended to provide any
rights or remedies to any Person other than the parties hereto and their
respective successors and assigns (if any).
10.17 Entire Agreement. This Agreement and the other agreements referred to
herein set forth the entire understanding of the parties hereto relating to the
subject matter hereof and thereof and supersede all prior agreements and
understandings among or between any of the parties relating to the subject
matter hereof and thereof.
10.18 Construction.
(a) For purposes of this Agreement, whenever the context requires: the
singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender
shall include the masculine and neuter genders; and the neuter gender shall
include the masculine and feminine genders.
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(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and "including," and
variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Agreement to
"Sections" and "Exhibits" are intended to refer to Sections of this
Agreement and Exhibits to this Agreement.
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The parties hereto have caused this Agreement to be executed and delivered
as of August 22, 1996.
CASTELLE,
a California corporation
By: /s/ Arthur H. Bruno
IBEX TECHNOLOGIES, INC.,
a California corporation
By: /s/ Ney Grant
/s/ Betsy Grey-Grant
/s/ Clovis Mattos
/s/ Curtis Powell
/s/ Teodoro Ramos Giminez
/s/ on behalf of Newark Holdings S.A.
/s/ on behalf of Tucha Limited
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EXHIBIT A-1
DESIGNATED SHAREHOLDERS
Name
Ney Grant and Betsy Gray-Grant
Clovis Mattos
Curtis Powell
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EXHIBIT A-2
SIGNING SHAREHOLDERS
Tucha Limited
Newark Holding S.A.
Teodoro Ramos Gimenez
Includes those persons identified as Designated Shareholders on Exhibit
A-1.
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EXHIBIT B
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit B):
Acquisition Transaction. "Acquisition Transaction" shall mean any
transaction involving:
(a) the sale, license, disposition or acquisition of all or a material
portion of Ibex's business or assets;
(b) the issuance, disposition or acquisition of (i) any capital stock or
other equity security of Ibex (other than common stock issued to employees
of Ibex, upon exercise of Ibex Options or otherwise, in routine
transactions in accordance with Ibex's past practices), (ii) any option,
call, warrant or right (whether or not immediately exercisable) to acquire
any capital stock or other equity security of Ibex (other than stock
options granted to employees of Ibex in routine transactions in accordance
with Ibex's past practices), or (iii) any security, instrument or
obligation that is or may become convertible into or exchangeable for any
capital stock or other equity security of Ibex; or
(c) any merger, consolidation, business combination, reorganization or
similar transaction involving Ibex.
Agreement. "Agreement" shall mean the Agreement and Plan of Merger and
Reorganization to which this Exhibit B is attached (including the Disclosure
Schedule), as it may be amended from time to time.
Ibex Contract. "Ibex Contract" shall mean any Contract: (a) to which Ibex
is a party; (b) by which Ibex or any of its assets is or may become bound or
under which Ibex has, or may become subject to, any obligation; or (c) under
which Ibex has or may acquire any right or interest.
Ibex Proprietary Asset. "Ibex Proprietary Asset" shall mean any Proprietary
Asset owned by or licensed to Ibex or otherwise used by Ibex.
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental Authorization).
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, warranty,
insurance policy, benefit plan or legally binding commitment or undertaking of
any nature.
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Damages. "Damages" shall include any loss, damage, injury, decline in
value, lost opportunity, liability, claim, demand, settlement, judgment, award,
fine, penalty, Tax, fee (including reasonable attorneys' fees), charge, cost
(including costs of investigation) or expense of any nature.
Disclosure Schedule. "Disclosure Schedule" shall mean the schedule (dated
as of the date of the Agreement) delivered to Castelle on behalf of Ibex and the
Designated Shareholders.
Encumbrance. "Encumbrance" shall mean any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
Government Bid. "Government Bid" shall mean any quotation, bid or proposal
submitted to any Governmental Body or any proposed prime contractor or
higher-tier subcontractor of any Governmental Body.
Government Contract. "Government Contract" shall mean any prime contract,
subcontract, letter contract, purchase order or delivery order executed or
submitted to or on behalf of any Governmental Body or any prime contractor or
higher-tier subcontractor, or under which any Governmental Body or any such
prime contractor or subcontractor otherwise has or may acquire any right or
interest.
Governmental Authorization. "Governmental Authorization" shall mean any:
(a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or otherwise
made available by or under the authority of any Governmental Body or pursuant to
any Legal Requirement; or (b) right under any Contract with any Governmental
Body.
Governmental Body. "Governmental Body" shall mean any: (a) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; or (c) governmental or quasi-governmental authority of any
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nature (including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or Entity and any court or
other tribunal).
Indemnitees. "Indemnitees" shall mean the following Persons: (a) Castelle;
(b) Castelle's current and future affiliates; (c) the respective Representatives
of the Persons referred to in clauses "(a)" and "(b)" above; and (d) the
respective successors and assigns of the Persons referred to in clauses "(a)",
"(b)" and "(c)" above; provided, however, that the Designated Shareholders shall
not be deemed to be "Indemnitees."
Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Body.
Material Adverse Effect. A violation or other matter will be deemed to have
a "Material Adverse Effect" on Ibex if such violation or other matter
(considered together with all other matters that would constitute exceptions to
the representations and warranties set forth in the Agreement or in the
Designated Shareholders' Closing Certificate but for the presence of "Material
Adverse Effect" or other materiality qualifications, or any similar
qualifications, in such representations and warranties) would have a material
adverse effect on Ibex's business, condition, assets, liabilities, operations,
financial performance or prospects.
Person. "Person" shall mean any individual, Entity or Governmental Body.
Proprietary Asset. "Proprietary Asset" shall mean any: (a) patent, patent
application, trademark (whether registered or unregistered), trademark
application, trade name, fictitious business name, service mark (whether
registered or unregistered), service mark application, copyright (whether
registered or unregistered), copyright application, maskwork, maskwork
application, trade secret, know-how, customer list, franchise, system, computer
software, computer program, invention, design, blueprint, engineering drawing,
proprietary product, technology, proprietary right or other intellectual
property right or intangible asset; or (b) right to use or exploit any of the
foregoing.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange Commission.
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Securities Act. "Securities Act" shall mean the Securities Act of 1933, as
amended.
Tax. "Tax" shall mean any tax (including any income tax, franchise tax,
capital gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad
valorem tax, transfer tax, stamp tax, sales tax, use tax, property tax, business
tax, withholding tax or payroll tax), levy, assessment, tariff, duty (including
any customs duty), deficiency or fee, and any related charge or amount
(including any fine, penalty or interest), imposed, assessed or collected by or
under the authority of any Governmental Body.
Tax Return. "Tax Return" shall mean any return (including any information
return), report, statement, declaration, estimate, schedule, notice,
notification, form, election, certificate or other document or information filed
with or submitted to, or required to be filed with or submitted to, any
Governmental Body in connection with the determination, assessment, collection
or payment of any Tax or in connection with the administration, implementation
or enforcement of or compliance with any Legal Requirement relating to any Tax.
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EXHIBIT C-1
FORM OF AFFILIATE AGREEMENT
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AFFILIATE AGREEMENT
THIS AFFILIATE AGREEMENT ("Agreement") is being executed and delivered as
of August __, 1996, by the parties identified on Exhibit A (each, an "Affiliate"
and collectively, the "Affiliates") and CASTELLE, a California corporation
("Castelle").
RECITALS
A. The Affiliates are shareholders of IBEX TECHNOLOGIES, INC., a California
corporation (the "Company").
B. Castelle, the Company, the Affiliates and certain other shareholders of
the Company have entered into an Agreement and Plan of Reorganization dated as
of August 22, 1996 (the "Reorganization Agreement") providing for the merger of
the Company with and into Castelle (the "Merger"). The Reorganization Agreement
contemplates that, upon consummation of the Merger, all outstanding shares of
capital stock of the Company will be converted into the right to receive shares
of common stock of Castelle ("Castelle Common Stock"). It is accordingly
contemplated that the Affiliates will receive shares of Castelle Common Stock in
the Merger.
C. Each Affiliate may be deemed to be an "affiliate" of the Company for
purposes of (i) the restrictions on resale imposed by interpretations of the
staff of the Securities and Exchange Commission (the "SEC") in transactions
exempted from registration under the Securities Act of 1933, as amended (the
"Securities Act"), and (ii) determining Castelle's eligibility to account for
the Merger as a "pooling of interests" under Accounting Series Releases 130 and
135, as amended, of the SEC.
AGREEMENT
1. Representations and Warranties. The Affiliates severally represent and
warrant to Castelle as follows:
(a) Each Affiliate is the holder and beneficial owner of the number of
shares of the Company's capital stock set forth under Affiliate's signature
below (the "Shares"), and Affiliate has good and valid title to the Shares,
free and clear of any liens, pledges, security interests, adverse claims,
equities, options, proxies, charges, encumbrances or restrictions of any
nature.
(b) Each Affiliate has carefully read this Agreement, and has discussed
with counsel to the extent Affiliate felt necessary the limitations imposed
on Affiliate's ability to sell, transfer or otherwise dispose of the
Shares, the shares of Castelle Common Stock that Affiliate is to receive in
the Merger (the "Castelle Shares") and other shares of the capital stock of
the Company or Castelle. Affiliate fully understands the limitations this
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Agreement places upon Affiliate's ability to sell, transfer or otherwise
dispose of the Shares, and the Castelle Shares and other shares of capital
stock of the Company or Castelle.
(c) Each Affiliate understands that the representations, warranties and
covenants set forth herein will be relied upon by Castelle and its counsel
and accountants for purposes of determining Castelle's eligibility to
account for the Merger as a "pooling of interests," for purposes of
determining whether to proceed with the Merger and for other purposes.
2. Prohibition Against Transfer. Each Affiliate agrees that:
(a) until such time as the Reorganization Agreement is validly terminated
in accordance with its terms, such Affiliate shall not sell, transfer or
otherwise dispose of, or reduce Affiliate's interest in or risk relating
to, (i) any capital stock of the Company (including the Shares and any
additional shares of capital stock of the Company acquired by Affiliate,
whether upon exercise of a stock option or otherwise), or (ii) any option
to purchase any capital stock of the Company, except pursuant to and upon
consummation of the Merger;
(b) during the period from the date on which the Merger is consummated
through the date on which financial results covering at least 30 days of
post-Merger combined operations of Castelle and the Company have been
published by Castelle (within the meaning of the applicable "pooling of
interests" accounting requirements), Affiliate shall not sell, transfer or
otherwise dispose of, or reduce Affiliate's interest in or risk relating
to, (i) any shares of Castelle Common Stock (including the Castelle Shares)
and any additional shares of Castelle Common Stock acquired by Affiliate,
whether upon exercise of a stock option or otherwise, or (ii) any option to
purchase shares of Castelle Common Stock; and
(c) without limiting the generality of the foregoing, or the effect of
clause (b) of this Section 2, Affiliate shall not effect any sale, transfer
or other disposition of the Castelle Shares unless:
(i) such sale, transfer or other disposition is made in conformity
with the volume and other requirements of Rule 145(d) under the
Securities Act, as evidenced by a broker's letter and a representation
letter executed by Affiliate, each stating that such requirements have
been met;
(ii) counsel reasonably satisfactory to Castelle shall have advised
Castelle in a written opinion letter upon which Castelle may rely that
such sale, transfer or other disposition will be exempt from
registration under the Securities Act;
(iii) such sale, transfer or other disposition has been registered
under the Securities Act; or
(iv) an authorized representative of the SEC shall have rendered
written advice to Affiliate to the effect that the SEC would take no
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action, or that the staff of the SEC would not recommend that the SEC
take action, with respect to such proposed sale, transfer or other
disposition, and a copy of such written advice and all other related
communications with the SEC shall have been delivered to Castelle.
For purposes of Section 2(c)(ii), counsel reasonably satisfactory to
Castelle shall include, in the case of sales, transfers or other dispositions by
Tucha Limited, Newark Holding S.A. and Teodoro Ramos Gimenez, the law firm of
Morse, Barnes-Brown & Pendleton, P.C., presently in Waltham, Massachusetts.
3. Stop Transfer Instructions.
(a) Each Affiliate acknowledges and agrees that stop transfer instructions
will be given to Castelle's transfer agent with respect to the Castelle
Shares and with respect to any shares of Castelle Common Stock acquired by
Affiliate upon any exercise of any option to purchase shares of Castelle
Common Stock, and that there will be placed on the certificates
representing such shares of Castelle Common Stock or any substitutions
thereof a legend, stating in substance:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED AND MAY
ONLY BE TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT
DATED AS OF AUGUST __, 1996, BETWEEN THE REGISTERED HOLDER HEREOF
AND CASTELLE, A COPY OF WHICH AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICES OF CASTELLE."
(b) Castelle agrees that such stop transfer instructions and legends will
be removed with respect to shares of Castelle Common Stock at such time as
Castelle is reasonably satisfied that the restrictions on resale imposed by
interpretations of the staff of the Commission are no longer applicable to
such shares.
4. Specific Performance. Affiliate agrees that irreparable damages would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms, or were otherwise breached.
It is, accordingly, agreed that Castelle shall be entitled to injunctive relief
to prevent breaches of the provisions of this Agreement, and to enforce
specifically the terms and provisions hereof, in addition to any other remedy to
which Castelle may be entitled at law or in equity.
5. Notices. Any notice or other communication required or permitted to be
delivered to Castelle or Affiliate under this Agreement shall be in writing and
shall be deemed properly delivered, given and received when delivered (by hand,
by registered mail, by courier or express delivery service or by facsimile) to
the address or facsimile telephone number set forth beneath the name of such
party below (or to such other address or facsimile telephone number as such
party shall have specified in a written notice given to the other party):
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if to Castelle: CASTELLE
3255-3 Scott Boulevard
Santa Clara, California 95054
Attn: President
Facsimile: (408) 654-4699
if to Affiliate: ______________________________
------------------------------
------------------------------
------------------------------
6. Severability. In the event that any provision of this Agreement, or the
application of any such provision to any person, entity or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to persons, entities or circumstances other than those as to which it is
determined to be invalid, unlawful, void or unenforceable, shall not be impaired
or otherwise affected and shall continue to be valid and enforceable to the
fullest extent permitted by law.
7. Governing Law. This Agreement shall be construed in accordance with, and
governed in all respects by, the laws of the State of California (without giving
effect to principles of conflicts of laws).
8. Waiver. No failure on the part of Castelle or an Affiliate to exercise
any power, right, privilege or remedy under this Agreement, and no delay on the
part of Castelle in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy. Neither Castelle nor an Affiliate shall be deemed to
have waived any claim arising out of this Agreement, or any power, right,
privilege or remedy under this Agreement, unless the waiver of such claim,
power, right, privilege or remedy is expressly set forth in a written instrument
duly executed and delivered on behalf of Castelle; and any such waiver shall not
be applicable or have any effect except in the specific instance in which it is
given.
9. Captions. The captions contained in this Agreement are for convenience
of reference only, shall not be deemed to be a part of this Agreement and shall
not be referred to in connection with the construction or interpretation of this
Agreement.
10. Further Assurances. Affiliate shall execute and/or cause to be
delivered to Castelle such instruments and other documents and shall take such
other actions as Castelle may reasonably request to effectuate the intent and
purposes of this Agreement.
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11. Entire Agreement. This Agreement, the Reorganization Agreement and the
other agreements referred to in the Reorganization Agreement set forth the
entire understanding of Affiliate and Castelle relating to the subject matter
hereof and thereof and supersede all prior agreements and understandings between
Affiliate and Castelle relating to the subject matter hereof and thereof.
12. Amendments. This Agreement may not be amended, modified, altered, or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of Castelle and Affiliate.
13. Binding Nature. This Agreement will be binding upon Affiliate and
Affiliate's representatives, executors, administrators, estate, heirs,
successors and assigns, and shall inure to the benefit of Castelle and
Affiliates and their successors and assigns.
14. Attorneys' Fees and Expenses. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Agreement is
brought against either Castelle or an Affiliate, the prevailing party shall be
entitled to recover reasonable attorneys' fees, costs and disbursements (in
addition to any other relief to which the prevailing party may be entitled).
15. Termination. This Agreement shall terminate and be of no force or
effect if the Reorganization Agreement is validly terminated in accordance with
its terms without the Merger having occurred. The representations, warranties,
covenants and other provisions contained in this Agreement shall survive the
Merger.
CASTELLE: AFFILIATE:
______________________________ _____________________________
(Signature) [name]
Stock Beneficially Owned by Affiliate:
______________________________
(Print Name) _____ shares of Common Stock
_____ shares of Preferred Stock
______________________________
(Print Title)
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EXHIBIT A
AFFILIATES
Tucha Limited
Newark Holding S.A.
Teodoro Ramos Gimenez
Ney Grant and Betsy Gray-Grant
Clovis Mattos
Curtis Powell
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EXHIBIT C-2
PERSONS TO EXECUTE AFFILIATE AGREEMENTS
Ney Grant and Betsy Gray-Grant
Clovis Mattos
Teodoro Ramos Gimenez
Curtis Powell
Newark Holdings S.A.
Tucha Limited
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EXHIBIT D
FORM OF TAX REPRESENTATION LETTERS
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____________, 1996
Cooley Godward Castro Huddleson & Tatum Graham & James LLP
One Maritime Plaza, 20th Floor 400 Capitol Mall, 24th Floor
San Francisco, California 94111 Sacramento, California 95814
Re: Merger pursuant to that certain Agreement and Plan of Reorganization (the
"Agreement") dated August 22, 1996 by and among Castelle ("Castelle"), Ibex
Technology, Inc. ("Ibex") and the Signing Shareholders
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of opinions
regarding certain United States federal income tax consequences of the Merger.
Unless otherwise indicated, capitalized terms not defined herein have the
meanings set forth in the Agreement.
Representations
The undersigned officer of Ibex, a California corporation, on behalf of the
management of Ibex, after consulting with legal counsel and financial auditors
regarding the meaning of and factual support for the following representations,
hereby represents, in connection with the proposed merger of Ibex, a California
corporation, with and into Castelle in a statutory merger (the "Merger")
pursuant to the Agreement and Exhibits thereto including but not limited to the
Agreement of Merger, that as of the time this letter is executed, the following
facts are true and will continue to be true as of the Effective Time and Closing
of the Merger and thereafter where relevant:
1. Ibex's principal reasons for participating in the Merger are bona fide
business reasons.
2. The total fair market value of all consideration other than Castelle
voting common stock received by Ibex shareholders in exchange for their Ibex
common and preferred stock in the Merger (including, without limitation, cash
paid to Ibex shareholders perfecting dissenters' rights and cash paid in lieu of
fractional shares) will be less than ten percent (10%) of the aggregate fair
market value of Ibex common and preferred stock outstanding immediately prior to
the Merger.
3. The liabilities of Ibex assumed by Castelle and the liabilities to which
the transferred assets of Ibex are subject were incurred by Ibex in the ordinary
course of its business.
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4. The fair market value of Ibex's assets on the Effective Date which are
transferred to Castelle will exceed the aggregate liabilities of Ibex plus the
amount of liabilities, if any, to which such assets are subject, and the total
adjusted basis of the assets of Ibex transferred to Castelle will equal or
exceed the sum of the liabilities assumed by Castelle, plus the amount of
liabilities, if any, to which the transferred assets are subject.
5. Ibex is not and will not be on the Effective Date an "investment
company" within the meaning of ss. 368(a)(2)(F) of the Internal Revenue Code of
1986, as amended, (the "Code").
6. Ibex has no knowledge of any plan or intention on the part of any Ibex
shareholder (a "Plan") to engage in a sale, exchange, transfer, distribution,
pledge, disposition or any other transaction which would result in a direct or
indirect disposition (a "Sale") of shares of Castelle voting common stock to be
issued to Ibex shareholders in the Merger, which shares would have an aggregate
fair market value, as of the Effective Date of the Merger, in excess of
fifty-percent (50%) of the aggregate fair market value, immediately prior to the
Merger, of all outstanding shares of Ibex common and preferred stock. For
purposes of this representation, shares of Ibex common and preferred stock (or
the portion thereof) (i) with respect to which a Ibex shareholder receives
consideration in the Merger other than Castelle voting common stock (including,
without limitation, cash received pursuant to the exercise of dissenters' rights
or paid in lieu of issuing fractional shares) and/or (ii) with respect to which
a sale occurs during the Pre-Merger Period, shall be considered shares of
outstanding Ibex common and preferred stock exchanged for Castelle voting common
stock in the Merger and then disposed of pursuant to a Plan.
7. The payment of cash by Castelle in lieu issuing fractional shares of
Castelle voting common stock is solely for the purpose of avoiding the expense
and inconvenience to Castelle of issuing fractional shares and does not
represent separately bargained for consideration. The Castelle fractional share
interests to which each Ibex shareholder may be entitled in the Merger will be
aggregated so that no Ibex shareholder will receive cash in an amount which
would equal or exceed, in the aggregate, the value of one whole share of
Castelle voting common stock.
8. Except with respect to (1) payments of cash to Ibex shareholders
perfecting dissenters' rights, and (2) payments of cash in lieu of fractional
shares of Castelle voting common and preferred stock, one hundred percent (100%)
of the Ibex common and preferred stock outstanding immediately prior to the
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Merger will be exchanged solely for Castelle voting common stock. Thus, except
as set forth in the preceding sentence, Ibex intends that no consideration be
paid or received (directly or indirectly, actually or constructively) for Ibex
common and preferred stock other than Castelle voting common stock.
9. During the Pre-Merger Period, no indebtedness or other obligation of
Ibex has been or will be guaranteed by any shareholder of Ibex (or any person or
entity related to a shareholder of Ibex).
10. On the Effective Date of the Merger, the fair market value of the
Castelle voting common stock and other consideration received by each Ibex
shareholder will be approximately equal to the aggregate fair market value of
the Ibex common and preferred stock surrendered in exchange therefor.
11. Ibex and the shareholders of Ibex will each pay separately its or their
own expenses in connection with the Merger as contemplated by the Agreement;
provided, however, that to the extent any expenses relating to the Merger (or
the "plan of reorganization" within the meaning of Treas. Reg. ss. 1.368-1(c)
with respect to the Merger) are funded directly or indirectly by a party other
than the incurring party, such expenses will be within the guidelines
established in Rev. Rul. 73-54, 1973-1 C.B. 187.
12. There is no intercorporate indebtedness existing between Castelle and
Ibex that was issued, acquired, or will be settled at a discount, and to the
best knowledge of the management of Ibex, Castelle will assume no liabilities of
any Ibex shareholder in connection with the Merger.
13. The terms of the Agreement and all other agreements entered into
pursuant thereto are the product of arm's length negotiations.
14. None of the compensation payments received by any shareholder of Ibex
will be separate consideration for, or allocable to, any of their shares of Ibex
common or preferred stock. None of the shares of Castelle voting common stock
received by any shareholder of Ibex will be separate consideration for, or
allocable to, any employment agreement, consulting agreement, any covenants not
to compete or otherwise for the performance of services; and the compensation
paid to any shareholder of Ibex will be for services actually rendered and will
be commensurate with amounts paid to third parties bargaining at arm's length
for similar services.
15. Ibex is authorized to make all of the representations set forth herein.
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GENERAL
YOUR RELIANCE IN RENDERING OPINIONS
LIMITATIONS ON YOUR OPINIONS
1. The undersigned recognize that (i) your opinions will be based on, among
other things, the representations and statements set forth herein, in the
Agreement (including exhibits attached thereto), and in the documents related
thereto, and (ii) your opinions will be subject to certain limitations,
qualifications and assumptions including that the opinions may not be relied
upon if any such representations or statements are not accurate in all material
respects.
2. The undersigned recognize that your opinions will not address any tax
consequences of the Merger or any action taken in connection therewith except as
expressly set forth in such opinions.
Very truly yours,
IBEX TECHNOLOGY, INC.
a California Corporation
By:
Title:
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______________, 1996
Cooley Godward Castro Huddleson & Tatum Graham & James LLP
One Maritime Plaza 400 Capitol Mall, 24th Floor
20th Floor Sacramento, California 95814
San Francisco, CA 94111
Re: Merger Transaction (the "Merger") Pursuant to that certain Agreement
and Plan of Reorganization (the "Agreement") Dated August 22, 1996
by and among Castelle ("Castelle"), Ibex Technologies, Inc. ("Ibex")
and the Signing Shareholders
Ladies and Gentlemen:
This letter is supplied to you in connection with your rendering of an
opinion regarding certain United States federal income tax consequences of the
Merger. Unless otherwise indicated, capitalized terms not defined herein have
the meanings set forth in the Agreement.
Representations
The undersigned officer of Castelle, a California corporation, on behalf of
the management of Castelle, after consulting with legal counsel and financial
auditors regarding the meaning of and the factual support for the following
representations, hereby represents, in connection with the proposed merger of
Ibex, a California corporation, with and into Castelle in a statutory merger
(the "Merger") pursuant to the Agreement and Exhibits thereto including but not
limited to the Agreement of Merger, with Castelle surviving the Merger, that as
of the time this letter is executed, the following facts are true and will
continue to be true as of the Effective Time and Closing of the Merger and
thereafter where relevant:
1. Castelle's principal reasons for participating in the Merger are bona
fide business reasons.
2. Castelle has no plan or intention to reacquire any of its stock issued
in the Merger.
3. Castelle has no plan or intention to sell or otherwise dispose of any of
the assets of Ibex acquired in the Merger, except for dispositions made in the
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ordinary course of business or transfers described in section 368(a)(2)(C) of
the Internal Revenue Code of 1986, as amended (the "Code").
4. Following the Merger, Castelle will continue Ibex's historic trade or
business or use a significant portion of its historic business assets in a
business.
5. Castelle is not, and will not be on the Effective Date, an "investment
company" within the meaning of section 368(a)(2)(F) of the Code.
6. No shareholder of Ibex is acting as agent for Castelle in connection
with the Merger or approval thereof, and Castelle will not reimburse any Ibex
shareholder for Ibex common stock or preferred stock such shareholder may have
purchased or for other obligations such shareholder may have incurred.
7. The payment of cash by Castelle in lieu of issuing fractional shares of
Castelle voting common stock is solely for the purpose of avoiding the expense
and inconvenience to Castelle of issuing fractional shares and does not
represent separately bargained for consideration. The Castelle fractional share
interests to which each Ibex shareholder may be entitled in the Merger will be
aggregated so that no Ibex shareholder will receive cash in an amount which
would equal or exceed, in the aggregate, the value of one whole share of
Castelle voting common stock.
8. Except with respect to (1) payments of cash to Ibex shareholders
perfecting dissenters' or appraisal rights and (2) payments of cash in lieu of
fractional shares of Castelle voting common stock or preferred stock, one
hundred percent (100%) of the Ibex common stock and preferred stock outstanding
immediately prior to the Merger will be exchanged solely for Castelle voting
common stock. Thus, except as set forth in the preceding sentence, Castelle
intends that no consideration be paid or received (directly or indirectly,
actually or constructively) for Ibex common stock or preferred stock other than
Castelle voting common stock.
9. The total fair market value of all consideration other than Castelle
voting common stock received by Ibex shareholders in exchange for their Ibex
common stock or preferred stock in the Merger (including, without limitation,
cash paid to Ibex shareholders perfecting dissenters' or appraisal rights and
cash paid in lieu of fractional shares) will be less than ten percent (10%) of
the aggregate fair market value of Ibex common stock and preferred stock
outstanding immediately prior to the Merger. In addition, the total cash
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consideration that will be paid in the Merger to Ibex shareholders in lieu of
fractional shares of Castelle voting common stock will not exceed one percent
(1%) of the total consideration that will be issued in the Merger to the Ibex
shareholders in exchange for their shares of Ibex common stock and preferred
stock.
10. On the Effective Date of the Merger, the fair market value of the
Castelle voting common stock and other consideration received by each Ibex
shareholder will be approximately equal to the aggregate fair market value of
the Ibex common stock and preferred stock surrendered in exchange therefor.
11. Castelle will pay separately its own expenses in connection with the
Merger as contemplated by the Agreement; provided, however, that to the extent
any expenses relating to the Merger (or the "plan of reorganization" within the
meaning of Treas. Reg. ss. 1.368-1(c) with respect to the Merger) are funded
directly or indirectly by a party other than the incurring party, such expenses
will be within the guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187.
12. There is no intercorporate indebtedness existing between Castelle and
Ibex that was issued, acquired, or will be settled at a discount, and Castelle
will not assume any liabilities of Ibex's shareholders in connection with the
Merger.
13. The terms of the Agreement and all other agreements entered into
pursuant thereto are the product of arm's-length negotiations.
14. None of the compensation payments which might be received by any
shareholder of Ibex will be separate consideration for, or allocable to, any of
their shares of Ibex common stock or preferred stock; none of the shares of
Castelle voting common stock to be received by any shareholder of Ibex will be
separate consideration for, or allocable to, any employment agreement,
consulting agreement, any covenants not to compete or otherwise for the
performance of services; and the compensation which might be paid to any
shareholder of Ibex will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's length for
similar services.
15. Castelle is authorized to make all the representations set forth
herein.
GENERAL
Your Reliance In Rendering Opinions; Limitations On Your Opinions
1. The undersigned recognizes that (i) your opinions will be based on,
among other things, the representations and statements set forth herein, in the
Agreement (including exhibits attached thereto), and in the documents related
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thereto, and (ii) your opinions will be subject to certain limitations,
qualification and assumptions including that the opinions may not be relied upon
if any such representations or statements are not accurate in all material
respects.
2. The undersigned recognizes that your opinions will not address any tax
consequences of the Merger or any action taken in connection therewith except as
expressly set forth in such opinions.
Very truly yours,
CASTELLE,
a California corporation
By:
Title:
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EXHIBIT E
FORM OF CONTINUITY OF INTEREST CERTIFICATE
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CONTINUITY OF INTEREST CERTIFICATE
The undersigned is aware that pursuant to an Agreement and Plan of
Reorganization, dated as of August 22, 1996 (the "Reorganization Agreement"),
made and entered into by and among CASTELLE, a California corporation
("Castelle") and IBEX TECHNOLOGIES, INC., a California corporation ("Ibex"), and
certain shareholders of Ibex, it is contemplated that Ibex will merge with and
into Castelle in a transaction (the "Merger") in which shares of the common
stock of Ibex ("Ibex Common Stock") and preferred stock of Ibex ("Ibex Prefered
Stock") will be exchanged for shares of the common stock of Castelle ("Castelle
Common Stock")
1. The undersigned represents, warrants and certifies as follows:
(a) The undersigned currently is the owner of that number and class of
shares of Ibex Common Stock and Ibex Preferred Stock set forth below (the
"Shares") and did not acquire any of the Shares in contemplation of the
Merger;
(b) The undersigned has not engaged in a Sale (as defined below) of any
shares of Ibex Common Stock or Ibex Preferred Stock in contemplation of the
Merger;
(c) The undersigned has, and will as of the Effective Date have, no plan or
intention (a "Plan") to engage in a sale, exchange, transfer, distribution
(including a distribution by a partnership to its partners or by a
corporation to its stockholders), redemption or reduction in any way of the
undersigned's risk of ownership (by short sale or otherwise), or other
disposition, directly or indirectly (such actions being collectively
referred to herein as a "Sale") of the shares of Castelle Common Stock to
be received by the undersigned in the Merger. For purposes of the preceding
sentence, shares of Ibex Common Stock or shares of Ibex Preferred Stock (or
the portion thereof) (i) with respect to which the undersigned will receive
consideration in the Merger other than shares of Castelle Common Stock
(including cash to be received in lieu of fractional shares of Castelle
Common Stock) and/or (ii) with respect to which a Sale (A) occurred in
contemplation of the Merger or (B) will occur prior to the Merger, shall be
considered shares of Ibex Common Stock or shares of Ibex Preferred Stock
exchanged for shares of Castelle Common Stock in the Merger and then
disposed of pursuant to a Plan;
(d) The undersigned has no Plan to exercise dissenters' rights in
connection with the Merger;
(e) The undersigned is not aware of, or participating in, any Plan on the
part of the holders of shares of Ibex Common Stock or shares of Ibex
Preferred Stock to engage in a Sale or Sales of the shares of Castelle
Common Stock to be received in the Merger such that the aggregate fair
market value, as of the Effective Time (as defined in the Reorganization
Agreement), of shares subject to such Sales would exceed fifty percent
(50%) of the aggregate fair market value of all shares of outstanding Ibex
Common Stock and Ibex Preferred Stock immediately prior to the Merger. For
purposes of the preceding sentence, shares of Ibex Common Stock (or the
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portion thereof) (i) with respect to which a shareholder of Ibex receives
consideration in the Merger other than shares of Castelle Common Stock
(including, without limitation, cash received pursuant to the exercise of
dissenters' rights or in lieu of a fractional share of Castelle Common
Stock) or (ii) with respect to which a Sale occurs prior to and in
contemplation of the Merger, shall be considered shares of outstanding Ibex
Common Stock or Ibex Preferred Stock exchanged for shares of Castelle
Common Stock in the Merger and then disposed of pursuant to a Plan;
(f) The undersigned waives any and all rights to seek damages or other
relief from Castelle or Ibex as a result of any losses incurred as a result
of the inaccuracy of any or all of the representations set forth in the
certificate dated August __, 1996 from Ibex to Cooley Godward Castro
Huddleson & Tatum and Graham & James LLP, provided pursuant to Section
5.8(b) of the Reorganization Agreement.
(g) Except to the extent written notification to the contrary is received
by Ibex from the undersigned prior to the Merger, the representations and
warranties and certifications contained herein shall be true and correct at
all times from the date hereof through the date on which the Merger occurs.
2. The undersigned has consulted with such legal and financial counsel as
the undersigned has deemed appropriate in connection with the execution of this
Certificate.
3. The undersigned understands that Castelle, Ibex, and their respective
shareholders, as well as legal counsel to Castelle and Ibex (in connection with
rendering of their opinions that the Merger will be a "reorganization" within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended)
will be relying on (a) the truth and accuracy of the representations contained
herein and (b) the undersigned's performance of the obligations set forth
herein.
IN WITNESS WHEREOF, the undersigned has executed this Certificate on
_____________________, 1996.
Signature:
Name:
Address:
Number of Shares of Ibex Common Stock Beneficially Owned:
Number of Shares of Ibex Preferred Stock Beneficially Owned:
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EXHIBIT F
PERSONS TO SIGN
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
Ney Grant
Curtis Powell
Clovis Mattos
Bryan Roe (no noncompetition agreement)
Fabio Matsui (no noncompetition agreement)
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EXHIBIT G
FORM OF EMPLOYMENT AGREEMENT
95
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is being entered into as of
August __, 1996 (the "Closing Date") by and between CASTELLE, a California
corporation (the "Corporation"), and ____________________ ("Employee").
RECITALS
A. Pursuant to an Agreement and Plan of Merger and Reorganization, dated as
of August 22, 1996, by and among the Corporation, Ibex Technologies, Inc., a
California corporation ("Ibex"), and certain shareholders of Ibex, as amended
(the "Reorganization Agreement"), Ibex is merging into the Corporation on the
Closing Date (the "Merger"). As a result of the Merger, Ibex shareholders are
receiving shares of Common Stock of the Corporation in exchange for their shares
of stock of Ibex.
B. Employee was a shareholder of Ibex prior to the Merger, and has been
serving as an employee of Ibex.
C. The Corporation has required, as a condition to consummating the
transactions contemplated by the Reorganization Agreement, that Employee execute
and deliver this Agreement.
D. Contemporaneously with the execution and delivery of this Agreement,
Employee is executing and delivering to the Corporation a Noncompetition
Agreement of even date herewith. The Reorganization Agreement, the
Noncompetition Agreement and the Proprietary Information Agreement previously
executed by Employee in favor of Ibex are referred to collectively in this
Agreement as the "Other Agreements."
AGREEMENT
In order to induce the Corporation to consummate the transactions
contemplated by the Reorganization Agreement, and in further consideration of
the mutual covenants and agreements contained herein, the parties agree as
follows:
1. EMPLOYMENT
1.1 Term; Duties.
(a) Term. Subject to Section 1.7 below, Employee agrees to serve as an
employee of the Corporation during the period commencing on the Closing
Date and ending on the date two years from the Closing Date (the
"Employment Term").
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(b) Duties. During the Employment Term, Employee shall serve in such
capacity as the Corporation's Chairman may specify from time to time, and
shall have such responsibilities as may be assigned to him by the
Corporation's Chairman. Employee agrees to serve the Corporation faithfully
and to the best of his ability, and to devote substantially all of his
working time, attention and efforts during the Employment Term to the
business and affairs of the Corporation. Employee represents and warrants
to the Corporation that he is under no contractual commitments inconsistent
with his obligations set forth in this Agreement.
1.2 Salary. In consideration of all services to be rendered by Employee to
the Corporation during the Employment Term, the Corporation shall pay to
Employee a salary of $__________ per annum, payable at such times as other
salaried employees of the Corporation receive their regular salary payments.
Employee's salary may be increased by the Corporation as a result of salary
reviews to be conducted by Castelle's Chief Executive Officer periodically. The
Corporation shall be entitled to withhold from the salary payments otherwise
required to be made to Employee such amounts as the Corporation may be required
to withhold under applicable tax laws and other applicable legal requirements.
1.3 Stay-On Bonus Payments. Subject to Section 1.7(b), the Corporation
shall pay to Employee, as a stay-on bonus, $__________ per month on each of the
first 12 monthly anniversaries of the Closing Date.
1.4 Other Benefits. The Corporation shall provide to Employee, during the
Employment Term, the same benefits that the Corporation makes generally
available to all of its other employees during the Employment Term, subject to
Employee's satisfaction of the respective eligibility requirements for such
benefits.
1.5 Other Compensation Matters. Employee acknowledges and agrees that he
shall not be entitled to receive from the Corporation, or from Castelle or any
other affiliate of the Corporation, any salary, bonus or other compensation or
benefit of any nature (whether relating to any period prior to the Closing Date
or relating to any period after the Closing Date) except as expressly provided
in the Other Agreements or in Sections 1.2, 1.3 and 1.4 above. Employee
represents and warrants to the Corporation that he is not aware of any claims or
rights against the Corporation arising directly or indirectly from his past
employment with the Corporation, and Employee hereby releases and discharges the
Corporation and its affiliates from all claims, rights, causes of action,
demands and obligations relating to or arising directly or indirectly from his
past employment with the Corporation.
1.6 Expenses. Employee shall be entitled to reimbursement from the
Corporation for reasonable out-of-pocket business expenses reasonably incurred
by Employee during the Employment Term in the performance of Employee's duties
under this Agreement; provided, however, that the Corporation shall not be
required to reimburse Employee for any such expenses unless: (a) Employee
presents vouchers and receipts indicating in reasonable detail the amount and
business purpose of each of such expenses; and (b) Employee otherwise complies
with the Corporation's reimbursement policies established from time to time and
in effect during the Employment Term.
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1.7 Termination.
(a) Either the Corporation or the Employee shall have the right to
terminate this Agreement, with or without Cause (as defined in Section 1.8
below), at any time during the Employment Term by delivering written notice
of termination to the other. Upon the termination of this Agreement during
the Employment Term, Employee's employment with the Corporation shall
terminate and, except as provided in Section 1.7(b) below, the Corporation
shall have no further monetary obligation or other obligation of any nature
to Employee under this Agreement or with respect to his employment or the
termination of his employment.
(b) If (i) the Corporation terminates this Agreement without Cause (as
defined in Section 1.8 below) during the Employment Term, (ii) Employee
satisfies all of his obligations relating to the termination of his
employment under this Agreement (including his obligations under Section
3.2 below), and (iii) Employee executes and delivers to the Corporation a
general release of liability (satisfactory in form and substance to the
Corporation) in favor of the Corporation, then so long as Employee does not
breach Section 2 below or any of the material provisions of the Other
Agreements, Employee shall be entitled to continue to receive the salary
specified in Section 1.2 above for the remainder of the Employment Term and
the stay-on bonus payments specified in Section 1.3.
(c) The termination of this Agreement pursuant to this Section 1.7 or
otherwise shall not limit or otherwise affect any of Employee's obligations
under Section 2 or Section 3.2 below or under any of the Other Agreements,
all of which shall remain in full force and effect.
1.8 Definition of "Cause." Employee's employment with the Corporation shall
be deemed to have been terminated for "Cause" if such employment is terminated
following: (a) any intentional misconduct, fraud or bad faith on the part of
Employee in the performance of his duties as an employee of the Corporation; (b)
the conviction of Employee of, or the entry by Employee of a plea of guilty or
no contest to, any felony; (c) the breach by Employee of any material provision
in any of the Other Agreements; (d) the continued failure of Employee to perform
any reasonable duties assigned to him, if such breach or failure is not fully
cured by Employee within ten days after he receives written notice of such
failure; or (e) the inability of Employee to perform any of his material duties
as a result of illness or injury, if Employee remains unable to perform such
duties for a total of ten consecutive weeks.
2. CONFIDENTIAL INFORMATION
2.1 Proprietary Information Agreement. Employee acknowledges that Employee
has previously executed a Proprietary Information Agreement in favor of Ibex and
agrees to continue to abide by the provisions of such agreement both during and
after the Employment Term as provided therein.
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2.2 Obligation to Keep Confidential. Employee agrees to keep all
Confidential Information (as defined in Section 2.3 below) strictly and
permanently confidential and, accordingly, agrees that he shall not at any time
(whether during or after the Employment Term) directly or indirectly use for any
purpose, or disclose or permit to be disclosed to any person or entity, any
Confidential Information. Employee acknowledges that the Confidential
Information constitutes unique and valuable assets of Ibex and the Corporation
acquired at great time and expense by Ibex and the Corporation, and that any
disclosure or other use of such Confidential Information, other than for the
sole benefit of Ibex and the Corporation, would be wrongful and would cause
irreparable harm to the Corporation.
2.3 Definition of "Confidential Information." The term "Confidential
Information" means any non-public information (whether or not in written form
and whether or not expressly designated as confidential) relating directly or
indirectly to the Corporation, Ibex or any of the Corporation's or Ibex'
subsidiaries or other affiliates or relating to the business, operations,
financial affairs, performance, assets, investments, technology, processes,
products, contracts, customers, licensees, sublicensees, suppliers, personnel,
plans or prospects of the Corporation or Ibex or any of the Corporation's or
Ibex subsidiaries or other affiliates, including any such information consisting
of or otherwise relating directly or indirectly to trade secrets, know-how,
technology, designs, drawings, processes, license or sublicense arrangements,
formulae, proposals, customer lists or preferences, pricing lists, referral
sources, marketing or sales techniques or plans, operations manuals, service
manuals, financial information, projections, lists of suppliers or distributors
or sources of supply; provided, however, that "Confidential Information" shall
not be deemed to include information which, at the time of initial disclosure to
Employee, is part of, or without violation of this Agreement or fault of
Employee becomes part of, the public knowledge or literature.
3. MISCELLANEOUS PROVISIONS
3.1 Other Agreements. Nothing in this Agreement shall limit Employee's or
the Corporation's obligations or the rights and remedies of Employee or the
Corporation under the Other Agreements, and nothing in any of the Other
Agreements shall limit Employee's or the Corporation's obligations or the rights
and remedies of the Employee or the Corporation under this Agreement.
3.2 Surrender of Records and Property. At such time as Employee no longer
serves as an employee of the Corporation, Employee shall deliver promptly to the
Corporation (a) all records, manuals, books, blank forms, documents, letters,
memoranda, notes, notebooks, reports, data, tables, calculations or copies
thereof in his possession or under his control which are the property of the
Corporation, and (b) all other property and Confidential Information of the
Corporation or Castelle in his possession or under his control, including all
documents which contain any Confidential Information of the Corporation or
Castelle.
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3.3 Notices. Any notice or other communication required or permitted to be
delivered to either party under this Agreement shall be in writing and shall be
deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other party hereto):
If to the Corporation: CASTELLE
3255-3 Scott Boulevard
Santa Clara, CA 95054
Attention: President
Facsimile: (408) 654-4699
If to Employee:
3.4 Severability. In the event that any provision of this Agreement, or the
application of any such provision to any person, entity or set of circumstances,
shall be determined to be invalid, unlawful, void or unenforceable to any
extent, the remainder of this Agreement, and the application of such provision
to persons, entities or circumstances other than those as to which it is
determined to be invalid, unlawful, void or unenforceable, shall not be impaired
or otherwise affected and shall continue to be valid and enforceable to the
fullest extent permitted by law.
3.5 Governing Law. This Agreement shall be construed in accordance with,
and governed in all respects by, the laws of the State of California (without
giving effect to principles of conflicts of laws).
3.6 Waiver. No failure on the part of either party to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of
either party in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy. Neither party shall be deemed to have waived any
claim arising out of this Agreement, or any power, right, privilege or remedy
under this Agreement, unless the waiver of such claim, power, right, privilege
or remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such party; and any such waiver shall not be applicable
or have any effect except in the specific instance in which it is given.
3.7 Captions. The captions contained in this Agreement are for convenience
of reference only, shall not be deemed to be a part of this Agreement and shall
not be referred to in connection with the construction or interpretation of this
Agreement.
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3.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall constitute an original and all of which, when taken
together, shall constitute one agreement.
3.9 Further Assurances. Each party hereto shall execute and/or cause to be
delivered to the other party hereto such instruments and other documents and
shall take such other actions as such other party may reasonably request to
effectuate the intent and purposes of this Agreement.
3.10 Entire Agreement. This Agreement and the Other Agreements set forth
the entire understanding of the parties relating to the subject matter hereof
and thereof and supersede all prior agreements and understandings between the
parties relating to the subject matter hereof and thereof.
3.11 Amendments. This Agreement may not be amended, modified, altered or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of the Corporation and Employee.
3.12 Assignment. This Agreement and all rights and obligations of Employee
hereunder are personal to Employee and may not be transferred or assigned by
Employee at any time. The Corporation may, with Employee's written consent
(which consent shall not be unreasonably withheld), assign its rights under this
Agreement to any entity that assumes the Corporation's obligations hereunder in
connection with any sale or transfer of all or a substantial portion of the
Corporation's assets to such entity.
3.13 Binding Nature. Subject to Section 3.12 above, this Agreement will be
binding upon and inure to the benefit of the Corporation and its successors and
assigns and Employee and his representatives, executors, administrators, estate,
heirs, successors and assigns.
3.14 Attorneys' Fees and Expenses. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Agreement is
brought against either party hereto, the prevailing party shall be entitled to
recover reasonable attorneys' fees, costs and disbursements (in addition to any
other relief to which the prevailing party may be entitled).
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date first above written.
CASTELLE
By:
Its:
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EXHIBIT H
FORM OF NONCOMPETITION AGREEMENT
NONCOMPETITION AGREEMENT
103
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NONCOMPETITION AGREEMENT
THIS NONCOMPETITION AGREEMENT ("Agreement") is being executed and delivered
as of August __, 1996 (the "Closing Date"), by _____________ ("Shareholder") in
favor of and for the benefit of CASTELLE, a California corporation ("Company").
RECITALS
A. As an employee and major shareholder of Ibex Technologies, Inc., a
California corporation ("Ibex"), Shareholder has obtained extensive and valuable
knowledge and information concerning the business of Ibex (including
confidential information relating to Ibex and its operations, assets, contracts,
customers, personnel, plans and prospects).
B. Pursuant to an Agreement and Plan of Merger and Reorganization dated as
of August 22, 1996, by and among the Company, Ibex, Shareholder and certain
other shareholders of the Company (the "Reorganization Agreement"), Ibex is
merging into the Company on the Closing Date (the "Merger"). In connection with
the Merger, Shareholder and the Company's other shareholders are exchanging all
of their shares of stock of Ibex for shares of Common Stock of the Company.
C. Concurrently with this Agreement, Shareholder has entered into an
Employment Agreement with Company with a term of two years (the "Employment
Agreement").
D. In connection with the Merger (and as a condition to the consummation of
the Merger), and to more fully secure unto the Company the benefits of the
Merger, the Company has required that Shareholder enter into this Agreement and
Shareholder is entering into this Agreement in order to induce the Company to
consummate the Merger.
E. The Company has conducted and is conducting its business on a worldwide
basis.
AGREEMENT
In order to induce the Company to consummate the transactions contemplated
by the Reorganization Agreement, and in consideration of the issuance and
delivery to Shareholder of shares of Common Stock of the Company pursuant to the
Reorganization Agreement, Shareholder agrees as follows:
1. Acknowledgments by Shareholder. Shareholder acknowledges that the
promises and restrictive covenants he is providing in this Agreement are
reasonable and necessary for the Company's protection of its legitimate
interests in its acquisition of Ibex pursuant to the Reorganization Agreement,
including but not limited to Ibex's goodwill. Shareholder acknowledges that
Shareholder is exchanging all of Shareholder's shares of stock of Ibex for
shares of Common Stock of the Company in the Merger.
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2. Noncompetition. During the period commencing on the Closing Date and
continuing until the date __________ (__) years after the termination of
Employee's employment with the Company (the "Noncompete Period"), Shareholder
shall not, directly or indirectly, provide any service (as an employee,
consultant or otherwise), support (including financial support), product or
technology to any person or entity, if such service, support, product or
technology involves or relates to, in any material respect, (A) the provision of
"information on demand" products, including but not limited to products
delivering information via facsimile, voice, video or any Internet mechanisms,
(B) "electronic commerce," (C) the use of the Internet for effecting economic
transactions, (D) the provision of information or products over the Internet,
(E) the design, development, coding or creation of software for use with or
otherwise involving the Internet including, but not limited to, the design,
development or coding of software for the purpose of gathering, collecting or
analyzing market data, customer data or web site visits (hits) over the
Internet, or (F) the design, development or coding of management software tools
utilized with "information on demand" products or to enhance the functionality
of network facsimile products (each, a "Restricted Business"); provided,
however, that nothing in this Section 2 shall prevent Shareholder from providing
services, support, products or technology to any person or entity while employed
by the Company, so long as Shareholder is providing such services, support,
products and technology solely in Shareholder's capacity as, and solely in the
course of discharging Shareholder's duties and responsibilities as, an employee
of the Company.
3. Nonsolicitation. Shareholder further agrees that during the Noncompete
Period, Shareholder will not:
(a) directly or indirectly, personally or through others, encourage,
induce, attempt to induce, solicit or attempt to solicit (on Shareholder's
own behalf or on behalf of any other person or entity) any employee of the
Company, or any of the Company's subsidiaries to leave his or her
employment with the Company, or any or of the Company's subsidiaries;
(b) employ, or permit any entity over which Shareholder exercises any
control, to employ such employee who has terminated his or her employment
with the Company or any of the Company's subsidiaries during the Noncompete
Period; or
(c) directly or indirectly, personally or through others, approach,
contact, solicit, advise or do (or attempt to do) business with, or
otherwise interfere with the relationship of the Company or any of the
Company's subsidiaries with, any person or entity who is, was or is
reasonably anticipated to become a customer or client of the Company or any
of the Company's subsidiaries with respect to any Restricted Business.
4. Consideration. As consideration for this Noncompetition Agreement, the
Company shall pay Shareholder $_______. Such payments shall be made to
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Shareholder in three (3) $____ installments with the first installment due
on the date of this Agreement and the second and third installments due on
the first and second monthly anniversaries of the date of this Agreement.
5. Termination. Shareholder's obligations under Sections 2 and 3, and
Company's obligations under Section 4 shall terminate if Shareholder's
employment with Company pursuant to the Employment Agreement is terminated
without Cause (as such term is defined in the Employment Agreement).
6. Independence of Obligations. The covenants of Shareholder set forth in
this Agreement shall be construed as independent of any other agreement or
arrangement between Shareholder, on the one hand, and the Company on the
other. The existence of any claim or cause of action by Shareholder against
the Company shall not constitute a defense to the enforcement of such
covenants against Shareholder.
7. Specific Performance. Shareholder agrees that in the event of any breach
or threatened breach by Shareholder of any covenant, obligation or other
provision contained in this Agreement, the Company shall be entitled (in
addition to any other remedy that may be available to them) to (a) a decree
or order of specific performance or mandamus to enforce the observance and
performance of such covenant, obligation or other provision, and (b) an
injunction restraining such breach or threatened breach.
8. Non-Exclusivity. The rights and remedies of the Company hereunder are
not exclusive of or limited by any other rights or remedies which the
Company may have, whether at law, in equity, by contract or otherwise, all
of which shall be cumulative (and not alternative). Without limiting the
generality of the foregoing, the rights and remedies of the Company
hereunder, and the obligations and liabilities of Shareholder hereunder,
are in addition to their respective rights, remedies, obligations and
liabilities under the law of unfair competition, misappropriation of trade
secrets and the like. This Agreement does not limit, and is not limited by,
the terms of the Employment Agreement or the terms of any other agreement
between Shareholder and the Company or any affiliate of the Company.
9. Notices. Any notice or other communication required or permitted to be
delivered to Shareholder or the Company under this Agreement shall be in
writing and shall be deemed properly delivered, given and received when
delivered (by hand, by registered mail, by courier or express delivery
service or by facsimile) to the address or facsimile telephone number set
forth beneath the name of such party below (or to such other address or
facsimile telephone number as such party shall have specified in a written
notice given to the other party hereto):
If to the Company: CASTELLE
3255-3 Scott Boulevard
Santa Clara, CA 95054
Attention: President
Facsimile: (408) 654-4699
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If to Shareholder:
10. Severability. If any provision of this Agreement or any part of any
such provision is held under any circumstances to be invalid or unenforceable in
any jurisdiction, then (a) such provision or part thereof shall, with respect to
such circumstances and in such jurisdiction, be deemed amended to conform to
applicable laws so as to be valid and enforceable to the fullest possible
extent, (b) the invalidity or unenforceability of such provision or part thereof
under such circumstances and in such jurisdiction shall not affect the validity
or enforceability of such provision or part thereof under any other
circumstances or in any other jurisdiction, and (c) such invalidity of
enforceability of such provision or part thereof shall not affect the validity
or enforceability of the remainder of such provision or the validity or
enforceability of any other provision of this Agreement. Each provision of this
Agreement is separable from every other provision of this Agreement, and each
part of each provision of this Agreement is separable from every other part of
such provision.
11. Governing Law. This Agreement shall be construed in accordance with,
and governed in all respects by, the laws of the State of California (without
giving effect to principles of conflicts of laws).
12. Waiver. No failure on the part of the Company to exercise any power,
right, privilege or remedy under this Agreement, and no delay on the part of the
Company in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy. The Company shall not be deemed to have waived any
claim arising out of this Agreement, or any power, right, privilege or remedy
under this Agreement, unless the waiver of such claim, power, right, privilege
or remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such party; and any such waiver shall not be applicable
or have any effect except in the specific instance in which it is given.
13. Captions. The captions contained in this Agreement are for convenience
of reference only, shall not be deemed to be a part of this Agreement and shall
not be referred to in connection with the construction or interpretation of this
Agreement.
14. Further Assurances. Shareholder shall execute and/or cause to be
delivered to the Company such instruments and other documents and shall take
such other actions as Company may reasonably request to effectuate the intent
and purposes of this Agreement.
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15. Entire Agreement. This Agreement and the Employment Agreement (and the
other agreements referred to in the Employment Agreement) set forth the entire
understanding of Shareholder and the Company relating to the subject matter
hereof and thereof and supersede all prior agreements and understandings between
any of such parties relating to the subject matter hereof and thereof.
16. Amendments. This Agreement may not be amended, modified, altered, or
supplemented other than by means of a written instrument duly executed and
delivered on behalf of the Company and Shareholder.
17. Assignment. This Agreement and all obligations hereunder are personal
to Shareholder and may not be transferred or assigned by Shareholder at any
time. The Company may, with Shareholder's written consent (which consent shall
not be unreasonably withheld), assign its rights under this Agreement to any
entity in connection with any sale or transfer of all or a substantial portion
of the Company's assets to such entity.
18. Binding Nature. Subject to Section 17, this Agreement will be binding
upon Shareholder and Shareholder's representatives, executors, administrators,
estate, heirs, successors and assigns, and will inure to the benefit of the
Company and its respective successors and assigns.
19. Attorneys' Fees and Expenses. If any legal action or other legal
proceeding relating to the enforcement of any provision of this Agreement is
brought against Shareholder, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
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IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the
date first above written.
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EXHIBIT I
FORM OF LEGAL OPINION OF GRAHAM & JAMES LLP
110
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[GRAHAM & JAMES LLP OPINION LETTER]
Castelle
3255-3 Scott Boulevard
Santa Clara, CA 95054
Ladies and Gentlemen:
We have acted as legal counsel for Ibex Technologies, Inc., a California
corporation (the "Company"), in connection with the merger of the Company with
and into Castelle, a California corporation ("Castelle") pursuant to an
Agreement and Plan of Reorganization dated as of August 22, 1996 (the
"Reorganization Agreement") by and among the Company, Castelle and the Signing
Shareholders listed on Exhibits A-1 and A-2 of the Agreement (the "Merger"). We
are rendering this opinion pursuant to Section 6.6(i) of the Agreement. Except
as otherwise defined herein, capitalized terms used but not defined herein have
the respective meanings given to them in the Agreement.
In rendering this opinions expressed below, we have examined originals,
certified copies or copies otherwise identified to us as being true copies of
the originals of the following documents:
(a) The Agreement.
(b) The Merger Agreement.
Items (a) and (b) are hereafter collectively referred to as the "Agreements".
We have also considered such questions of law and examined such other
instruments, records, certificates, opinions, memoranda and documents as we have
deemed necessary or advisable for the purpose of preparing this opinion letter.
As to questions of fact material to this opinion letter, we have relied upon the
certificates of officers of the Company. We have undertaken no further
investigation in connection with this opinion letter except for only such
factual inquiries as we deemed appropriate with respect to the facts underlying
such certificates and the Agreements.
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Castelle
______________, 1996
In rendering this opinion, we have assumed the following:
(i) The representations and warranties in the Agreements and any other
certificates, instruments or agreements executed in connection with the
Agreements or delivered to us are true, correct and not misleading;
(ii) The signatures on all original documents examined by us are genuine
and all copies of such documents submitted to us are genuine;
(iii) The due authorization, execution and delivery of all documents (other
than the Company where authorization, execution and delivery are a
prerequisite to the effectiveness thereof);
(iv) All individuals executing and delivering documents had the legal
capacity to so execute and deliver;
(v) Each party to the Agreements, other than the Company is duly organized,
validly existing and in good standing under its jurisdiction of
organization and is in good standing as a foreign corporation in each such
jurisdiction in which the conduct of its business or its ownership or
leasing of property currently requires that it qualify as a foreign
corporation, with the corporate or other organizational power to perform
its obligations under the Agreements to which it is a party, each such
party has complied with any applicable requirement to file tax returns and
pay taxes in each jurisdiction in which it is required to do so, each such
party has validly authorized, executed and delivered each of the Agreements
to which it is a party and the Agreements constitute the valid and binding
obligations of each such party, enforceable against each such party in
accordance with their terms;
(vi) The factual matters set forth in the Agreements are accurate and
complete in all material respects and all certificates and all other
written representations as to factual matters delivered or made to us by
officers of the Company or the Signing Shareholders are accurate and
complete in all material respects;
(vii) There are no agreements, written or oral, among any of the parties to
any of the Agreements that modify, waive, amend or affect the terms of any
of the Agreements;
(viii) Neither the execution of the Agreements nor the consummation of the
transactions provided for therein contravenes any applicable law of any
jurisdiction, other than California law or federal law.
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Castelle
______________, 1996
The opinions hereinafter expressed are subject to the following additional
qualifications:
(a) The attorneys in our firm who have prepared this opinion are admitted
to practice law only in the States of California, and we express no opinion
herein concerning any law other than the law of the States of California
and the federal law of the United States.
(b) To the extent any opinion is rendered herein with respect to the
enforceability of any agreement: (1) we express no opinion as to the effect
on such enforceability of applicable federal or state bankruptcy,
insolvency, reorganization, moratorium or other similar laws generally
affecting relief of debtors or the enforcement of the rights of creditors;
(2) we express no opinion as to the effect on such enforceability of laws
governing specific performance, injunctive relief, fraudulent sales and/or
conveyances, preferences or other equitable remedies; (3) the
enforceability of obligations in the Agreements is subject to general
principles of equity regardless of whether such enforceability is
considered in a proceeding in equity or law, and a court applying such
principles may refuse to enforce, or may limit the application of, a
contract or any clause thereof; and (4) enforcement of indemnification
provisions contained in the Agreements may be limited by applicable law.
(c) We express no opinion herein as to compliance or non-compliance with
federal or state securities laws, including but not limited to, the
antifraud provisions of any state or federal securities law, rule or
regulation.
(d) We have acted as counsel to the Company and the Signing Shareholders
only with respect to certain corporate matters, the negotiation of the
Agreements and the rendering of these opinions. Accordingly, we may not
have knowledge of all matters of fact or law relating to the Company or the
Signing Shareholders that may be relevant in connection with the opinions
herein. Any alteration of those facts may adversely affect our opinions.
Whenever a statement herein is qualified by "known to us," "to our current
actual knowledge," or similar phrase, it is intended to indicate that
during the course of our representation of the Company, no information that
would give us current actual knowledge of the inaccuracy of such statement
has come to the attention of those attorneys in this firm who have rendered
legal services to the Company. However, except as otherwise expressly
indicated, we have not undertaken any independent investigation to
determine the accuracy of any such statement (including, without
limitation, any search of litigation filings in any court), and any limited
inquiry undertaken by us during the preparation of this letter should not
be regarded as such an investigation. No inference as to our current actual
knowledge of any matters bearing on the accuracy of any such statement
should be drawn from the fact of our representation of the Company.
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Castelle
______________, 1996
(e) With regard to our opinion in paragraph 4 below, we have examined and
relied upon a certificate executed by an officer of the Company, to the
effect that the consideration for all outstanding shares of capital stock
of the Company was received by the Company in accordance with the
provisions of the applicable Board of Directors resolutions and any plan or
agreement relating to the issuance of such shares, and we have undertaken
no independent verification with respect thereto.
(f) With regard to our opinion in paragraph 5 below with respect to
material defaults under any material agreement known to us, we have relied
solely upon (i) inquiries of officers of the Company, (ii) a list supplied
to us by the Company, a copy of which has been supplied to your counsel,
Cooley Godward Castro Huddleson & Tatum, of material agreements to which
the Company is a party, or by which it is bound, and (iii) an examination
of the items on the aforementioned list; we have made no further
investigation.
On the basis of the foregoing, in reliance thereon and with the foregoing
qualifications, we are of the opinion that:
1. The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of California.
2. The Company has the requisite corporate power to own or lease its
property and assets and to conduct its business as it is currently being
conducted and, to the best of our knowledge, is qualified as a foreign
corporation to do business and is in good standing in each jurisdiction in
the United States in which the ownership of its property or the conduct of
its business requires such qualification and where any statutory fines or
penalties or any corporate disability imposed for the failure to qualify
would materially and adversely affect the Company, its assets, financial
condition or operations.
3. The Agreements have been duly and validly authorized, executed and
delivered by the Company and constitute valid and binding agreements of the
Company and the Signing Shareholders enforceable against the Company and
the respective Signing Shareholders in accordance with their terms.
4. The Company's authorized capital stock consists of (a) ten million
(10,000,000) shares of Common Stock, without par value, of which one
hundred forty-one thousand sixteen (141,016) shares are issued and
outstanding, and (b) five million (5,000,000) shares of Preferred Stock,
without par value, of which forty-eight thousand thirty-five (48,035)
shares have been designated Series A Preferred Stock, without par value, of
which all such shares are issued and outstanding. The outstanding shares of
Common Stock and of Preferred Stock have been authorized and validly issued
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Castelle
______________, 1996
and are fully paid and nonassessable. The rights, preferences and
privileges of the Series A Preferred Stock are as stated in the Certificate
of Determination of Preferences of Series A Preferred Stock. To the best of
our knowledge, there are no options, warrants, conversion privileges,
preemptive rights or other rights presently outstanding to purchase any of
the authorized but unissued capital stock of the Company, other than the
conversion privileges of the Series A Preferred Stock, rights created in
connection with the transactions contemplated by the Agreements and twenty
thousand (20,000) shares reserved for issuance under the Company's 1992
Stock Option Plan, of which fourteen thousand seven hundred thirty-one
(14,731) shares are subject to outstanding options.
5. The execution and delivery of the Agreements by the Company do not
violate any provision of the Company's Articles of Incorporation or Bylaws,
and do not constitute a material default under the provisions of any
material agreement known to us to which the Company is a party or by which
it is bound, and do not violate or contravene (a) any governmental statute,
rule or regulation applicable to the Company or (b) any order, writ,
judgment, injunction, decree, determination or award which has been entered
against the Company and of which we are aware, the violation or
contravention of which would materially and adversely affect the Company,
its assets, financial condition or operations.
6. To the best of our knowledge, there is no action, proceeding or
investigation pending or overtly threatened against the Company before any
court or administrative agency that questions the validity of the
Agreements or might result, either individually or in the aggregate, in any
material adverse change in the assets, financial condition, or operations
of the Company.
7. All consents, approvals, authorizations, or orders of, and filings,
registrations, and qualifications with any regulatory authority or
governmental body in the United States required for the consummation by the
Company and, to our knowledge, the Signing Shareholders, of the
transactions contemplated by the Agreements, have been made or obtained.
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Castelle
______________, 1996
This opinion is intended solely for your use in connection with the transactions
contemplated by the Agreements and is not to be made available to or relied upon
by other persons or entities without our prior written consent. Our opinion is
expressly limited to the matters set forth above and we render no opinion,
whether by implication or otherwise, as to any other matters relating to the
Company or the Signing Shareholders. Our opinion is rendered as of the date
hereof, and we assume no obligation to advise you of facts, circumstances,
events or developments which hereafter may be brought to our attention and which
may alter, affect or modify the opinions expressed herein.
Very truly yours,
Graham & James LLP
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EXHIBIT J
FORM OF LEGAL OPINION OF
COOLEY GODWARD CASTRO HUDDLESON & TATUM
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[COOLEY GODWARD OPINION LETTER]
____________, 1996
To the Ibex Shareholders
listed on Schedule A hereto
Dear Sir or Madam:
We have acted as counsel for Castelle, a California corporation (the "Company"),
in connection with the merger of Ibex Technologies, Inc. ("Ibex") with and into
the Company pursuant to an Agreement and Plan of Reorganization dated as of
August 22, 1996 (the "Reorganization Agreement") by and among the Company, Ibex
and the Signing Shareholders listed on Exhibit A-1 and A-2 of the Reorganization
Agreement (the "Merger) and the issuance and sale of [eight hundred fifty
thousand (850,000)] shares of Castelle Common Stock (the "Shares") in connection
with the Merger. We are rendering this opinion pursuant to Section 6.6(i) of the
Reorganization Agreement. Except as otherwise defined herein, capitalized terms
used but not defined herein have the respective meanings given to them in the
Reorganization Agreement.
In connection with this opinion, we have examined and relied upon the
representations and warranties as to factual matters contained in and made
pursuant to the Reorganization Agreement by the various parties and originals or
copies certified to our satisfaction, of such records, documents, certificates,
opinions, memoranda and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinion expressed below. Where we render
an opinion "to the best of our knowledge" or concerning an item "known to us" or
our opinion otherwise refers to our knowledge, it is based solely upon (i) an
inquiry of attorneys within this firm who perform legal services for the
Company, (ii) receipt of a certificate executed by an officer of the Company
covering such matters, and (iii) such other investigation, if any, that we
specifically set forth herein.
In rendering this opinion, we have assumed: the genuineness and authenticity of
all signatures on original documents; the authenticity of all documents
submitted to us as originals; the conformity to originals of all documents
submitted to us as copies; the accuracy, completeness and authenticity of
certificates of public officials; and the due authorization, execution and
delivery of all documents (except the due authorization, execution and delivery
by the Company of the Reorganization Agreement and the exhibits thereto,
including the Merger Agreement and the Disclosure Schedule, (collectively the
"Agreements"), where authorization, execution and delivery are prerequisites to
the effectiveness of such documents. We have also assumed: that all individuals
executing and delivering documents had the legal capacity to so execute and
deliver; that you have received all documents you were to receive under the
Agreements; that the Agreements are obligations binding upon you; if you are a
corporation or other entity, that you have filed any required California
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franchise or income tax returns and have paid any required California franchise
or income taxes; and that there are no extrinsic agreements or understandings
among the parties to the Agreements that would modify or interpret the terms of
the Agreements or the respective rights or obligations of the parties
thereunder.
Our opinion is expressed only with respect to the federal laws of the United
States of America and the laws of the State of California. We express no opinion
as to whether the laws of any particular jurisdiction apply, and no opinion to
the extent that the laws of any jurisdiction other than those identified above
are applicable to the subject matter hereof. We are not rendering any opinion as
to compliance with any antifraud law, rule or regulation.
With regard to our opinion in paragraph 4 below with respect to material
defaults under any material agreement known to us, we have relied solely upon
(i) inquiries of officers of the Company, (ii) a list supplied to us by the
Company, a copy of which has been supplied to your counsel, Graham & James LLP,
of material agreements to which the Company is a party, or by which it is bound,
and (iii) an examination of the items on the aforementioned list; we have made
no further investigation.
On the basis of the foregoing, in reliance thereon and with the foregoing
qualifications, we are of the opinion that:
1. The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of California.
2. The Agreements have been duly and validly authorized, executed and
delivered by the Company and constitute valid and binding agreements of the
Company enforceable against the Company in accordance with their terms, except
as rights to indemnity under section 9 of the Reorganization Agreement may be
limited by applicable laws and except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or
other similar laws affecting creditors' rights, and subject to general equity
principles and to limitations on availability of equitable relief, including
specific performance.
3. The Shares, when issued in accordance with the terms of the
Reorganization Agreement, will be duly authorized, validly issued, fully paid
and non-assessable.
4. The execution and delivery of the Agreements by the Company pursuant
thereto do not violate any provision of the Company's Amended and Restated
Articles of Incorporation or Bylaws, and do not constitute a material default
under the provisions of any material agreement known to us to which the Company
is a party or by which it is bound, and do not violate or contravene (a) any
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governmental statute, rule or regulation applicable to the Company or (b) any
order, writ, judgment, injunction, decree, determination or award which has been
entered against the Company and of which we are aware, the violation or
contravention of which would materially and adversely affect the Company, its
assets, financial condition or operations.
5. To the best of our knowledge, there is no action, proceeding or
investigation pending or overtly threatened against the Company before any court
or administrative agency that questions the validity of the Agreements or might
result, either individually or in the aggregate, in any material adverse change
in the assets, financial condition, or operations of the Company.
All consents, approvals, authorizations, or orders of, and filings,
registrations, and qualifications with any regulatory authority or governmental
body in the United States required for the consummation by the Company of the
transactions contemplated by the Agreements, have been made or obtained.
Registration #33-__________ (the "Registration Statement") filed pursuant
to the Securities Act of 1933, as amended (the "Securities Act"), has become
effective, and, to the best of our knowledge, no stop order suspending the
effectiveness of the Registration Statement or preventing the use of the
associated Prospectus/Proxy Statement has been issued and no proceedings for
that purpose have been instituted or are pending or threatened by the Securities
and Exchange Commission.
The Registration Statement and the Prospectus/Proxy Statement (except for
the financial statements and schedules, other financial information and
statistical data which are included therein and information concerning Ibex, as
to which we express no opinion) comply as to form in all material respects with
the requirements of the Securities Act and the rules and regulations thereunder.
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This opinion is intended solely for your benefit and is not to be made available
to or be relied upon by any other person, firm, or entity without our prior
written consent.
Very truly yours,
COOLEY GODWARD CASTRO
HUDDLESON & TATUM
By:
Samuel M. Livermore
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Schedule A
Ney Grant and Betsy Gray-Grant
Clovis Mattos
Curtis Powell
Tucha Limited
Newark Holding S.A.
Teodoro Ramos Gimenez
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EXHIBIT L
ESCROW AGREEMENT
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ESCROW AGREEMENT
THIS ESCROW AGREEMENT is entered into as of August __, 1996 (the "Closing
Date"), by and among: CASTELLE, a California corporation ("Castelle"); IBEX
TECHNOLOGIES, INC., a California corporation ("Ibex"); the Shareholders of Ibex
who are listed on Attachment A (the "Shareholders"); NEY GRANT as agent of the
Shareholders (the "Shareholders' Agent"); and ___________________ ("Escrow
Agent").
RECITALS
A. Castelle, Ibex, and the Shareholders are entering into an Agreement and
Plan of Reorganization of even date herewith (the "Reorganization Agreement"),
pursuant to which Ibex shall be merged into Castelle and Ibex shareholders shall
exchange their stock in Ibex for shares of Castelle.
B. The Reorganization Agreement contemplates the establishment of an escrow
arrangement to secure the indemnification and other obligations of Ibex and the
Shareholders under the Reorganization Agreement and various related agreements.
C. Pursuant to Section 10.1 of the Reorganization Agreement, the Designated
Shareholders have appointed the Designated Shareholders' Agent as their
attorneys-in-fact for the purposes of this Agreement.
D. The Designated Shareholders have agreed to deposit ten percent (10%) of
the total number of shares of Common Stock of Castelle received pursuant to the
Reorganization Agreement (the "Shares") with Escrow Agent in connection with the
Designated Shareholders' performance of their obligations under the
Reorganization Agreement.
E. The Designated Shareholders' Agent and Castelle desire that Escrow Agent
hold the Shares pursuant to the terms hereof and to distribute such Shares in
accordance with the procedures specified herein.
AGREEMENT
The parties to this Escrow Agreement, intending to be legally bound, agree
as follows:
SECTION 1. DEFINED TERMS
Capitalized terms used and not otherwise defined in this Escrow Agreement
shall have the meanings assigned to them in the Reorganization Agreement.
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SECTION 2. ESCROW
2.1 Shares and Stock Powers to be Placed in Escrow. On the Closing Date,
(i) Castelle shall issue certificates for the Shares in the names of the
Designated Shareholders evidencing the shares of Castelle Stock to be held in
escrow in accordance with this Escrow Agreement, and (ii) the Designated
Shareholders shall deliver to Escrow Agent three stock powers each endorsed by
the Designated Shareholders in blank (the "Stock Powers"). Ibex and the
Designated Shareholders' Agent shall ensure that all signatures on the Stock
Powers delivered to Escrow Agent in accordance with the preceding sentence have
been guaranteed by a national bank or New York Stock Exchange member firm. The
shares and Stock Powers referred to in this Section 2.1 shall be held by Escrow
Agent in escrow (the "Escrow") in accordance with the provisions of this Escrow
Agreement.
2.2 Voting of Shares. The record owner of the Shares shall be entitled to
exercise all voting rights with respect to such Shares.
2.3 Dividends, Etc. Any cash, securities or other property distributable
(whether by way of dividend, stock split or otherwise) in respect of or in
exchange for any Shares shall not be distributed to the record owner of such
Shares, but rather shall be held by the Escrow Agent in the Escrow. At the time
any Shares are required to be released from the Escrow to any person pursuant to
this Escrow Agreement, any cash, securities or other property previously
distributed in respect of or in exchange for such shares shall be released from
the Escrow to such person.
2.4 Transferability. The interests of the Designated Shareholders' Agent
and the Shareholders in the Escrow and in the Shares held in the Escrow shall
not be assignable or transferable, other than by operation of law. No transfer
of any of such interests by operation of law shall be recognized or given effect
until Castelle shall have received written notice of such transfer.
2.5 Fractional Shares. No fractional shares of Castelle Stock shall be
retained in or released from the Escrow pursuant to this Escrow Agreement. In
connection with any release of shares from the Escrow, Castelle shall make a
cash payment to the owner of record for such fractional share which payment
shall be determined utilizing the Stipulated Value of such Share.
2.6 Receipt By Escrow Agent. Escrow Agent acknowledges receipt from
Castelle of a certificate representing the Shares and from the Designated
Shareholders' Agent of stock powers executed in blank by the Designated
Shareholders with respect to the Shares. Escrow Agent accepts appointment
hereunder and agrees to hold and distribute the Shares in accordance herewith.
SECTION 3. CLAIM PROCEDURES
Claim Procedures shall be as set forth in Section 9 of the Reorganization
Agreement and this Section.
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3.1 Response Notice. Within twenty (20) business days after the delivery of
an Officer's Certificate to the Designated Shareholders' Agent (with a copy to
the Escrow Agent), the Designated Shareholders' Agent shall deliver to Escrow
Agent and Castelle a written notice (the "Response Notice") containing: (i)
instructions to the effect that Shares having a Stipulated Value (as defined in
Section 5 of this Escrow Agreement) equal to the entire Claim Amount set forth
in such Claim Notice are to be released from the Escrow to Castelle; or (ii)
instructions to the effect that Shares having a Stipulated Value equal to a
specified portion (but not the entire amount) of the Claim Amount set forth in
such Claim Notice are to be released from the Escrow to Castelle, together with
a statement that the remaining portion of such Claim Amount is being disputed;
or (iii) a statement that the entire Claim Amount set forth in such Claim Notice
is being disputed. If no Response Notice is received by Escrow Agent from the
Designated Shareholders' Agent within twenty (20) business days after the
delivery of an Officer's Certificate to the Designated Shareholders' Agent, then
the recipient of such Claim Notice shall be deemed to have given instructions
that Shares having a Stipulated Value equal to the entire Claim Amount set forth
in such Claim Notice are to be released to Castelle from the Escrow.
3.2 Release of Shares to Castelle.
(a) If the Designated Shareholders' Agent gives (or is deemed to have
given) instructions that shares of Castelle Stock having a Stipulated Value
equal to the entire Claim Amount set forth in an Officer's Certificate are
to be released from the Escrow to Castelle, then Escrow Agent shall be
authorized to use a Stock Power held in the Escrow to transfer to Castelle,
from the Escrow, Shares having a Stipulated Value equal to such Claim
Amount.
(b) If a Response Notice delivered by the Designated Shareholders' Agent in
response to an Officer's Certificate contains instructions to the effect
that Shares having a Stipulated Value equal to a specified portion (but not
the entire amount) of the Claim Amount set forth in such Officer's
Certificate are to be released from the Escrow to Castelle, then (i) Escrow
Agent shall be authorized to use a Stock Power held in the Escrow to
transfer to Castelle, from the Escrow, Shares having a Stipulated Value
equal to such specified portion of such Claim Amount, and (ii) the
procedures set forth in Section 3.2(c) of this Escrow Agreement shall be
followed with respect to the remaining portion of such Claim Amount.
(c) If a Response Notice delivered by the Designated Shareholders' Agent in
response to a Claim Notice contains a statement that all or a portion of
the Claim Amount set forth in such Claim Notice is being disputed (such
Claim Amount or the disputed portion thereof being referred to as the
"Disputed Amount"), then, notwithstanding anything contained in Section 4
of this Escrow Agreement, Escrow Agent shall continue to hold in the Escrow
(in addition to any other Shares permitted to be retained in the Escrow,
whether in connection with any other dispute, or otherwise) Shares having a
Stipulated Value equal to 125% of the Disputed Amount. Such Shares shall
continue to be held in the Escrow until such time as (i) Castelle and the
Designated Shareholders' Agent execute a settlement agreement containing
instructions regarding the release of such Shares, (ii) Escrow Agent
receives a written decision from the arbitrator assigned to the dispute and
an application to correct or vacate the arbitration award can no longer be
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filed pursuant to the terms of the Reorganization Agreement, or (iii)
Escrow Agent receives a copy of a court order containing instructions to
Escrow Agent regarding the release of such Shares. Escrow Agent shall
thereupon release such Shares from the Escrow in accordance with the
instructions set forth in such settlement agreement, arbitration decision
or court order. (The parties acknowledge that it is appropriate to retain
more than 100% of the Claim Amount in the Escrow in recognition of the fact
that Castelle may have underestimated the aggregate amount of the actual
and potential Damages arising from a particular breach.)
SECTION 4. RELEASE OF SHARES TO DESIGNATED SHAREHOLDERS' AGENT
4.1 Shares to be Released. On the date 365 days after the Closing Date,
Escrow Agent shall release to the Designated Shareholders' Agent from the Escrow
all Shares then held in the Escrow, except for any Shares subject to an
Officer's Certificate which has been delivered or that are to be retained in the
Escrow in accordance with Section 3.2(c) of this Escrow Agreement.
4.2 Procedures for Releasing Shares. Any release of shares to the
Designated Shareholders' Agent pursuant to Section 4.1 of this Escrow Agreement
may be effected by utilizing a nationally recognized overnight courier to
deliver a stock certificate to the Designated Shareholders' Agent.
SECTION 5. VALUATION OF SHARES HELD IN ESCROW
For purposes of this Escrow Agreement, the "Stipulated Value" of each of
the Shares held in the Escrow shall be deemed to be equal to $8.00 (adjusted as
appropriate to reflect any stock split, reverse stock split, stock dividend or
similar transaction effected by Castelle after the Closing Date).
SECTION 6. FEES AND EXPENSES
The Shareholders shall reimburse the Designated Shareholders' Agent for all
reasonable expenses (including attorneys' fees) incurred by the Designated
Shareholders' Agent in connection with the performance of his duties hereunder.
In addition, the Designated Shareholders' Agent shall be promptly reimbursed by
the Designated Shareholders, in proportion to the number of shares of Castelle
Common Stock received by each of them as a result of the Merger, for any
payments which the Designated Shareholders' Agent is obligated to make and which
are made to the Escrow Agent pursuant to the indemnification provisions of this
Escrow Agreement.
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SECTION 7. PAYMENT OF ESCROW AGENT'S FEES AND EXPENSES
All fees and expenses (including, without limitation, reasonable attorneys'
fees) charged by Escrow Agent for its activities pursuant to this Agreement
shall be paid by Castelle pursuant to the attached fee schedule.
SECTION 8. RIGHTS AND OBLIGATIONS OF ESCROW AGENT
8.1 Successor Escrow Agent. Escrow Agent may resign as Escrow Agent at any
time by notice to the Designated Shareholders' Agent and Castelle (the
"Resignation Notice"). Upon receipt of the Resignation Notice, the Designated
Shareholders' Agent and Castelle shall appoint a successor Escrow Agent, which
shall be a banking corporation or trust company, organized under the laws of the
United States or of the State of California, with a place of business in San
Francisco. Upon receipt of notice of appointment from the Designated
Shareholders' Agent and Castelle, Escrow Agent shall promptly deliver the Shares
to such successor. In the event the Designated Shareholders' Agent and Castelle
do not agree upon a successor and deliver written notice thereof to Escrow Agent
within 60 days following delivery of the Resignation Notice, the Presiding Judge
of the Superior Court of the State of California, in and for the City and County
of San Francisco, shall appoint a successor in accordance with the
above-mentioned guidelines, and Escrow Agent shall promptly deliver the Shares
to such successor.
8.2 Indemnification. The Designated Shareholders' Agent and Castelle,
jointly and severally, hereby agree to indemnify and hold Escrow Agent harmless
from and against any and all losses, claims, damages, actions, suits or other
charges incurred by or assessed against Escrow Agent in the performance of its
duties hereunder, except to the extent resulting from its own negligence or
misconduct.
8.3 Limitation Of Liability. Escrow Agent shall not incur any liability to
anyone for damages, losses or expenses with respect to (a) any action taken or
omitted in good faith upon advice of Escrow Agent's counsel given with respect
to any questions relating to Escrow Agent's duties and responsibilities
hereunder, or (b) any action taken or omitted in reliance upon any instrument
(including, without limitation, any Officer's Certificate or Response Notice
provided for herein) which Escrow Agent shall in good faith believe to be
genuine, to have been signed or presented by a proper person or persons and to
conform with the provisions hereof. Furthermore, in the event Escrow Agent shall
be uncertain as to its rights or obligations hereunder, or in the event Escrow
Agent shall receive any communication from the Designated Shareholders' Agent or
Castelle with respect to the Shares which, in the opinion of Escrow Agent, is in
conflict with any of the provisions of this Agreement, Escrow Agent shall be
entitled to refrain from taking any action until it shall be directed otherwise
in writing by the Designated Shareholders' Agent and Castelle or by order of a
court of competent jurisdiction.
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8.4 Controversies. If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, Escrow Agent will not be required to
determine the controversy or to take any action regarding it. Escrow Agent may
hold all documents and funds and may wait for settlement of any such controversy
pursuant to Section 9.11 of the Reorganization Agreement hereof or by final
appropriate legal proceedings or other means as, in Escrow Agent's discretion,
Escrow Agent may require, despite what may be set forth elsewhere in this
Agreement. In such event, Escrow Agent will not be liable for interest or
damage.
8.5 No Interest. Notwithstanding any provision to the contrary contained in
any other agreement between or among any of the parties hereto, Escrow Agent
shall have no interest in the Shares.
8.6 No Implied Obligations. This Agreement sets forth the exclusive
obligations of Escrow Agent with respect to any and all matters pertinent
hereto, and no implied duties or obligations of Escrow Agent shall be read into
this Agreement.
SECTION 9. GENERAL
9.1 Confirmation of Appointment. The Shareholders confirm the appointment
and authority of the Designated Shareholders' Agent as set forth in Section 10.1
of Reorganization Agreement with respect to all matters relating to this Escrow
Agreement. Any successor to the Designated Shareholders' Agent who is appointed
in accordance with the provisions of Section 10.1 of the Reorganization
Agreement shall be deemed to be the "Designated Shareholders' Agent" for
purposes of this Escrow Agreement. Any document executed or action taken by the
Shareholders' Agent shall be binding upon all of the Shareholders.
9.2 Other Agreements. Nothing in this Escrow Agreement is intended to limit
any of Castelle's rights, or any obligation of any Shareholder or Ibex, under
the Reorganization Agreement.
9.3 Notices. Any notice or other communication required or permitted to be
delivered to any party under this Escrow Agreement shall be in writing and shall
be deemed properly delivered, given and received when delivered (by hand, by
registered mail, by courier or express delivery service or by facsimile) to the
address or facsimile telephone number set forth beneath the name of such party
below (or to such other address or facsimile telephone number as such party
shall have specified in a written notice given to the other parties hereto):
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if to the Designated Shareholders' Agent or any of the Shareholders:
NEY GRANT
2725 Romer Boulevard
Pollock Pines, CA 95726
Facsimile: (916) 647-2055
if to Castelle:
CASTELLE
3255-3 Scott Boulevard
Santa Clara, California 95054
Attn: President
Facsimile: (408) 654-4699
if to Escrow Agent:
--------------------
--------------------
--------------------
9.4 Counterparts. This Escrow Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
9.5 Time of the Essence. Time is of the essence of this Escrow Agreement.
9.6 Headings. The underlined headings contained in this Escrow Agreement
are for convenience of reference only, shall not be deemed to be a part of this
Escrow Agreement and shall not be referred to in connection with the
construction or interpretation of this Escrow Agreement.
9.7 Governing Law; Venue.
(a) This Escrow Agreement shall be construed in accordance with, and
governed in all respects by, the internal laws of the State of California
(without giving effect to principles of conflicts of laws).
(b) Subject to the arbitration provisions of Section 9.11 of the
Reorganization Agreement, any legal action or other legal proceeding
relating to this Escrow Agreement or the enforcement of any provision of
this Escrow Agreement may be brought or otherwise commenced in any state or
federal court located in the State of California. Each party to this Escrow
Agreement:
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(i) expressly and irrevocably consents and submits to the jurisdiction
of each state and federal court located in the State of California
(and each appellate court located in the State of California) in
connection with any such legal proceeding;
(ii) agrees that each state and federal court located in the State of
California shall be deemed to be a convenient forum; and
(iii) agrees not to assert (by way of motion, as a defense or
otherwise), in any such legal proceeding commenced in any state or
federal court located in the State of California, any claim that such
party is not subject personally to the jurisdiction of such court,
that such legal proceeding has been brought in an inconvenient forum,
that the venue of such proceeding is improper or that this Escrow
Agreement or the subject matter of this Escrow Agreement may not be
enforced in or by such court.
(c) Unless addressed in Section 9.7(b) of this Escrow Agreement, nothing
contained in this Escrow Agreement shall be deemed to limit or otherwise
affect the right of any party hereto to commence any legal proceeding or
otherwise proceed against any other party hereto in any other forum or
jurisdiction.
9.8 Successors and Assigns; Parties in Interest.
(a) Subject to Sections 2.4 and 9.8(b) of this Escrow Agreement, this
Escrow Agreement shall be binding upon: Ibex and its successors and assigns
(if any); the Designated Shareholders' Agent and the Shareholders and their
respective estates, successors and assigns (if any); and Castelle and its
successors and assigns (if any). This Escrow Agreement shall inure to the
benefit of: Ibex; the Shareholders; Castelle; the other Indemnitees
(subject to Section 9.8 of the Reorganization Agreement); and the
respective successors (if any) of the foregoing.
(b) Castelle may freely assign any or all of its rights under this Escrow
Agreement, in whole or in part, to any other person without obtaining the
consent or approval of any other party hereto or of any other person.
Castelle may not delegate its obligations under this Escrow Agreement to
any other person without the prior consent of the Designated Shareholders'
Agent. None of the Shareholders, the Designated Shareholders' Agent or Ibex
shall be permitted to assign any of his, her or its rights or delegate any
of his, her or its obligations under this Escrow Agreement without
Castelle's prior reasonable written consent.
9.9 Waiver.
(a) No failure on the part of any person to exercise any power, right,
privilege or remedy under this Escrow Agreement, and no delay on the part
of any person in exercising any power, right, privilege or remedy under
this Escrow Agreement, shall operate as a waiver of such power, right,
privilege or remedy; and no single or partial exercise of any such power,
right, privilege or remedy shall preclude any other or further exercise
thereof or of any other power, right, privilege or remedy.
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(b) No person shall be deemed to have waived any claim arising out of this
Escrow Agreement, or any power, right, privilege or remedy under this
Escrow Agreement, unless the waiver of such claim, power, right, privilege
or remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such person; and any such waiver shall not be
applicable or have any effect except in the specific instance in which it
is given.
9.10 Amendments. This Escrow Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of Castelle and the Designated Shareholders'
Agent.
9.11 Severability. In the event that any provision of this Escrow
Agreement, or the application of any such provision to any person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Escrow Agreement, and the
application of such provision to persons or circumstances other than those as to
which it is determined to be invalid, unlawful, void or unenforceable, shall not
be impaired or otherwise affected and shall continue to be valid and enforceable
to the fullest extent permitted by law.
9.12 Entire Agreement. This Escrow Agreement, the Reorganization Agreement
and the Exhibits thereto set forth the entire understanding of the parties
relating to the subject matter hereof and thereof and supersede all prior
agreements and understandings among or between any of the parties relating to
the subject matter hereof and thereof.
9.13 Construction.
(a) For purposes of this Escrow Agreement, whenever the context requires:
the singular number shall include the plural, and vice versa; the masculine
gender shall include the feminine and neuter genders; the feminine gender
shall include the masculine and neuter genders; and the neuter gender shall
include the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall not be
applied in the construction or interpretation of this Escrow Agreement.
(c) As used in this Escrow Agreement, the words "include" and "including,"
and variations thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words "without limitation."
(d) Except as otherwise indicated, all references in this Escrow Agreement
to "Sections" are intended to refer to Sections of this Escrow Agreement.
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IN WITNESS WHEREOF, the parties have executed this Escrow Agreement as of
the date first above written.
CASTELLE,
a California corporation
By:
IBEX TECHNOLOGIES, INC.,
a California corporation
By:
Ney Grant, President
Shareholders' Agent
ESCROW AGENT
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ATTACHMENT A
SHAREHOLDERS
Ney Grant and Betsy Gray-Grant
Clovis Mattos
Curtis Powell
134
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ATTACHMENT B
ESCROW AGENT FEE SCHEDULE
135
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EXHIBIT M
FORM OF IRREVOCABLE PROXY
136
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IRREVOCABLE PROXY
____________________ ("Shareholder"), a shareholder of Ibex Technologies,
Inc., a California corporation (the "Company"), hereby irrevocably appoints
Castelle, a California corporation, the attorney and proxy of the undersigned,
with full power of substitution and resubstitution, to vote the __________
shares of voting common stock of the Company owned of record by Shareholder (the
"Shares") with respect to the following matters (the "Identified Matters"):
(a) the Reorganization Agreement (as herein defined), the Merger (as herein
defined), and the other transactions contemplated by the Reorganization
Agreement;
(b) any proposal made in opposition to or in competition with the
consummation of the Merger;
(c) any proposal contemplating any transaction involving: (i) the sale,
license, disposition or acquisition of all or a material portion of the
Company's business or assets; or (ii) the issuance, disposition or
acquisition of (A) any capital stock or other equity security of the
Company, (B) any option, call, warrant or right (whether or not immediately
exercisable) to acquire, or otherwise relating to, any capital stock or
other equity security of the Company, or (C) any security, instrument or
obligation that is or may become convertible into or exchangeable for any
capital stock or other equity security of the Company; or
(d) any merger, consolidation, business combination, share exchange,
reorganization or similar transaction involving the Company; and
(e) any other action or agreement that could reasonably be expected to
result in (i) a breach of any representation, warranty covenant or
obligation of the Company or Shareholder under the Reorganization
Agreement, or under any other agreement executed on behalf of the Company
or Shareholder, or (ii) any of the conditions to the Company's or
Castelle's obligations under the Reorganization Agreement not being
satisfied.
This Proxy shall terminate at such time (if ever) as that certain Agreement
and Plan of Reorganization dated as of August __, 1996 (the "Reorganization
Agreement") among Castelle, the Company, Shareholder and certain other
shareholders of the Company, providing for the merger of the Company into
Castelle (the "Merger"), shall have been validly terminated or closed in
accordance with its terms. Upon the execution hereof, all prior proxies given by
Shareholder with respect to the Shares are hereby revoked, and no subsequent
proxies will be given. This Proxy is irrevocable, is coupled with an interest
and is granted in consideration of Castelle entering into the Reorganization
Agreement. The attorneys and proxies appointed pursuant to this Proxy will be
empowered (at all times prior to the termination of the Reorganization
Agreement) to exercise (in their discretion and in such manner as they may deem
appropriate) all voting and other rights of Shareholder with respect to the
Shares (including, without limitation, the power to execute and deliver written
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consents with respect to the Shares), with respect to the Identified Matters, at
every meeting of the shareholders of the Company (and every adjournment or
postponement thereof) or by written consent in lieu of such a meeting, or
otherwise.
This Proxy shall be binding upon the Shareholder and his personal
representatives, executors, administrators, estates, heirs, successors and
assigns (if any). This Proxy shall inure to the benefit of Castelle and its
respective successors and assigns (if any).
Dated: ______________, 1996 _______________________________
Shareholder
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CASTELLE TO ACQUIRE IBEX TECHNOLOGIES, INC.
Leader in LAN Fax Servers and Leader in Fax-on-Demand to Join Forces
SANTA CLARA, Calif., Aug. 22, 1996--Castelle (NSDQ:CSTL), a leading supplier of
internetwork fax- and print-server products, has signed a definitive agreement
to purchase Ibex Technologies, Inc., the market leader in fax-on-demand systems.
Under the terms of the agreement, which is accounted for as a pooling of
interests, Castelle will acquire all of the outstanding stock of the
privately-held Ibex Technologies in exchange for approximately 850,000 shares of
Castelle common stock. The closing sale price for Castelle common stock on
NASDAQ on Aug. 21, 1996, was $7.00 per share. The transaction has been approved
by the boards of directors of both companies and is subject to the approval of
Castelle and Ibex shareholders.
Castelle develops products that broaden communications among workgroup users by
enabling them to send and receive faxes and print documents from their networked
PCs; the products are sold through domestic and international distributors, and
selected OEMs worldwide. Ibex's product line includes fax-on-demand, fax
gateway, fax broadcast and Web fax applications which are sold direct and
through value-added resellers (VARs). According to recent market studies,
Castelle and Ibex hold 17 percent and 18 percent shares of the LAN fax and
fax-on-demand markets, respectively.
Art Bruno, Castelle CEO and chairman, said the acquisition will create "an
entity that possesses the technologies and channels necessary to address the
emerging market for universal information-on-demand solutions integrating fax,
e-mail and the World Wide Web. Unlike many merging companies, Castelle and Ibex
have truly complementary, non-conflicting sales channels. Ibex has over 100
sophisticated VARs that have helped sell its products into Fortune 1000 firms.
Castelle's workgroup-oriented products are available through a worldwide network
of leading distributors and resellers. Together these channels will expand both
companies' sales opportunities, enabling Ibex to deliver fax-on-demand to the
mass market and Castelle to penetrate large enterprises with its LAN fax
solutions."
Following the completion of the acquisition, which is expected in October, Ibex
will operate as the Ibex Division of Castelle, and its 25 employees will remain
in the company's El Dorado Hills, Calif., headquarters. Grant will head the
division, reporting to Bruno. Grant and other key Ibex executives will enter
into employment and non-competition agreements with Castelle.
Castelle reported 1995 revenues of $25.1 million. Ibex's 1995 revenues were
approximately $3.1 million.
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APPENDIX B
<PAGE>
Board of Directors
Castelle
August 22, 1996
Page 1
August 22, 1996
Board of Directors
Castelle
3255-3 Scott Boulevard
Santa Clara, CA 95054
Gentlemen:
We understand that Castelle ("Castelle" or the "Company") and Ibex
Technologies, Inc. ("Ibex") have entered into a merger agreement pursuant to
which Ibex shall be merged with and into Castelle (the "Merger"). In connection
with the Merger, Castelle will issue 850,000 shares of its Common Stock in
exchange for all Ibex capital stock and options to purchase Ibex capital stock
(the "Merger Consideration").
You have requested our opinion of the Merger with respect to fairness, from
a financial point of view, to Castelle.
In connection with our review, we have, among other things
(i) reviewed the Agreement and Plan of Reorganization dated August 22,
1996,
(ii) reviewed financial information with respect to the business operations
of the Company including, but not limited to audited consolidated
financial statements for the fiscal years ended December 31, 1993,
December 31, 1994 and December 31, 1995 and unaudited consolidated
financial data for the period ended June 28, 1996,
(iii)reviewed financial information with respect to the business
operations of Ibex including, but not limited to, audited financial
statements for the fiscal years ended December 31, 1994 and December
31, 1995 and unaudited consolidated financial data for the period
ended June 30, 1996,
(iv) reviewed certain internal financial, operating and other information
relating to Castelle and Ibex (including financial projections)
prepared by the respective managements of each company,
(v) held discussions with certain members of both Castelle and Ibex
management concerning past and current operations, financial condition
and business prospects,
(vi) held discussions and reviewed material prepared by certain members of
Castelle management analyzing their assessments of the business and
prospects of Castelle and Ibex and the potential financial effect of
the Merger on Castelle if the Merger were consummated,
(vii)discussed with Castelle management the results of their due diligence
of Ibex and reviewed related documents and analyses,
(viii) reviewed a comparison of operating results and other financial
information of Castelle and Ibex with other companies which we deemed
appropriate,
(ix) reviewed a comparison of the financial terms of the Merger with the
terms of certain other mergers and transactions which we deemed
appropriate, and
(x) considered such other information, financial studies and analyses as
we deemed relevant and performed such analyses, studies and
investigations as we deemed appropriate.
Unterberg Harris has assumed and relied upon, without independent
verification, the accuracy and completeness of the information reviewed by it.
With respect to any financial projections, we assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the respective future financial performances of Castelle and
Ibex and the future financial performance of the combined company. We also have
assumed without independent verification that Ibex owns and has adequate legal
protection for all material intellectual property it purports to own, that Ibex
owns or has adequate rights to use all intellectual property material to its
business as conducted or contemplated to be conducted and that the
representations and warranties of Castelle and Ibex in the Agreement and Plan of
Reorganization are true and correct. We have also assumed that the merger will
be accounted for as a pooling of interests.
We have not conducted a physical inspection of the properties or facilities
of Castelle or Ibex or made any independent valuation or appraisal of the
assets, liabilities, patents or intellectual property of Castelle or Ibex, nor
have we been furnished with any such valuations or appraisals. We have assumed
that the assessments of management have been made in good faith and reflect the
best currently available management judgments as to the matters covered. Our
opinion is necessarily based upon economic, market and other conditions as in
effect on, and the information made available to us as of, the date of this
letter.
We understand that in considering the Merger, the Board of Directors of the
Company has considered a wide range of financial and non-financial factors, many
of which are beyond the scope of this letter. This letter is not intended to
substitute for the Board's exercise of its own business judgment in reviewing
the Merger.
Based upon and subject to the foregoing considerations, it is our opinion
as financial advisors that the Merger Consideration is fair, from a financial
point of view, to Castelle.
This opinion is delivered to you based on your agreement that it is
intended solely for the benefit and use of the Company in considering the Merger
and that the Company will not use this opinion for any other purpose and will
not reproduce, disseminate or refer to this opinion at any time or make any
public reference to us or our engagement to deliver this opinion without our
prior written consent. It should be understood that, although subsequent
developments may affect this opinion, Unterberg Harris does not have any
obligation to update, revise or reaffirm this opinion. Delivery of this opinion
is not intended to confer rights on any third party, including stockholders,
employees or creditors of the Company or Ibex.
Very truly yours,
Unterberg Harris
By: /s/ Unterberg Harris
<PAGE>
APPENDIX C
Div. 1 Title 1
GENERAL CORPORATION LAW
ss. 1300. Corporate purchase of dissenting shares
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a)
and (b) or subdivision (e) or (f) of Section 1201, each shareholder of
the corporation entitled to vote on the transaction and each
shareholder of a subsidiary corporation in a short-form merger may, by
complying with this chapter, require the corporation in which the
shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares
as defined in subdivision (b). The fair market value shall be
determined as of the day before the first announcement of the terms of
the proposed reorganization or short-form merger, excluding any
appreciation or depreciation in consequence of the proposed action,
but adjusted for any stock split, reverse stock split, or share
dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities
exchange certified by the Commissioner of Corporations under
subdivision (o) of Section 25100 or (B) listed on the list of OTC
margin stocks issued by the Board of Governors of the Federal
Reserve System, and the notice of meeting of shareholders to act
upon the reorganization summarizes this section and Sections
1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists
any restriction on transfer imposed by the corporation or by any
law or regulation; and provided, further, that this provision
does not apply to any class of shares described in subparagraph
(A) or (B) if demands for payment are filed with respect to 5
percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were
not voted in favor of the reorganization or, (B) if described in
subparagraph (A) or (B) of paragraph (1) (without regard to the
provisos in that paragraph), were voted against the
reorganization, or which were held of record on the effective
date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any
case where the approval required by Section 1201 is sought by
written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance
with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement,
in accordance with Section 1302.
1.
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Div. 1 Title 1
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
(Added by Stats. 1975, c. 682 ss. 7 eff. Jan. 1, 1977. Amended by
Stats.1976, c. 641, ss. 21.3, eff. Jan. 1, 1977; Stats. 1982, c. 36,
p. 69, ss. 3, eff. Feb. 17, 1982; Stats. 1990, c. 1018 (A.B. 2259),
ss. 2; Stats.1993, c. 543 (A.B. 2063), ss. 13.)
ss. 1301. Notice to dissenting shareholders; demand for purchase of shares
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs
(3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each
such shareholder a notice of the approval of the reorganization by its
outstanding shares (Section 152) within 10 days after the date of such
approval accompanied by a copy of Sections 1300, 1302, 1303, 1304 and
this section, a statement of the price determined by the corporation
to represent the fair market value of the dissenting shares, and a
brief description of the procedure to be followed if the shareholder
desires to exercise the shareholder's right under such sections. The
statement of price constitutes an offer by the corporation to purchase
at the price stated any dissenting shares as defined in subdivision
(b) of Section 1300, unless they lose their status as dissenting
shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and
who desires the corporation to purchase such shares shall make written
demand upon the corporation for the purchase of such shares and
payment to the shareholder in cash of their fair market value. The
demand is not effective for any purpose unless it is received by the
corporation or any transfer agent thereof (1) in the case of shares
described in clause (i) or (ii) of paragraph (1) of subdivision (b) of
Section 1300 (without regard to the provisos in that paragraph), not
later than the date of the shareholders' meeting to vote upon the
reorganization, or (2) in any other case within 30 days after the date
on which the notice of the approval by the outstanding shares pursuant
to subdivision (a) or the notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the
corporation purchase and shall contain a statement of what such
shareholder claims to be the fair market value of those shares as of
the day before the announcement of the proposed reorganization or
short-form merger. The statement of fair market value constitutes an
offer by the shareholder to sell the shares at such price. (Added by
Stats.1975, c. 682, ss. 7 eff. Jan. 1, 1977. Amended by Stats.1976, c.
641, ss. 21.6, eff. Jan. 1, 1977; Stats.1980, c. 501, p. 1052, ss. 5;
Stats.1980, c. 1155, p. 3831, ss. 1.)
2.
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Div. 1 Title 1
ss. 1302. Shareholder certificates or notice; time limit for submission
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to shareholder, the shareholder shall submit to the corporation at its
principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares. (Added by Stats.1975, c. 682,
ss. 7, eff. Jan. 1, 1977. Amended by Stats.1986, c. 766, ss. 23.)
ss. 1303. Agreed price; interest; filing agreements; time for payment
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the
dissenting shareholder is entitled to the agreed price with interest
thereon at the legal rate on judgments from the date of the agreement.
Any agreements fixing the fair market value of any dissenting shares
as between the corporation and the holders thereof shall be filed with
the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the
amount thereof has been agreed or within 30 days after any statutory
or contractual conditions to the reorganization are satisfied,
whichever is later, and in the case of certificated securities,
subject to surrender of the certificates therefor, unless provided
otherwise by agreement. (Added by Stats.1975, c. 682, ss. 7, eff. Jan.
1, 1977. Amended by Stats.1980, c. 501, p. 1053, ss. 6; Stats.1986, c.
766, ss. 24.)
ss. 1304. Action to determine whether shares are dissenting or to determine
fair market value
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market
value of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six
months after the date on which notice of the approval by the
outstanding shares (Section 152) or notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder, but not thereafter, may
file a complaint in the superior court of the proper county praying
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the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both may intervene in
any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions
may be consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court
shall first determine that issue. If the fair market value of the
dissenting shares is in issue, the court shall determine, or shall
appoint one or more impartial appraisers to determine, the fair market
value of the shares. (Added by Stats.1975, c. 682, ss. 7, eff. Jan. 1,
1977.)
ss. 1305. Appraiser's report
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the
time fixed by the court, the appraisers, or a majority of them, shall
make and file a report in the office of the clerk of the court.
Thereupon, on the motion of any party, the report shall be submitted
to the court and considered on such evidence as the court considers
relevant. If the court finds the report reasonable, the court may
confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within
such further time as may be allowed by the court or the report is not
confirmed by the court, the court shall determine the fair market
value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair
market value of each dissenting share multiplied by the number of
dissenting shares which any dissenting shareholder who is a party, or
who has intervened, is entitled to require the corporation to
purchase, with interest thereon at the legal rate from the date on
which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated
securities, only upon the endorsement and delivery to the corporation
of the certificates for the shares described in the judgment. Any
party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned
as the court considers equitable, but, if the appraisal exceeds the
price offered by the corporation, the corporation shall pay the costs
(including in the discretion of the court attorneys' fees, fees of
expert witnesses and interest at the legal rate on judgments from the
date of compliance with Sections 1300, 1301 and 1302 if
4.
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Div. 1 Title 1
the value awarded by the court for the shares is more than 125 percent of the
price offered by the corporation under subdivision (a) of Section 1301). (Added
by Stats.1975, c. 682, ss. 7, eff. Jan. 1, 1977. Amended by Stats.1976, c. 641,
ss. 22, eff. Jan. 1, 1977; Stats.1976, c. 235, p.
1068, ss. 16; Stats.1986, c. 766, ss. 25.)
ss. 1306. Holders of dissenting shares as creditors
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5. (Added by Stats.1975, c. 682, ss.
7, eff. Jan. 1, 1977)
ss. 1307. Dividends on dissenting shares after approval date
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor. (Added by Stats.1975, c. 682, ss. 7, eff. Jan. 1, 1977.)
ss. 1308. Rights in dissenting shares prior to determination of fair
market value
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto. (Added by Stats.1975, c. 682, ss. 7, eff. Jan. 1, 1977.)
ss. 1309. Termination of dissenting shareholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this
chapter all necessary expenses incurred in such proceedings and
reasonable attorneys' fees.
5.
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Div. 1 Title 1
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price
of the shares, and neither files a complaint or intervenes in a
pending action as provided in Section 1304, within six months after
the date on which notice of the approval by the outstanding shares or
notice pursuant to subdivision (i) of Section 110 was mailed to the
shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting
shares. (Added by Stats.1975, c. 682, ss. 7, eff. Jan. 1, 1977.)
ss. 1310. Litigation; suspension of proceedings
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation. (Added by Stats.1975, c. 682, ss. 7, eff. Jan. 1, 1977.)
ss. 1311. Shares specifying amount in event of merger or reorganization
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger. (Added by
Stats. 1975, c. 682, ss. 7 eff. Jan. 1, 1977. Amended by Stats.1988, c. 919, ss.
8.)
ss. 1312. Attack on validity of merger or reorganization
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall
have any right at law or in equity to attack the validity of the
reorganization or short-form merger, or to have the reorganization or
short-form merger set aside or rescinded, except in an action to test
whether the number of shares required to authorize or approve the
reorganization have been legally voted in favor thereof; but any
holder of shares of a class whose terms and provisions specifically
set forth the amount to be paid in respect to them in the event of a
reorganization or short-form merger is entitled to payment in
accordance with those terms and provisions or, if the principal terms
of the reorganization are approved pursuant to subdivision (b) of
Section 1202, is entitled to payment in accordance with the terms and
provisions of the approved reorganization.
6.
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Div. 1 Title 1
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with,
another party to the reorganization or short-form merger, subdivision
(a) shall not apply to any shareholder of such party who has not
demanded payment of cash for such shareholder's shares pursuant to
this chapter; but if the shareholder institutes any action to attack
the validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, the
shareholder shall not thereafter have any right to demand payment of
cash for the shareholder's shares pursuant to this chapter. The court
in any action attacking the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set
aside or rescinded shall not restrain or enjoin the consummation of
the transaction except upon 10 days' prior notice to the corporation
and upon a determination by the court that clearly no other remedy
will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with,
another party to the reorganization or short-form merger, in any
action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, (1) a party to a reorganization or short-form merger which
controls another party to the reorganization or short- form merger
shall have the burden of proving that the transaction is just and
reasonable as to the shareholders of the controlled party, and (2) a
person who controls two or more parties to a reorganization shall have
the burden of proving that the transaction is just and reasonable as
to the share-holders of any party so controlled. (Added by Stats.1975,
c. 682, ss. 7, eff. Jan. 1, 1977. Amended Stats.1976, c. 641, ss.
22.5, eff. Jan. 1, 1977; Stats.1988, c. 919, ss. 9.)
7.
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APPENDIX D
IBEX TECHNOLOGIES, INC.
1992 STOCK OPTION PLAN
1. Purposes of the Plan.
The purposes of this Stock Option Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentives to Employees, Non-Employee Directors and Consultants of
the Company and its Subsidiaries, and to promote the success of the Company's
business. Options granted hereunder may be either Incentive Stock Options or
Nonstatutory Stock Options at the discretion of the Committee. This is intended
to be a stock option plan for purposes of Section 408 of the California General
Corporation Law.
2. Definitions.
As used herein, and in any Option granted hereunder, the following
definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Ibex Technologies, Inc., a California
corporation.
(e) "Committee" shall mean the Committee appointed by the Board in
accordance with paragraph (a) of Section 4 of the Plan. If the Board
does not appoint or ceases to maintain a Committee, the term
"Committee" shall refer to the Board.
(f) "Consultant" shall mean any independent contractor retained to perform
services for the Company or any Subsidiary.
(g) "Continuous Employment" shall mean the absence of any interruption or
termination of service as an Employee or Non-Employee Director by the
Company or any Subsidiary. Continuous Employment shall not be
considered interrupted during any period of sick leave, military leave
or any other leave of absence approved by the Board or in the case of
transfers between locations of the Company or between the Company and
any Parent, Subsidiary or successor of the Company.
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(h) "Disinterested Person" shall mean a person who has not at any time
within one year prior to service as a member of the Committee (or
during such service) been granted or awarded Options or other equity
securities pursuant to the Plan or any other plan of the Company or
any Parent or Subsidiary. Notwithstanding the foregoing, a member of
the Committee shall not fail to be a Disinterested Person merely
because he or she participates in a plan meeting the requirements of
Rule 16b-3(c)(2)(i)(A) or (B) promulgated under the Exchange Act.
(i) "Employee" shall mean any person, including officers (whether or not
they are directors), employed by the Company or any Subsidiary.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(k) "Incentive Stock Option" shall mean any option granted under this Plan
and any other option granted to an Employee in accordance with the
provisions of Section 422 of the Code, and the regulations promulgated
thereunder.
(l) "Non-Employee Director" shall mean any director of the Company or any
Subsidiary who is not employed by the Company or such Subsidiary.
(m) "Nonstatutory Stock Option" shall mean an Option granted under the
Plan that is subject to the provisions of Section 1.83-7 of the
Treasury Regulations promulgated under Section 83 of the Code.
(n) "Option" shall mean a stock option granted pursuant to the Plan.
(o) "Option Agreement" shall mean a written agreement between the Company
and the Optionee regarding the grant and exercise of Options to
purchase Shares and the terms and conditions thereof as determined by
the Committee pursuant to the Plan.
(p) "Optioned Shares" shall mean the Common Stock subject to an Option.
(q) "Optionee" shall mean an Employee, Non- Employee Director or
Consultant who receives an Option.
(r) "Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined by Section 424(e) of the Code.
(s) "Plan" shall mean this 1992 Stock Option Plan.
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(t) "Registration Date" shall mean the effective date of the first
registration statement filed by the Company pursuant to Section 12(g)
of the Exchange Act with respect to any class of the Company's equity
securities.
(u) "Securities Act" shall mean the Securities Act of 1933, as amended.
(v) "Share" shall mean a share of the Common Stock subject to an Option,
as adjusted in accordance with Section 11 of the Plan.
(w) "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
(x) "Transfer Agreement" shall have the meaning ascribed thereto in
Section 9(b) hereof.
3. Stock Subject to the Plan.
Subject to the provisions of Section 11 of the Plan, the maximum aggregate
number of Shares which may be optioned and sold under the Plan is twenty
thousand (20,000) Shares. The Shares may be authorized but unissued or
reacquired shares of Common Stock. If an Option expires or becomes unexercisable
for any reason without having been exercised in full, the Shares which were
subject to the Option but as to which the Option was not exercised shall, unless
the Plan shall have been terminated, become available for other Option grants
under the Plan.
The Company intends that as long as it is not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act and is not an investment
company registered or required to be registered under the Investment Company Act
of 1940, all offers and sales of Options and Shares issuable upon exercise of
any Option shall be exempt from registration under the provisions of Section 5
of the Securities Act, and the Plan shall be administered in such a manner so as
to preserve such exemption. The Company intends that the Plan shall constitute a
written compensatory benefit plan within the meaning of Rule 701(b) of 17 CFR
Section 230.701 promulgated by the Securities and Exchange Commission pursuant
to such Act. The Committee shall designate which Options granted under the Plan
by the Company are intended to be granted in reliance on Rule 701.
4. Administration of the Plan.
(a) Procedure. The Plan shall be administered by the Board. The Board may
appoint a Committee consisting of not less than three (3) members of
the Board to administer the Plan, subject to such terms and conditions
as the Board may prescribe. Once appointed, the Committee shall
continue to serve until otherwise directed by the Board. From time to
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time, the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however
caused, and remove all members of the Committee and, thereafter,
directly administer the Plan.
Members of the Board or Committee who are either eligible for Options
or have been granted Options may vote on any matters affecting the
administration of the Plan or the grant of Options pursuant to the
Plan, except that no such member shall act upon the granting of an
Option to himself, but any such member may be counted in determining
the existence of a quorum at any meeting of the Board or the Committee
during which action is taken with respect to the granting of an Option
to him or her.
The Committee shall meet at such times and places and upon such notice
as the Chairperson determines. A majority of the Committee shall
constitute a quorum. Any acts by the Committee may be taken at any
meeting at which a quorum is present and shall be by majority vote of
those members entitled to vote. Additionally, any acts reduced to
writing or approved in writing by all of the members of the Committee
shall be valid acts of the Committee.
(b) Procedure After Registration Date. Notwithstanding subsection (a)
above, after the date of registration of the Company's Common Stock on
a national securities exchange or the Registration Date, the Plan
shall be administered either by: (i) the full Board, provided that all
members of the Board are Disinterested Persons; or (ii) a Committee of
three (3) or more directors, each of whom is a Disinterested Person.
After such date, the Board shall take all action necessary to
administer the Plan in accordance with the then effective provisions
of Rule 16b-3 promulgated under the Exchange Act, provided that any
amendment to the Plan required for compliance with such provisions
shall be made consistent with the provisions of Section 13 of the
Plan, and said regulations.
(c) Powers of the Committee. Subject to the provisions of the Plan, the
Committee shall have the authority: (i) to determine, upon review of
relevant information, the fair market value of the Common Stock; (ii)
to determine the exercise price of Options to be granted, the
Employees, Directors or consultants to whom and the time or times at
which Options shall be granted, and the number of Shares to be
represented by each Option; (iii) to interpret the Plan; (iv) to
prescribe, amend and rescind rules and regulations relating to the
Plan; (v) to determine the terms and provisions of each Option granted
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under the Plan (which need not be identical) and, with the consent of
the holder thereof, to modify or amend any Option; (vi) to authorize
any person to execute on behalf of the Company any instrument required
to effectuate the grant of an Option previously granted by the
Committee; (vii) defer an exercise date of any Option (with the
consent of the Optionee), subject to the provisions of Section 9(a) of
the Plan; (viii) to determine whether Options granted under the Plan
will be Incentive Stock Options or Nonstatutory Stock Options; (ix) to
make all other determinations deemed necessary or advisable for the
administration of the Plan; and (x) to designate which Options granted
under the Plan will be issued in reliance on Rule 701.
(d) Effect of Committee's Decision. All decisions, determinations and
interpretations of the Committee shall be final and binding on all
potential or actual Optionees, any other holder of an Option or other
equity security of the Company and all other persons.
5. Eligibility.
(a) Persons Eligible for Options. Options under the Plan may be granted
only to Employees, Non-Employee Directors or Consultants whom the
Committee, in its sole discretion, may designate from time to time.
Incentive Stock Options may be granted only to Employees. An Employee
who has been granted an Option, if he or she is otherwise eligible,
may be granted an additional Option or Options. However, the aggregate
fair market value (determined in accordance with the provisions of
Section 8(a) of the Plan) of the Shares subject to one or more
Incentive Stock Options grants that are exercisable for the first time
by an Optionee during any calendar year (under all stock option plans
of the Company and its Parents and Subsidiaries) shall not exceed
$100,000 (determined as of the grant date).
(b) No Right to Continuing Employment. Neither the establishment nor the
operation of the Plan shall confer upon any Optionee or any other
person any right with respect to continuation of employment or other
service with the Company or any Subsidiary, nor shall the Plan
interfere in any way with the right of the Optionee or the right of
the Company (or any Parent or Subsidiary) to terminate such employment
or service at any time.
6. Term of Plan. The Plan shall become effective upon its adoption by the
Board or its approval by vote of the holders of the outstanding shares of the
Company entitled to vote on the adoption of the Plan (in accordance with the
provisions of Section 18 hereof), whichever is earlier. It shall continue in
effect for a term of ten (10) years unless sooner terminated under Section 13 of
the Plan.
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7. Term of Option. Unless the Committee determines otherwise, the term of
each Option granted under the Plan shall be ten (10) years from the date of
grant. The term of the Option shall be set forth in the Option Agreement. No
Incentive Stock Option shall be exercisable after the expiration of ten (10)
years from the date such Option is granted; provided that, no Incentive Stock
Option granted to any Employee who, at the date such Option is granted, owns
(within the meaning of Section 425(d) of the Code) more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company or any
Parent or Subsidiary shall be exercisable after the expiration of five (5) years
from the date such Option is granted.
8. Exercise Price and Consideration.
(a) Exercise Price. Except as provided in subsection (b) below, the
exercise price for the Shares to be issued pursuant to any Option
shall be such price as is determined by the Committee, which shall in
no event be less than: (i) in the case of Incentive Stock Options, the
fair market value of such Shares on the date the Option is granted; or
(ii) in the case of Nonstatutory Stock Options, 85% of such fair
market value; provided that, in the case of any Optionee owning stock
possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or any Parent or
Subsidiary of the Company, the exercise price shall be 110% of fair
market value on the date the Option is granted. Fair market value of
the Common Stock shall be determined by the Committee, using such
criteria as it deems relevant; provided, however, that if there is a
public market for the Common Stock, the fair market value per Share
shall be the average of the last reported bid and asked prices of the
Common Stock on the date of grant, as reported in The Wall Street
Journal (or, if not so reported, as otherwise reported by the National
Association of Securities Dealers Automated Quotation (NASDAQ) System)
or, in the event the Common Stock is listed on a national securities
exchange (within the meaning of Section 6 of the Exchange Act) or on
the NASDAQ National Market System (or any successor national market
system), the fair market value per Share shall be the closing price on
such exchange on the date of grant of the Option, as reported in The
Wall Street Journal.
(b) Ten Percent Shareholders. No Option shall be granted to any Employee
who, at the date such Option is granted, owns (within the meaning of
Section 424(d) of the Code) more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any
Parent or Subsidiary, unless the exercise price for the Shares to be
issued pursuant to such Option is at least equal to 110 percent (110%)
of the fair market value of such Shares on the grant date determined
by the Committee in the manner set forth in subsection (a) above.
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(c) Consideration. The consideration to be paid for the Optioned Shares
shall be payment in cash or by check unless payment in some other
manner, including by promissory note, other shares of the Company's
Common Stock or such other consideration and method of payment for the
issuance of Optioned Shares as may be permitted under Sections 408 and
409 of the California General Corporation Law, is authorized by the
Committee at the time of the grant of the Option. Any cash or other
property received by the Company from the sale of Shares pursuant to
the Plan shall constitute part of the general assets of the Company.
9. Exercise of Option.
(a) Vesting Period. Any Option granted hereunder shall be exercisable at
such times and under such conditions as determined by the Committee
and as shall be permissible under the terms of the Plan, which shall
be specified in the Option Agreement evidencing the Option. Options
granted under the Plan shall vest at a rate of at least twenty percent
(20%) per year.
(b) Exercise Procedures. An Option shall be deemed to be exercised when
written notice of such exercise has been given to the Company in
accordance with the terms of the option agreement evidencing the
Option, and full payment for the Shares with respect to which the
Option is exercised has been received by the Company.
Pursuant to the terms of the Option Agreement, the Committee may
require that any Option may be exercised only upon the execution of a
Restricted Stock Transfer Agreement (the "Transfer Agreement") which
gives the Company a right of first refusal in the Option Shares at the
per share price at which the Option Shares are proposed to be
transferred. The right of first refusal shall terminate on the
effective date of a firm commitment public offering pursuant to the
Securities Act of 1933, as amended, covering the offer and sale of the
Company's Common Stock for the account of the Company. The Transfer
Agreement shall contain such provisions as the Committee may approve
in its sole discretion.
An Option may not be exercised for fractional shares. As soon as
practicable following the exercise of an Option in the manner set
forth above, the Company shall issue or cause its transfer agent to
issue stock certificates representing the Shares purchased. Until the
issuance of such stock certificates (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer
agent of the Company), no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned
Shares notwithstanding the exercise of the Option. No adjustment will
be made for a dividend or other rights for which the record date is
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prior to the date of the transfer by the Optionee of the consideration
for the purchase of the Shares, except as provided in Section 11 of
the Plan. After the Registration Date, the exercise of an Option by
any person subject to short-swing trading liability under Section
16(b) of the Exchange Act shall be subject to compliance with all
applicable requirements of Rule 16b-3(d) or (e) promulgated under the
Exchange Act.
(c) Death of Optionee. In the event of the death during the Option period
of an Optionee who is at the time of his death, or was within the
ninety (90)-day period immediately prior thereto, an Employee or
Non-Employee Director, and who was in Continuous Employment as such
from the date of the grant of the Option until the date of death or
termination, the Option may be exercised, at any time prior to the
expiration of the Option period, by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent of the accrued right to exercise
at the time of the termination or death, whichever comes first.
(d) Disability of Optionee. In the event of the disability during the
Option period of an Optionee who is at the time of such disability, or
was within the ninety (90)-day period prior thereto, an Employee or
Non-Employee Director, and who was in Continuous Employment as such
from the date of the grant of the Option until the date of disability
or termination, the Option may be exercised at any time within one (1)
year following the date of disability, but only to the extent of the
accrued right to exercise at the time of the termination or
disability, whichever comes first, subject to the condition that no
option shall be exercised after the expiration of the Option period.
(e) Termination of Status as Employee, Non- Employee Director or
Consultant. If an Optionee shall cease to be an Employee or
Non-Employee Director for any reason other than disability or death,
or if an Optionee shall cease to be Consultant for any reason, the
Optionee may, but only within ninety (90) days (or such other period
of time as is determined by the Committee) after the date he or she
ceases to be an Employee or Non-Employee Director, exercise his or her
Option to the extent that he or she was entitled to exercise it at the
date of such termination, subject to the condition that no option
shall be exercisable after the expiration of the Option period.
(f) Exercise of Option With Stock After Registration Date. After the
Registration Date, the Committee may permit an Optionee to exercise an
Option by delivering shares of the Company's Common Stock. If the
Optionee is so permitted, the option agreement covering such Option
may include provisions authorizing the Optionee to exercise the
Option, in whole or in part, by: (i) delivering whole shares of the
Company's Common Stock previously owned by such Optionee (whether or
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not acquired through the prior exercise of a stock option) having a
fair market value equal to the aggregate exercise price for the
Optioned Shares issuable on exercise of the Option; and/or (ii)
directing the Company to withhold from the Shares that would otherwise
be issued upon exercise of the Option that number of whole Shares
having a fair market value equal to the aggregate exercise price for
the Optioned Shares issuable on exercise of the Option. Shares of the
Company's Common Stock so delivered or withheld shall be valued at
their fair market value at the close of the last business day
immediately preceding the date of exercise of the Option, as
determined by the Committee, in accordance with the provisions of
Section 8(a) of the Plan. Any balance of the exercise price shall be
paid in cash. Any shares delivered or withheld in accordance with this
provision shall not again become available for purposes of the Plan
and for Options subsequently granted thereunder.
(g) Tax Withholding. After the Registration Date, when an Optionee is
required to pay to the Company an amount with respect to tax
withholding obligations in connection with the exercise of an Option
granted under the Plan, the Optionee may elect prior to the date the
amount of such withholding tax is determined (the "Tax Date") to make
such payment, or such increased payment as the Optionee elects to make
up to the maximum federal, state and local marginal tax rates,
including any related FICA obligation, applicable to the Optionee and
the particular transaction, by: (i) delivering cash; (ii) delivering
part or all of the payment in previously owned shares of Common Stock
(whether or not acquired through the prior exercise of an Option);
and/or (iii) irrevocably directing the Company to withhold from the
Shares that would otherwise be issued upon exercise of the Option that
number of whole Shares having a fair market value equal to the amount
of tax required or elected to be withheld (a "Withholding Election").
If an Optionee's Tax Date is deferred beyond the date of exercise and
the Optionee makes a Withholding Election, the Optionee will initially
receive the full amount of Optioned Shares otherwise issuable upon
exercise of the Option, but will be unconditionally obligated to
surrender to the Company on the Tax Date the number of Shares
necessary to satisfy his or her minimum withholding requirements, or
such higher payment as he or she may have elected to make, with
adjustments to be made in cash after the Tax Date.
Any withholding of Optioned Shares with respect to taxes arising in
connection with the exercise of an Option by any person subject to
short-swing trading liability under Section 16(b) of the Exchange Act
shall satisfy the following conditions:
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(i) An advance election to withhold Optioned Shares in settlement of
a tax liability must satisfy the requirements of Rule
16b-3(d)(1)(i), regarding participant- directed transactions;
(ii) Absent such an election, the withholding of Optioned Shares to
settle a tax liability may occur only during the quarterly window
period described in Rule 16b-3(e);
(iii)Absent an advance election or window- period withholding, the
Optionee may deliver shares of Common Stock owned prior to the
exercise of an Option to settle a tax liability arising upon
exercise of the Option, in accordance with Rule 16b-3(f); or
(iv) The delivery of previously acquired shares of Common Stock (but
not the withholding of newly acquired Shares) will be allowed
where an election under Section 83(b) of the Code accelerates the
Tax Date to a day that occurs less than six (6) months after the
advance election and is not within the quarterly window period
described in Rule 16b-3(e).
Any adverse consequences incurred by an Optionee with respect to the
use of shares of Common Stock to pay any part of the exercise price or
of any tax in connection with the exercise of an Option, including
without limitation any adverse tax consequences arising as a result of
a disqualifying disposition within the meaning of Section 422 of the
Code shall be the sole responsibility of the Optionee. Shares withheld
in accordance with this provision shall not again become available for
purposes of the Plan and for Options subsequently granted thereunder.
10. Non-Transferability of Options. An Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent and distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization. Subject to any required
action by the shareholders of the Company, the number of Optioned Shares covered
by each outstanding Option, and the per share exercise price of each such
Option, shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock resulting from a stock split, reverse
stock split, recapitalization, combination, reclassification, the payment of a
stock dividend on the Common Stock or any other increase or decrease in the
number of such shares of Common Stock effected without receipt of consideration
by the Company; provided, however, that conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration". Such adjustment shall be made by the Board, whose determination
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in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option.
The Committee may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the number or class of securities
covered by any Option, as well as the price to be paid therefor, in the event
that the Company effects one or more reorganizations, recapitalizations, rights
offerings, or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.
Unless otherwise determined by the Board, upon the dissolution or
liquidation of the Company the Options granted under the Plan shall terminate
and thereupon become null and void. The Optionee shall be given not less than
ten (10) days notice of such event and the opportunity to exercise each
outstanding option before such event is effected.
Upon any merger or consolidation, if the Company is not the surviving
corporation, the Options granted under the Plan shall either be assumed by the
new entity or shall terminate in accordance with the provisions of the preceding
paragraph.
12. Time of Granting Options. Unless otherwise specified by the Committee,
the date of grant of an Option under the Plan shall be the date on which the
Committee makes the determination granting such Option. Notice of the
determination shall be given to each Optionee to whom an Option is so granted
within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
The Board may amend or terminate the Plan from time to time in such
respects as the Board may deem advisable, except that, without approval of the
holders of a majority of the outstanding capital stock no such revision or
amendment shall change the number of Shares subject to the Plan, change the
designation of the class of employees eligible to receive Options or add any
material benefit to Optionees under the Plan. Any such amendment or termination
of the Plan shall not affect Options already granted, and such Options shall
remain in full force and effect as if the Plan had not been amended or
terminated.
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14. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an Option granted under the Plan unless the exercise of such Option
and the issuance and delivery of such Shares pursuant thereto shall comply with
all relevant provisions of law, including, without limitation, the Securities
Act, the Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance. As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
15. Reservation of Shares. During the term of this Plan the Company will at
all times reserve and keep available the number of Shares as shall be sufficient
to satisfy the requirements of the Plan. Inability of the Company to obtain from
any regulatory body having jurisdiction and authority deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such Shares as to which such requisite authority shall not have been
obtained.
16. Information to Optionee. During the term of any Option granted under
the Plan, the Company shall provide or otherwise make available to each Optionee
a copy of its financial statements at least annually.
17. Option Agreement. Options granted under the Plan shall be evidenced by
Option Agreements.
18. Shareholder Approval. The Plan shall be subject to approval by the
affirmative vote of the holders of a majority of the outstanding capital stock
of the Company entitled to vote within twelve (12) months before or after the
Plan is adopted. Any option exercised before shareholder approval is obtained
must be rescinded if shareholder approval is not obtained within twelve (12)
months before or after the Plan is adopted. Shares issued upon the exercise of
such options shall not be counted in determining whether such approval is
obtained. Any amendments to the Plan which require shareholder approval shall be
by the affirmative vote of the holders of a majority of the outstanding capital
stock of the Company entitled to vote.
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