UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 0-220-20
CASTELLE
(Name of small business issuer in its charter)
-------------------------------
California 77-0164056
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3255-3 Scott Boulevard, Santa Clara, California 95054
(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: (408) 496-0474
SECURITIES REGISTERED PURSUANT TO Section 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO Section 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes X
No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The Company's revenues for its most recent fiscal year were $32,725,000.
The approximate aggregate market value of the voting stock held by nonaffiliates
of the Registrant as of February 28, 1997, based upon the last trade price of
the Common Stock reported on the Nasdaq National Market on February 28, 1997,
was $21,694,157. Excludes an aggregate of 1,393,045 shares of Common Stock held
by Directors, Officers and other affiliates at February 28, 1997.
The number of shares of Common Stock outstanding as of February 28, 1997 was
4,437,839.
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PART I
ITEM 1. BUSINESS
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Report.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section under
"Introduction" and "Risk Factors" as well as in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INTRODUCTION
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, FactsLine fax-on-demand software and LANpress print
servers. The Company entered the Small Office/Branch Office ("SOBO") market
through a joint marketing arrangement with 3Com Corporation ("3Com") as the
supplier of print and fax servers for 3Com's stackable network systems products.
In recent years, organizations have increasingly interconnected personal
computers into LANs. 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 the 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 communicated have 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. The
Company has developed its line of network enhancement products to address these
needs.
"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 Company's objective is to be a leading worldwide supplier of network
enhancement solutions. Key elements of the Company's strategy to achieve this
objective include: maintaining market focus in order to provide the Company with
a competitive edge in innovation and time-to-market relative to its larger
competitors; broadening its software offerings to leverage its installed base of
fax, fax-on-demand and print servers; continuing to develop products that are
widely compatible with leading network operating systems and adapting those
products for remote access and Internet connectivity capabilities; further
penetrating the growing SOBO market; strengthening and growing its domestic and
international distribution network; and expanding existing relationships
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and fostering new alliances to augment the Company's product offerings and
enable the Company to respond quickly to technological changes.
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, retailers and other resellers. The Company's
major domestic distributors include Ingram Micro, Inc. ("Ingram Micro"), Tech
Data Corporation and Merisel, Inc. The Company's primary distributor in Japan is
Macnica Corporation ("Macnica"). The Company also has relationships with
selected original equipment manufacturers and sells software and upgrades
directly to end users.
In November 1996 Ibex Technologies, Inc. ("Ibex") merged with and into the
Company in a transaction accounted for as a pooling of interests. As a result of
the transaction, 790,617 shares of the Company's Common Stock were issued in
exchange for all of the outstanding Ibex common stock and preferred stock and
59,345 shares of the Company's Common Stock were reserved for issuance upon
exercise of outstanding options to purchase Ibex common stock assumed by the
Company in connection with the transaction. Ibex designed, developed and
marketed fax-on-demand, fax-gateway, fax broadcast and Web/fax applications sold
directly and through value-added resellers.
The Company was incorporated in California in 1987, and its principal
offices are located at 3255-3 Scott Boulevard, Santa Clara, California 95054.
The Company's telephone number is (408) 496-0474. Castelle(R), LANpress(R) and
JetPress(R) are registered trademarks and FaxPressTM is a trademark of the
Company. This Report includes trademarks and trade names of other companies.
RISK FACTORS
Shareholders or investors in shares of the Company's Common Stock should
carefully consider the following risk factors, in addition to other information
in this Report.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors" as well as in
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Fluctuations in Operating Results
The Company's revenue and operating results have fluctuated in the past and
the Company's future revenues and operating results are likely to do so in the
future, particularly on a quarterly basis.
The Company's operating results may vary significantly from quarter to
quarter due to a variety of factors, including changes in the Company's product
and customer mix, the introduction of new products by the Company or its
competitors, constraints in the Company's manufacturing and assembling
operations, shortages or increases in the prices of raw materials and
components, changes in pricing policy by the Company 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. The
Company's backlog at any given time is not necessarily indicative of actual
sales for any succeeding period. The Company's sales will often reflect orders
shipped in the same quarter in which they are received. In addition, a
significant portion of the Company's expenses are relatively fixed in nature,
and planned expenditures are based primarily on sales forecasts. Therefore, if
the Company inaccurately forecasts demand for its products, the impact on net
income may be magnified by the Company's inability to adjust spending quickly
enough to compensate for the net sales shortfall. Future demand for the
Company's products may be stronger during the last quarter of each year than the
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first quarter of the succeeding year as the sales personnel of the Company's
distributors seek to meet their annual sales quotas. The Company'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."
The Company's quarterly operating results may continue to fluctuate due to
numerous other factors. Some of these factors include the demand for the
Company's products, seasonality, customer order deferrals in anticipation of new
versions of the Company's products, the introduction of new products and product
enhancements by the 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
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 the Company's products is affected by rapidly changing
networking technology and evolving industry standards. The Company believes that
its future success will depend upon its ability to enhance its 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 the Company will be successful
in these efforts. In order to develop new products successfully, the Company is
dependent upon timely access to information about new technological developments
and standards. There can be no assurance that the Company 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 others.
Furthermore, the Company expects that printer and other peripheral manufacturers
will add features to their products that make them more network accessible,
which may reduce demand for the Company's network enhancement devices. There can
be no assurance that products or technologies developed by others will not
render the Company's products non-competitive or obsolete. The fax-on-demand
market in general has been negatively affected by the growth of the World Wide
Web (the "Web") and the Internet. Although the Company has new web/fax/email
products in development, there can be no assurance these products will compete
successfully. The Company began shipping the OfficeConnect product line, which
includes a Fax server, a Print server and CD-ROM in 1996. Complex products such
as those offered by the Company may contain undetected or unresolved hardware
defects or software errors when they are first introduced or as new versions are
released. Changes in the Company's or its suppliers' manufacturing processes or
the inadvertent use of defective components by the Company or its suppliers
could adversely affect the Company's ability to achieve acceptable manufacturing
yields and product reliability. The Company has in the past discovered hardware
defects and software errors in certain of its new products and enhancements
after their introduction. Although the Company 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.
The Company has incurred, and the 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 the Company 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 the Company and by
third-party test sites, errors will not be found in future releases of the
Company's products, which would negatively affect market acceptance of these
products.
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The introduction of new or enhanced products requires the Company to manage
the transition from older products. The Company 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. The Company has 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
Company. See "Business -- Products," "-- Research and Development," and "--
Sales, Marketing and Distribution."
Recent Acquisition
In November 1996, the Company acquired Ibex. Management of the Company will
be required to devote substantial time and attention for an extended period of
time to the completion of the acquisition and the integration of these
businesses. The integration of recently merged companies is expensive, complex
and time-consuming and subject to a number of inherent risks. There can be no
assurance that the Company will not experience operational or financial problems
as a result of the merger. Should the Company not be able to integrate the
businesses in a timely and coordinated fashion, it could result in a material
adverse effect on the Company's business, operating results and financial
condition. The Company's management group has little experience in business
combinations of this size. Realization of the anticipated benefits of the merger
will continue to depend in part upon the successful combination and integration
of Castelle and Ibex's management. The inability to successfully integrate
management or the loss of the services of one or more of these key person could
have a material adverse effect on the Company. The management of the Company
also must continue to attract and retain key managerial, technical, sales and
marketing personnel and continue to motivate employees in light of
organizational changes resulting from the merger. In addition, the merger may
continue to cause uncertainties, hesitation and possible dissatisfaction among
customers and potential customers of the Company. The requirement that
management devote substantial time and resources to the process of integrating
the two companies and the occurrence of any material operational or financial
problems as a result of the merger could have a material adverse effect on the
Company's business, operating results and financial condition.
International Sales
Sales to customers located outside Canada and the United States accounted
for approximately 49% and 48% of the Company's net sales in 1996 and 1995,
respectively. The Company 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
approximately 41% and 39% of the Company's international sales in 1996 and 1995,
respectively. Macnica, the Company's principal Japanese distributor, accounted
for approximately 30% and 26% of the Company's net sales in 1996 and 1995,
respectively. The Company expects that international sales will continue to
represent a significant portion of the Company's product revenues and that the
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 the Company has not previously experienced any
difficulties under foreign law in exporting its products to other countries,
there can be no assurance that the Company will not experience such difficulties
in foreign countries in the future. In addition, because the Company invoices
its foreign sales in U.S. dollars, fluctuations in exchange rates could affect
demand for the Company's products by causing its prices to be out of line with
products priced in the local currency. See also "Dependence on Proprietary
Rights; Uncertainty of Obtaining Licenses." Additionally, any such difficulties
would have a material adverse effect on the Company's international sales and a
resulting material adverse effect on the Company's business, operating results
and financial condition. The Company 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 -- Sales, Marketing and Distribution."
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History of Losses; Accumulated Deficit
The Company has experienced significant operating losses and, as of
December 31, 1996, had an accumulated deficit of $6.7 million. The development
and marketing by the Company of new products will continue to require
substantial product development and other expenditures. Although the Company 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."
Key Personnel
The Company' success depends to a significant degree upon the continued
contributions of the Company's key management, marketing, product development
and operational personnel. The success of the 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 Company will be able to attract and retain
enough qualified employees. If the business of the Company grows, it may become
increasingly difficult for it to hire, train and assimilate the new employees
needed. The Company's inability to retain and attract key employees could have a
material adverse effect on the Company's product development, business,
operating results and financial condition. The Company does not carry key person
life insurance with respect to any of its personnel. See "Directors, Executive
Officers, Promoters and Control Persons."
Competition and Price Erosion
The network enhancement products and computer software markets are highly
competitive, and the Company believes that such competition will intensify in
the future. The competition is characterized by rapid change and improvements in
technology along with constant pressure to reduce prices. The Company currently
competes principally in the market for network print servers and network fax
servers and fax-on-demand software. Increased competition, direct and indirect,
could adversely affect the Company's business and operating results through
pricing pressure, loss of market share and other factors. In particular, the
Company 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 the
Company's products would require the Company to increase unit sales in order to
avoid a reduction in net sales and would adversely affect gross margins. There
can be no assurance the Company 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 the Company'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 the Company'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 the Company. The Company also
experiences competition from a number of other companies. In addition to its
current competitors, the Company may face substantial competition from new
entrants into the network enhancement market, including established and emerging
computer, computer peripherals, communications and software companies. As the
Company develops and introduces more fax server software products, it may
experience increasing competition from companies such as Symantec Corp.
("Symantec") and Computer Associates International, Inc. ("Computer
Associates"). There can be no assurance that competitors will not introduce
products incorporating technology more advanced than that of the Company. In
addition, certain competing methods of communications such as the Internet or
electronic mail could adversely affect the market for fax products. Certain of
the Company'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 the Company will be able to compete successfully or that competition will
not have a material adverse effect on the Company's business, operating results
and financial condition. See
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Competition."
Product Transition; Risk of Product Returns and Inventory Obsolescence
From time to time, the 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 release of a new product or product
version may result in the write-down of product in inventory if such inventory
becomes obsolete. The 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 the Company provides an allowance for
anticipated returns, and believes its existing policy results in the
establishment of an allowance that is currently adequate, there can be no
assurance that product returns will not exceed such allowance in the future and
will not have a material adverse effect on the Company's business, operating
results and financial condition.
Concentration of Distributors; Distribution Risks
The Company sells its products primarily through a two-tier domestic and
international distribution network, with the Company's distributors selling the
Company's products to value-added resellers ("VARs"), retailers 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. The Company's five largest distributors
accounted for 63% of its net sales in 1996 and 62% of the Company's net sales in
1995. Macnica, the Company's principal Japanese distributor, and Ingram, the
Company's largest domestic distributor, accounted for approximately 30% and 14%
of its net sales in 1996, respectively, and 26% and 16% of net sales in 1995.
The Company's distributors typically represent other product lines that are
complementary to, or compete with, those of the Company. While the Company
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
the Company'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 the Company's large United States distributors and,
as a result, the Company believes such distributors give higher priority to
products offered by such competitors. The Company's distributors are not
contractually committed to future purchases of the Company's products and could
discontinue carrying the Company's products at any time for any reason. In
addition, because the Company is dependent on a small number of distributors for
a significant portion of the sales of its products, the loss of any of the
Company's major distributors or their inability to satisfy their payment
obligations to the Company could have a significant adverse effect on the
Company's business, operating results and financial condition. The Company has a
stock rotation policy with certain of its distributors which allows them to
return marketable inventory against offsetting orders. Should the Company reduce
its prices, the Company credits certain of its distributors for the difference
between the purchase price of products remaining in their inventory and the
Company's reduced price for such products. In addition, due to industry
conditions or the actions of competitors, inventory levels of the Company's
products held by distributors could become excessive resulting in product
returns and inventory write-downs. There can be no assurance that in the future
returns and price protection will not have a material adverse effect on the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Sales, Marketing and Distribution."
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Lack of Product Revenue Diversification
The Company derives substantially all of its sales from the Fax Server and
Print Server line of products. The Company expects that these hardware and
software products will continue to account for a majority of the 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 Company's business, operating results and financial condition.
Dependence on Suppliers and Subcontractors
The Company'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 the Company's products,
including Token Ring interface modules from Silcom Manufacturing Technology Inc.
("Silcom"), a modem chip set from Rockwell International Corporation
("Rockwell")and a microprocessor from Motorola, Inc. ("Motorola"), are currently
available from only single sources. Other components of the Company's products
are currently available from only a limited number of sources. In addition, the
Company 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 the Company. The Company does not have
material long-term supply contracts with these or any other sole or limited
source vendors and subcontractors other than an agreement with SerComm
Corporation ("SerComm"), and otherwise purchases components or sub-assemblies on
a purchase order basis. The Company'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 the Company were
unable to obtain a sufficient supply of high-quality components or
sub-assemblies from its current sources, the Company could experience delays in
obtaining such components or sub-assemblies from other sources. Resulting delays
or reductions in product shipments could adversely affect the Company's
business, operating results and financial condition and damage customer
relationships. Furthermore, a significant increase in the price of one or more
of these components or sub-assemblies or the Company's inability to lower
component or sub-assembly prices in response to competitive price reductions
could adversely affect the Company's business, operating results and financial
condition.
The Company augments its product offerings by obtaining access to
third-party products and technologies in areas outside of its core competencies
or where the Company believes internal development of products and technologies
is not cost effective. The Company's third-party product supplier is SerComm for
certain of the Company's print server products. The Company 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 the Company's internally-generated products. The
Company's agreement with its third-party product supplier has a limited term of
two years, subject to earlier termination upon the occurrence of certain events.
Extensions of the terms of the agreement require the consent of both the Company
and its supplier. Although, to date, the Company has not experienced supply
problems that were material to the Company's business, there can be no assurance
that the parties with which the Company contracts will continue to provide the
quantities and quality of products needed by the Company or they will upgrade
their respective products on a timely basis. The termination of the Company's
relationships with third-party product suppliers and with SerComm, in
particular, could result in delays or reductions in product shipments, which
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business -- Manufacturing."
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Government Regulation
Certain aspects of the networking industry in which the Company 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 the Company's business and operating results. In addition, if
the Company were unable to obtain regulatory approvals within a reasonable
period of time, the Company's operating results could be adversely affected. The
Company'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 the Company's operating
results.
Dependence on Proprietary Rights; Uncertainty of Obtaining Licenses
The Company's success depends to a certain extent upon its technological
expertise and proprietary software technology. The Company relies upon a
combination of contractual rights and copyright, trademark and trade secret laws
to establish and protect its technologies. Despite the precautions taken by the
Company, it may be possible for unauthorized third parties to copy the Company's
products or to reverse engineer or obtain and use information that the Company
regards as proprietary. In addition, the laws of some foreign countries either
do not protect the Company'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 the Company'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 the Company and
divert the efforts of the Company's technical and management personnel, whether
or not such litigation is determined in favor of the Company. In the event of an
adverse result in any such litigation, the Company 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 the Company would be successful in such development or that any
such licenses would be available. The Company also relies on technology licenses
from third parties. There can be no assurance that these licenses will continue
to be available to the Company upon reasonable terms, if at all. Any impairment
or termination of the Company's relationship with third-party licensors could
have a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company's precautions
will be adequate to deter misappropriation or infringement of its proprietary
technologies. Furthermore, while the Company 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 the Company has not registered any
of its trademarks in foreign jurisdictions. There can be no assurance that the
Company's use of such registered trademarks will not be contested by third
parties in the future. See "Business - - Proprietary Rights" and "-- Research
and Development."
The Company has received, and may receive in the future, communications
asserting that its products infringe the proprietary rights of third parties or
seeking indemnification against such infringement. The Company is not aware that
any of its 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 Company in the future
with respect to current or future products or that any such assertion may not
require the 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, the Company believes that
software developers may become increasingly subject to infringement clams. 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
Company's business, operating results and financial condition. As a result of
such claims or litigation, it may become necessary or desirable in the future
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for the 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 --
Proprietary Rights" and "-- Research and Development."
Possible Volatility of the Company's Common Stock Price
The price of the Company's Common Stock has 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 the Company believes that such past fluctuations may
have been caused by announcements of new products, quarterly fluctuations in the
results of operations and other factors, including changes in the condition of
the personal computer industry in general. 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. 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 the Company and other high technology companies, often
for reasons unrelated to the operating performance of the specific companies.
The Company anticipates that prices for Castelle Common Stock may continue to be
volatile. 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 the Company's business,
operating results and financial condition.
Future Capital Requirements
Although the Company believes that its existing capital resources, expected
cash flows from operations and available lines of credit will be sufficient to
meet its anticipated capital requirements at least through the next 12 months,
the Company 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 the Company's
existing and 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 -- Liquidity and
Capital Resources."
Voting Control by Officers, Directors and Affiliates
At February 28, 1997, the Company's officers and directors and their
affiliates beneficially owned approximately 14.5% of the outstanding shares of
Common Stock. Accordingly, together they had the ability to significantly
influence the election of the Company's directors and other corporate actions
requiring shareholder approval. Such concentration of ownership may have the
effect of delaying, deferring or preventing a change in control of the Company.
Certain Charter Provisions
The Company'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 the Company, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, such Preferred Stock
may have other rights, including economic rights, senior to the Common Stock,
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and as a result, the issuance thereof could have a material adverse effect on
the market value of the Common Stock.
BUSINESS DESCRIPTION
General
Castelle designs, develops, markets and supports network enhancement
products, both software and hardware, that improve the productivity, performance
and functionality of LANs and enhance the LAN user's ability to communicate. The
Company's current products include FaxPress fax server systems, LANpress print
servers and FactsLine fax-on-demand software. The Company entered the SOBO
market through a joint marketing arrangement with 3Com as the supplier of print
and fax servers for 3Com's stackable network systems products. See "Products
Under Development."
In November 1996 Ibex merged with and into the Company in a transaction
accounted for as a pooling of interests. As a result of the transaction, 790,617
shares of the Company's Common Stock were issued in exchange for all of the
outstanding Ibex common stock and preferred stock and 59,345 shares of the
Company's Common Stock were reserved for issuance upon exercise of outstanding
options to purchase Ibex common stock assumed by the Company in connection with
the transaction. Ibex designed, developed and marketed fax-on-demand,
fax-gateway, fax broadcast and Web/fax applications sold directly and through
value- added resellers. See "Risk-Factors-Recent Acquisition."
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
10. Page 11 of 83
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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
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.
Fax-On-Demand. 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.
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. The
Company 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, the Company believes that the
demand for such network enhancement products will increase.
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.
Castelle Strategy
Castelle's objective is to be a leading worldwide supplier of network
enhancement solutions. The Company intends to continue to provide innovative
products focused on enhancing the LAN user's ability to communicate. Key
elements of the Company's strategy include:
Focus on Network Enhancement Products. The Company focuses exclusively on
providing innovative, reliable, easy-to-use network enhancement products. Since
its inception, the Company has focused on developing networking products that
utilize advanced software to tightly integrate proprietary hardware systems with
standard computing platforms. As a result, the Company believes it has developed
a high level of expertise in networking, software development, hardware design
and telephony technology. The Company plans to capitalize on these attributes by
11. Page 12 of 83
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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, the Company 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 4,000 corporate
end-users, the Company is marketing these products through a direct
telemarketing team.
Expand Product Line. The Company 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
SOBO market and products acquired as a result of the merger with Ibex, the
Company continues to expand both its fax server and print server product lines.
Penetrate the Small Office/Branch 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, fax workgroup and CD-ROM server modules for 3Com's OfficeConnect
product line.
Strengthen and Expand Distribution Channels. The Company has established a
two-tier domestic and international distribution network of leading national and
regional network product distributors and resellers. The Company also sells
through OEM vendors such as Ricoh Corporation ("Ricoh") and Fujitsu Ltd.
("Fujitsu"). The Company is expanding its distribution network in North America,
Europe, the Asia-Pacific and Latin America regions and other markets in order to
capitalize on the rapid growth in LANs in these regions.
Leverage Strategic Relationships. The Company augments its product offering
by establishing relationships with companies able to provide products in areas
outside of the Company's core technical competencies or in instances where
internal development of such products is not cost-effective. The Company 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
The Company develops and markets a broad range of products that enhance
network productivity, performance and functionality. The Company's current
products include FaxPress fax server systems, LANpress print servers and
FactsLine fax-on-demand software and a range of software enhancements for its
fax and print server product lines. In 1996, Castelle entered the SOBO 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
The Company's fax server product line includes FaxPress fax server systems
as well as FaxPress software. The Company's line of FaxPress software includes
client applications and interfaces for use with the FaxPress system and software
enhancements and options. The Company'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
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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. The
Company'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. The
Company is seeking regulatory clearance in a number of other countries. During
1996 and 1995, fax servers represented 42% and 38%, respectively, of total net
sales.
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. The Company expects to introduce client
software for the Macintosh in the second quarter of 1997.
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.
The Company 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 the Company's FaxPress system product
line:
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<PAGE>
<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> <C> <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>
FaxPress Software. The Company's line of FaxPress software includes client
applications and interfaces for use with FaxPress systems and software
enhancements and options.
o Client Applications and Interfaces: The Company 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
the Company's FaxPress products. For the user who has already
installed other third-party fax application software, the Company
offers software that enables the user to access the capabilities of
the Company's FaxPress products through such third-party software. In
addition, the Company is developing an interface which enables
Macintosh clients to send and receive faxes through FaxPress systems.
The Company has also developed utilities that permit network and
systems administrators to monitor and control the routing of fax
files.
o Software Enhancements and Upgrades: The Company 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 $199 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
Image Enhancement editable format. 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.
- --------------------------------------------------------------------------------
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Print Servers
The Company's print server products perform network printing services
otherwise handled by a file server or a dedicated personal computer. The Company
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 1996 and 1995, print servers represented
44% and 48%, respectively, of total net sales.
The Company believes its print servers provide a superior method of
connecting printers to a LAN for a number of reasons, including:
o Network performance enhancement: The Company'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: The Company'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: The Company'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: The Company's print servers are more
cost-effective than dedicated personal computers or direct file server
connections.
o Compatibility: The Company's print servers are compatible with
printers from virtually all major printer vendors and support leading
network operating systems on both the Ethernet network (100 Base-T or
10 Base-T) and Token Ring network.
LANpress Product Line. The Company'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, Windows 95, Windows for Workgroups 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.
15. Page 16 of 83
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The following table summarizes the Company's line of LANpress external
print servers:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Network Topology Networking Environment
------------------------ ----------------------------------------------------------------- Flash
Product Token NetWare UNIX Windows NT Apple Upgrade
Configuration (1) Ethernet Ring 2.x, 3.x, 4.x TCP/IP Windows 95 Ethertalk Capability
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OfficeConnect Print (1) x x x x x
LANpress 3P/100 (4) x 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
- ------------------------------------------------------------------------------------------------------------------------------------
(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.
</TABLE>
Fax-On-Demand
Castelle'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 and Fax-It-Back.
FactsLine for Windows. Castelle'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 addition of a number of optional advanced modules and features
- -- the management and capabilities of the FactsLine for Windows systems can be
further optimized. Key optional advanced modules and features include:
o Intelligent Menus: expands the branching technique of FactsLine to
include powerful logic and analysis capability.
o Credit Card: allows FactsLine to verify, authorize and charge caller's
credit cards.
o Application Programming Interface (API): enables FactsLine to retrieve
information from another computer and then fax or read back dynamic
information to a caller.
o Aspect Integration: integrates FactsLine with Aspect to provide
powerful caller queuing, intelligent call routing and convenient fax
retrieval functions.
o FactsLine for Notes: merges FactsLine with the document management
capabilities of Lotus Notes.
o Transaction Manager: provides sophisticated management features to
achieve the ultimate performance from a FactsLine fax-on-demand
system.
16. Page 17 of 83
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o Fax Description Language: provides a scripting language that adds
graphical interest to your faxable documents.
o FactsLine for the Web: an add-on to Web servers, which allows native
Web documents to be used as fax-on-demand documents.
o OpenFax: allows native Windows applications files on FactsLine
fax-on-demand systems.
o Fax Gateway: allows third party programs to send fax transactions via
the intelligent Ibex fax engine.
InfoPress Product Family. Castelle is developing support for the Microsoft
Windows NT operating system under the new InfoPress product family. The
InfoPress Fax-On-Demand module will eventually replace FactsLine for Windows as
the flagship fax-on-demand solution. Since the FactsLine for Windows product
line consists of numerous modules and added-cost options, complete support for
NT across the entire product line will not occur until late in 1997.
New Product Line. Infopress will allow companies to use one source of
documents in a Castelle 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.
The InfoPress 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 InfoPress 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.
17. Page 18 of 83
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Fax-It-Back. Castelle's entry-level Windows 95 fax-on-demand system is
specifically designed for small- to mid-size organizations and departmental use
and provides a professional multi-line (one or two lines) system sturdy enough
for production fax-on-demand, yet affordable and easy for non-technical staff to
use.
Small Office/Branch Office Market: The OfficeConnect Family of Products
Castelle has partnered with 3Com to develop the OfficeConnect product
family to target the SOBO 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 Microsoft
peer-to-peer.
OfficeConnect CD-ROM Server. Castelle introduced another member to the
OfficeConnect family. The OfficeConnect CD-ROM Server began shipping in the
fourth quarter of 1996. 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 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 allows 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.
18. Page 19 of 83
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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 33,600 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, as
described below:
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,
to access the FaxPress server "home page fax director" and view
incoming faxes or to send a fax. This gateway capability allows UNIX
users 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 functionalities such as a more advanced phone book
structure, the use of additional cover pages, greater facility when
attaching documents for transmission and a new look and feel for wider
user acceptance.
InfoPress Web Delivery. The InfoPress 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 InfoPress
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. The InfoPress 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 Word 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)
Research and Development
The Company was an early entrant into the fax server and print server
markets and has made substantial investments in research and development. Most
of the Company's early product development initiatives was directed towards fax
server products although much of the resultant technology has application to the
further development of the Company's print server products. Currently, a
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significant percentage of the Company's research and development expenses are
related to software development. The Company 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. The Company intends to leverage its proprietary technology and
industry expertise into new product offerings that it believes will further
enhance network users' productivity. In addition, the Company intends to
continue to expand the software component of its products to enhance
functionality and improve performance.
To facilitate product development, the Company 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, the Company is dependent on timely access to
information about new developments in the marketplace. There can be no assurance
that the Company 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. The Company has an established two-tier
domestic and international distribution network of leading national and regional
network product distributors and resellers. The Company also sells through OEM
vendors such as Ricoh and Fujitsu. Software enhancements and options that
complement the FaxPress product line are primarily marketed directly by the
Company 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. The Company is expanding its distribution network in
North America, Europe, the Asia-Pacific and Latin America regions and other
markets in order to capitalize on the anticipated growth in LANs in these
regions. The Company'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. The Company 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. The Company's
sales and marketing efforts are enhanced by a specific program designed to
encourage VARs and other resellers to promote and sell the Company'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.
The Company's five largest distributors accounted for approximately 63% of
the Company's net sales in 1996 and 62% of its net sales in 1995. Macnica, the
Company's principal Japanese distributor, and Ingram Micro, the Company's
largest domestic distributor, accounted for approximately 30% and 14%,
respectively, of the Company's net sales in 1996 and 26% and 16%, respectively,
of its net sales in 1995. Sales to customers located in the Pacific Rim and
Europe made up approximately 49% and 48% of the Company's net sales in 1996 and
1995, respectively. The Pacific Rim has been the fastest growing sector for the
Company primarily due to strong market growth and a relationship with Macnica.
The Company's distributors typically represent other product lines that are
complementary to or compete with, those of the Company. While the Company
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
the Company's products. In particular, certain of its competitors, including
Hewlett-Packard and Intel, sell a substantially higher total dollar volume of
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products through several of the Company's large United States distributors and,
as a result, the Company believes such distributors give higher priority to
products offered by such competitors. The Company's distributors are not
contractually committed to future purchases of the Company's products and could
discontinue carrying the Company's products at any time for any reason. In
addition, because the Company is dependent on a small number of distributors for
a significant portion of the sales of its products, the loss of any of the
Company's major distributors or their inability to satisfy their payment
obligations to the Company could have a significant adverse effect on the
Company's business, operating results and financial condition. The Company has a
stock rotation policy with certain of its distributors which allows them to
return marketable inventory against offsetting orders. Should the Company reduce
its prices, the Company credits certain of its distributors for the difference
between the purchase price of products remaining in their inventory and the
Company's reduced price for such products. In addition, due to industry
conditions or the actions of competitors, inventory levels of the Company's
products held by distributors could become excessive resulting in product
returns and inventory write downs.
Customer Service and Support
The Company's customers require service support, which is available at all
times to assist customers with installation, use and operation issues. The
Company 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 the Company. An
electronic bulletin board is available on a 24-hour basis to assist customers in
obtaining pertinent facts. The Company is also implementing other customer
support activities, including a World Wide Web site as well as an internal help
desk system. The Company's technical support is also accessible through
CompuServe.
Competition
The network enhancement products and computer software markets are highly
competitive, and the Company believes that such competition will intensify in
the future. The competition is characterized by rapid change and improvements in
technology along with constant pressure to reduce prices. The Company currently
competes principally in the market for network print servers and network fax
servers and fax-on-demand software. Increased competition, direct and indirect,
could adversely affect the Company's business and operating results through
pricing pressure, loss of market share and other factors. In particular, the
Company 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 the
Company's products would require the Company to increase unit sales in order to
avoid a reduction in net sales and would adversely affect gross margins. There
can be no assurance the Company 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 the Company'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 the Company's existing and potential
competitors, most notably Hewlett-Packard and Intel , have substantially greater
financial, engineering, manufacturing and marketing resources than does the
Company. The Company also experiences competition from a number of other
companies. In addition to its current competitors, the Company may face
substantial competition from new entrants into the network enhancement market,
including established and emerging computer, computer peripherals,
communications and software companies. As the Company develops and introduces
more fax server software products, it may experience increasing competition from
companies such as Symantec and Computer Associates. There can be no assurance
that competitors will not introduce products incorporating technology more
advanced than that of the Company. In addition, certain competing methods of
communications such as the Internet or electronic mail could adversely affect
the market for fax products. Certain of the Company's existing and potential
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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 the Company will be able to
compete successfully or that competition will not have a material adverse effect
on the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Competition."
Manufacturing
The Company's current in-house manufacturing operations consist primarily
of material planning, final test and assembly, quality control and service
repair. Certain of the Company's manufacturing operations are performed by third
party manufacturers that provide customized, integrated manufacturing services,
including procurement, manufacturing and associated printed circuit board
assembly. The Company also relies on SerComm to provide it with certain of its
print server products. These arrangements enable the Company to shift certain
costs to such providers, thereby allowing the Company to focus resources on its
product development efforts. The failure of such manufacturers, particularly
SerComm, to meet their contractual commitments to the Company could cause delays
in product shipments, thereby potentially adversely affecting the Company's
business, operating results and financial condition.
The Company does not currently have any material long-term supply contracts
with any of its manufacturing subcontractors or component suppliers other than
an agreement with SerComm relating to the manufacture of print servers. Other
than its relationship with SerComm, the Company purchases components on a
purchase order basis. The Company owns all engineering and sourcing
documentation and functional test equipment and tooling used in manufacturing
its products, except for the products which are produced by SerComm, and
believes that it could shift product assembly to alternate suppliers if
necessary. Certain key components of the Company's products, including Token
Ring interface modules from Silcom, a modem chip set from Rockwell, and a
microprocessor from Motorola, are currently available from only single sources.
Other components of the Company's products are currently available from only a
limited number of sources. In addition, the Company 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 the Company. The Company'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 the Company were
unable to obtain a sufficient supply of high-quality components or
sub-assemblies from its current sources, the Company could experience delays in
obtaining such components or sub-assemblies from other sources. Resulting delays
or reductions in product shipments could adversely affect the Company's
business, operating results and financial condition and damage customer
relationships. Furthermore, a significant increase in the price of one or more
of these components or sub-assemblies or the Company's inability to lower
component or sub-assembly prices in response to competitive price reductions
could adversely affect the Company's business operating results and financial
condition.
Proprietary Rights
The Company's success depends to a certain extent upon its technological
expertise and proprietary software technology. The Company relies upon a
combination of contractual rights and copyright, trademark and trade secret laws
to establish and protect its technologies. Additionally, the Company 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. Because of the rapid pace of technological change in the LAN
product industry, the Company 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
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and product enhancements, and the timeliness and quality of support services
provided by the Company. See "Risk Factors -- Dependence on Proprietary Rights;
Uncertainty of Obtaining Licenses."
Despite the precautions taken by the Company, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
to reverse engineer or obtain and use information that the Company regards as
proprietary. There can be no assurance that the Company's precautions will be
adequate to deter misappropriation or infringement of its proprietary
technologies. Furthermore, while the Company 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 the Company has not registered any
of its trademarks in foreign jurisdictions. There can be no assurance that the
Company'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 the Company'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 the Company'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 the Company and divert
the efforts of the Company's technical and management personnel, whether or not
such litigation is determined in favor of the Company. In the event of an
adverse result in any such litigation, the Company 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 the Company would be successful in such development or that any
such licenses would be available. The Company also relies on technology licenses
from third parties. There can be no assurance that these licenses will continue
to be available to the Company upon reasonable terms, if at all. Any impairment
or termination of the Company's relationship with third-party licensors could
have a material adverse effect on the Company's business and operating results.
Government Regulation
Certain aspects of the networking industry in which the Company 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 the Company's business and operating results. In addition, if
the Company were unable to obtain regulatory approvals within a reasonable
period of time, the Company's operating results could be adversely affected. The
Company'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 the Company's operating
results.
Employees
As of December 31, 1996, the Company employed a total of 122 full-time
equivalent personnel, 28 in manufacturing, 34 in sales and marketing, 30 in
engineering, 15 in customer service and 15 in finance and administration. In
addition, the Company employs people on a part-time or contract basis. The
Company intends to continue to hire additional personnel in connection with the
expansion of its operations. The Company has never had a work stoppage, no
employees are represented by a labor organization and the Company considers its
employee relations to be good.
The Company has entered into confidentiality agreements with its employees
(including its officers) that prohibit disclosure of confidential information to
anyone outside of the Company both during and subsequent to employment and
require disclosure to the Company of ideas, discoveries or inventions relating
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to or resulting from the employee's work for the Company and assignment to the
Company of all proprietary rights to such ideas, discoveries or inventions.
ITEM 2. PROPERTIES
The Company'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. The Company
occupies this facility under a lease, the term of which expires in October 2000.
The Company also occupies an additional 5,200 square feet of floor space which
is located in El Dorado Hills, California. This facility is under a lease, the
term of which expires in the year 2000. In addition, the Company rents office
space for sales and customer support offices in Florida, Illinois, Pennsylvania,
Germany and the Netherlands. The Company believes its existing facilities will
be adequate to meet its requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware of
any pending or threatened litigation against the Company that could have a
material adverse effect on the Company's business, operating results and
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held November 19,1996.
A proposal to approve and adopt the Agreement and Plan of Reorganization
dated as of August 22, 1996 (the "Merger Agreement"), among Castelle, Ibex and
certain shareholders of Ibex, and to approve the merger (the "Merger") of
Castelle with and into Ibex pursuant to the Merger Agreement and the issuance of
Common Stock in the Merger was approved by the shareholders. This proposal
received the following votes:
For: 2,264,277
Against: 318
Abstain: 0
As a result of the Merger, Ibex shareholders received 4.029796 shares of
Castelle Common Stock for each share of Ibex Common Stock and Ibex shareholders
received 5.029796 shares of Castelle Common Stock for each share of Ibex
preferred stock, and Ibex merged into Castelle.
The stockholders elected the Board's nominees as directors by the votes
indicated:
Nominee Votes in Favor Votes Withheld
Arthur H. Bruno 2,264,580 15
John Freidenrich 2,264,580 15
Alan Kessman 2,264,580 15
Kanwal S. Rekhi 2,264,580 15
Delbert W. Yocam 2,264,580 15
The selection of Coopers & Lybrand L.L.P. as the Company's independent
auditors was ratified with 2,264,595 votes in favor, 0 against and 0
abstentions.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock (Nasdaq symbol "CSTL") began trading on the
over-the-counter market through the Nasdaq National Market on December 20, 1995.
The following table presents information during fiscal 1996 and the fourth
quarter of fiscal 1995 on the price range of the Company's Common Stock,
indicating the high and the low sale prices reported by the Nasdaq National
Market. These prices do not include retail markups, markdowns or commissions.
FISCAL 1995 HIGH LOW
Fourth Quarter $7-3/4 $6-15/16
FISCAL 1996 HIGH LOW
First Quarter $9-1/4 $7
Second Quarter $9-3/4 $7-1/4
Third Quarter $8 $6-1/2
Fourth Quarter $6-7/8 $5-1/4
As of December 31, 1996, there were 139 holders of the Company's Common
Stock, which does not include those who held in street or nominee name. On
February 28, 1997, the last sale price reported on the Nasdaq National Market
for the Company's Common Stock was $7-1/8 per share.
Dividend Policy
The Company has not paid cash dividends on its Common Stock and does not
plan to pay cash dividends for the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section as well as in
the section entitled "Business - Risk Factors."
Results of Operations
Net sales increased 16% to $32.7 million in 1996 from $28.2 million in
1995. The increase in net sales resulted primarily from higher sales of the
Company's fax server products. Fax server product sales increased by 28% to
$13.8 million in 1996 from $10.8 million during 1995. Net sales increased 27% in
1995 to $28.2 million from $22.2 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. International sales were $15.9 million, $13.5 million and $8.3 million in
1996, 1995 and 1994, respectively, representing 49%, 48% and 37%, respectively,
of net sales in 1996, 1995 and 1994. These increases are due primarily to sales
growth in the Pacific Rim region. Although all of the Company's international
sales to date have been determined in U.S. dollars, such sales could be
adversely affected by changes in demand resulting from fluctuations in currency
exchange rates.
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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 the Company's manufacturing operations and warranty
expenses. Cost of sales were $15.6 million, $14.3 million and $12.2 million in
1996, 1995 and 1994, respectively, and represented 48%, 51% and 55% of net sales
for those years. Cost of sales has increased in absolute dollars but decreased
as a percentage of net sales from 1994 to 1996. This percentage decrease is
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.
Research and development expenses were $3.0 million, $2.7 million and $2.6
million in 1996, 1995 and 1994, respectively. Most of the Company's product
development efforts during these periods were focused on fax server products,
although much of the resultant technology has application to the further
development of the Company's print server products. A significant percentage of
the Company's research and development expenses is related to software
development. The Company 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 expenses were $8.7 million, $7.0 million and $5.4
million for 1996, 1995 and 1994, respectively, and represented 27%, 25% and 24%
of net sales for those periods. Sales and marketing expenses have continued to
increase in absolute dollars, as well as a percentage of net sales, due to
increases in the number of sales and marketing personnel, additional sales and
advertising promotional expenses and facilities-related expenses needed to
address sales opportunities and better support customers using the Company's
products.
General and administrative expenses were relatively constant at $1.9
million, $1.7 million and $1.7 million for 1996, 1995 and 1994, respectively, or
6%, 6% and 8% of net sales for those periods.
During the year, the Company incurred expenses of $1.4 million to acquire
Ibex Technologies, Inc., a leading supplier of fax-on-demand software. For
further information, see the Company's Form S-4 (Registration No. 333-14815), as
filed with the Securities and Exchange Commission on October 24, 1996.
Net interest income was $341,000 in 1996, and net interest expense was
$304,000 and $481,000 in 1995 and 1994, respectively. The increase in interest
income 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 resulting from retiring the Company's
outstanding debt during 1996. The decrease in interest expense in 1995 relative
to 1994 was due to reductions in the Company's debt.
The Company recorded a benefit from income taxes in 1996 of $3.4 million
and provisions for income tax in 1995 and 1994 of $69,000 and $121,000,
respectively. In 1996, in accordance with Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes," the Company recorded an income
tax benefit of $4.2 million, reflecting the recognition of various deductible
deferred assets, including prior years' net operating loss carry forwards,
business tax credits and various temporary accounting differences. See Note 8 of
Notes to Consolidated Financial Statements for a discussion of the Company's
provision for income taxes.
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 operations were $398,000, $3.2 million and $3,000 in
1996, 1995 and 1994, respectively. Castelle acquired capital equipment of
$425,000, $241,000 and $446,000 in 1996, 1995 and 1994, respectively.
As of December 31, 1996, the Company had $8.2 million of cash and cash
equivalents. Working capital increased to $13.2 million at December 31, 1996
from $9.4 million at December 31, 1995. The Company has a $6.0 million secured
revolving line of credit with a bank which expires in June 1997, pursuant to
which the Company may borrow 75% of eligible domestic accounts receivable at the
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bank's prime rate. As of December 31, 1996 the Company had no outstanding
borrowings under this line of credit. In addition, the Company has a $3.0
million foreign accounts receivable and inventory line of credit which is part
of the overall $6.0 million commitment. The Company may borrow 90% of eligible
accounts receivable and 40% of eligible inventory. Under the terms of the
agreement, the Company is required to comply with covenants, including a certain
minimum quick ratio and tangible net worth and maximum debt to tangible net
worth, is prohibited from paying cash dividends and is also restricted from
loaning money or assets or entering into any mergers or acquisitions where the
total consideration exceeds $15,000,000, without the bank's consent. The Company
is in compliance with these covenants and at December 31, 1996 has no borrowings
under the line of credit.
Although the Company believes that its existing capital resources, expected
cash flows from operations and available lines of credit will be sufficient to
meet its anticipated capital requirements at least through the next 12 months,
the Company 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 the Company's
existing and 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.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements of the Company and the report of the
Company's independent accountants are included in Item 13:
Report of Coopers & Lybrand L.L.P., Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statement of Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Identification of Directors and Executive Officers.
The names of the directors and executive officers and of the Company and
their ages as of February 28, 1997 are set forth below:
Name Age Position
Arthur H. Bruno 63 Chairman of the Board, Chief Executive Officer,
President and Director
Jerome J. Burke 56 Executive Vice President
Randall I. Bambrough 41 Chief Financial Officer, Vice President of
Finance and Administration and Secretary
John Freidenrich (1) 59 Director
Alan Kessman (2) 50 Director
Kanwal S. Rekhi (1) 50 Director
- ---------------
(1) Member of Compensation Committee of the Board of Directors.
(2) Member of Audit Committee of the Board of Directors.
Arthur H. Bruno
Mr. Bruno has served as the Company'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
has served as a director of White Pine Software, Inc. since February 1994 and is
also a director of several privately-held companies.
Jerome J. Burke
Mr. Burke joined the Company and has served as the Company'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
Mr. Bambrough joined the Company in June 1992 and was named to his current
positions in August 1995. From October 1990 until joining the Company, 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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John Freidenrich
Mr. Freidenrich has served as a director of the Company 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
Mr. Kessman has served as a director of the Company 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
Mr. Rekhi has served as a director of the Company 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, as a director of Gupta
Corporation from June 1990 through September 1996 and as a director of
CyberMedia, Inc., since September 1995.
Other Key Employees
In addition to directors and executive officers, the Company has the
following key employees:
Ariel Bialik joined the Company 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
the Company. 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.
Ney Grant has served as the President of the Company's Ibex division since
the acquisition of Ibex by the Company in November 1996. Mr Grant was a
co-founder of Ibex in 1989 and served as its President from 1990 through the
Company's merger with and into Castelle in 1996. From 1988 to 1989, Mr. Grant
was a product marketing manager at Genesis Electronics Corp. a manufacturer of
voice mail systems. From 1986 to 1988, Mr. Grant served as general manager at
Heuristics, Inc., an industrial software company. Mr. Grant holds an engineering
degree from the University of California, Santa Barbara and an MBA from the
University of California, Davis.
Donald Masulis, a founder of the Company, 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 the Company'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.
Curtis Powell has served as Vice President of Development of the Company's
Ibex division since the acquisition of Ibex by the Company in November 1996. Mr.
Powell was a co-founder of Ibex in 1989, and served as its Vice President of
Development from 1990 through the Company's merger with and into Castelle in
1996. From 1987 to 1989, Mr. Powell was a Senior Software Engineer at
Heuristics, Inc., and from 1986 to 1987 was a system analyst at the University
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of California, Davis and specialized in process control and industrial
automation. Mr. Powell holds a Ph.D and an MBA from the University of
California, Davis.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten percent shareholders are required by Commission regulation to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and representations that no other reports were
required, during the fiscal year ended December 31, 1996, all Section 16(a)
filing requirements applicable to its officers, directors and greater than ten
percent beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
Compensation of Directors
Directors currently receive no cash compensation from the Company for their
services as members of the Board of Directors. They are reimbursed for certain
expenses in connection with attendance at Board and Committee meetings.
The Company has 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 the
Company and to each eligible director of the Company who joins the Board after
the date of the adoption of the Directors' Plan.
On April 1, 1996, pursuant to the Directors' Plan, John Freidenrich, Alan
Kessman and Kanwal S. Rekhi were each granted an option to purchase 2,000 shares
of Common Stock at an exercise price of $8.00. The options will vest ratably
over two years.
30. Page 31 of 83
<PAGE>
Compensation of Executive Officers
Summary of Compensation
The following table shows for the fiscal years ended December 31, 1996,
1995 and 1994, compensation awarded or paid to, or earned by, the Company's
Chief Executive Officer and its other executive officers 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> <C> <C>
Arthur H. Bruno, 1996 176,538 50,000 -- --
Chairman of the Board, 1995 180,000 7,500 -- --
President, Chief Executive 1994 180,000 -0- -- --
Officer and Director
Randall I. Bambrough 1996 112,188 10,000 -- --
Chief Financial Officer, 1995 92,298 581
Vice President of Finance 1994 81,988 14,654
and Administration and
Secretary
Jerome J. Burke 1996 124,578 120,720(1) -- --
Executive Vice President 1995 117,385 60,909 -- --
1994 120,000 26,559(2) -- --
</TABLE>
(1) Represents bonus and sales commissions paid by the Company for sales made
in 1996.
(2) Represents sales commissions paid by the Company for sales made in 1994.
Stock Option Grants and Exercises
The Company grants options to its executive officers under its 1988 Equity
Incentive Plan (the "1988 Plan"). As of February 28, 1997, options to purchase a
total of 418,124 shares had been granted and were outstanding under the 1988
Plan and 225,700 shares remained available for grant thereunder.
There were no stock option exercises during fiscal 1996 by any Named
Executive Officer.
31. Page 32 of 83
<PAGE>
The following tables show for the fiscal year ended December 31, 1996,
certain information regarding options granted to, exercised by, and held at year
end by the Named Executive Officers:
<TABLE>
<CAPTION>
Option Grants In Last Fiscal Year
Individual Grants
%
Number of of Total
Securities Options
Underlying Granted Exercise
Options in Fiscal Price Expiration
Name Granted Year(1) Per Share(2) Date
<S> <C> <C> <C> <C>
Arthur H. Bruno
Chairman and Chief
Executive Officer -- -- -- --
Randall I. Bambrough
Chief Financial Officer,
Vice
President of Finance and
Administration and
Secretary 5,000 3.4% $7.75 04/17/03
Jerome J. Burke
Executive Vice President -- -- -- --
- --------------------
</TABLE>
(1) Based on an aggregate of 149,000 options granted to employees and directors
of the Company in fiscal 1996 including the Named Executive Officer as set
forth in the "Summary Compensation Table" above and directors set forth in
"Director Compensation" above.
(2) The exercise price is equal to 100% of the fair market value of the Common
Stock at the date of grant.
32. Page 33 of 83
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of the Company's Common Stock as of February 28, 1997 by: (i) each director;
(ii) each executive officer named in the Summary Compensation Table; (iii) all
executive officers and directors of the Company as a group; and (iv) all those
known by the Company to be beneficial owners of more than five percent of its
Common Stock.
Beneficial Owner Beneficial Ownership (1)
Number Percent
of Shares of Total
Entities Affiliated with 959,348 20.8%
Hambrecht & Quist Group (2)
One Bush Street
18th Floor
San Francisco, CA 94104
Entities Affiliated with 386,454 8.7%
Bay Partners (3)
10600 North DeAnza Blvd.
Suite 100
Cupertino, CA 95014
Wellington Management Company, LLP 237,000 5.3%
75 State Street
Boston, MA 02109
Arthur H. Bruno (4) 142,250 3.2%
c/o Castelle
3255-3 Scott Boulevard
Santa Clara, CA 95054
Randall I. Bambrough (5) 12,741 *
Jerome J. Burke 73,565 1.7%
John Freidenrich (6) 397,453 9.0%
Alan Kessman (7) 5,558 *
Kanwal S. Rekhi (8) 14,948 *
All directors and executive officers as a group 646,515 14.5%
(6 persons) (3)(4)(5)(6)(7)(8)
* 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, the Company 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
4,437,839 shares outstanding on February 28, 1997, 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
33. Page 34 of 83
<PAGE>
Enterprise Capital PLC, 85,536 shares (and warrants exercisable within 60
days for 16,666 shares) held by Hambrecht & Quist Group, 45,232 shares held
by the Hambrecht 1980 Revocable Trust, and 499 shares of Common stock
subject to options exercisable within 60 days of February 28, 1997 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.
(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. John
Freidenrich, a director of the Company, 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 the Company'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) Includes 10,000 shares of Common Stock held by Mr. Bruno's wife.
(5) Includes 12,041 shares of Common Stock subject to options exercisable
within 60 days of February 28, 1997 and 200 shares held by Mr. Bambrough's
daughter.
(6) 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. John
Freidenrich, a director of the Company, 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.
Freidenrich 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 Freidenrich Family Trust and 999 shares of Common
Stock subject to options exercisable within 60 days of February 28, 1997.
(7) Includes 999 shares of Common Stock subject to options exercisable within
60 days of February 28, 1997.
(8) Includes 14,948 shares of Common Stock subject to options exercisable
within 60 days of February 28, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Executive Officer Stock Purchases and Option Grants
Arthur H. Bruno, Chairman of the Board, Chief Executive Officer, President
and a director of Castelle, purchased 35,000 shares of Castelle's Common Stock
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. On
February 12, 1997, the Company granted Mr. Bruno an option to purchase 45,000
shares of the Company's Common Stock at an exercise price of $5.75 per share.
The options will vest ratably over two years.
Jerome J. Burke, Executive Vice President of Castelle, 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. On
February 12, 1997, the Company granted Mr. Burke an option to purchase 30,000
shares of the Company's Common Stock at an exercise price of $5.75 per share.
The options will vest ratably over two years.
34. Page 35 of 83
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Financial Statements
Page in
Form 10-KSB
Report of Independent Accountants............................................................. F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995.................................. F-2
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994......................................................... F-3
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994......................................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994......................................................... F-5
Notes to Consolidated Financial Statements.................................................... F-6
All schedules are omitted because they are not applicable, or not required,
or because the required information is included in the financial statements or
notes thereto.
(b) Exhibits
2.1(1) Agreement and Plan of Merger, dated as of August 22, 1996 among Castelle, Ibex
Technologies, Inc. and Certain Shareholders of Ibex Technologies, Inc.
3.1(2) Amended and Restated Articles of Incorporation of the Company.
3.4(2) Amended and Restated Bylaws of the Company.
4.1 Reference is made to Exhibits 3.1 and 3.4.
4.2 Fifth Amended and Restated Registration Rights Agreement dated November 20, 1996 by and
among the Registrant and certain holders of the
Company's Common Stock and Warrants to purchase
Common Stock.
10.2(2)* 1995 Outside Directors' Stock Option Plan, and form of Director Stock Option Agreement.
10.3(3) Warrant for Common Stock issued to Unterberg Harris.
10.4(2)* Form of Indemnity Agreement between the Registrant and each of its directors and executive
officers.
10.5(2) Form of Reseller and Development Agreement dated
September 8, 1995, by and between the Registrant
and Tobit Software International GmbH.
10.6(2) License Agreement dated June 9, 1995, by and between the Registrant and 3Com Limited.
10.7(2) OEM Purchase Agreement dated May 23, 1995, by and between the Registrant and SerComm
Corporation.
10.8(2) Distribution Agreement dated February 26, 1990, by and between the Registrant and Ingram
Micro D Inc.
10.9(2) Distributor Contract dated June 25, 1991, as
amended June 25, 1991, by and between the
Registrant and Tech Data Corporation.
10.10(2) Distribution Agreement dated March 26, 1992, as
amended March 26, 1992, by and between the
Registrant and Merisel, Inc.
- ------------------
</TABLE>
(1) Filed as an exhibit to the Company's Form 8-K dated August 22, 1996 and
incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form SB-2
(Reg. No. 33-99628-LA-) or amendments thereto and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year-ended
December 31, 1995 and incorporated herein by reference.
* Indicates management contracts or compensatory plans or arrangements filed
pursuant to Item 601(b)(10) of Regulation S-B.
35. Page 36 of 83
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.11(2) Distributor Agreement dated October 1, 1990, by and between the Registrant and Vitek.
10.12(2) International Distributor Agreement dated February 24, 1994, by and between the Registrant
and Macnica.
10.13(2) International Distributor Agreement dated July 13, 1992, by and between the Registrant and
Azlan Ltd.
10.14(3)* 1988 Equity Incentive Plan, as amended.
10.15(3) Warrant for Common Stock issued to RvR Securities Corp.
11.1 Computation of Net Income (Loss) Per Share.
24.1 Consent of Coopers & Lybrand L.L.P. (reference is made to page 60).
25.1 Power of Attorney. Reference is made to the signature page.
(c) The following reports on Form 8-K were filed for the quarter ended December 31, 1996:
The Company filed a Form 8-K dated August 22, 1996 with the
Securities and Exchange Commission and reported under Item 5 the
execution of an Agreement and Plan of Merger pursuant to which Ibex
Technologies, Inc. would be merged with and into the Company (the
"Agreement"). Under Item 7 of the Form 8-K the Company filed a copy of
the Agreement and a copy of the press release announcing the merger.
The Company filed a Form 8-K dated November 21, 1996 with the
Securities and Exchange Commission and reported under Item 2 the
consummation of the merger of Ibex Technologies, Inc. with and into the
Company pursuant to the Agreement. Under Item 7 of the Form 8-K the
Company filed a copy of the press release announcing the merger and the
consent of the Company's auditors to the filing of the following
audited financial statements of Ibex Technologies, Inc., incorporated
by reference to the Company's Form S-4 (Registration No. 333-14815)
filed on October 24, 1996:
(i) Balance Sheets at December 31, 1995 and December 31, 1994.
(ii) Statement of Operations for the years ended December 31, 1995 and
December 31, 1994.
(iii) Statements of Changes in Shareholders' Equity for the years ended December 31,
1995 and December 31, 1994.
(iv) Statements of Cash Flows for the years ended December 31, 1995 and
December 31, 1994.
- ------------------
</TABLE>
(1) Filed as an exhibit to the Company's Form 8-K dated August 22, 1996 and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form SB-2
(Reg. No. 33-99628-LA-) or amendments thereto and incorporated herein by
reference.
(3) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year-ended
December 31, 1996 and incorporated herein by reference.
* Indicates management contracts or compensatory plans or arrangements filed
pursuant to Item 601(b)(10) of Regulation S-K.
36. Page 37 of 83
<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, 1996 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, 1996. 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, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand, L.L.P.
San Jose, California
February 9, 1997
F-1 Page 38 of 83
<PAGE>
CASTELLE AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
-----
<TABLE>
<CAPTION>
December 31,
--------------------------------
ASSETS 1996 1995
------------- -------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 8,161 $ 7,406
Accounts receivable, net of allowance for doubtful accounts
of $467 in 1996 and $429 in 1995 5,783 3,380
Inventories 2,841 3,678
Prepaid expenses and other current assets 626 550
Deferred income taxes 1,439 71
------------- -------------
Total current assets 18,850 15,085
Property and equipment, net 593 448
Other, net 84 120
Deferred income taxes 2,860 -
------------- -------------
Total assets $ 22,387 $ 15,653
============= =============
LIABILITIES
Current liabilities:
Long-term debt, current portion $ - $ 268
Accounts payable 1,862 2,772
Accrued liabilities 3,825 2,603
------------- -------------
Total current liabilities 5,687 5,643
Other long-term liabilities 21
------------- -------------
Total liabilities 5,687 5,664
------------- -------------
Commitments (Note 4)
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 2,000 shares in 1996 and 1995
Issued and outstanding: no shares in 1996 and 1995
Common stock, no par value:
Authorized: 25,000 shares
Issued and outstanding: 4,440 shares in 1996 and 4,267 shares
in 1995 23,698 22,713
Notes receivable for purchase of common stock (296) (379)
Accumulated deficit (6,702) (12,345)
------------- -------------
Total shareholders' equity 16,700 9,989
------------- -------------
Total liabilities and shareholders' equity $ 22,387 $ 15,653
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2 Page 39 of 83
<PAGE>
CASTELLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
-----
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 32,725 $ 28,173 $ 22,194
Cost of sales 15,609 14,303 12,194
------------ ------------ ------------
Gross profit 17,116 13,870 10,000
------------ ------------ ------------
Operating expenses:
Research and development 2,986 2,666 2,611
Sales and marketing 8,694 7,032 5,372
General and administrative 1,930 1,667 1,702
Acquisition costs 1,430
------------ ------------ ------------
15,040 11,365 9,685
------------ ------------ ------------
Operating income 2,076 2,505 315
Interest income (expense), net 341 (304) (481)
Other income (expense), net (130) (49) 121
------------ ------------ ------------
Income (loss) before (benefit from)
provision for income taxes 2,287 2,152 (45)
(Benefit from) provision for income taxes (3,356) 69 121
------------ ------------ ------------
$ 5,643 $ 2,083 $ (166)
Net income (loss)
============ ============ ============
Net income (loss) per share $ 1.20 $ 0.59 $ (0.17)
============ ============ ============
Shares used in per share calculation 4,702 3,519 949
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3 Page 40 of 83
<PAGE>
CASTELLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
-----
<TABLE>
<CAPTION>
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, January 1, 1994, as
previously reported 19,339 $ 12,911 312 $ 237 $ (111) $ (14,301) $(1,264)
Adjustments in connection with
pooling of interests 775 356 39 395
Balances, January 1, 1994, as restated 19,339 12,911 1,087 593 (111) (14,262) (869)
Issuance of Series E preferred
stock, net of issuance costs 3,010 2,949 2,949
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 (166) (166)
------ ------ ------ ------ ------ ---------- ------
Balances, December 31, 1994 22,349 15,860 1,228 660 (130) (14,428) 1,962
Issuance of common stock through:
Exercise of stock options 25 35 35
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 2,083 2,083
------ ------ ------ ------ ------ ---------- ------
Balances, December 31, 1995 - - 4,267 22,713 (379) (12,345) 9,989
Issuance of common stock through:
Exercise of stock options 23 10 10
Exercise of underwriter's
overallotment option 150 976 976
Repurchase of common stock (1) (1)
Repayment of notes receivable 83 83
Net income 5,643 5,643
------ ------ ------ ------ ------ ---------- ------
Balances, December 31, 1996 - $ - 4,440 $ 23,698 $ (296) $ (6,702) $ 16,700
====== ====== ====== ====== ====== ========== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4 Page 41 of 83
<PAGE>
CASTELLE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
-----
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
----------- ------------ -------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 5,643 $ 2,083 $ (166)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 330 631 919
Loss on disposition of property and equipment 12
Research and development expenses paid by issuance of
stock and a note 178
Provision for doubtful accounts 171 53 259
Provision for excess and obsolete inventory 29 323 279
Changes in assets and liabilities:
Accounts receivable (2,574) (976) (643)
Inventories 808 (1,222) (197)
Prepaid expenses and other current assets (5) (227) (13)
Accounts payable (910) 1,636 (370)
Accrued liabilities and other liabilities 1,205 704 (47)
Deferred income taxes (4,299) 1 (18)
----------- ------------ -------------
Net cash provided by operating activities 398 3,196 3
----------- ------------ -------------
Cash flows from investing activities:
Acquisition of property and equipment (425) (241) (446)
Capitalization of software development costs (12)
Acquisition of intangible assets (14) (59)
(Increase) decrease in other assets (24) 35
----------- ------------ -------------
Net cash used in investing activities (439) (265) (482)
----------- ------------ -------------
Cash flows from financing activities:
(Increase) decrease in restricted cash 426 (426)
Repayment of notes payable (241) (1,198) (1,036)
Proceeds from bank borrowings 19,035 15,784
Repayment of bank borrowings (20,639) (17,292)
Principal payments on capitalized leases (31) (44) (47)
Proceeds from issuance of preferred stock, net of issuance costs 2,566
Proceeds from collection of note receivable for stock 83
Proceeds from issuance of common stock and warrants, net of repurchases 985 5,899 20
----------- ------------ -------------
Net cash provided by (used in) financing activities 796 3,479 (431)
----------- ------------ -------------
Net increase (decrease) in cash and cash equivalents 755 6,410 (910)
Cash and cash equivalents at beginning of period 7,406 996 1,906
----------- ------------ -------------
Cash and cash equivalents at end of period $ 8,161 $ 7,406 $ 996
=========== ============ =============
Supplemental information:
Cash paid during the period for:
Interest $ 8 $ 225 $ 478
Income taxes $ 86 $ 204 $ 39
Noncash investing and financing activities:
Conversion of notes payable to shareholders to preferred stock $ 383
Issuance of common stock in exchange for notes receivable $ 263 $ 31
Repurchase of common stock in exchange for notes receivable $ 14 $ 12
Cancellation of license prepayment and related accrued liability $ 500
Issuance of common stock on conversion of preferred stock $ 15,860
Issuance of a note and common stock for purchase of
development rights for a software product $ 178
Sales of software products in exchange for computer
software, marketing, advertising and telephone services $ 59 $ 24
Conversion of preferred stock to common stock in
connection with merger $ 300
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5 Page 42 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, FactsLine fax-on-demand
software and LANpress print servers. 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 sells software enhancements
and upgrades directly to end users.
2. Summary of Significant Accounting Policies:
Pooling of Interests:
On November 20, 1996, the Company issued 790,617 shares of its common stock
in exchange for all of the outstanding common stock of Ibex Technologies,
Inc (Ibex). In addition, outstanding Ibex stock options were converted into
options to purchase 59,345 shares of Castelle common stock. The transaction
was accounted for as a pooling of interests and therefore, all financial
information presented has been restated to reflect the combined operations
of Castelle and Ibex.
Continued
F-6 Page 43 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, continued:
Pooling of Interests, continued:
Separate net sales, net income and related per share amounts of the merged
entities are presented in the following table:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
(in thousands, except per share amounts)
Net sales:
<S> <C> <C> <C>
Castelle $ 29,125 $ 25,082 $ 19,486
Ibex Technologies, Inc. 3,600 3,091 2,708
-------------- -------------- --------------
Combined $ 32,725 $ 28,173 $ 22,194
-------------- -------------- --------------
Net income (loss):
Castelle $ 6,202 $ 2,024 $ (378)
Ibex Technologies, Inc. (559) 59 212
-------------- -------------- --------------
Combined $ 5,643 $ 2,083 $ (166)
-------------- -------------- --------------
</TABLE>
Merger Costs and Expenses:
In connection with the merger, costs and expenses totaling $1,430,000 were
incurred and have been charged to expense in the fourth quarter of 1996.
The merger costs and expenses consisted of merger related legal, accounting
and investment banking fees.
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.
Continued
F-7 Page 44 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, continued:
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.
Financial Instruments:
Cash equivalents comprise highly liquid investments with original
maturities at the date of purchase of three months or less.
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. Three customers accounted for 54% of
accounts receivable at December 31, 1996 and two customers accounted for
34% of accounts receivable at December 31, 1995.
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 print server products is currently
manufactured by a single supplier and certain key components are currently
available from only single sources.
Continued
F-8 Page 45 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, continued:
Inventories:
Inventories are stated at the lower of standard cost (which
approximates cost on a 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 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 were not significant in 1996 or 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 $2,304,000, $1,138,000 and $901,000 in
1996, 1995 and 1994, respectively.
Continued
F-9 Page 46 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, continued:
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.
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.
Reclassifications:
Certain reclassifications have been made to the 1994 statement of
cash flows presentation to conform with the 1995 presentation.
3. Balance Sheet Detail, (in thousands):
Inventories:
December 31,
----------------------------
1996 1995
------------- -------------
Raw material $ 878 $ 2,361
Work in process 212 419
Finished goods 1,751 898
------------- -------------
$ 2,841 $ 3,678
============= =============
Continued
F-10 Page 47 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
3. Balance Sheet Detail (in thousands), continued:
Property and Equipment:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
------------ -------------
<S> <C> <C>
Production, test and demonstration equipment $ 637 $ 524
Computer equipment 2,185 1,885
Office equipment 315 309
Leasehold improvements 109 102
------------ -------------
3,246 2,820
Less accumulated depreciation and amortization (2,653) (2,372)
------------ -------------
$ 593 $ 448
============ =============
</TABLE>
Equipment acquired under capital leases included in property and equipment
above comprise:
December 31,
-----------------------
1996 1995
---------- ----------
Equipment $ 151 $ 151
Less accumulated amortization (151) (133)
---------- ----------
$ - $ 18
========== ==========
Accrued Liabilities:
December 31,
----------------------------
1996 1995
------------- -------------
Accrued compensation $ 893 $ 664
Accrued sales and marketing 743 698
Accrued professional fees 58 332
Deferred revenue 239 117
Accrued income tax 427 100
Accrued acquisition costs 292
Other 1,173 692
------------- -------------
$ 3,825 $ 2,603
============= =============
Continued
F-11 Page 48 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
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 (in
thousands):
1997 $ 316
1998 300
1999 310
2000 268
-------------
$ 1,194
=============
Rent expense, including the facility lease and equipment rental, was
$374,000, $418,000 and $348,000 for 1996, 1995 and 1994, respectively.
5. Bank Borrowings:
The Company has a $6.0 million revolving line of credit with a bank which
expires in June 1997, pursuant to which the Company may borrow 75% of
eligible domestic accounts receivable ($2,007,000 at December 31, 1996) at
the bank's prime rate (8.25% at December 31, 1996). Borrowings under this
line of credit agreement are collateralized by all assets of the Company.
In addition, the Company has a $3.0 million foreign accounts receivable and
inventory line which is part of the overall $6.0 million commitment. The
Company may borrow 90% of eligible accounts receivable and 40% of eligible
inventory. Under the terms of the agreement, the Company is required to
comply with covenants, including a certain minimum quick ratio and tangible
net worth and maximum debt to tangible net worth, and is also restricted
from entering into any mergers or acquisitions where the total annual
consideration exceeds $15,000,000 without the bank's approval. The Company
is in compliance with these covenants and at December 31, 1996, the line of
credit had no outstanding balance. The line of credit prohibits the payment
of cash dividends and contains certain restrictions on the Company's
ability to loan money or assets or purchase interests in other entities
without the prior written consent of the lender.
Continued
F-12 Page 49 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
6. Long-Term Debt:
December 31,
---------------------------
1996 1995
-------------- -----------
Bank note payable $ 7
Vendor note payable 159
Note payable 75
Capital lease obligations 31
-------------- -----------
$ - 272
Less current maturities (268)
-------------- -----------
$ - $ 4
============== ===========
The bank note payable bore interest at 12% per annum and was repayable in
monthly installments of principal and interest. The note was subject to the
same conditions as the Company's line of credit (see Note 5) and was repaid
in full in January 1996.
The vendor note payable balance resulted from the conversion of $2,121,000
of accounts payable due to a single vendor at December 31, 1993, bore
interest at 7% per annum and was repaid in full in January 1996.
In 1995, the Company purchased exclusive license and development rights for
a software product in exchange for 18,033 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 was not collateralized, was 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. 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, 1996, 80,693 such shares were subject
to the Company's repurchase right.
Continued
F-13 Page 50 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
7. Common Stock, continued:
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). As of December
31, 1996, 120,000 shares of the Company's common stock have been reserved
for issuance under the Directors Plan and activity under the Plan is as
follows (in thousands):
Stock Options Outstanding
-------------------------------------
Number Exercise
of Shares Price Total
---------- ---------- ------------
Balances, January 1, 1996
Options granted 10 $8.00 $ 80
Options canceled (3) $8.00 (22)
---------- ------------
Balances, December 31, 1996 7 $ 58
========== ============
At December 31, 1996, 3,247 options were exercisable.
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 incentive stock 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, 1996, there were no stock purchase rights
outstanding, and 4 shares purchased pursuant to stock purchase rights were
subject to repurchase by the Company.
Continued
F-14 Page 51 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
7. Common Stock, continued:
Stock Plans:
Option activity under the 1988 Plan is as follows (in thousands):
<TABLE>
<CAPTION>
Stock Options Outstanding Weighted
------------------------------------------- Average
Number Exercise Exercise
of Shares Price Total Price
----------- ---------------- ------------ --------
<S> <C> <C> <C> <C>
Balances, January 1, 1994 57 $5.00-$25.00 $ 649 $9.25
Options granted 116 $.20 24 $.20
Options canceled (73) $.20-$20.00 (267) $5.27
----------- ------------ --------
Balances, December 31, 1994 100 $.20-$20.00 406 $.42
Options granted 191 $.20-$6.00 853 $4.58
Options canceled (27) $.20-$25.00 (133) $1.45
Options exercised (2) $.20-$18.00 (1) $.57
----------- ------------ --------
Balances, December 31, 1995 262 $.20-$6.00 1,125 $3.26
Options granted 139 $6.00-$7.75 987 $7.18
Options canceled (64) $.20-$7.75 (425) $6.61
Options exercised (2) $.20-$9.00 (7) $.20
----------- ------------ --------
Balances, December 31, 1996 335 $ 1,680
=========== ============
</TABLE>
At December 31, 1996, 118,548 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.
Continued
F-15 Page 52 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
7. Common Stock, continued:
Stock Plans, continued:
1992 Stock Option Plan:
Under the 1992 Stock Option Plan (1992 Plan), the Board of Directors may
grant options to purchase shares of the Company's common stock at prices
not less than the fair market value at the date of grant. Options granted
under the 1992 Plan generally become exercisable ratably over a three year
period.
Option activity under the 1992 Plan is as follows (in thousands):
<TABLE>
<CAPTION>
Stock Options Outstanding Weighted
-------------------------------------- Average
Number Exercise Total Exercise
of Shares Price Price
---------- ------------- ---------- --------
<S> <C> <C> <C> <C>
Balances, January 1, 1994 34 $0.96-$1.55 $ 50 $1.07
Options granted 13 $1.55 20 $1.55
---------- ---------- --------
Balances, December 31, 1994 47 $0.96-$1.55 70 $1.25
Options granted 11 $1.55-$3.41 20 $1.81
Options exercised (5) $3.41 (19) $3.41
---------- ---------- --------
Balances, December 31, 1995 53 $0.96-$3.41 71 $1.34
Options granted 6 $3.41 21 $3.41
Options exercised (7) $1.55 (10) $1.55
---------- ---------- --------
Balances, December 31, 1996 52 $ 82
========== ==========
</TABLE>
At December 31, 1996, 41,080 outstanding options were exercisable.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the Non-Employee Directors' Stock Option Plan or the 1988
Incentive Stock Plan. Had compensation cost for these Plans been determined
based on the fair value at the grant date for awards in 1996 and 1995
consistent with the provisions of SFAS No. 123, the Company's net income
and net income per share for the years ended December 31, 1996 and 1995
would have been reduced to the pro forma amounts indicated below (in
thousands):
1996 1995
------------ -------------
Net income - as reported $ 5,643 $ 2,083
============ =============
Net income - pro forma $ 5,505 $ 2,044
============ =============
Net income per share - as reported $ 1.20 $ 0.59
============ =============
Net income per share - pro forma $ 1.17 $ 0.58
============ =============
Continued
F-16 Page 53 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
7. Common Stock, continued:
Stock Plans, continued:
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes method with the following weighted average assumptions by
subgroup:
Risk-free interest rate 5.38%-6.75%
Expected life 3 years
Expected dividends -
Volatility 60%
The options outstanding and currently exercisable by exercise price at
December 31, 1996 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
----------------------------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
------------ ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$0.20 99 5.0 $0.20 63 $0.20
$0.96 - $1.00 22 2.0 $0.96 22 $0.96
$1.55 22 5.0 $1.55 18 $1.55
$3.41 - $5.00 111 5.5 $4.91 40 $4.99
$6.00 - $8.00 140 6.5 $6.70 12 $6.74
</TABLE>
The weighted average fair value of those options granted in 1996 and 1995
was $3.41 and $1.98, respectively.
Continued
F-17 Page 54 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
7. Common Stock, continued:
Warrants:
The Company has outstanding fully exercisable warrants at December 31, 1996
as follows (in thousands):
Stock Under
Expiration Stock Under Exercise Number of
Date Warrant Price Shares
----------------- --------------- ---------- -----------
December 2000 Common $8.40 100
March 2000 Common $1.00 133
March 1999 Common $3.00 15
The warrant holders have certain demand and registration rights as
specified in the warrant agreement. During 1995, 6,916 warrants were
exercised. No warrants were exercised during 1996.
Notes Receivable:
At December 31, 1996, the Company held notes receivable of $296,000, which
bear interest between 6.3% and 7.05% per annum, from three executive
officers or directors, 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.
Continued
F-18 Page 55 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
8. Income Taxes:
The provision for income taxes comprised (in thousands):
Year Ended December 31,
----------------------------------------
1996 1995 1994
------------- ----------- -----------
Current:
Federal $ 793 $ 52 $ 109
State 130 16 30
Foreign 20 - -
------------- ----------- -----------
943 68 139
------------- ----------- -----------
Deferred:
Federal (3,890) 3 (13)
State (409) (2) (5)
Foreign - - -
------------- ----------- -----------
(4,299) 1 (18)
------------- ----------- -----------
$ (3,356) $ 69 $ 121
============= =========== ===========
Continued
F-19 Page 56 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
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,
----------------------------------------
1996 1995 1994
------------- ----------- -----------
<S> <C> <C> <C>
Federal tax at statutory rate $ 778 $ 731 $ (16)
Permanent difference due to non-deductible expenses 228 17 (1)
State taxes, net of federal benefit 251 95 8
Utilization of net operating loss carryforwards (1,829) (823) -
Net operating losses not benefited - - 146
Release of valuation allowance (2,347) - -
General business credits (123) - -
Other (314) 49 (16)
------------- ----------- -----------
------------- ----------- -----------
$ (3,356) $ 69 $ 121
============= =========== ===========
</TABLE>
The components of the net deferred tax assets and liabilities are as
follows (in thousands):
December 31,
----------------------------
1996 1995
------------ -------------
Inventory allowances and adjustments $ 327 $ 323
Accounts receivable allowances 483 530
Other liabilities and allowances 622 133
State income taxes 7 260
Net operating loss carryforwards 1,829 3,027
Tax credit carryforwards 899 538
Depreciation 132 -
Valuation allowance - (4,740)
------------ -------------
Total deferred tax assets $ 4,299 $ 71
============ =============
Depreciation $ - $ 7
------------ -------------
Total deferred tax liabilities $ - $ 7
============ =============
Continued
F-20 Page 57 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
8. Income Taxes, continued:
At December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $5,380,000 available to offset future
regular and alternative minimum taxable income. These loss carryforwards
expire in 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 1996, 1995 and 1994, the Company made no
contributions to the plan.
Continued
F-21 Page 58 of 83
<PAGE>
- --------------------------------------------------------------------------------
CASTELLE AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
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,
----------------------------------------------
1996 1995 1994
-------------- -------------- ------------
Europe $ 5,100 $ 5,100 $ 4,500
Pacific Rim 10,800 8,400 3,800
-------------- -------------- ------------
$ 15,900 $ 13,500 $ 8,300
============== ============== ============
Customers that individually accounted for greater than 10% of net sales are
as follows (in thousands):
Years Ended December 31,
--------------------------------------------------------
Customer 1996 1995 1994
-------- -------------- --------------- -----------------
A $ 3,833 12% $ 2,761 10% $ 2,549 11%
B 4,419 14% 4,514 16% 4,465 20%
C 9,711 30% 7,300 26% 3,296 15%
F-22 Page 59 of 83
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Castelle and subsidiaries
is included at page F-1 of this Form 10-KSB. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedule included at page F-24 of this Form 10-KSB.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material repects, the information required to be
included therein.
Coopers & Lybrand, L.L.P.
San Jose, California
February 9, 1997
F-23 Page 60 of 83
<PAGE>
SCHEDULE II
CASTELLE AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
Charged
Balance at to Costs Balance
Beginning and at End of
of Period Expenses Deductions Period
---------- --------- --------- ----------
Year Ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts $ 184 $ 244 $ - $ 428
Allowance for excess and obsolete inventory $ 788 $ 279 $ 564 $ 503
Year Ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 428 $ 75 $ 74 $ 429
Allowance for excess and obsolete inventory $ 503 $ 733 $ 458 $ 778
Year Ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 429 $ 149 $ 111 $ 467
Allowance for excess and obsolete inventory $ 778 $ 443 $ 414 $ 807
</TABLE>
F-24 Page 61 of 83
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Santa Clara, State
of California, on the 28th day of March, 1997.
By:
Arthur H. Bruno
Chief Executive Officer and President
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Arthur H. Bruno and Randall I. Bambrough,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution for him, and in his name in any and all capacities, to
sign any and all amendments to this report, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, and any of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
___________________________________ Chairman of the Board, Chief Executive March 28, 1997
Arthur H. Bruno Officer, President (principal executive
officer) and Director
___________________________________ Chief Financial Officer, Vice President, March 28, 1997
Randall I. Bambrough Finance and Administration and
Secretary (principal financial and
accounting officer)
___________________________________ Director March 28, 1997
John Freidenrich
___________________________________ Director March 28, 1997
Alan Kessman
___________________________________ Director March 28, 1997
Kanwal S. Rekhi
</TABLE>
Page 62 of 83
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Santa
Clara, State of California, on the 28th day of March, 1997.
By: /S/ ARTHUR H. BRUNO
Arthur H. Bruno
Chief Executive Officer and President
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Arthur H. Bruno and Randall I. Bambrough,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution for him, and in his name in any and all capacities, to
sign any and all amendments to this report, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, and any of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
/S/ ARTHUR H. BRUNO Chairman of the Board, Chief Executive March 28, 1997
Arthur H. Bruno Officer, President (principal executive
officer) and Director
/s/ RANDALL I. BAMBROUGH Chief Financial Officer, Vice President, March 28, 1997
Randall I. Bambrough Finance and Administration and Secretary
(principal financial and accounting officer)
/s/ JOHN FREIDENRICH Director March 28, 1997
John Freidenrich
/s/ ALAN KESSMAN Director March 28, 1997
Alan Kessman
/s/ KANWAL S. REKHI Director March 28, 1997
Kanwal S. Rekhi
</TABLE>
Page 63 of 83
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C>
Exhibit Sequentially
Number Description Numbered Page
4.2 Fifth Amended and Restated Registration Rights Agreement dated November 20,
1996 by and among the Registrant and certain holders of the Company's
Common Stock and Warrants to purchase Common Stock. 65
11.1 Computation of Net Income (Loss) Per Share. 81
24.1 Consent of Coopers & Lybrand L.L.P. (reference is made to page 60). 60
25.1 Power of Attorney. Reference is made to the signature page. 63
27.1 Financial Data Schedule 83
</TABLE>
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EXHIBIT 4.2
Page 65 of 83
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CASTELLE
FIFTH AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the
"Agreement") is entered into as of the 20th day of November, 1996 by and among
CASTELLE, a California Corporation (the "Company"), and the persons and entities
listed on Exhibit A hereto.
RECITALS
WHEREAS, the holders of the Company's Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E
Preferred Stock, 1990 Common, 1992 Common, 1994 Warrants and Underwriters'
Warrants, and Eli Schetrit, Don Masulis and Q. T. Wiles (collectively, the
"Prior Holders") possess certain registration rights pursuant to that certain
Amended and Restated Registration Rights Agreement dated as of February 25,
1991, amended on February 12, 1992, further amended on February 24, 1992,
further amended on February 24, 1994 and further amended on December 26, 1995
(the "Prior Agreements"); and
WHEREAS, in connection with the merger of Ibex Technologies, Inc., a
California corporation ("Ibex"), into the Company pursuant to an Agreement and
Plan of Reorganization dated as of August 22, 1996 (the "Merger"), the Company
has agreed to grant certain registration rights to certain Ibex shareholders
upon the receipt by them of Company Common Stock pursuant to the Merger; and
WHEREAS, since the effective date of the Third Amended and Restated
Registration Rights Agreement, the Company has effected a 1-for-20 reverse split
of its Common Stock; and
WHEREAS, the rights granted in this Agreement are intended to supersede and
replace those granted to the Prior Holders pursuant to the Prior Agreements.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein the parties hereby agree as follows:
1. Definitions. As used herein, the following terms shall have the
following respective meanings:
(a) "1994 Warrants" means (i) the warrant issued to H&Q London Ventures
and initially exercisable for 1,000,000 shares of the Company's Common
Stock, dated February 24, 1994, (ii) the warrant issued to Hambrecht &
Quist Group and initially exercisable for 1,000,000 shares of the
Company's Common Stock, dated February 24, 1994, and (iii) the warrant
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issued to Hambrecht & Quist Guaranty Finance and initially exercisable
for 6,000,000 shares of the Company's Common Stock, dated February 24,
1994.
(b) "Bank Warrant" shall mean the warrant issued to Silicon Valley Bank
exercisable for 45,000 shares of the Company's Series E Preferred
Stock and dated March 1, 1994.
(c) "Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
(d) "Eligible Holder" shall mean Holders, Ibex Holders and Warrant Share
Holders, collectively.
(e) "Holders" shall mean and include any person or persons to whom
Registrable Securities (as defined herein) were originally issued or
qualifying transferees under Section 11 hereof who hold Registrable
Securities.
(f) "Ibex Holders" shall mean and include any person or persons to whom
Ibex Merger Shares (as defined herein) were originally issued or
qualifying transferees under Section 11 hereof who hold Ibex Merger
Shares.
(g) "Ibex Merger Shares" shall mean those shares of Company Common Stock
issued pursuant to the Merger.
(h) "Initiating Holders" shall mean any Holders who in the aggregate own
not less than 35% of the Registrable Securities which have not been
sold to the public.
(i) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement
in compliance with the Securities Act, and the declaration or ordering
of the effectiveness of such registration statement.
(j) "Registrable Securities" means (i) 37,500 shares of Common Stock held
by Eli Schetrit, 22,500 shares of Common Stock held by Don Masulis and
10,312 shares of Common Stock held by Q. T. Wiles (collectively
referred to as "Founders Stock"), (ii) shares of the Company's Common
Stock issued or issuable pursuant to the conversion of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock which have not
been sold to the public, (iii) 7,494 shares of the Company's Common
Stock issued pursuant to conversion of warrants to purchase Common
Stock dated prior to November 14, 1990 (the "1990 Common"), (iv) 7,811
shares of the Company's Common Stock issued by the Company in August
1992 to the purchasers of Series D Preferred Stock (the "1992 Common")
and (v) any Common Stock of the Company issued or issuable in respect
of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock or
the Underwriters' Warrants or any shares of the Company's Common Stock
or other securities issued or issuable pursuant to the conversion of,
or with respect to, the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
2. Page 67 of 83
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Preferred Stock and the Founder's Stock, the 1990 Common, the 1992
Common and the Underwriters' Warrants upon any stock split, stock
dividend, recapitalization, or similar event, which shares have not
been sold to the public.
(k) "Registration Expenses" shall mean all expenses incurred by the
Company in complying with Sections 2, 3 and 4 hereof, including,
without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for
the Company, fees and disbursements of one counsel for all Holders,
blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration (but excluding the
compensation of regular employees of the Company which shall be paid
in any event by the Company).
(l) "Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
(m) "Securities" shall mean the shares of Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, the 1990 Common, the 1992 Common, the Ibex
Merger Shares, the 1994 Warrants, the Bank Warrants and the
Underwriters' Warrants (or any shares issued upon conversion or
exercise thereof).
(n) "Selling Expenses" shall mean all underwriting fees, discounts,
selling commissions and stock transfer taxes applicable to the
securities registered by the Holders and all fees and disbursements of
counsel for any Holder, other than are counsel acting on behalf of all
Holders.
(o) "Special Ibex Holder" shall mean and include Tucha Limited, Newark
Holding S.A. and Teodoro Ramos Gimenez and any person or persons to
whom Ibex Merger Shares held by those parties have been transferred in
accordance with Section 11 hereof.
(p) "Underwriters' Warrants" shall mean those two warrants issued to
Unterberg Harris and RvR Securities Corp. in connection with the
Company's initial public offering in December, 1995 for the purchase
of 100,000 shares of Company Common Stock each.
(q) "Underwriters' Warrants Holders" shall mean any Holders who in the
aggregate own or would own upon exercise not less than 50% of the
shares of the Company's Common Stock underlying the Underwriters'
Warrants.
(r) "Warrant Shares" shall mean shares of the Company's Common Stock
issued or issuable pursuant to exercise of the 1994 Warrants and
shares of the Company's Common Stock issued or issuable upon
conversion of the Company's Series E Preferred Stock issued or
issuable upon exercise of the Bank Warrant.
3. Page 68 of 83
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(s) "Warrant Share Holder" shall mean holders of shares of Common Stock
issued or issuable upon exercise of the 1994 Warrants and the Bank
Warrant.
2. Requested Registration.
(a) Request for Registration. In case the Company shall receive from
Initiating Holders or Underwriters' Warrants Holders a written request
that the Company effect any registration, qualification or compliance
and an anticipated aggregate offering price, net of underwriting
discounts and commissions, that would exceed either $5,000,000 (in the
case of a request by Initiating Holders) or $500,000 (in the case of a
request by Underwriters' Warrants Holders), the Company will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(ii) use its diligent efforts to effect such registration,
qualification or compliance as soon as practicable (including,
without limitation, the execution of an undertaking to file
post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under
the Securities Act and any other governmental requirements or
regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of
such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities
of any Holder or Holders joining in such request as are specified
in a written request received by the Company within 15 days after
receipt of such written notice from the Company;
Provided, however, that the Company shall not be obligated to take any
action to effect any such registration, qualification or compliance pursuant to
this Section 2:
(A) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process
in effecting such registration, qualification or compliance
unless the Company is already subject to service in such
jurisdiction and except as may be required by the Securities
Act;
(B) Prior to January 1, 1996;
(C) Within six (6) months immediately following the effective
date of any registration statement pertaining to a firmly
underwritten offering of securities of the Company for its
own account; or
(D) Upon request from the Initiating Holders, after the Company
has effected one such requested registration pursuant to
this Agreement upon request from the Initiating Holders,
such registration has been declared or ordered effective and
the securities offered pursuant to such registration have
been sold.
4. Page 69 of 83
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(E) Upon request from the Underwriters' Warrants Holders, after
the Company has effected one such requested registration
pursuant to this Agreement upon request from the
Underwriters' Warrants Holders, such registration has been
declared or ordered effective and the securities offered
pursuant to such registration have been sold.
Subject to the foregoing clauses (A) through (E), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable, after receipt of the request of the
Initiating Holders or Underwriters' Warrants Holders; provided, however, that if
the Company shall furnish to such Holders a certificate signed by the President
of the Company stating that in the good faith judgment of the Board of Directors
of the Company, it would be seriously detrimental to the Company and its
shareholders for such registration statement to be filed on or before the date
filing would be required, and it is therefore essential to defer the filing of
such registration statement, the Company shall have the right to defer such
filing for a period of not more than 90 days after receipt of the request of the
Initiating Holders or Underwriters' Warrants Holders; provided, however, that
the Company may not make such certification more than once in any twelve (12)
month period.
(b) Underwriting.
(i) The distribution of the Registrable Securities covered by the
request of the Initiating Holders shall be effected by means of a
firm commitment underwriting. The right of any Initiating Holder
to registration pursuant to Section 2 shall be conditioned upon
such Initiating Holder's participation in such underwriting and
the inclusion of such Initiating Holder's Registrable Securities
in the underwriting to the extent requested (unless otherwise
mutually agreed by a majority in interest of the Initiating
Holders and such Initiating Holder) to the extent provided
herein.
The Company (together with all Initiating Holders and Underwriters'
Warrants Holders proposing to distribute their securities through such
underwriting) shall enter into an underwriting agreement in customary form with
the managing underwriter selected for such underwriting by a majority in
interest of the Initiating Holders. Notwithstanding any other provision of this
Section 2, if the managing underwriter advises the Initiating Holders and the
Underwriters' Warrants Holders in writing that marketing factors require a
limitation of the number of shares to be underwritten, then, subject to the
provisions of this Section 2(b), the Initiating Holders and Underwriters'
Warrants Holders shall so advise all holders of Registrable Securities, and the
number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all Initiating Holders
and Underwriters' Warrants Holders thereof in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Initiating Holders and Underwriters' Warrants Holders at the time of filing the
registration statement. No Registrable Securities excluded from the underwriting
by reason of the managing underwriter's marketing limitation shall be included
in such registration.
If any Initiating Holder or Underwriters' Warrants Holder of Registrable
Securities disapproves of the terms of the underwriting, such person may elect
to withdraw therefrom by written notice to the Company, the managing
5. Page 70 of 83
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underwriter, the Initiating Holders and Underwriters' Warrants Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration; provided, however, that, if by the withdrawal of
such Registrable Securities a greater number of Registrable Securities held by
other Initiating Holders or Underwriters' Warrants Holders may be included in
such registration (up to the maximum of any limitation imposed by the
underwriters), then the Company shall offer to all Initiating Holders and
Underwriters' Warrants Holders who have included Registrable Securities in the
registration the right to include additional Registrable Securities in the same
proportion used in determining the underwriter limitation in this Section 2(b).
(ii) Notwithstanding any terms in this Agreement to the contrary, the
distribution of the shares issuable upon exercise of the
Underwriters' Warrants is not required to be effected by means of
an underwriting.
(c) Inclusion of Shares by Company. If the managing underwriter has not
limited the number of Registrable Securities to be underwritten, the
Company may include securities for its own account or for the account
of others in such registration if the managing underwriter so agrees
and if the number of Registrable Securities held by participating
Holders which would otherwise have been included in such registration
and underwriting will not thereby be limited. The inclusion of such
shares shall be on the same terms as the registration of shares held
by the Initiating Holders or Underwriters' Warrants Holders.
3. Company Registration.
(a) Notice of Registration to Eligible Holders. If at any time or from
time to time, the Company shall determine to register any of its
securities, either for its own account or the account of a security
holder or holders, other than (i) a registration relating solely to
employee benefit plans, or (ii) a registration relating solely to a
Commission Rule 145 transaction, the Company will:
(i) promptly give to each Eligible Holder written notice thereof; and
(ii) include in such registration (and any related qualification under
blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities, Ibex Merger
Shares and Warrant Shares specified in a written request or
requests, made within 15 days after receipt of such written
notice from the Company, by any Eligible Holder.
(b) Inclusion of Additional Shares. The Company may include in any
registration pursuant to this Section 3 securities held by officers
and employees of the Company, in amounts as determined by the
Company's Board of Directors; provided, however, that the number of
such shares included in such registration shall not exceed 10% of the
total number of shares to be included on behalf of the Company's
security holders in such registration.
6. Page 71 of 83
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(c) Underwriting. If the registration of which the Company gives notice is
for a registered public offering involving an underwriting, the
Company shall so advise the Eligible Holders as a part of the written
notice given pursuant to Section 3(a)(i). In such event the right of
any Eligible Holder to registration pursuant to this Section 3 shall
be conditioned upon such Eligible Holder's participation in such
underwriting and the inclusion of such Eligible Holder's Registrable
Securities, Ibex Merger Shares and Warrant Shares in the underwriting
to the extent provided herein. All Eligible Holders proposing to
distribute their securities through such underwriting shall (together
with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such
underwriting by the Company. Notwithstanding any other provision of
this Section 3, if the managing underwriter determines that marketing
factors require a limitation of the number of shares to be
underwritten: (i) if such registration is the first offering by the
Company to the general public of its securities for its own account,
the underwriter may exclude some or all Registrable Securities, Ibex
Merger Shares and Warrant Shares from such registration and
underwriting (provided the securities of other shareholders are not
included therein), and (ii) if such registration is other than the
first offering by the Company to the general public of its securities
for its own account, the underwriter may limit the Registrable
Securities, Ibex Merger Shares and Warrant Shares held by Eligible
Holders and securities to be included pursuant to Section 3(b) to be
included in such registration and underwriting to an aggregate of not
less than 25% of the total value of the securities to be distributed
through such registration and underwriting. The Company shall so
advise all Eligible Holders and the other holders distributing their
securities through such underwriting, and the number of shares of
Registrable Securities, Ibex Merger Shares, Warrant Shares and other
securities that may be included in the registration and underwriting
shall be allocated among all Eligible Holders and other holders
thereof in proportion, as nearly as practicable, to the respective
amounts of securities entitled to inclusion in such registration held
by all such Eligible Holders and other holders at the time of filing
the registration statement, except that Ibex Merger Shares includible
in the registration shall first consist of those shares offered by any
Special Ibex Holder with the balance of the Ibex Merger Shares to be
included being allocated among the remaining Ibex Holders
participating in the registration in proportion, as nearly as
practicable, to the respective amounts of Ibex Merger Shares held by
such Ibex Holders which are includible in such registration. If any
Eligible Holder or other holder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such
registration, but if the registration is the first offering by the
Company to the general public of its securities for its own account,
then the securities so excluded or withdrawn shall not be transferred
in a public distribution prior to 120 days after the effective date of
the registration statement relating thereto.
4. Registration on Form S-3.
(a) In addition to the rights set forth in Section 2, if Holders or Ibex
Holders request that the Company file a registration statement on Form
S-3 (or any successor to Form S-3) for a public offering of shares of
Registrable Securities and/or Ibex Merger Shares, the reasonably
anticipated aggregate price to the public of which would either (i) be
7. Page 72 of 83
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at least $1,000,000 or (ii) include at least $500,000 of Registrable
Securities issued upon exercise of the Underwriters' Warrants, and the
Company is a registrant entitled to use Form S-3 to register the
shares for such an offering, the Company shall use its best efforts to
cause such shares to be registered for the offering as soon as
practicable on Form S-3 (or any successor form to Form S-3). The
number of shares of Registrable Securities that may be included on the
Form S-3 shall be allocated among all Holders and Ibex Holders in
proportion to the respective amounts of Registrable Securities and
Ibex Merger Shares entitled to inclusion in such registration at the
time of filing the registration statement, except that Ibex Merger
Shares includible in the registration shall first consist of those
shares offered by any Special Ibex Holder with the balance of the Ibex
Merger Shares to be included being allocated among the remaining Ibex
Holders participating in the registration in proportion, as nearly as
practicable, to the respective amounts of Ibex Merger Shares held by
such Ibex Holders which are includible in such registration.
(b) Collectively, the Ibex Special Holders shall have the right to make a
single request, which shall be identified as such request in the
notice to the Company, that the Company file a registration statement
on Form S-3 (or any successor to Form S-3) for a public offering of
Ibex Merger Shares held by the Special Ibex Holders, the reasonably
anticipated aggregate price to the public of which would be at least
$1,000,000. If Company is a registrant entitled to use Form S-3 to
register the shares for such an offering, the Company shall use its
best efforts to cause such shares to be registered for the offering as
soon as practicable on Form S-3 (or any successor form to Form S-3)
and shall keep such registration effective and current for a period of
30 days. During such thirty day period, the Company shall not allow
any other registration statement filed pursuant to Sections 2-4 to
become effective. The number of shares of Registrable Securities that
may be included on the Form S-3 shall be allocated among all Special
Ibex Holders in proportion to the respective amounts of Ibex Merger
Shares entitled to inclusion in such registration at the time of
filing the registration statement. Should the Company not be obligated
to take the action requested in Section 4(b) due to the exceptions to
such obligation identified in Section 4(c)(ii), (iii) or (iv), the
right to make a single request for registration pursuant to Section
4(b) shall be treated as unexercised until the Special Ibex Holders
make a subsequent request for registration.
(c) Notwithstanding the foregoing, the Company shall not be obligated to
take any action pursuant to this Section 4: (i) in any particular
jurisdiction in which the Company would be required to execute a
general consent to service of process in effecting such registration,
qualification or compliance unless the Company is already subject to
service in such jurisdiction and except as may be required by the
Securities Act; (ii) if the Company, within ten (10) days of the
receipt of the request of the Holders, gives notice of its bona fide
intention to effect the filing of a registration statement with the
Commission within forty-five (45) days of receipt of such request
(other than with respect to a registration statement relating to a
Rule 145 transaction, an offering solely to employees or any other
registration which is not appropriate for the registration of
Registrable Securities); (iii) except as noted in Section 4(b), during
the period starting with the date of filing of, and ending on a date
ninety (90) days following the effective date of, a registration
8. Page 73 of 83
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statement described in (ii) above or pursuant to Section 2, provided
that the Company is actively employing in good faith all reasonable
efforts to cause such registration statement to become effective and
further provided that no other person or entity could require the
Company to file a registration statement in such period; (iv) more
than once in any twelve month period or (v) with regard to a Holder or
Ibex Holder of less than one percent (1%) of the Company's outstanding
Common Stock determined in accordance with Rule 144 under the
Securities Act.
5. Expenses of Registration. All Registration Expenses, other than
underwriting fees, discounts or commissions or fees of counsel other than one
counsel for all selling shareholders, incurred in connection with any
registration, qualification or compliance pursuant to Sections 2, 3 and 4, shall
be borne by the Company. Unless otherwise stated, all Selling Expenses relating
to securities registered by the Holders or the Eligible Holders shall be borne
by the holders of such securities pro rata on the basis of the number of shares
so registered.
6. Registration Procedures. In the case of each registration, qualification
or compliance effected by the Company pursuant to this Agreement, the Company
will keep each participating Eligible Holder advised in writing as to the
initiation of each registration, qualification and compliance and as to the
completion thereof. At its expense the Company will:
(a) Except as noted in Section 4(b), keep such registration, qualification
or compliance effective and current for a period of 90 days (or such
longer period as may be necessary to accommodate the filing of
amendments or supplements necessary to comply with the Securities Act)
or until the participating Eligible Holder or participating Eligible
Holders have completed the distribution described in the registration
statement relating thereto, whichever first occurs; and
(b) Furnish such number of prospectuses and other documents incident
thereto as a participating Eligible Holder from time to time may
reasonably request.
(c) Use its best efforts to register and qualify the securities covered by
such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the
participating Eligible Holders, provided that the Company shall not be
required in connection therewith or as a condition thereto to qualify
to do business or to file a general consent to service of process in
any such states or jurisdiction.
(d) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each
Eligible Holder participating in such underwriting shall also enter
into and perform its obligations under such an agreement.
(e) Notify each participating Eligible Holder of Registrable Securities
and Warrant Shares covered by such registration statement, at any time
when a prospectus relating thereto covered by such registration
statement is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact
9. Page 74 of 83
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required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then
existing.
7. Indemnification.
(a) The Company will indemnify each Eligible Holder, depending on the form
of the registration, each of its officers and directors and partners
and such Eligible Holder's legal counsel and independent accountants,
and each person controlling any such persons within the meaning of
Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this
Agreement, and each underwriter, if any, and each person who controls
any underwriter within the meaning of Section 15 of the Securities
Act, against all expenses, claims, losses, damages and liabilities (or
actions in respect thereof), including any of the foregoing incurred
in settlement of any litigation, commenced or threatened, arising out
of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus,
offering circular or other document, or any amendment or supplement
thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to
make the statements therein, not misleading, or any violation by the
Company of any rule or regulation promulgated under the Securities Act
or any state securities laws applicable to the Company and relating to
action or inaction required of the Company in connection with any such
registration, qualification or compliance, and will reimburse each
such Eligible Holder, each of its officers and directors and such
Eligible Holder's legal counsel and independent accountants, and each
person controlling any such persons, each such underwriter and each
person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case
to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or
alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Company by an
instrument duly executed by such Eligible Holder or underwriter and
stated to be specifically for use therein.
(b) Each Eligible Holder will, if Securities held by such Eligible Holder
are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company,
each of its directors and officers and its legal counsel and
independent accountants, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of Section
15 of the Securities Act, and each other such Eligible Holder, each of
its officers and directors and each person controlling such Eligible
Holder within the meaning of Section 15 of the Securities Act, against
all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such
registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
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statements therein not misleading, and will reimburse the Company,
such Eligible Holders, such directors, officers, legal counsel,
independent accountants, underwriters or control persons for any legal
or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such
untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering
circular or other document in reliance upon and in conformity with
written information furnished to the Company by an instrument duly
executed by such Eligible Holder and stated to be specifically for use
therein; provided, however, that the obligations of such Eligible
Holders hereunder shall be limited to an amount equal to the proceeds
to each such Eligible Holder of Registrable Securities or Warrant
Shares sold as contemplated herein.
(c) Each party entitled to indemnification under this Section 7 (the
"Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party (whose approval shall not unreasonably be
withheld). The Indemnified Party may participate in such defense at
such party's expense; provided, however, that the Indemnifying Party
shall bear the expense of such defense of the Indemnified Party if
representation of both parties by the same counsel would be
inappropriate due to actual or potential conflicts of interest. The
failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this
Agreement. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation.
8. Lockup Agreement. In consideration for the Company agreeing to its
obligations under this Agreement, each Eligible Holder agrees in connection with
the first registration of the Company's securities whether for its own account
or under Section 2, upon the request of the Company or the underwriters managing
the underwritten offering of the Company's securities, not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any Registrable Securities or Warrant Shares (other than those included in
the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 120
days) from the effective date of such registration as the Company or the
underwriters may specify; provided, however, that (i) such Eligible Holder shall
have no obligation to enter into the agreement described herein unless all
executive officers and directors of the Company enter into similar agreements
and (ii) nothing herein shall prevent any Eligible Holder that is a partnership
from making a distribution of Registrable Securities or Warrant Shares to the
partners thereof that is otherwise in compliance with applicable securities
laws.
9. Information by Eligible Holder. The Eligible Holder of Securities
included in any registration shall furnish to the Company such information
regarding such Eligible Holder or Holders and the distribution proposed by such
11. Page 76 of 83
<PAGE>
Eligible Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Agreement.
10. Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of securities of the Company to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all
times after the effective date of the first registration under the
Securities Act filed by the Company for an offering of its securities
to the general public;
(b) Use its best efforts to then file with the Commission in a timely
manner all reports and other documents required of the Company under
the Securities Act and the Securities Exchange Act of 1934, as amended
(at any time after it has become subject to such reporting
requirements);
(c) So long as a Eligible Holder owns any Securities to furnish to the
Eligible Holder forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said
Rule 144 (at any time after 90 days after the effective date of the
first registration statement filed by the Company for an offering of
its securities to the general public), and of the Securities Act and
the Securities Exchange Act of 1934 (at any time after it has become
subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and
documents of the Company as an Eligible Holder may reasonably request
in availing itself of any rule or regulation of the Commission
allowing an Eligible Holder to sell any such securities without
registration.
11. Transfer of Registration Rights. The rights to cause the Company to
register securities granted Holders under Section 2 and to Holders and Ibex
Holders under Section 4, and to Eligible Holders under Sections 3, may not be
assigned to a transferee or assignee without the prior written consent of the
Company. Notwithstanding the foregoing, rights to cause the Company to register
securities may be assigned in connection with the transfer or assignment of
Securities, without the Company's consent, either during the Eligible Holder's
lifetime, or on death by will or intestacy, to his other ancestors, descendants
or spouse, or any custodian or trustee for the account of Eligible Holder or
Holders' ancestors, descendants or spouse or to any constituent partner of an
Eligible Holder, where such Eligible Holder is a partnership, or to any parent
or subsidiary corporation or any officer, director or principal shareholder
thereof, where such Eligible Holder is a corporation.
12. Termination of Registration Rights. The rights granted pursuant to this
Agreement shall terminate as to any Eligible Holder at the earlier of (i) five
years after the Company's initial public offering or (ii) unless the Eligible
Holder is a holder of at least 1% of the aggregate of all outstanding Common
Stock of the Company, at such time as such Eligible Holder may sell under Rule
12. Page 77 of 83
<PAGE>
144, or a successor rule, in a three month period, all Securities then held by
such Eligible Holder.
13. Miscellaneous.
(a) Waivers and Amendments. With the written consent of the holders of a
majority of the Securities (as then adjusted for any stock dividends,
stock splits, recapitalizations or combinations), the obligations of
the Company and the rights of the Eligible Holders under this
Agreement may be waived (either generally or in a particular instance,
either retroactively or prospectively, and either for a specified
period of time or indefinitely) or amended; provided, however, that no
such waiver or amendment shall reduce the aforesaid number of shares,
the holders of which are required to consent to any waiver or
amendment, without the consent of the holders of all of the Securities
and provided further that no such waiver or amendment shall be
effective as to the Special Ibex Holders or the Ibex Merger Shares
held by them without the written consent of the Special Ibex Holders.
Upon the effectuation of each such waiver or amendment, the Company
shall promptly give written notice thereof to the holders of the
Securities who have not previously consented thereto in writing.
(b) Governing Law. This Agreement shall be governed by and construed under
the laws of the State of California as such laws are applied to
contracts made and to be fully performed entirely within that state
between residents of that state. All disputes arising out of this
Agreement shall be subject to the exclusive jurisdiction and venue of
the California State courts of Santa Clara County, California (or, if
there is exclusive federal jurisdiction, the United States District
Court for the Northern District of California) and the parties consent
to the personal and exclusive jurisdiction and venue of these courts.
(c) Successors and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
(d) Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the
subjects hereof and thereof.
(e) Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by first class,
postage prepaid, addressed (a) if to an Eligible Holder, at such
Eligible Holder's address as indicated in the Company's transfer
agent's records, or (b) if to the Company, at 3255-3 Scott Boulevard,
Santa Clara, California 95051, or at such other address as the Company
shall have furnished to the Holders in writing.
(f) Separability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions of this Agreement shall not
in any way be affected or impaired thereby.
13. Page 78 of 83
<PAGE>
(g) Titles and Subtitles. The titles of the sections and subsections of
this Agreement are for conveniences of reference only and are not to
be considered in construing this Agreement.
(h) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which
together constitute one instrument.
The foregoing Agreement is hereby executed as of the date first above
written.
CASTELLE,
a California corporation
By: /s/ Arthur Bruno
ARTHUR BRUNO,
President and Chief Executive Officer
14. Page 79 of 83
<PAGE>
COUNTERPART SIGNATURE PAGE FOR
FIFTH AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
The undersigned is executing this signature page for the Fifth Amended and
Restated Registration Rights Agreement with respect to all Securities and
Registrable Securities held by the undersigned shareholder.
SHAREHOLDER: *
Name:
Signature:
By:
Title:
* The persons and entities listed below are signatories to the Agreement:
Applied Systems Engineering, Inc.
Asset Management Associates 1984
Bay Partners III
Bay Partners IV
Henry S. Bienen
California BPIV, L.P. (formerly BP IV)
Daniel H. Case III
Marian H. Case
Eric Chen
Colleen E. Curry
Delaware Charter Guarantee & Trust Co.
Scott Edwards
Antonio J. Espinosa
Elizabeth Hambrecht Eu
Boyd W. Fellows
Dieter Folta
Peter S. Friedman
Golden Moon Ventures
The 1990 Grant Revocable Trust
Robert Ney Grant
Joseph A. Greco & Roslyn M. Greco
Guaranty Finance Management Corp.
H&Q Group
H&Q London Ventures
H&Q TV Management N.V. H&Q Ventures International C.V.
H&Q Ventures IV
Hambrecht & Quist Venture Partners
Hambrecht 1980 Revocable Trust
Amelia T. Hambrecht
Forrest Hambrecht
George N. Hambrecht
Robert H. Hambrecht
Susan L. Hambrecht
William R. Hambrecht
Hamco Capital Corporation
Hamquist
Donald E. Hansen & Sarah A. Blanchette
Hardie Honda
INL Ventures, Inc.
Ivory & Sime Enterprise Capital plc
(formerly The Independent Investment
Co. Plc)
Brian H. Jones
Alan Kessman
Robert F. Killion
Samuel D. Kingsland
Donald R. Klarich and Geraldine Klarich
Kulp 1983 Revocable Trust 04/01/83
Douglas Look
Edgar L. Lowe
Bruce M. Lupatkin
Gordon S. Macklin
Dean Witter Reynolds, Custodian for
Bruce A. Mann Rollover dated 11/02/94
Clovis F. Mattos
Cristina M. Morgan
William R. Murray and Mary Patricia
Murray, Trustees of the Murray
Family Revocable Trust dtd 6/6/90
Randall A. Nishimi
Standish H. O'Grady
Paul F. Pelosi
Robert Place
Curtis R. Powell
Elizabeth Powell
John S. Powell
Hans-Peter Riecken
RvR Securities Corp.
Kevin R. Skaggs
J.F. Shea Company, Inc.
J.F. Shea Co., as Nominee 1989-15
John J.F. Sherrerd
Susan Sherrerd
Silicon Valley Bank
Sharon L. Smith
Prakash C. Sootarsing
Timothy M. Spicer
William R. Timken
Barry Traub
Tucha Limited
Unterberg Harris, L.P.
John C. Vlahoyiannis
Leonor Velasco
Dennis Walton
P. Stewart Ward
Lawrence P. Weiner
William Welty
Richard J. & Robin L. Wetmore
Susan Witter
Page 80 of 83
<PAGE>
EXHIBIT 11.1
Page 81 of 83
<PAGE>
EXHIBIT 11.1
CASTELLE AND SUBSIDIARIES
COMPUTATION OF NET LOSS PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
Primary and fully diluted:
<S> <C> <C> <C>
Weighted average common shares outstanding for the period 4,461 1,588 875
Weighted average shares from assumed conversion of
preferred stock 1,724
Common equivalent shares pursuant to Staff Accounting
Bulletin No. 83 74 74
Common equivalent shares assuming conversion of stock
options under the treasury stock method 241 133
------------ ------------ ------------
Shares used in per share calculation 4,702 3,519 949
============ ============ ============
Net income $ 5,643 $ 2,032 $ (166)
Income addback under modified treasury stock method 51
Net income $ 5,643 $ 2,083 $ (166)
============ ============ ============
Net income per share $ 1.20 $ 0.59 $ (0.17)
============ ============ ============
Page 82 of 83
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Financial Statements for the period ending December 31, 1996 included
in the Company's Form 10-KSB filed March 31, 1997 and is qualified in its
entirety by reference to such statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,161
<SECURITIES> 0
<RECEIVABLES> 6,250
<ALLOWANCES> 467
<INVENTORY> 3,648
<CURRENT-ASSETS> 18,850
<PP&E> 3,246
<DEPRECIATION> 2,653
<TOTAL-ASSETS> 22,387
<CURRENT-LIABILITIES> 5,687
<BONDS> 0
0
0
<COMMON> 23,698
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,387
<SALES> 32,725
<TOTAL-REVENUES> 32,725
<CGS> 15,609
<TOTAL-COSTS> 15,609
<OTHER-EXPENSES> 15,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (341)
<INCOME-PRETAX> 2,287
<INCOME-TAX> (3,356)
<INCOME-CONTINUING> 5,643
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,643
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20
</TABLE>
