SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant (x)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
(x) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
CASTELLE
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box)
(x) No fee required.
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
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2. Aggregate number of securities to which transaction applies:
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3. Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
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4. Proposed maximum aggregate value of transaction:
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5. Total fee paid:
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( ) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
6. Amount Previously Paid:
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7. Form, Schedule or Registration Statement No.:
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8. Filing Party:
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9. Date Filed:
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<PAGE>
CASTELLE
3255-3 SCOTT BOULEVARD
SANTA CLARA, CALIFORNIA
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 29, 1998
TO THE SHAREHOLDERS OF CASTELLE:
Notice is hereby given that the Annual Meeting of Shareholders of
CASTELLE, a California corporation (the "Company"), will be held on Wednesday,
April 29, 1998 at 10:00a.m. local time at the Company's corporate offices,
located at 3255-3 Scott Boulevard, Santa Clara, California for the following
purposes:
1. To elect directors to serve for the ensuing year and until their successors
are elected.
2. To approve the Company's 1988 Incentive Stock Plan, as amended, to increase
the aggregate number of shares of Common Stock authorized for issuance
under such plan by 981,935 shares and to add provisions with respect to
Section 162(m) of the Internal Revenue Code of 1986, as amended.
3. To ratify the selection of Coopers & Lybrand LLP as independent auditors of
the Company for its fiscal year ending December 31, 1998.
4. To transact such other business as may properly come before the meeting or
any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on March 19,
1998, as the record date for the determination of shareholders entitled to
notice of and to vote at this Annual Meeting and at any adjournment or
postponement thereof.
By Order of the Board of Directors
/s/ Randall I. Bambrough
RANDALL I. BAMBROUGH
Secretary
Santa Clara, California
April 1, 1998
All Shareholders are cordially invited to attend the meeting in person.
Whether or not you expect to attend the meeting, please complete, date, sign and
return the enclosed proxy as promptly as possible in order to ensure your
representation at the meeting. A return envelope (which is postage prepaid if
mailed in the United States) is enclosed for that purpose. Even if you have
given your proxy, you may still vote in person if you attend the meeting. Please
note, however, that if your shares are held of record by a broker, bank or other
nominee and you wish to vote at the meeting, you must obtain from the record
holder a proxy issued in your name.
<PAGE>
CASTELLE
3255-3 SCOTT BOULEVARD
SANTA CLARA, CALIFORNIA
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
April 29, 1998
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of the Board of Directors
(the "Board") of CASTELLE, a California corporation (the "Company"), for use at
the Annual Meeting of Shareholders to be held on April 29, 1998, at 10:00 a.m.
local time (the "Annual Meeting"), or at any adjournment or postponement
thereof, for the purposes set forth herein and in the accompanying Notice of
Annual Meeting. The Annual Meeting will be held at the Company's corporate
offices, located at 3255-3 Scott Boulevard, Santa Clara California. The Company
intends to mail this proxy statement and accompanying proxy card on or about
April 1, 1998, to all shareholders entitled to vote at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of solicitation of proxies,
including preparation, assembly, printing and mailing of this proxy statement,
the proxy and any additional information furnished to shareholders. Copies of
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares of Common Stock beneficially owned
by others to forward to such beneficial owners. The Company may reimburse
persons representing beneficial owners of Common Stock for their costs of
forwarding solicitation materials to such beneficial owners. Original
solicitation of proxies by mail may be supplemented by telephone, telegram or
personal solicitation by directors, officers or other regular employees of the
Company. No additional compensation will be paid to directors, officers or other
regular employees for such services.
VOTING RIGHTS AND OUTSTANDING SHARES
Only holders of record of Common Stock at the close of business on
March 19, 1998 will be entitled to notice of and to vote at the Annual Meeting.
At the close of business on March 19, 1998 the Company had outstanding and
entitled to vote 4,493,425 shares of Common Stock.
Each holder of record of Common Stock on such date will be entitled to
one vote for each share held on all matters to be voted upon. With respect to
the election of directors, shareholders may exercise cumulative voting rights.
Under cumulative voting, each holder of Common Stock will be entitled to four
(4) votes for each share held. Each shareholder may give one candidate, who has
been nominated prior to voting, all the votes such shareholder is entitled to
cast or may distribute such votes among as many such candidates as such
shareholder chooses. (However, no shareholder will be entitled to cumulate votes
unless the candidate's name has been placed in nomination prior to the voting
and at least one shareholder has given notice at the meeting, prior to the
voting, of his or her intention to cumulate votes). Unless the proxyholders are
otherwise instructed, shareholders, by means of the accompanying proxy, will
grant the proxyholders discretionary authority to cumulate votes.
All votes will be tabulated by the inspector of election appointed for
the meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions and broker non-votes are counted
towards a quorum but are not counted for any purpose in determining whether a
matter is approved.
REVOCABILITY OF PROXIES
Any person giving a proxy pursuant to this solicitation has the power
to revoke it at any time before it is voted. It may be revoked by filing with
the Secretary of the Company at the Company's principal executive office, 3255-3
Scott Boulevard, Santa Clara, California 95054, a written notice of revocation
or a duly executed proxy bearing a later date, or it may be revoked by attending
the meeting and voting in person. Attendance at the meeting will not, by itself,
revoke a proxy.
<PAGE>
SHAREHOLDER PROPOSALS
Proposals of shareholders that are intended to be presented at the
Company's 1999 Annual Meeting of Shareholders must be received by the Company
not later than December 2, 1998 in order to be included in the proxy statement
and proxy relating to that Annual Meeting.
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
There are four nominees for the four Board positions presently
authorized in the Company's Bylaws. Each director to be elected will hold office
until the next annual meeting of Shareholders and until his successor is elected
and has qualified, or until such director's earlier death, resignation or
removal. Each nominee listed below is currently a director of the Company, three
having been elected by the shareholders, and one director, Robert Hambrecht,
having been elected by the Board.
Shares represented by executed proxies will be voted, if authority to
do so is not withheld, for the election of the four nominees named below,
subject to the discretionary power to cumulate votes. In the event that any
nominee should be unavailable for election as a result of an unexpected
occurrence, such shares will be voted for the election of such substitute
nominee as management may propose. Each person nominated for election has agreed
to serve if elected and management has no reason to believe that any nominee
will be unable to serve.
The four candidates receiving the highest number of affirmative votes
cast at the meeting will be elected directors of the Company.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NAMED NOMINEE
Identification of Directors
The names of the nominees and certain information about them are are
set forth below:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Arthur H. Bruno 64 Chairman of the Board, Chief Executive Officer
and Director
John Freidenrich (1) 60 General Partner, Bay Management and Bay Management
IV, L.P.
Robert Hambrecht 31 Partner and Director of Distribution,
W.R. Hambrecht & Company
Alan Kessman (1) 51 Chairman of the Board, President and Chief Executive
Officer of Executone Information Systems, Inc.
</TABLE>
---------------
(1)Member of the Audit Committee of the Board of Directors.
Arthur H. Bruno
Mr. Bruno has served as the Company's Chairman of the Board since October
1993, was Chief Executive Officer from October 1993 through April 1997 and
has served as such from November 1997 to the present. He served as
President from October 1993 through April 1997. From February 1996 to the
present he has served as the Chairman of the Board and as a director of
Ashlar, a privately-held maker of computer-aided design software. From 1991
to 1993, he was Chairman of the Board of White Pine Software Inc., a
desktop connectivity company. From 1989 to 1991, he was the Chairman of the
Board and Chief Executive Officer of Wellsley Medical Management
Corporation, a primary care medical service provider. From 1986 to 1989, he
was the Chairman of the Board 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.
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 1968
through 1991.
<PAGE>
Robert Hambrecht
Mr. Hambrecht has served as a director of the Company since March 1998. He
has been a partner and Director of Distribution for W.R. Hambrecht &
Company, an investment banking firm, since January 1998, and was Vice
President of H&Q Venture Partners, a venture capital firm, from April 1996
through January 1998. From January 1994 to March 1996 Mr. Hambrecht was
employed by Unterberg Harris, an investment banking firm, most recently as
an associate. Mr. Hambrecht attended Columbia University from September
1991 through December 1993 where he earned a master's degree in public
administration. Mr. Hambrecht also serves on the Board of Directors of four
privately-held companies.
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 1988.
BOARD COMPOSITION
In connection with his resignation as the Chief Executive Officer and
President of Castelle in November 1997, Mr. Prasad also resigned his position as
a director of the Company. Mr. Rekhi, a director of the Company since 1995,
resigned from the Board in December 1997. As a result of these actions, the
Board reduced the number of Board positions from five to four and elected Mr.
Hambrecht to fill the vacancy existing on the Board.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 1997 the Board of Directors
held eleven meetings. The Board has an Audit Committee.
The Audit Committee meets with the Company's independent auditors at
least annually to review the results of the annual audit and discuss the
financial statements; recommends to the Board the independent auditors to be
retained; and receives and considers the accountants' comments as to controls,
adequacy of staff and management performance and procedures in connection with
audit and financial controls. The Audit Committee is composed of two
non-employee directors: Messrs. Freidenrich and Kessman. It met four times
during the year.
During the year ended December 31, 1997, each Board member attended 75%
or more of the aggregate of the meetings of the Board and of the committee on
which he served, held during the period for which he was a director or committee
member, respectively.
<PAGE>
PROPOSAL 2
1988 EQUITY INCENTIVE PLAN
In April 1988, the Board of Directors adopted, and the shareholders
subsequently approved, the Company's 1988 Equity Incentive Plan (the ("Incentive
Plan"). As a result of a series of amendments, at March 31, 1997 there were
945,582 shares of the Company's Common Stock authorized for issuance under the
Incentive Plan.
In April 1997, the Board approved an amendment to the Incentive Plan,
subject to shareholder approval, to enhance the flexibility of the Board in
granting stock awards to the Company's employees. The amendment increases the
number of shares authorized for issuance under the Incentive Plan from a total
of 945,582 shares to 1,927,517 shares. The Board adopted this amendment to
ensure that the Company can continue to grant stock awards to employees at
levels determined appropriate by the Board.
The Board also amended the Incentive Plan, subject to shareholder
approval, generally to permit the Company, under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), to continue to be able to deduct
as a business expense certain compensation attributable to the exercise of stock
options granted under the Incentive Plan. Section 162(m) denies a deduction to
any publicly held corporation for certain compensation paid to specified
employees in a taxable year to the extent that the compensation exceeds
$1,000,000 for any covered employee. See "Federal Income Tax Information" below
for a discussion of the application of Section 162(m). In light of the Section
162(m) requirements, the Board has amended the Incentive Plan, subject to
shareholder approval, to include a limitation providing that no employee may be
granted options under the Incentive Plan during a calendar year to purchase in
excess of 400,000 shares of Common Stock. Previously, no such formal limitation
was placed on the number of shares available for option grants to an employee.
In addition, the Incentive Plan was amended, subject to shareholder approval, to
provide that, in the Board's discretion, directors who grant options to covered
employees generally will be "outside directors" as defined in Section 162(m).
For a description of this requirement, see "Administration." In addition, the
Board made some minor amendments to the Incentive Plan in order to conform it to
the current requirement of Section 16 of the Securities and Exchange Act of
1934, as amended, which do not require shareholder approval.
At March 19, 1998, restricted stock purchase awards of 281,120 shares
of the Company's Common Stock and options (net of cancelled or expired options)
covering an aggregate of 1,094,813 shares of the Company's Common Stock had been
granted under the Incentive Plan, and 551,584 shares (plus any shares that might
in the future be returned to the plans as a result of cancellations or
expiration of options or the repurchase of unvested restricted stock by the
Company) remained available for future grant under the Incentive Plan. During
the year ended December 31, 1997, under the Incentive Plan, the Company has
granted to all executive officers as a group options to purchase 630,000 shares
at exercise prices of $4.50 to $5.75 per share, to all employees (excluding
executive officers) as a group options to purchase 554,370 shares at exercise
prices of $4.50 to $5.75 per share and made no grants to non-employee directors.
Shareholders are requested in this Proposal 2 to approve the Incentive
Plan, as amended. If the shareholders fail to approve this Proposal 2, certain
options granted under the Incentive Plan will not qualify as performance-based
compensation and, in some circumstances, the Company may be denied a business
expense deduction for compensation recognized in connection with the exercise of
these stock options. The affirmative vote of the holders of a majority of the
shares present in person or represented by proxy and voting at the meeting will
be required to approve the Incentive Plan, as amended.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2
The essential features of the Incentive Plan are outlined below:
GENERAL
The Incentive Plan provides for the grant or issuance of incentive
stock options to employees and nonstatutory stock options, restricted stock
purchase awards and stock bonuses to consultants, employees and directors. To
date incentive stock options, nonstatutory stock options and restricted stock
awards have been awarded under the Incentive Plan. Incentive stock options
granted under the Incentive Plan are intended to qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). Nonstatutory stock options granted under the Incentive
Plan are intended not to qualify as incentive stock options under the Code. See
<PAGE>
"Federal Income Tax Information" for a discussion of the tax treatment of the
various awards included in the Incentive Plan.
PURPOSE
The Incentive Plan provides a means by which selected employees and
directors of, and consultants to, the Company, and its affiliates, may be given
an opportunity to purchase Common Stock of the Company. The Company, by means of
the Incentive Plan, seeks to retain the services of persons who are now
employees of or consultants or directors to the Company or its affiliates, to
secure and retain the services of new employees, directors and consultants, and
to provide incentives for such persons to exert maximum efforts for the success
of the Company and its affiliates.
FORMS OF BENEFIT
The Incentive Plan provides for incentive stock options, nonstatutory
stock options, restricted stock purchase awards and stock bonuses (collectively
"Stock Awards").
ADMINISTRATION
The Incentive Plan is administered by the Board unless and until the
Board delegates administration to a committee composed of two or more Board
members, all of the members of which committee may be non-employee directors (as
such term is defined in Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and/or outside directors (as such term
is defined in the Treasury regulations promulgated under Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code")). If administration is
delegated to a committee, such committee will have, in connection with the
administration of the Incentive Plan, the powers possessed by the Board,
subject, however, to such resolutions, not inconsistent with the provisions of
the Incentive Plan, as may be adopted from time to time by the Board. The Board
or the committee may delegate to a committee of one or more members of the Board
the authority to grant Stock Awards to eligible persons who are not then subject
to Section 16 of the Exchange Act and/or who are either (i) not then employees
covered by Code Section 162(m) and are not expected to be covered by Section
162(m) at the time of recognition of income resulting from such Stock Award, or
(ii) not persons with respect to whom the Company wishes to avoid the
application of Section 162(m). The Board may abolish such committee at any time
and revest in the Board the administration of the Incentive Plan.
The Board has the power to determine from time to time which of the
persons eligible under the Incentive Plan shall be granted awards, the type of
awards to be granted, when and how each award shall be granted, to construe and
interpret the Incentive Plan and awards granted under it, and to establish,
amend and revoke rules and regulations for its administration. The Board may
correct any defect in the Incentive Plan or in any award agreement to make the
Incentive Plan fully effective.
SHARES SUBJECT TO THE PLAN
The Common Stock that may be sold pursuant to awards under the
Incentive Plan shall not exceed in the aggregate 1,927,517 shares of the
Company's Common Stock. If any stock option expires or terminates, in whole or
in part, without having been exercised in full, the stock not purchased under
such award will revert to and again become available for issuance under the
Incentive Plan. Any shares of the Company's Common Stock which are subject to a
repurchase or reacquisition right in favor of the Company, which are repurchased
or reacquired by the Company pursuant to the terms of such rights, shall revert
to and again become available for issuance under the Incentive Plan. The Common
Stock subject to the Incentive Plan may be unissued shares or treasury shares,
bought on the market or otherwise.
ELIGIBILITY
Incentive stock options may be granted only to employees. Nonstatutory
stock options, restricted stock purchase awards and stock bonuses may be granted
only to employees, directors or consultants.
No person is eligible for the grant of an incentive stock option if, at
the time of grant, such person owns stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company unless
the exercise price of such option is at least one hundred ten percent (110%) of
the fair market value of such Common Stock subject to the option at the date of
grant and the option is not exercisable after the expiration of five (5) years
from the date of grant. In addition, no person shall be eligible to be granted
options covering more than four hundred thousand (400,000) shares of the
Company's Common Stock in any calendar year.
<PAGE>
TERM AND TERMINATION
No option is exercisable after the expiration of ten (10) years from
the date it was granted.
In the event an optionee's continuous status as an employee, director
or consultant is terminated, the optionee may exercise his or her option (to the
extent that the optionee was entitled to exercise it at the time of termination)
but only within the earlier of (i) the date three (3) months after the
termination of the optionee's continuous status as an employee, director or
consultant, or (ii) the expiration of the term of the option as set forth in the
option agreement.
In the event an optionee's continuous status as an employee, director
or consultant terminates as a result of the optionee's disability, the optionee
may exercise his or her option, but only within the period ending on the earlier
of (i) twelve (12) months following such termination (or such longer or shorter
period as specified in the option agreement) or (ii) the expiration of the term
of the option as set forth in the option agreement.
In the event an optionee's continuous status as an employee, director
or consultant terminates as a result of the optionee's death the optionee's
estate, heirs or beneficiaries may exercise his or her option, but only with the
period ending on the earlier of (i) eighteen (18) months following such
termination (or such longer or shorter period as specified in the option
agreement) or (ii) the expiration of the term of the option as set forth in the
option agreement.
In the event a stock bonus or restricted stock recipient's continuous
status as an employee, director or consultant terminates, the Company may
repurchase or otherwise reacquire any or all of the shares of stock held by that
person which have not vested as of the date of termination under the terms of
the stock bonus or restricted stock purchase agreement between the Company and
such person.
EXERCISE PRICE
The exercise price of each incentive stock option will not be less than
one hundred percent (100%) of the fair market value of the Company's Common
Stock on the date of grant. The exercise price of each nonstatutory stock option
will not be less than eighty-five percent (85%) of the fair market value on the
date of grant. The purchase price of restricted stock shall be such amount as
the Board shall determine and designate in the restricted stock purchase
agreement. Stock bonuses may be awarded in consideration for past services
actually rendered to the Company or for its benefit.
CONSIDERATION
The purchase price of stock acquired pursuant to a Stock Award is paid
either in cash at the time of exercise or purchase, or (if determined by the
Board at the time of grant for an option) by deferred payment or other
arrangement or in any other form of legal consideration that may be acceptable
to the Board. Additionally, in the case of an option and in the discretion of
the Board at the time of the grant of an option, by delivery to the Company of
other Common Stock of the Company. In the case of any deferred payment
arrangement, interest will be payable at least annually and will be charged at
the minimum rate of interest necessary to avoid the treatment as interest of
amounts that are not stated to be interest.
TRANSFERABILITY
An incentive stock option will not be transferable except by will or by
the laws of descent and distribution, and shall be exercisable during the
lifetime of the person to whom the incentive stock option is granted only by
such person. A nonstatutory stock option, stock bonus, or restricted stock award
generally will not be transferable except by will or by the laws of descent and
distribution or pursuant to a domestic relations order; provided; however, that
a nonstatutory stock option may be made transferable for certain limited estate
planning purposes. In addition, an optionee may designate a beneficiary who may
exercise his or her option after death.
VESTING
The total number of shares of stock subject to an option may, but need
not, be allotted in periodic installments. The option agreement may provide that
from time to time during each of such installment periods, the option may become
exercisable ("vest") with respect to some or all of the shares allotted to that
period, and may be exercised with respect to some or all of the shares allotted
to such period and/or any prior period as to which the option became vested but
was not fully exercised. The option agreement may also provide that an optionee
may exercise an option prior to full vesting, provided that the Company may have
a repurchase right with respect to any unvested shares.
<PAGE>
Restricted stock purchase awards and stock bonuses granted under the
Incentive Plan may be granted pursuant to a repurchase option in favor of the
Company in accordance with a vesting schedule determined by the Board.
ADJUSTMENTS UPON CHANGES IN STOCK
If any change is made in the Common Stock subject to the Incentive
Plan, or subject to any Stock Award, without receipt of consideration by the
Company (through merger, consolidation, reorganization, recapitalization, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or otherwise), the class(es) and maximum number of shares subject to
the Incentive Plan, the maximum annual award applicable under the Incentive Plan
and the class(es) and number of shares and price per share of stock subject to
outstanding Stock Awards will be appropriately adjusted.
In the event of a merger, consolidation, liquidation, dissolution or
the sale of substantially all of the Company's assets, any surviving corporation
shall assume any Stock Awards outstanding under the Incentive Plan or shall
substitute similar awards for those outstanding under the Incentive Plan or such
Stock Awards shall continue in full force and effect. In the event a surviving
corporation refuses to assume such Stock Awards or substitute similar awards,
then, with respect to stock awards held by persons then performing services as
employees, directors or consultants, the time during which such Stock Awards may
be exercised shall be accelerated prior to completion of such transaction and
such Stock Awards terminated if not exercised prior to such transaction. An
optionee's option agreement may include additional provisions which address the
handling of such option upon the occurrence of a transaction described above;
provided, however, that any such additional provisions shall not impair or
reduce the rights of the optionee.
AMENDMENT OF THE INCENTIVE PLAN
The Board at any time, and from time to time, may amend the Incentive
Plan. However, no amendment shall be effective unless approved by the
shareholders of the Company within twelve (12) months before or after the
adoption of the amendment, where the amendment will increase the number of
shares reserved for issuance under the Incentive Plan, modify the requirements
as to eligibility for participation or in any other way if such modification
requires shareholder approval in order for the Incentive Plan to satisfy the
requirements of Section 422 of the Code, Rule 16b-3 promulgated under the
Exchange Act, or any Nasdaq or securities exchange requirements. The Board may
in its sole discretion submit any other amendment to the Incentive Plan for
shareholder approval.
TERMINATION OR SUSPENSION OF THE INCENTIVE PLAN
The Board may suspend or terminate the Incentive Plan at any time.
Unless sooner terminated, the Incentive Plan shall terminate on November 14,
2005. No Stock Awards may be granted under the Incentive Plan while the
Incentive Plan is suspended or after it is terminated.
FEDERAL INCOME TAX INFORMATION
Incentive Stock Options. Incentive stock options under the Incentive
Plan are intended to be eligible for the favorable federal income tax treatment
accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionee
or the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may increase the optionee's
alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive
stock option for at least two years from the date on which the option is granted
and at least one year from the date on which the shares are transferred to the
optionee upon exercise of the option, any gain or loss on a disposition of such
stock will be capital gain or loss. Generally, if the optionee disposes of the
stock before the expiration of either of these holding periods (a "disqualifying
disposition"), at the time of disposition, the optionee will realize taxable
ordinary income equal to the lesser of (a) the excess of the stock's fair market
value on the date of exercise over the exercise price, or (b) the optionee's
actual gain, if any, on the purchase and sale. The optionee's additional gain,
or any loss, upon the disqualifying disposition will be a capital gain or loss,
which will be long-term, mid-term or short-term depending on how long the
optionee holds the stock. Capital gains are generally subject to lower tax rates
than ordinary income. Slightly different rules may apply to optionees who are
subject to Section 6 of the Exchange Act or who acquire stock subject to certain
repurchase options.
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, Code Section 162(m) and the satisfaction of a
tax reporting obligation) to a corresponding business expense deduction in the
tax year in which the disqualifying disposition occurs.
<PAGE>
Nonstatutory Stock Options. Nonstatutory stock options granted under
the Incentive Plan generally have the following federal income tax consequences:
There are no tax consequences to the optionee or the Company by reason
of the grant of a nonstatutory stock option. Upon exercise of a nonstatutory
stock option, the optionee normally will recognize taxable ordinary income equal
to the excess of the stock's fair market value on the date of exercise over the
option exercise price. Generally, with respect to employees, the Company is
required to withhold from regular wages or supplemental wage payments an amount
based on the ordinary income recognized. Subject to the requirement of
reasonableness, Code Section 162(m) and the satisfaction of a tax reporting
obligation, the Company will generally be entitled to a business expense
deduction equal to the taxable ordinary income realized by the optionee. Upon
disposition of the stock, the optionee will recognize a capital gain or loss
equal to the difference between the selling price and the sum of the amount paid
for such stock plus any amount recognized as ordinary income upon exercise of
the option. Such gain or loss will be long-term, mid-term or short-term
depending on how long the optionee holds the stock. Slightly different rules may
apply to optionees who are subject to Section 16(b) of the Exchange Act or who
acquire stock subject to certain repurchase rights.
Restricted Stock Purchase Awards and Stock Bonuses. Restricted stock
purchase awards and stock bonuses granted under the Incentive Plan generally
have the following federal income tax consequences:
Upon acquisition of the stock, the recipient normally will recognize
taxable ordinary income equal to the excess of the stock's fair market value
over the purchase price, if any. However, to the extent the stock is subject to
certain types of vesting restrictions, the taxable event will be delayed until
the vesting restrictions lapse unless the recipient elects to be taxed on
receipt of the stock. With respect to employees, the Company is generally
required to withhold from regular wages or supplemental wage payments an amount
based on the ordinary income recognized. Generally, the Company will be entitled
to a business expense deduction equal to the taxable ordinary income realized by
the optionee. Upon disposition of the stock, the optionee will recognize a
capital gain or loss equal to the difference between the selling price and the
sum of the amount paid for such stock plus any amount recognized as ordinary
income upon acquisition (or vesting) of the stock. Such gain or loss will be
long-term, mid-term or short-term depending on how long the stock was held.
Slightly different rules may apply to optionees who acquire stock subject to
certain repurchase options or who are subject to Section 16(b) of the Exchange
Act.
Potential Limitation on Company Deductions. Code Section 162(m) denies
a deduction to any publicly held corporation for compensation paid to certain
employees in a taxable year to the extent that compensation exceeds $1 million
for a covered employee. It is possible that compensation attributable to awards
granted in the future under the Incentive Plan, when combined with all other
types of compensation received by a covered employee from the Company, may cause
this limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options will qualify as performance-based compensation,
provided that the option is granted by a compensation committee comprised solely
of "outside directors" and either: (i) the option plan contains a per-employee
limitation on the number of shares for which options may be granted during a
specified period, the per-employee limitation is approved by the shareholders,
and the exercise price of the option is no less than the fair market value of
the stock on the date of grant; or (ii) the option is granted (or exercisable)
only upon the achievement (as certified in writing by the compensation
committee) of an objective performance goal established in writing by the
compensation committee while the outcome is substantially uncertain, and the
option is approved by shareholders.
Compensation attributable to restricted stock will qualify as
performance-based compensation, provided that: (i) the award is granted by a
compensation committee comprised solely of "outside directors;" and (ii) the
purchase price of the award is no less than the fair market value of the stock
on the date of grant. Stock bonuses qualify as performance-based compensation
under the Treasury regulations only if (i) the award is granted by a
compensation committee comprised solely of "outside directors;" (ii) the award
is granted (or exercisable) only upon the achievement of an objective
performance goal established in writing by the compensation committee while the
outcome is substantially uncertain; (iii) the compensation committee certifies
in writing prior to the granting (or exercisability) of the award that the
performance goal has been satisfied and (iv) prior to the granting (or
exercisability) of the award, shareholders have approved the material terms of
the award (including the class of employees eligible for such award, the
business criteria on which the performance goal is based, and the maximum amount
(or formula used to calculate the amount) payable upon attainment of the
performance goal).
<PAGE>
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected Coopers & Lybrand LLP as the
Company's independent auditors for the fiscal year ended December 31, 1998 and
has further directed that management submit the selection of independent
auditors for ratification by the shareholders at the Annual Meeting. Coopers &
Lybrand LLP has audited the Company's financial statements since its inception
in 1987. Representatives of Coopers & Lybrand LLP are expected to be present at
the Annual Meeting, will have an opportunity to make a statement if they so
desire and will be available to respond to appropriate questions.
Shareholder ratification of the selection of Coopers & Lybrand LLP as
the Company's independent auditors is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the selection of Coopers & Lybrand
LLP to the shareholders for ratification as a matter of good corporate practice.
If the shareholders fail to ratify the selection, the Audit Committee and the
Board will reconsider whether or not to retain that firm. Even if the selection
is ratified, the Audit Committee and the Board in their discretion may direct
the appointment of different independent auditors at any time during the year if
they determine that such a change would be in the best interests of the Company
and its shareholders.
The affirmative vote of the holders of a majority of the shares present
in person or represented by proxy and voting at the Annual Meeting will be
required to ratify the selection of Coopers & Lybrand LLP.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3
<PAGE>
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 20, 1998 by: (i) each
director; (ii) each executive officer; (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.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP TABLE
- - --------------------------------------------------------------------------------
Beneficial Ownership (1)
---------------------------
Number of Percent
Beneficial Owner Shares of Total
- - --------------------------------------------- ------------- ----------
<S> <C> <C>
Entities Affiliated with: 911,863 20.3%
Hambrecht & Quist Group (2)
One Bush Street
18th Floor
San Francisco, CA 94104
Wellington Management Company, LLP (3) 415,000 9.2%
75 State Street
Boston, MA 02109
Entities Affiliated with: 386,454 8.6%
Bay Partners (4)
10600 North DeAnza Boulevard
Suite 100
Cupertino, CA 95014
Entities Affiliated with: 261,500 5.8%
Special Situations Fund III, LP (5)
153 East 53rd Street
51st Floor
New York, NY 10022
Arthur H. Bruno (6) 180,375 4.0%
c/o Castelle
3255-3 Scott Boulevard
Santa Clara, CA 95054
Randall I. Bambrough (7) 19,770 *
Jerome J. Burke (8) 92,315 2.0%
John Freidenrich (9) 399,453 8.9%
Robert Hambrecht (10) 6,128 *
Alan Kessman (11) 11,932 *
Roy Prasad (12) 59,893 1.3%
All directors and executive officers as 709,973 15.5%
a group (total of 6 persons)
See notes (6)(7)(8)(9)(10)(11)(13) below
</TABLE>
--------------------
* Less than one percent of total shares.
(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 4,490,047 shares outstanding on
February 20, 1998, adjusted as required by rules promulgated by the
SEC.
<PAGE>
(2) Includes 60,839 shares held by H & Q Ventures IV, 338,482 shares (and
warrants exercisable within 60 days for 16,666 shares) held by H & Q
London Ventures, 1,251 shares held by Hamquist, 1,034 shares held by
Venture Associates (BVI) Limited, 182,517 shares held by Ivory & Sime
Enterprise Capital PLC, 85,540 shares (and warrants exercisable
within 60 days for 86,666 shares) held by Hambrecht & Quist
California, 43,634 shares held by the Hambrecht & Quist Venture
Partners, 45,234 shares held by William Hambrecht and warrants
exercisable within 60 days for 50,000 shares held by RVR Securities.
The entities and individual named above and the entities' respective
general partners, directors, executive officers, members and/or
managers, as applicable, disclaim beneficial ownership of any
securities identified other than those directly held by such person.
(3) Wellington Management Company, LLP ("WMC"), a registered investment
advisor under the Investment Advisors Act of 1940, shares voting and
investment power over 415,000 shares of the Company's Common Stock
with its clients.
(4) 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.
(5) Includes 197,000 shares held by Special Situations Fund III, L.P.
(the "Situations Fund") and 64,500 shares held by Special Situations
Cayman Fund, L.P. (the "Cayman Fund"). MGP is the general partner of
the Situations Fund and a registered investment advisor under the
Investment Advisors Act of 1940. Austin Marxe is the principal owner
and president of AWM Investment Company, Inc., ("AWM"), a registered
investment advisor under the Investment Advisors Act of 1940 and
general partner of the Cayman Fund and MGP. In such capacities AWM
and Austin Marxe have sole voting and investment power over the
shares of Company Common Stock held by the Situations Fund and the
Cayman Fund.
(6) Includes 28,125 shares of Common Stock subject to options exercisable
within 60 days of February 20, 1998 and 10,000 shares of Common Stock
held by Mr. Bruno's wife.
(7) Includes 19,070 shares of Common Stock subject to options exercisable
within 60 days of February 20, 1998 and 200 shares held by Mr.
Bambrough's daughter.
(8) Includes 18,750 shares of Common Stock subject to options exercisable
within 60 days of February 20, 1998.
(9) Includes 15,453 shares held by California BP IV, L.P., 193,231 shares
held by Bay Partners III and 177,770 shares held by Bay Partners IV.
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 2,999 shares of Common Stock subject to
options exercisable within 60 days of February 20, 1998.
(10)Includes 208 shares of Common Stock subject to options exercisable
within 60 days of February 20, 1998.
(11)Includes 7,373 shares of Common Stock subject to options exercisable
within 60 days of February 20, 1998.
(12)Includes 59,893 shares of Common Stock subject to option exercisable
within 60 days of February 20, 1998.
(13)The total number of shares of Common Stock for all directors and
executive officers as a group does not include any shares of Common
Stock owned or subject to options exercisable within 60 days of
February 20, 1998 for Mr. Prasad who was not an executive officer of
the Company at February 20, 1998.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
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 SEC 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 SEC
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 written representations that no other
reports were required, during the fiscal year ended December 31, 1997, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with except that
reports by each of Messrs. Bambrough, Burke, Bruno and Prasad Raje, the
Company's Chief Technical Officer and Vice President of Engineering, covering
one transaction each, were filed late. In addition, Mr. Raje's Initial Statement
of Beneficial Ownership of Securities (a "Form 3") was filed late.
<PAGE>
EXECUTIVE COMPENSATION
Compensation of Directors
Directors currently receive no cash compensation from the Company for
their services as members of the Board. They are reimbursed for certain expenses
in connection with attendance at Board and Committee meetings.
Each non-employee director of the Company receives stock option grants
under the 1995 Non-Employee Directors' Stock Option Plan (the "Directors'
Plan"). Only non-employee directors of the Company are eligible to receive
options under the Directors' Plan. Options granted under the Directors' Plan are
intended by the Company not to qualify as incentive stock options under the
Code.
Option grants under the Directors' Plan are non-discretionary. Upon
initial election to be a non-employee director, a person is granted an option to
purchase 5,000 shares of Common Stock of the Company. On April 1 of each year
(or the next business day should such date be a legal holiday), each member of
the Company's Board who is not an employee of the Company is automatically
granted under the Directors' Plan, without further action by the Company, the
Board or the shareholders of the Company, an option to purchase 2,000 shares of
Common Stock of the Company. The exercise price of options granted under the
Directors' Plan is 100% of the fair market value of the Common Stock subject to
the option on the date of the option grant. Options granted under the Directors'
Plan vest in 24 equal installments beginning one month after the date of grant
provided the optionee has, during the entire period prior to such vesting date,
continuously served as a non-employee director, employee or consultant of the
Company or an affiliate of the Company. The term of options granted under the
Directors' Plan is ten years. In the event of a merger of the Company with or
into another corporation or a consolidation, acquisition of assets or other
change-in-control transaction involving the Company, vesting will be accelerated
and the option will terminate if not exercised prior to the consummation of the
transaction.
Effective March 20, 1998, pursuant to the terms of the Directors' Plan,
the Company granted options covering 5,000 shares of Common Stock of the Company
to Robert Hambrecht upon his election to the Board as a non-employee director,
at an exercise price per share of $2.41 which was the fair market value of such
Common Stock on the date of grant (based on the closing sales price reported in
the National Market System for the date of grant).
On April 1, 1997, pursuant to the terms of the Directors' Plan, the
Company granted options covering 2,000 shares of Common Stock of the Company to
each non-employee director of the Company, at an exercise price per share of
$6.12 which was the fair market value of such Common Stock on the date of grant.
As of February 20, 1998, no options had been exercised under the Directors'
Plan.
<PAGE>
Compensation of Executive Officers
Summary of Compensation
The following table shows for the fiscal years ended December 31, 1997,
1996 and 1995, compensation awarded or paid to, or earned by, the Company's
Chief Executive Officers and its other executive officers whose total annual
salary and bonus exceeded $100,000 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- - ----------------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
Annual Compensation Awards
----------------------------------------------- --------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying All Other
Position Year Salary ($) Bonus ($) Compensation Award(s)(1)($) Options (#) Compensation
- - ------------------------- ------ ------------ ------------- -------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arthur H. Bruno 1997 $183,462 $50,000 -- -- 45,000 --
Chairman of the Board, 1996 $176,538 $50,000 -- -- -- --
Chief Executive Officer 1995 $180,000 $7,500 -- -- -- --
and Director
Roy Prasad (2) 1997 $114,396 -- -- -- 308,000 $180,000 (3)
Former President and
Chief Executive Officer
Jerome J. Burke 1997 $135,000 $118,584 (4) -- -- 77,000 --
President and 1996 $124,578 $120,720 (5) -- -- -- --
Chief Operating Officer 1995 $117,385 $60,909 -- -- -- --
Randall I. Bambrough 1997 $126,077 $15,000 -- -- 50,000 --
Chief Financial Officer, 1996 $112,188 $10,000 -- -- 5,000 --
Vice President of 1995 $92,298 $581 -- -- 10,000 --
Finance
and Administration
and Secretary
</TABLE>
---------------
(1) Because all restricted stock awards required purchase by the
recipient at fair market value on the date of grant, the restricted
stock awards had no dollar value to the recipient on the date of grant.
At December 31, 1997, the aggregate holdings and dollar value (based on
the closing sales price at the end of 1997 of the Company's Common
Stock as reported on the Nasdaq National market multiplied by the
number of shares held) of restricted stock of the Named Executive
Officers was as follows: Arthur H. Bruno, 132,250 shares, valued at
$281,031 and Jerome J. Burke, 73,065 shares, valued at $155,263. The
restrictions on awards of restricted stock lapse with respect to 25% of
the total number of shares per year on the first anniversary of the
date of grant and with respect to 1/48th of the total shares subject to
the award each month thereafter such that the shares are fully vested
on the fourth anniversary of the date of grant. Dividends are paid on
shares of restricted stock when, as and if the Board declares dividends
on the Common Stock of the Company.
(2)Mr. Prasad was President and Chief Executive Officer from April 1997
through November 1997.
(3)Represents payments made pursuant to the Company's executive severance
agreement with Mr. Prasad. See "Executive Compensation - Termination of
Employment Arrangements."
(4)Represents bonus and sales commissions paid by the Company for sales
made in 1997.
(5)Represents bonus and sales commissions paid by the Company for sales
made in 1996.
Stock Option Grants and Exercises
The Company grants options to its executive officers under the
Incentive Plan. As of February 20, 1998, all employees, executive officers and
non-employee directors options to purchase a total of 1,077,009 shares had been
granted and were outstanding under the Incentive Plan and 533,567 shares
remained available for grant thereunder.
There were no stock option exercises during 1997 by any Named Executive
Officer.
<PAGE>
The following tables show for the fiscal year ended December 31, 1997,
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
- - ----------------------------------------------------------------------------------------------------------------------------
Number of Potential Realizable Value at
Securities % of Total Assumed Annual Rates of Stock Price
Underlying Options Exercise Appreciation for Option Term
-----------------------------------
Name and Options Granted Granted in Price Expiration
Principal Fiscal Year Per Share (2) Date 5% ($) 10% ($)
Position (1)
- - ------------------ -------------- ------------- ------------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Arthur H. Bruno 45,000 3.8% $5.75 2/12/04 $108,180 $260,820
Chairman of the
Board,
Chief Executive
Officer
and Director
Roy Prasad (3) 308,000 26.0% $4.50 08/18/04 $579,348 $1,397,088
President and
Chief Executive
Officer
Jerome J. Burke 47,000 4.0% $4.50 8/18/04 $88,407 $213,192
President and 30,000 2.5% $5.75 2/12/04 $72,120 $173,880
Chief Operating
Officer
Randall I. Bambrough 45,000 3.8% $4.50 8/18/04 $84,645 $204,120
Chief Financial 5,000 .4% $5.50 1/22/04 $11,495 $27,720
Officer,
Vice President
of Finance
and Administration
and Secretary
</TABLE>
--------------------
(1)Based on an aggregate of 1,184,370 shares of Common Stock subject to
options granted to employees in 1997.
(2)The exercise price is equal to 100% of the fair market value of Common
Stock at the date of grant.
(3)Mr. Prasad served as the Company's President and Chief Executive
Officer from April 1997 through November 1997.
Compensation Committee Interlocks and Insider Participation
As noted above, the Company's Board, consisting of Messrs. Bruno,
Freidenrich, Hambrecht and Kessman, acts on matters concerning executive officer
compensation. Mr. Bruno was Chief Executive Officer of the Company from October
1993 through April 1997 and has served as such from November 1997 to the
present. He served as President of the Company from October 1993 through April
1997. Mr. Bruno is excused from Board deliberations concerning his compensation.
Termination of Employment Arrangements
Effective November 14, 1997 Mr. Prasad resigned as a director,
President and Chief Executive officer of the Company. Under the terms of his
executive severance agreement the Company paid him $180,000 within 30 days of
his resignation, maintained his medical benefits for one year and extended the
period during which the vested portion of stock options at the date of his
resignation exercisable for Company Common Stock may be exercised from three
months after termination of employment to one year after termination of
employment. In addition, the Company agreed that the acquisition of the Company
in certain circumstances, which include the transaction being deemed a change in
control, within one year from Mr. Prasad's resignation, will result in the
immediate vesting of the 248,107 unvested shares of Castelle Common Stock
subject to the options currently held by Mr. Prasad.
The Company has entered into severance and transition benefit
agreements with Messrs. Bambrough and Burke pursuant to which the Company will
pay the executive a lump sum equal to 100% of each officer's annualized salary
and maintain the medical benefits enjoyed by him for one year following either a
voluntary termination of employment for good reason (as defined in the
agreement) by the executive or an involuntary termination of employment without
cause (as defined in the agreement). In addition, each executive is eligible to
earn an additional lump sum payment equal to six months of his base salary if he
remains with the Company at least ninety days after a change in control and is
terminated for cause or leaves voluntarily without good reason, or if he remains
in excess of ninety days and his employment is subsequently terminated.
<PAGE>
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION(*1)
The Board is responsible for determining compensation policies for the
Company's executive officers, including any stock-based awards to such
individuals under the Company's 1988 Equity Incentive Plan. In determining
executive officer compensation, the Board considers corporate performance
against the Company's objectives.
In addition, the Board structures executive compensation packages with
two objectives: (1) to ensure that the compensation and incentives provided to
the executive officers are closely aligned with the Company's financial
performance and shareholder value, and (2) to attract and retain, through a
competitive compensation structure, those key executives critical to the
long-term success of the Company.
In addressing the first objective, the Board utilizes stock option
grants to executive officers in lieu of higher salaries or cash bonuses to tie
executive officer compensation directly to the Company's stock price
performance. The Board believes that the grant of an equity interest in the
Company serves to link management interests with shareholder interests and to
motivate executive officers to make decisions that are in the best interests of
the Company and the shareholders. The Board considers stock option grants to
executive officers based on various factors, including (i) each officer's
responsibilities, (ii) any changes in such responsibilities, (iii) past option
grants and each officer's current equity interest in the Company and (iv)
performance.
The second objective of the overall executive compensation policy is
addressed by a salary and bonus policy which is based on (i) consideration of
the salaries and total compensation of executive officers in similar positions
with comparable companies in the industry (ii) the qualifications and experience
of each executive officer, (iii) the Company's financial performance during the
past year and (iv) each officer's performance against objectives related to
their areas of responsibility. The Board periodically reviews individual base
salaries of executive officers, and adjusts salaries based on individual job
performance and changes in the officer's duties and responsibilities. In making
salary decisions, the Board exercises its discretion and judgment based on these
factors. No specific formula is applied to determine the weight of each factor,
although the mix among the compensation elements of salary, cash incentive and
stock options are biased toward stock options to emphasize the link between
executive incentives and the creation of shareholder value as measured by the
equity markets. Consequently, salaries and cash incentives are set in the
low-range as compared to the comparable companies in the industry while stock
options are set in the mid to high-range compared to comparable companies. The
Chief Executive Officer provides the Board with recommendations for individual
executive officers based upon an evaluation of their performance against
objectives and responsibilities.
The Board believes that another key element of executive compensation
should be the variable portion provided by annual cash incentive plans. The cash
incentive portion of the executive officers' compensation is dependent primarily
on the Company's financial performance and achievement of specified corporate
objectives as determined by the Board. The Company's executive officer annual
bonus plan is designed such that if the Company performs above its stated
objectives, cash incentives awarded may be above the targeted amounts. If the
Company performs below its stated objectives, cash awards may be significantly
reduced, and may be eliminated altogether if performance is below defined
thresholds. A substantially smaller portion of each executives' annual bonus is
based on performance against individual objectives.
The Board uses the same factors described above for the executive
officers in setting the annual salary, stock option grant and cash incentives
awarded to the Chief Executive Officer. As a result of the subjective evaluation
of these factors, the Board did not increase his base salary for 1997 above the
amount earned by him in 1996 and his cash bonus also remained unchanged. In 1997
the Board did grant the Chief Executive Officer options to purchase 45,000
shares of the Company's Common Stock at fair market value on the date of grant.
The Chief Executive Officer, who is also a director, was excused from the
Board's consideration of his compensation package.
In connection with the engagement of Mr. Prasad as the new Chief
Executive Officer of the Company in April 1997, the Board negotiated a
compensation package with that individual which included provision for severance
payments upon the termination of his employment under certain circumstances.
Those circumstances were triggered when Mr. Prasad left the Company in November
1997. The compensation package received by Mr. Prasad, including the severance
component, was approved by the Board based on the collective experience of the
Board members with respect to the competitive labor market in the Silicon
Valley, the opportunities available to qualified candidates such as Mr. Prasad,
and the terms of compensation packages typically offered to attract qualified
executive officers.
- - ----------
*1 The material in this report is not "soliciting material," is not deemed
"filed" with the SEC, and is not to be incorporated by reference into any
filing of the Company under the 1933 Act or 1934 Act, whether made before
or after the date hereof and irrespective of any general incorporation
language contained in such filing.
<PAGE>
Section 162(m) of the Internal Revenue Code (the "Code") limits the
Company to a deduction for federal income tax purposes of no more than $1
million of compensation paid to certain Named Executive Officers in a taxable
year. Compensation above $1 million may be deducted if it is "performance-based
compensation" within the meaning of the Code. The Committee has determined that
stock options granted under the Company's 1998 Incentive Stock Plan with an
exercise price at least equal to the fair market value of the Company's Common
Stock on the date of grant shall be rated as "performance-based compensation."
As a result, the Company's shareholders have been asked to approve an amendment
to this plan which would allow any compensation recognized by a Named Executive
Officer as a result of such a stock option to be deductible by the Company, as
part of the package of amendments discussed in the second proposal of this proxy
statement which will also increase the number of shares available for issuance
under the Incentive Plan.
Arthur H. Bruno John Freidenrich Robert Hambrecht Alan Kessman
<PAGE>
PERFORMANCE MEASUREMENT COMPARISON(*2)
The following table shows the total shareholder return of an investment
of $100 in cash on December 20, 1995 for (i) the Company's Common Stock, (ii)
the Nasdaq Stock Market Index (US Companies) and (iii) the Nasdaq Computer
Manufacturers Stock Index. All values assume reinvestment of the full amount of
all dividends and are calculated as of December 31 of each year:
<TABLE>
<CAPTION>
PERFORMANCE MEASUREMENT TABLE
- - --------------------------------------------------------------------------------
Date CASTELLE Nasdaq Stock Nasdaq Computer
Market Index Manufacturers Stock
(US Companies) Index
- - ------------ ---------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
12/20/95 $100.000 $100.000 $100.000
12/29/95 $106.897 $102.668 $101.867
12/31/96 $79.310 $126.278 $136.783
12/31/97 $29.310 $154.996 $165.580
</TABLE>
- - --------
*2 This Section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by reference in any filing of the Company
under the 1933 Act or the 1934 Act whether made before or after the date
hereof and irrespective of any general incorporation language in any such
filing.
<PAGE>
CERTAIN TRANSACTIONS
The Company's Bylaws provide that the Company will indemnify its
directors and executive officers to the fullest extent not prohibited by
California law. Under the Company's Bylaws, indemnified parties are entitled to
indemnification for negligence, gross negligence and otherwise to the fullest
extent permitted by law. The Bylaws also require the Company to advance
litigation expenses in the case of legal proceedings, against an undertaking by
the indemnified party to repay such advances if it is ultimately determined that
the indemnified party is not entitled to indemnification.
<PAGE>
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented
for consideration at the Annual Meeting. If any other matters are properly
brought before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors
/s/ Randall I. Bambrough
Randall I. Bambrough
Secretary
April 1, 1998
A copy of the Company's Annual Report to the Securities and Exchange
Commission on Form 10-K for the fiscal year ended December 31, 1997 is available
without charge upon written request to: Corporate Secretary, Castelle, 3255-3
Scott Boulevard, Santa Clara, California 95054.
