UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-220-20
CASTELLE
(Exact name of Registrant as specified in its charter)
California 77-0164056
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3255-3 Scott Boulevard, Santa Clara, California 95054
(Address of principal executive offices, including zip code)
(408) 496-0474
(Registrant's telephone number, including area code)
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in any amendment to this Form 10-K or in
definitive proxy or information statements incorporated by reference in Part III
of the Form 10-K. ___
The approximate aggregate market value of the Common Stock held
by-non-affiliates of the Registrant, based upon the last sale price of the
Common Stock reported on the Nasdaq SmallCap Market on March 1, 2000 was
$6,139,000. Shares of Common Stock held by persons who hold more than 10% of the
outstanding shares and shares held by officers and directors of the Registrant
have been excluded because such persons may be deemed to be affiliates. This
determination is not necessarily conclusive.
The number of shares of Common Stock outstanding as March 1, 2000 was 4,651,996.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Castelle's proxy statement relating to the annual meeting of
shareholders to be held on May 10, 2000 (the "Proxy Statement") are incorporated
by reference into Part III of this Form 10-K.
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CASTELLE
FORM 10-K
TABLE OF CONTENTS
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PART I ....................................................................................................1
ITEM 1. BUSINESS........................................................................................1
ITEM 2. PROPERTIES.....................................................................................20
ITEM 3. LEGAL PROCEEDINGS..............................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........................................20
PART II ...................................................................................................21
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...........................21
ITEM 6. SELECTED FINANCIAL DATA........................................................................22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION..........22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........27
PART III ...................................................................................................28
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................28
ITEM 11. EXECUTIVE COMPENSATION.........................................................................28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................28
PART IV ...................................................................................................29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................29
SIGNATURES ...................................................................................................31
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PART I
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that are based on our current expectations
about our company and our industry. We use words such as
"plan,""expect,""intend,""believe,""anticipate,""estimate" and other similar
expressions to identify some forward-looking statements, but not all
forward-looking statements include these words. All of our forward-looking
statements involve risks and uncertainties. The Company's actual results could
differ significantly from our expectations and from the results expressed in or
implied by these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed elsewhere in this
Annual Report on Form 10-K. We urge you to consider these cautionary statements
carefully in evaluating our forward-looking statements. Except as required by
law, we undertake no obligation to publicly update any forward-looking
statements to reflect subsequent events and circumstances.
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 Annual Report
on Form 10-K.
INTRODUCTION
Castelle (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, and
InfoPressTM are trademarks of the Company. This Annual Report on Form 10-K
includes trademarks and trade names of other companies.
The Company designs, develops, markets and supports server appliances
providing office messaging solutions and other shared services. The Company's
current products are focused on two areas: fax messaging products and print
servers. The Company's products consist of FaxPress, an integrated
hardware/software network faxing solution; InfoPress, an enterprise-level
fax-on-demand software product, and LANpress print servers.
The Company's products have historically centered on fax and print
servers and related technologies. Starting in 1997, the Company's revenues have
declined as competition increased, primarily with the print server products in
the Asia Pacific Region, while at the same time the Internet and other
networking technologies advanced. As a result, the Company experienced annual
operating losses during 1997 through 1999. During the past two years, management
has redirected the Company's efforts to focus on server appliances and on
development efforts to integrate existing and future products with the Internet
and emerging networking technologies. Through restructuring and implementing
numerous cost reductions, the company was able to report an operating profit in
the fourth quarter of 1999 and a positive cash flow for the year.
Castelle's objective is to be a leading worldwide supplier of server
appliances providing office messaging solutions and other shared services. The
Company's products answer the need for specialized networking equipment that
allow network administrators to deploy complex networking applications without
the cost and time required to install server-based software solutions. Castelle
pioneered server appliances, establishing a benchmark for "plug and play" and
ease of use with its fax and print server product families. Castelle products
are installed in most Fortune 1000 companies, and in small and medium sized
businesses worldwide. Castelle is now applying its proven technology to expand
its line of server appliances to provide Internet and Intranet messaging and
communication solutions for small and medium enterprises, and departments of
large corporations.
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The Company has adapted its products for use with the Internet and will
continue to focus on the effect of the Internet on network productivity. The
Company's FaxPress fax servers provide an essential component of a corporate
unified messaging solution. The Company has developed Internet fax capability
with its FaxPress and InfoPress servers and Internet print capability with its
LANpress print servers.
Castelle sells its products through multiple channels, determined by
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's distributors sell
Castelle's products to value-added resellers ("VARs"), e-commerce vendors and
other resellers. The Company's three major domestic distributors include Ingram
Micro, Inc. ("Ingram"), Tech Data Corporation ("Tech Data") and Merisel, Inc.
("Merisel"). and its largest international distributors are Macnica Corporation
("Macnica") in Japan and Ingram UK in the United Kingdom. The Company's
e-commerce strategy includes developing close relationships with such mass
market vendors as CDW, Insight, MicroWarehouse, and BUY.COM. The Company also
distributes its products through its on-line store on the Company's Web site.
The Company also has relationships with certain original equipment manufacturers
and sells software and upgrades directly to end-users.
RISK FACTORS
Shareholders or investors considering the purchase of shares of the
Company's Common Stock should carefully consider the following risk factors, in
addition to other information in this Annual Report on Form 10-K. Additional
risks and uncertainties not presently known to the Company or that the Company
currently deems immaterial also may impair the Company's business 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, 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 sales will often reflect orders shipped
in the same quarter in which they are received. The Company's backlog at any
given time is not necessarily indicative of actual sales for any succeeding
period. In addition, significant portions 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. The
Company's performance in any quarter is not necessarily indicative of its
performance in any subsequent quarter.
Other factors contributing to fluctuations in the Company's quarterly
operating results include changes in the demand for the Company's products,
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, the effects of filling the distribution channels
following such introductions, potential delays in the availability of announced
or anticipated products, the mix of license and service revenue, the
commencement or conclusion of significant development contracts, changes in
foreign currency exchange rates, the timing of acquisitions and associated
costs, and the timing of significant marketing and sales promotions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
2
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History of Losses; Accumulated Deficit
The Company has experienced significant operating losses and, as of
December 31, 1999, had an accumulated deficit of $25 million. The development
and marketing by the Company of new products will continue to require
substantial product development and other expenditures. Although the Company had
been profitable in 1996, the Company has sustained annual losses in 1997 through
1999, and there can be no assurance that growth in net sales or profitability
will be achieved or sustained in future years. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Nasdaq SmallCap Listing; Risk associated with Limited Market
The Company's Common Stock has been listed on the Nasdaq SmallCap
Market since April 1999. In order to maintain its listing on the Nasdaq SmallCap
Market, the Company must maintain total assets, capital and public float at
specified levels, and generally must maintain a minimum bid price of $1.00 per
share. If the Company fails to maintain the standard necessary to be quoted on
the Nasdaq SmallCap Market, the Company's Common Stock could become subject to
delisting. If the Common Stock is delisted, trading in the Common Stock could be
conducted on the OTC Bulletin Board or in the over-the-counter market in what is
commonly referred to as the "pink sheets." If this occurs, a shareholder will
find it more difficult to dispose of the Common Stock or to obtain accurate
quotations as to the price of the Common Stock. Lack of any active trading
market would have an adverse effect on a shareholder's ability to liquidate an
investment in the Company's Common Stock easily and quickly at a reasonable
price. It might also contribute to volatility in the market price of the
Company's Common Stock and could adversely effect the Company's ability to raise
additional equity or debt financing on acceptable terms or at all. Failure to
obtain desired financing on acceptable terms could adversely affect the
Company's business, financial condition and results of operations.
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 and the emergence of the
Internet and other communication technologies. 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. 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 research and development cost estimates or that new products will achieve
market acceptance and generate sales sufficient to offset development costs. 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 print servers. 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 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. 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 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 result in adverse
product reviews and negatively affect market acceptance of these products.
3
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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 Product Development," and
"-- Sales, Marketing and Distribution."
Key Personnel
The Company's 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 "Business -- Research
and Product Development."
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 fax servers and
network print 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 will continue to decline, as the market for these products
becomes increasingly competitive. Any material reduction in the average selling
prices of the Company's products 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.
4
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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
software, hardware and service 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. In the fax server
market the Company competes with companies such as Applied Voice Technology,
Inc., Omtool, Ltd. and Computer Associates International, Inc. 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 in the print server market 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."
International Sales
Sales to customers located outside Canada and the United States
accounted for approximately 31% and 38% of the Company's net sales in 1999 and
1998, respectively. The Company sells its products in approximately 40 foreign
countries through approximately 70 international distributors. Macnica, the
Company's principal Japanese distributor, accounted for approximately 60% and
67% of the Company's international sales in 1999 and 1998, 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. See also "Dependence on Proprietary Rights; Uncertainty of
Obtaining Licenses." 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 primarily
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. 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."
Lack of Product Revenue Diversification
The Company derives substantially all of its sales from its fax and
print server products. The Company is leveraging its expertise in these areas to
develop new messaging features and products to support greater integration into
corporate network environments and with Internet communications. See "Business
- -Research and Product Development". The Company expects that its current
products will continue to account for a majority of the Company's sales in the
near future. A decline in demand for these products as a result of competition,
technological change or other factors, or a delay in the development and market
acceptance of new features and products, would have a material adverse effect on
the Company's business, operating results and financial condition.
5
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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. The Company's distributors sell
Castelle's products to VARs, e-commerce vendors and other resellers. The
distribution of personal computers and networking products 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 distributors typically represent other
products that are complementary to, or compete with, those of the Company. In
particular, certain of its competitors, including Hewlett-Packard and Intel,
sell a substantially higher dollar volume of products through several of the
Company's large U.S. 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 that 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 "Business -- Sales, Marketing and Distribution" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
6
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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 a modem chip set from Rockwell International Corporation
("Rockwell") and a microprocessor from Motorola, Inc. ("Motorola"), are
currently available from single sources. Other product components 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 supplier of certain print
server products is SerComm. There can be no assurance that these products will
produce gross margins comparable to those of the Company's internally generated
products or that the parties with which the Company contracts will continue to
provide the quantities and quality of products needed by the Company or that
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."
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, or
the inability to obtain regulatory approvals within a reasonable period of time,
could have a material, adverse effect on the Company's business, operating
results and financial condition. 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 have a
material, adverse impact on the Company's business, operating results and
financial condition.
7
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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 that 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 registered some 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-Research and Product Development" and
"-Proprietary Rights."
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. There can be no assurance
that third parties will not assert infringement claims against the Company 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 claims. Any
such claims, with or without merit, can be time consuming and expensive to
defend. There can be no assurance that any such intellectual property litigation
that may be brought in the future will not have a material adverse effect on the
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
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-Research and Product Development" and "-Proprietary Rights."
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 the Company's Common Stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices for the Company's Common Stock. The management of the Company believes
that such past fluctuations may have been caused by the factors identified above
as well as 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 Company's
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.
8
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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 March 1, 2000 the Company's officers and directors and their
affiliates beneficially owned approximately 24% 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 Company's 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,
and as a result, the issuance thereof could have a material adverse effect on
the market value of the Company's Common Stock.
BUSINESS
General
Castelle designs, develops, markets and supports server appliances
providing office messaging solutions and other shared services. The Company's
current products are focused on two areas: fax messaging products, including a
range of software enhancements, and print servers. The Company's products
consist of FaxPress, an integrated hardware/software network faxing solution;
InfoPress an enterprise-level fax-on-demand software product and LANpress print
servers. See "Business -- Research and Product Development."
The Company's products have historically centered on fax and print
servers and related technologies. Starting in 1997, the Company's revenues have
declined as competition increased, primarily with the print server products in
the Asia Pacific Region, while at the same time the Internet and other
networking technologies advanced. As a result, the Company experienced annual
operating losses during 1997 through 1999. During the past two years, management
has redirected the Company's efforts to focus on server appliances and on
development efforts to integrate existing and future products with the Internet
and emerging networking technologies. Through restructuring and implementing
numerous cost reductions, the company was able to report an operating profit of
$114,000 in the fourth quarter of 1999. Additionally, increased cash management
during 1999 provided a positive cash flow for the year.
9
<PAGE>
Industry Background
In the mid-1980s, organizations began to interconnect personal
computers into local area networks (LANs) in order to allow work groups to share
files and peripherals such as printers. As LANs have proliferated throughout
organizations and client/server architectures have gained acceptance, they have
become increasingly complex, the size and multimedia intensity of files being
transmitted has increased and the applications operating on the computer
networks have become more critical to the success of the business enterprise.
The proliferation of the Internet and Intranets and popularity of electronic
communications expanded the role of LAN's as a means to provide common access to
the Internet, email and other messaging applications. Installation, maintenance
and administration of LAN equipment has always required a staff of highly
skilled professionals. The costs associated with LANs and related equipment are
significant and affordable only for larger organizations. Many small and medium
sized businesses were not able to invest in necessary equipment and support
staff. This created the need for specialized networking equipment that would
allow network administrators to deploy complex networking applications without
the cost and time required to install server-based software solutions. These
devices are known in the industry as "Server Appliances" or "Thin Servers". A
server appliance is an integrated software/hardware solution designed to reduce
the complexity and cost for a specific server based application. Internet
routers, email servers, remote access servers, communication servers, and print
servers are examples of the server appliances used by businesses today.
Castelle pioneered server appliances, establishing a benchmark for
"plug and play" and ease of use with its fax and print server product families.
Fax Messaging Products: The increasing popularity of email
and the Internet provided the boost to all types of electronic
communications as many users and organizations became more comfortable
and accustomed to their use. To further simplify and improve inter- and
intra-organizational communications, corporate MIS departments are
looking for ways to integrate different types of messaging into a
unified messaging environment. Fax remains one of the key business
communication tools and is one of the essential components of the
corporate messaging environment. In corporate communication
infrastructures, fax is being integrated into email. To facilitate this
capability companies install email-integrated fax server systems.
Users can send and receive faxes as easily as emails, using the same
email application for both types of messages. A fax server can sort
incoming faxes and route them electronically and confidentially
directly to the electronic mailboxes of the intended recipients and
store non-urgent outgoing faxes for automatic transmission at an
"off-peak" time when telephone rates are lower. In addition to reduced
cost of fax transmissions, fax servers utilize Fax-Over-IP technology
to transmit faxes over the Internet.
These fax servers can be provided using complex software that require
Windows NT or UNIX systems and specialized and expensive fax modems.
The other approach is a dedicated fax server appliance, such as
Castelle FaxPress.
10
<PAGE>
Fax servers can also be used as an independent network shared messaging
system in environments that require high-volume incoming and outgoing
faxes. Users are able to send and receive 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.
The Company also has Information Delivery Systems, which include
email-on-demand and fax-on-demand products. Fax-on-Demand is the
ability to use a touch-tone phone and a fax machine to request and
receive copies of documents 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
information-on-demand customer.
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.
Server appliances, such as communications/messaging servers and print servers,
have emerged to gain significant market acceptance due to their ability to
significantly reduce complexity and cost associated with the installation and
maintenance of networking systems. These appliances also make the complex
functionality of Internet and Intranet communications available and affordable
to many smaller businesses. As MIS professionals in larger organizations and
business owners of smaller enterprises continue to recognize the benefits of
server appliances to provide such critical functionality as Internet and
Intranet communications, remote access, scanning, electronic mail and related
functions, the Company believes that the demand for such network systems will
increase.
Castelle Strategy
Castelle's objective is to be a leading worldwide supplier of server
appliances providing office messaging solutions and other shared services.
Castelle pioneered server appliances, establishing a benchmark for "plug and
play" and ease of use with its fax and print server product families. Castelle
products are installed in most Fortune 1000 companies, and in small and medium
sized businesses worldwide. Castelle is now applying its proven technology to
the office, integrating desktop messaging, Internet connectivity, print and
other shared services.
11
<PAGE>
Focus on Server Appliances: The Company focuses exclusively on
providing innovative, reliable, easy-to-use network 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
continuing to focus on providing network enhancement products that
enable users to communicate more effectively.
Focus on Messaging and Communications: The Company focuses on
developing application solutions for Inter and Intra-company
communications. The Company believes that its focus on application
servers rather than on infrastructure systems enables the Company to
offer products that bring higher value services to customers and
provide a higher margin to the Company.
Expand Product Line: The Company is leveraging its expertise in server
appliances to offer new easy-to-use, cost-effective solutions. The
Company continues to expand both its fax and print server products and
apply its proven technology to other areas.
Focus on E-commerce and Other High Volume Distribution Channels: The
Company has established a two-tier domestic and international
distribution network of leading national and regional network product
distributors and resellers including Ingram Micro, TechData, and
Merisel. Castelle's products are well suited for sale by e-commerce
vendors and the Company has been successful working with leading
suppliers such as CDW, BUY.COM, Insight, MicroWarehouse domestically
and Software Catalog and W-Store in Europe. The Company also sells
through OEM vendors such as Fujitsu Ltd. in Japan (" Fujitsu"). and
Veritek ("Veritek") in Korea. The Company is focused on maintaining and
strengthening its current distribution network in North America,
Europe, and Asia-Pacific regions.
Leverage Strategic Relationships: The Company augments its product
offerings 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 range of server appliance products
that enhance network productivity, performance and functionality. The Company's
current products are grouped into two areas: fax messaging products, including a
range of software enhancements, and print servers.
Fax Messaging Products: The Company offers the FaxPress family of
email-integrated fax server appliances. The Company positions the
FaxPress as the easiest way to add faxing to your network and integrate
fax with email. FaxPress allows network users to send, receive, route,
print, store, edit and retrieve fax transmissions from their own
personal computers on a local area network. FaxPress can be integrated
into an email system creating a unified fax/email messaging
environment. FaxPress enables users to transmit documents directly to a
fax device as easily as if they were printing to a laser printer or
sending an email message. The product also provides network
administration features like control, monitoring, logging,
configuration, etc. The Company's fax server products are designed to
comply with regulatory standards in the United States as well as
countries in Europe and the Pacific Rim. During 1999 and 1998, fax
products represented 78% and 68%, respectively, of total net sales.
12
<PAGE>
Key features of the FaxPress products (configured with its current
software versions) include:
o Easy Installation and maintenance: FaxPress is a fax server
appliance and comes with all necessary hardware and
software. The hardware system is a small box with integrated
10/100 Base-T Ethernet or Token Ring interfaces, and one to
eight intelligent fax modems. All the required system and
client software is provided with the product.
o Support for popular network operating environments: FaxPress
operates in any local area network based on Microsoft
Windows 2000, Windows NT, NT Terminal Server, Novell NetWare
or Linux servers.
o Ability to create unified fax/email messaging environment:
FaxPress has the ability to integrate fax into a corporate
email system, allowing users to send and receive faxes in
the same manner as emails. FaxPress supports Microsoft
Exchange/Outlook, Lotus Notes, Novell GroupWise, Netscape
and other SMTP compatible systems. Castelle's unique
Exchange Direct interface offloads fax processing from MS
Exchange Server while maintaining tight integration with the
Outlook client.
o Ability to send faxes from many applications: Easy faxing
from within any Windows, Windows 95/98 and Windows NT/2000
application such as Microsoft Office and Lotus Smart Suite.
o Electronic delivery of faxes to desktops: FaxPress supports
several methods [DID (Direct Inward Dialing), DTMF (Dual
Tone Multifrequency), T.30 sub-addressing, OCR (Optical
Character Recognition) routing, line routing] to deliver
incoming faxes direct to the email or fax inbox of the
intended recipient.
o Internet faxing capabilities reduce transmission costs:
FaxPress enables users to connect several units via the
Internet or the Intranet to form a private Fax-over-IP
network that can significantly reduce the cost of fax
transmissions. FaxPress can also operate within a Fax2Net
Internet Faxing network, a worldwide ISP.
o Integration into custom applications: The Company provides a
Software Development Kit which allows programmers to
integrate faxing functions into their current applications
or to create new customized applications that use the
FaxPress server.
o Software Options: The Company offers a range of value-added
software options which increase the functionality of
Castelle's FaxPress systems and enables the FaxPress to
address specialized applications. Software upgrades and
options are available to the installed base of FaxPress
units at prices ranging from $99 to $1,375.
The Company offers a family of FaxPress fax server systems
ranging from entry-level products targeted to small businesses with
under 50 users to high-end fax solutions capable of supporting
enterprise-wide installations. The suggested U.S. list prices for
FaxPress fax server products range from $1,495 to $7,995. The server
pricing is based on hardware model, with no per-user costs. The
FaxPress 2500, 3500 and 5000 come with the FaxPress 6.0 PRO version
that adds integration with popular email packages, and many advanced
fax management and integration features. FaxPress 6.0 PRO is optional
on FaxPress SBE. The following table summarizes the Company's FaxPress
system products:
13
<PAGE>
<TABLE>
<CAPTION>
-----------------------------
Network Environment
---------------------------------------------------------------------------------------------
NetWare Windows
Number of Email Network 3.x, 4.x, 5.x NT/2000
Product Model Modems Integration Topology (IPX) (IPX,IP)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FaxPress SBE 1 Optional Ethernet |X| |X|
FaxPress 1500-N 2 |X| Ethernet |X| |X|
FaxPress 3500 4 |X| Token Ring |X| |X|
FaxPress 5000 4 or 8 |X| Ethernet |X| |X|
---------------------------------------------------------------------------------------------
</TABLE>
Information-on-demand systems: InfoPress software enables the access of
information via any touch-tone phone and a fax machine and allows the
dissemination of information via "broadcasting" to a select database of
fax numbers. InfoPress allows companies to use one source of documents
in a Castelle document library and to automatically publish the
documents using either the fax-on-demand and/or email-on-demand
methods.
Castelle's InfoPress is a software product designed to operate on the
Microsoft Windows NT/2000 platform. The system utilizes voice and fax
processing hardware, as well as telephone system interface (analog or
T1) hardware with as few as two and as many as 288 ports that are
actually deployed at a customer site.
o Fax-on-Demand:Fax-on-Demand allows a user to request and
receive information on demand by dialing a telephone number.
The user interacts with a series of voice prompts to select
specific documents, by simply using the telephone keypad,
and requesting delivery of these documents to a fax number.
o Email-on-Demand:Email-on-Demand allows a user to request and
receive information on demand by using email. Auto-reply
email exists today, but is limited to receiving one
document, usually in text format. The main benefit of
email-on-demand is the ability to share the document library
with fax-on-demand.
o Web Integration:InfoPress supports Web HTML documents in the
document library. The Web documents are automatically
rendered into a fax document when required.
Print Servers: Printer sharing continues to be one of the important
benefits of computer networking. Print servers are the most efficient
and economical way of sharing printers on networks. While demand for
print servers in various sizes of businesses continues to grow, the
market is very competitive. Castelle has been involved in the print
server business for more than 10 years. After continuous improvements
on the cost and feature set, Castelle's LANpress has become a
well-received print server product line. Our latest print server models
incorporate a RISC microprocessor, Fast Ethernet, Windows 2000,
Internet Printing and many other attractive new features. Castelle
LANpress JR is the world's smallest print server commercially available
today. It's similar in size to that of a standard printer cable
connector. The suggested U.S. list price for LANpress print servers
ranges from $149 to $499.
14
<PAGE>
The following table summarizes the Company's line of LANpress external
print servers:
<TABLE>
<CAPTION>
-----------------------------------------------------
Network Environment
- -----------------------------------------.....................................................-------------------------
Ethernet Windows Flash
Product Configuration Network NetWare 3.x, UNIX TCP/IP 95 / 98 / Apple Upgrade Internet
Interface 4.x, 5.x NT / 2000 Ethertalk Capability Printing
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
LANpress 1P/100 MP (1) 10/1000 |X| |X| |X| |X| |X| |X|
LANpress 3P/100 10/1000 |X| |X| |X| |X| |X| |X|
LANpress Jr. MP (2) 10 |X| |X| |X| |X| |X| |X|
LANpress 2+1 MP (3) 10 |X| |X| |X| |X| |X| |X|
LANpress 3+1 MP (3) 10 |X| |X| |X| |X| |X| |X|
- ----------------------------------------------------------------------------------------------------------------------
--------------------
(1)1 Centronics parallel port
(2)Connects directly to port on Printer
(3)Numbers refer to the number of parallel and serial port
connections, respectively. The LANpress 2+1 MP also comes
with a Token Ring network interface.
</TABLE>
Research and Product Development
The Company has invested substantially in research and product
development. The Company believes its future performance will depend in large
part on its ability to enhance its current products, to expand its product
offerings, to maintain technological competitiveness and meet an expanding range
of customer requirements.
Castelle continues to invest in enhancing its server appliance product
lines by developing new versions of client and server software and server
hardware. The product feature set is driven by the increasing complexity of user
needs. The changing corporate communications/messaging environment and
increasing demand for easy-to-use networking systems define these needs. The
development efforts are focused on enhancing functionality of existing products
and developing other systems to expand our product offerings. The Company is
leveraging its unique technology and engineering expertise in server appliances,
networking, and client and server software to develop a new line of office
messaging server appliances. The Company's development efforts are focusing on
high value applications, while relying on its partners to provide basic
functionality for some of its product lines.
The current FaxPress fax server product line is being enhanced to offer
greater integration into corporate networking environments with such features
as:
o Windows NT Terminal Server support
o Windows 2000 Professional, Server and Advanced Server support
o Linux file server support
o Improved integration with Microsoft Exchange via Exchange Connector
Castelle will continue to further its strategy of supporting
Fax-Over-IP (Internet Faxing) through its own FaxPress-to-FaxPress communication
and interfaces to third-party Internet Fax providers.
The Company developed new versions of its FaxPress servers to offer
higher performance at a lower cost. Furthermore, the Company is applying this
technology to the development of new generations of server appliances that will
provide integrated email/fax messaging and other shared services.
15
<PAGE>
The InfoPress Information Delivery product line is being improved to
support the current versions of Adobe Acrobat Reader and Netscape. It will
support Windows 2000 with a new printer driver. New and improved Web integration
is also being developed for the next version release.
There can be no assurance that the Company will be successful in
developing and marketing the new software and hardware product versions or in
responding to other emerging technological developments or that any development
will achieve commercial acceptance. The Company is seeking and will continue to
seek to hire additional skilled development engineers. Such engineers are likely
to be in short supply, and the Company's business, operating results and
financial condition could be adversely affected if it encounters delays in
hiring or fails to retain the required skilled engineers. See "Business -- Risk
Factors -- Key Personnel."
Sales, Marketing and Distribution
Castelle sells its products through multiple channels, determined by
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 Fujitsu in Japan and Veritek in Korea. Software enhancements and
options that complement the FaxPress products are primarily marketed directly by
the Company to registered end users. The direct sales group works closely with
distributors and VARs in qualifying sales opportunities for the fax and print
server products. The Company also sells some products through the on-line store
on its Web site. The Company's European headquarters located in the UK provides
sales and support services for Europe.
Demand for Castelle's products is created through a variety of
marketing programs. These programs are targeted toward end-users to stimulate
demand for the products and toward distributors, resellers, VARs and e-commerce
vendors to promote the product in the sales channel. These programs include
targeted and active participation in industry networking and communication trade
shows, as well as advertising in associated publications. The Company increases
awareness of Company products by Internet marketing via targeted e-advertising,
publishing and sponsoring email newsletters, enhancing its Web presence, print
advertising, conducting direct mail campaigns, offering seminars, trade shows
and conferences and other forms of public relations efforts. To further expand
its Internet marketing efforts, the Company has deployed an e-marketing system
by MarketFirst Software to better respond to customers who contact the Company
via the Internet. The Company's Web site has been updated and designed to assist
customers in obtaining information about Castelle products and contacting
Castelle sales personnel, and offers selected products and services through the
Company's on-line store.
The Company's products are well suited for sale by e-commerce vendors,
and the Company has experienced success working with leading suppliers such as
CDW, BUY.COM, Insight, MicroWarehouse domestically and Software Catalog and
W-Store in Europe.
16
<PAGE>
The Company's five largest distributors accounted for approximately 42%
of the Company's net sales in 1999 and 57% of its net sales in 1998. Macnica,
the Company's principal Japanese distributor, and Ingram, the Company's largest
domestic distributor, accounted for approximately 18% and 12%, respectively, of
the Company's net sales in 1999 and 26% and 17%, respectively, of its net sales
in 1998. Sales to customers located in the Pacific Rim and Europe comprised
approximately 31% and 38% of the Company's net sales in 1999 and 1998,
respectively. The Company's distributors typically represent other products that
are complementary to or compete with those of the Company. While the Company
attempts to encourage its distributors to focus on Castelle's products through a
variety of marketing and support programs, our distributors may give higher
priority to products of other suppliers, thereby reducing the efforts they
devote to selling our products. In particular, certain of our competitors,
including Hewlett-Packard and Intel, sell a substantially higher total dollar
volume of products through several of the Company's large U.S. 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. The
Company has a stock rotation policy with certain of its distributors that allows
them to return marketable inventory against offsetting orders. In the event that
the Company reduces 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. See "Business -Risk
Factors - Dependence on Suppliers and Subcontractors."
Customer Service and Support
The Company provides customers with support services, which are
available to assist customers with installation, use and operation issues that
will ensure smooth and reliable operation of Castelle products. The Company's
network engineers, located at corporate headquarters, provide technical support
via telephone, fax and email during normal Company business days from 6:00 a.m.
to 5:00 p.m. (Pacific Time). As part of the Company's global partner program,
VARs have access to "priority technical support" via a special toll-free number
that provides immediate access to Castelle network engineers. Support is
provided under warranty as well as with different extended software and hardware
support agreements sold directly to the customer by the Company. The Company
also has other customer support, including a Web site as well as an internal
help desk system. The Company has an automated call management distribution
system that provides improved levels of support to help resolve customer issues.
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 manufacture 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, sourcing
documentation, 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 a modem chip set
from Conexant, and microprocessors from Motorola, are currently available from
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. See "Business -- Risk Factors -
Dependence on Suppliers and Subcontractors."
17
<PAGE>
Competition
See "Business -- Risk Factors -- Competition and Price Erosion" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
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 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 registered some 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 that 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.
Government Regulation
See "Business -- Risk Factors -- Government Regulations."
18
<PAGE>
Employees
As of February 22, 2000, the Company employed a total of 72 full-time
equivalent personnel, 15 in manufacturing, and 16 in sales and marketing, 17 in
engineering, 12 in customer service and 12 in finance and administration. 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 all its
employees (including its officers) that prohibit disclosure of information
confidential to the Company to anyone outside of the Company both during and
subsequent to employment and require disclosure to the Company of ideas,
discoveries or inventions relating 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.
EXECUTIVE OFFICERS OF THE COMPANY
Identification of Executive Officers
The names of the executive officers of the Company and their ages as of
February 22, 2000 are set forth below:
Name Age Position
Donald L. Rich 58 Chairman of the Board, President, Chief Executive
Officer, Chief Financial Officer and Secretary
Ronnie E. Mansoor 43 Chief Technology Officer, Vice President of
Engineering
Edward J. Heinze 54 Vice President Sales, North America
Donald L. Rich
Mr. Rich joined the Company in November 1998 and has served as Chief
Executive Officer and President from November 1998 to the present. Mr. Rich
has served as Chief Financial Officer since April 1999. He became Chairman
of the Board in May 1999 and has served as Secretary since February 2000.
From January 1997 until November 1998, Mr. Rich was self-employed as a
consultant. From 1993 through 1997, Mr. Rich was Chief Executive Officer and
President of Talarian Corporation, a provider of communications middleware
software. Prior to that, he held various sales and marketing management
positions at Integrated Systems, Inc. and International Business Machines
Corporation. Mr. Rich holds a BS degree in Mechanical Engineering from
Purdue University and an MBA from the Stanford Graduate School of Business.
Ronnie E. Mansoor
Mr. Mansoor joined the Company in 1997, after working as a consultant
for Castelle since 1995. He has served as the Director of Engineering and
was appointed Chief Technology Officer and Vice President of Engineering in
August 1999. Prior to joining Castelle, Mr. Mansoor served as the President
of Implicit Inc., a consulting company which provided software development
services to companies such as: Canon, Minolta, Adaptec, ASP, and Cylink, in
the fields of networking, imaging, security, and Internet technologies. In
addition, he held project management positions at Document Technologies, a
document imaging company, and ADAC Laboratories, a medical imaging company.
Mr. Mansoor holds a BS degree in Electrical Engineering and a PE degree in
Physics from Tel Aviv University.
19
<PAGE>
Edward J. Heinze
Mr. Heinze has been with Castelle Inc. since 1994. He was appointed
Vice President Sales, North America in January 2000. Prior to his
appointment to Vice President, Mr. Heinze served Castelle as Product
Manager, Fax Product Line, and Regional Sales Manager. Before joining
Castelle, he served in several capacities at Visual/White Pine Software,
including Vice President of Sales. Prior to his tenure at White Pine, he was
Chief Operations Officer for XMARK, and Vice President of Sales and
Marketing at EIT, Millicom, Olympia, and Ontel. He holds a BS degree from
Waynesburg College.
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 2,000 square feet of floor
space that is located in El Dorado Hills, California. This facility is under a
lease, expiring in March 2001. In addition, the Company rents office space for
sales and customer support offices in Illinois, Pennsylvania and the United
Kingdom. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock (Nasdaq symbol "CSTL") began trading on the
Nasdaq National Market on December 20, 1995 and was transferred to the Nasdaq
SmallCap Market as of April 1999. The following table shows the intraday high
and low sale prices per share of Castelle's Common Stock as reported on the
Nasdaq National Market for the periods indicated prior to April 1999 and as
reported on the Nasdaq SmallCap Market for the periods indicated after April
1999. Such quotations do not include retail markups, markdowns or commissions.
Fiscal 1998 High Low
First Quarter $3 3/8 $2
Second Quarter $4 $1 1/2
Third Quarter $2 1/2 $ 7/8
Fourth Quarter $1 5/8 $ 1/2
Fiscal 1999 High Low
First Quarter $1 1/2 $ 1/2
Second Quarter $1 5/32 $ 3/8
Third Quarter $1 1/4 $ 5/8
Fourth Quarter $2 3/8 $ 7/8
As of December 31, 1999, there were 114 holders of record of the
Company's Common Stock. On March 1, 2000 the last sale price reported on the
Nasdaq SmallCap Market for the Company's Common Stock was $1.9375 per share.
Dividend Policy
The Company has not paid cash dividends on its Common Stock. The Board
of Directors currently intends to retain any and all earnings for use in the
Company's business and the Company does not anticipate paying cash dividends in
the foreseeable future.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from the
audited Consolidated Financial Statements. The information set forth below is
not necessarily indicative of results of future operations, and should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes thereto included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(in thousands, except per share amounts)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net Sales $16,116 $21,746 $25,343 $29,461 $25,082
Gross Profit $ 8,404 $11,598 $13,507 $14,468 $11,511
Gross Profit as a % of Net Sales 52% 53% 53% 49% 46%
Net income/(loss) ($3,555) ($7,534) ($6,895) $5,724 $2,024
Net income/(loss) as a % of Net Sales (22%) (35%) (27%) 19% 8%
Net income/(loss) per share - diluted ($0.78) ($1.67) ($1.54) $1.45 $0.78
BALANCE SHEET DATA:
Cash and Cash Equivalents $4,714 $3,924 $6,204 $8,161 $7,268
Working Capital $3,555 $6,763 $10,816 $13,163 $8,912
Total Assets $8,502 $12,494 $18,926 $27,303 $14,728
Long-term Liabilities -- $98 $52 -- $75
Stockholders Equity $4,020 $7,501 $14,855 $21,616 $9,289
</TABLE>
Net loss for 1999, 1998, and 1997 included net charges for
restructuring and other non-recurring items of $.4 million, $5.1 million, and
$6.1 million respectively, and a net benefit of 2.5 million in 1996. For
detailed information on these transactions see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Restructuring and
Other Charges and Amortization of Intangible Assets" and the Consolidated
Financial Statements and related Notes thereto included elsewhere in this Annual
Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Castelle's actual results could differ materially from those
discussed herein. 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".
22
<PAGE>
The Company's products have historically centered on fax and print
servers and related technologies. Starting in 1997, the Company's revenues have
declined as competition increased, primarily with the print server products in
the Asia Pacific Region, while at the same time the Internet and other
networking technologies advanced. As a result, the Company experienced annual
operating losses beginning from 1997 through 1999. During the past two years,
management has redirected the Company's efforts to focus on server appliances
and on development efforts to integrate existing and future products with the
Internet and emerging networking technologies. Through restructuring and
implementing numerous cost reductions, the company was able to report an
operating profit of $114,000 in the fourth quarter of 1999. Additionally,
increased cash management during 1999 provided a positive cash flow for the
year. Accounts receivable collections were improved, resulting in the average
Days Sales Outstanding of 35 at the end of 1999 versus 87 at the end of the
prior year. Inventory levels also decreased resulting in a doubling of inventory
turns in 1999.
Results of Operations
Net Sales
Net sales decreased 26% to $16.1 million in 1999 from $21.7 million in
1998. The decline of $5.6 million in net sales resulted primarily from lower
sales of the Company's main product lines, including a $3.7 million decrease
in print server products in Asia, and the Company's efforts to manage down
the inventory in the distribution channel. Revenue in 1998 had been reduced
by increases in the sales return allowance of approximately $1.0 million.
In 1998, net sales decreased 14% to $21.7 million from $25.3 million in
1997. The $3.6 million decline in net sales resulted primarily from lower
sales of the Company's print server products in Japan, increases in sales
returns and allowance of approximately $1.0 million, and increases in local
competition in Europe. The increase in Sales Returns Allowances allowed the
Company to better manage the level of inventory in the distribution channel.
International sales were $4.9 million, $8.3 million, and $11.9 million
in 1999, 1998 and 1997, respectively, representing 31%, 38% and 47%,
respectively, of net sales. Lower international sales were the result of a
reduction in general demand for the Company's print server products in Asia
and increased local competition in Europe. Most of the Company's
international sales to date have been denominated in U.S. dollars. Such
sales could be adversely affected by changes in demand resulting from
fluctuations in currency exchange rates.
Cost of Sales
Cost of sales includes cost of materials, including components,
manuals, diskettes, 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, obsolescence and
manufacturing costs and warranty expenses. Cost of sales were $7.7 million,
$10.1 million and $11.8 million in 1999, 1998 and 1997, respectively, and
represented 48%, 47% and 47% of net sales for those years. Cost of sales as
a percentage of net sales has remained constant during these years as a
result of a higher proportion of net sales being derived from higher margin
fax products, offset by a lower gross margin percentage on sales of print
servers and unfavorable manufacturing overhead absorption rates due to lower
volumes. During 1999 the Company reduced manufacturing overhead by $.4
million through reduction of personnel and other costs savings. However in
1999 the Company recognized $1.1million of expense related to the disposal
of obsolete inventory.
Research and Development
Research and product development expenses were $2.7 million, $2.9
million and $3.1 million in 1999, 1998 and 1997, respectively, and
represented 17%, 13% and 12% of net sales for those periods. Spending has
supported existing products and the development of unified messaging server
appliances. The absolute dollar amount of research and product development
expense decreased slightly in 1999 due to improved expense controls.
However, the Company continues to be committed to the development of highly
competitive new products and services through the efficient utilization of
its engineering resources.
The decrease in research and development expenses in 1998 compared to
1997 was mainly due to improved expense controls.
Sales & Marketing
Sales and marketing expenses were $6.7 million, $8.8 million and $9.2
million for 1999, 1998 and 1997, respectively, and represented 42%, 40% and
36% of net sales for those periods. The expense decline in 1999 compared to
1998 was due to a reduction in personnel, lower marketing promotion, trade
show, occupancy and other cost savings.
The expense decline in 1998 compared to 1997 was due to a
reorganization of the sales and marketing activities implemented in the
fourth quarter of 1997, resulting in more efficient operations and a smaller
staff, which was partially offset by the increase in sales efforts for a new
fax product line.
General & Administrative
General and administrative expenses were $2.1 million, $2.4 million and
$2.3 million for 1999, 1998 and 1997, respectively, or 13%, 11% and 9% of
net sales for those periods. The decrease in expenses in 1999 was due to a
lower allowance for doubtful accounts and overall cost savings, offset by
increases in the amounts paid for administrative salaries and bonuses.
The increase in expenses in 1998 was due to an increase in the
Company's allowance for doubtful accounts and severance costs associated
with executives who left the Company, which was only partially offset by
expense reductions resulting from the Company's restructuring implemented in
the fourth quarter of 1997.
Restructuring and Other Charges & Amortization of Intangible Assets
In 1999, the Company recognized a restructuring charge of $402,000 for
expenses associated with the Company's exit from the Object-Fax NT product
line including the disposition of excess inventory, reductions in personnel
and the write-off of excess office space. This disposition is expected to
reduce the Company's operating costs in future years.
In April 1998, the Company acquired the Object-Fax NT product from
Tolvusamskipti HF, an Icelandic corporation. A portion of the purchase price
was allocated to in-process research and development, and, accordingly, the
Company recorded a one-time charge against earnings in the second quarter of
1998 of $1.1 million, as the technology acquired had not reached
technological feasibility and had no alternative future use. The Company
also recorded intangible assets of $160,000, which were amortized over 12
months, resulting in a $120,000 charge in 1998. In determining the amount of
in-process research and development, the Company engaged an independent
valuation firm to conduct an appraisal of the acquired assets. The
intangible assets acquired, including in-process research and development,
were valued based on estimates of future cash flows discounted to their
present value at risk-adjusted rates of return.
24
<PAGE>
In 1997, the Company recorded a total restructuring charge of $6.2
million to restructure its operations to streamline activities and focus on
key products to reduce ongoing costs. Of the total restructuring charge,
$1.2 million was to account for implementing and completing the
restructuring plan which included relocation of the Company's European
office, exit from certain lines of business, a workforce reduction, the
write-off of certain assets relating to Ibex and other estimated
restructuring costs. This was in addition to a charge of $5.0 million
associated with the write-off of the Ibex goodwill and related intangibles.
In addition, the Company recorded amortization expense of $574,000 in 1997
related to intangible assets associated with the write-down to fair market
value of assets acquired in the merger with Ibex in November 1996.
Interest Income, net
Net interest income was $126,000, $170,000 and $288,000 in 1999, 1998
and 1997, respectively. The changes in interest income versus the prior
years are due to changing cash balances.
Provision for (Benefit from) Income Taxes
In 1999 the Company's provision for income taxes was $4,000,
representing state taxes only. Because of the Company's net loss in 1999,
there were no federal nor substantial state income taxes recognized.
In the fourth quarter of 1998, due to the uncertainty surrounding the
realization of favorable tax attributes in future tax returns, the Company
provided a full valuation allowance against its deferred tax asset,
resulting in a non-recurring, non-cash charge of $4.0 million.
In 1997 the Company recorded a net benefit from income taxes of
$732,000. At the time, this amount reflected 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 9 of the 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 the issuance of capital stock and the assumption of bank debt. As of
December 31, 1999, the Company had $4.7 million of cash and cash equivalents,
increased from $3.9 million for the same period in 1998. Working capital
decreased to $3.6 million at December 31, 1999 from $6.8 million at December 31,
1998. Cash and cash equivalents increased in 1999, even after funding the
operating loss for 1999, primarily because of significantly improved collections
of accounts receivable and reduction in inventory requirements. Working capital
decreased primarily because of the operating loss in 1999.
The Company has a $3.0 million secured revolving line of credit with a bank,
which expires in March 2000, pursuant to which the Company may borrow 100%
against pledges of cash at the bank's prime rate (8.50% at December 31, 1999).
Borrowings under this line of credit agreement are collateralized by all of the
assets of the Company. Under the terms of the loan agreement, the Company is
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 was in compliance with the terms of the agreement,
and at December 31, 1999 had no borrowings under the line of credit. The Company
expects to negotiate an extension of this line of credit.
25
<PAGE>
In December 1997, as a source of capital asset financing, the Company
entered into a loan and security agreement with a finance company for an amount
up to $288,000. As of December 31, 1999, the Company had drawn $288,000 against
this amount of which $98,000 is outstanding at December 31, 1999. The loan is
subject to an interest rate of 10.11%, is repayable by December 2000 and is
collateralized by a certificate of deposit of $125,000, which is classified as
restricted cash on the Company's balance sheet.
As of December 31, 1999, net accounts receivable were $1.5 million, down
from $3.5 million for the same period in 1998. At the end of 1999 the average
Days Sales Outstanding was 35 versus 87 at the end of 1998. This is the result
of a focus on increased cash collections by the Company in 1999.
Net inventories as of December 31, 1999 were $1.4 million, down from $3.7
million in 1998. Inventory turnover for the year-ended 1999 was 4.4, up from 1.9
in 1998. This is the result of efforts by the Company to reduce inventory,
especially for older product lines.
Castelle acquired additional capital equipment of $184,000, $223,000 and
$732,000 in 1999, 1998 and 1997, respectively. The decline in capital equipment
spending in 1998 was primarily the result of large one-time purchases in 1997
for the Company's customer support system and an upgrade to the internal network
infrastructure.
In 1998 the Company acquired the Object-Fax NT product line for a total
purchase price of $1.4 million, including $300,000 in cash and 440,000 shares of
Castelle Common Stock.
Although the Company believes that its existing capital resources and
expected cash flows from operations 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments". The Company
had no holdings of derivative financial or commodity instruments at December 31,
1999. However, the Company is exposed to financial market risks, including
changes in interest rates and foreign currency exchange rates. While much of the
Company's revenue is transacted in U.S dollars, some revenues and capital
spending are transacted in Pounds Sterling. These amounts are not currently
material to the financial statements of Castelle; therefore we believe that
foreign currency exchange rates should not materially affect the Company's
overall financial position, results of operations or cash flows. The fair value
of the Company's money market account or related income would not be
significantly impacted by increases or decreases in interest rates due mainly to
the highly liquid nature of this investment. However, sharp declines in interest
rates could seriously harm interest earnings on this account.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following financial statements of the Company and the
report of the Company's independent accountants are included
in Item 14:
<TABLE>
<CAPTION>
Page in
Form 10-K
<S> <C>
Report of Independent Accountants............................................. F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998.................. F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997......................................... F-3
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997......................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997......................................... F-5
Notes to Consolidated Financial Statements.................................... F-6
(b) The following financial statement schedules of Castelle for
the years ended December 31, 1999, 1998 and 1997 are filed as
part of this Form 10-K and should be read in conjunction with
the Company's Financial Statements.
Page in
Form 10-K
Report of Independent Accountants............................................. F-1
Schedule II - Valuation and Qualifying Accounts............................... F-21
</TABLE>
Schedules not listed above have been omitted because they are
not applicable or are not required or because the required
information is included in the Financial Statements or Notes
thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors
The information required by this Item concerning the Company's directors is
incorporated by reference from the sections captioned "Proposal 1: Election of
Directors" contained in the Company's definitive Proxy Statement related to the
Annual Meeting of Shareholders to be held May 10, 2000, to be filed by the
Company with the Securities and Exchange Commission (the "Proxy Statement").
Identification of Executive Officers
The information required by this Item concerning the Company's executive
officers is set forth in Part I of this Report.
Compliance with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by reference from the
section captioned "Compliance with Section 16(a) of the Securities and Exchange
Act of 1934" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
section captioned "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
sections captioned "Certain Transactions" and "Executive Compensation" contained
in the Proxy Statement.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. Consolidated Financial Statements required to be filed by
Item 8 of Form 10-K. See the list of Financial Statements
contained in Item 8 of this Report.
2. Financial Statement Schedules required to be filed by Item 8
of Form 10-K. See the list of Financial Statement Schedules
contained in Item 8 of this Report.
(b) Reports on Form 8-K - None
(c) 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.
3.2(3) Amended and Restated Bylaws of the Company.
4.1 Reference is made to Exhibits 3.1 and 3.2.
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.
10.1(3)* 1995 Non-Employee Directors' Stock Option Plan, and form
of Director Stock Option Agreement.
10.2(4) Warrant for Common Stock issued to Unterberg Harris.
10.3(2)* Form of Indemnity Agreement between the Registrant and
each of its directors and executive officers.
10.4(2) OEM Purchase Agreement dated May 23, 1995, by and
between the Registrant and SerComm Corporation.
10.5(2) Distribution Agreement dated February 26, 1990, by and
between the Registrant and Ingram Micro D Inc.
10.6(2) Distributor Contract dated June 25, 1991, as amended
June 25, 1991, by and between the Registrant and Tech
Data Corporation.
10.7(2) Distribution Agreement dated March 26, 1992, as amended
March 26, 1992, by and between the Registrant and
Merisel, Inc.
10.8(2) Distributor Agreement dated October 1, 1990, by and
between the Registrant and Vitek.
10.9(2) International Distributor Agreement dated February 24,
1994, by and between the Registrant and Macnica.
------------------
(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 herewith.
(4) 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-K.
29
<PAGE>
10.10(5)*1988 Equity Incentive Plan, as amended.
10.11(4) Warrant for Common Stock issued to RvR Securities Corp.
10.12(6)*Form of Executive Severance and Transition Benefits
Agreement between the Company and Messier. P. Raje.
10.13(6)*Form of Executive Severance and Transition Benefits
Agreement between the Company and Messier. J. Burke.
10.14(3)*The Executive Severance and Transition Benefits
Agreement dated November 10, 1998 between the Company
and Messier. Don Rich.
10.15(7)*Employment agreement between the Company and Messier.
D. Rich.
11.1(3) Computation of Net Income (Loss) Per Share. Reference is
made to page F-20 of the Notes to Consolidated Financial
Statements.
23.1(3) Consent of PricewaterhouseCoopers LLP.
24.1(3) Power of Attorney. Reference is made to the signature
page.
27.1(3) Financial data schedule.
------------------
(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 herewith.
(4) Filed as an exhibit to the Company's Form 10-KSB for the fiscal
year ended December 31, 1996 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form
S-8, dated March 29, 1999.
(6) Filed as an exhibit to the Company's Form 10-Q for the period ended
September 26, 1997 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended December 31, 1998 and incorporated herein by reference.
* Indicates management contracts or compensatory plans or arrangements
filed pursuant to Item 601(b)(10) of Regulation S-K.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
By: /S/ DONALD L. RICH
Donald L. Rich
Chief Executive Officer and President
March 17, 2000
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Donald L. Rich, as his true and lawful
attorney-in-fact and agent, with full power of substitution for him, and in his
name in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, 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 attorney-in-fact and
agent, 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 Annual Report on Form 10-K has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date
/S/ DONALD L. RICH Chairman of the Board and Director, March 17, 2000
- -------------------- Chief Executive Officer, President
Donald L. Rich (principal executive officer),
Secretary, Chief Financial Officer
(principal accounting officer)
/s/ PETER TIERNEY Director March 17, 2000
- --------------------
Peter Tierney
/s/ SCOTT MCDONALD Director March 17, 2000
- --------------------
Scott McDonald
/s/ ROBERT HAMBRECHT Director March 20, 2000
- --------------------
Robert Hambrecht
31
<PAGE>
Castelle and Subsidiaries
Consolidated Financial Statements
as of December 31, 1999 and 1998
and for each of the three years in the
period ended December 31, 1999
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Castelle
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the consolidated financial position of
Castelle and subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 of these
statements in accordance with auditing standards generally accepted in the
United States which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
February 4, 2000
<PAGE>
Castelle and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31,
....................................
1999 1998
---------------- -----------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,714 $ 3,924
Restricted cash 125 125
Accounts receivable, net of allowance for doubtful accounts
of $493 in 1999 and $720 in 1998 1,525 3,472
Inventories 1,411 3,739
Prepaid expenses and other current assets 262 398
---------------- -----------------
Total current assets 8,037 11,658
Property and equipment, net 387 666
Other, net 78 170
---------------- -----------------
Total assets $ 8,502 $ 12,494
================ =================
Liabilities and Shareholders' Equity
Current liabilities:
Long-term debt, current portion $ 98 96
Accounts payable 1,336 2084
Accrued liabilities 3,048 2715
---------------- -----------------
Total current liabilities 4,482 4,895
Other long-term liabilities - 98
---------------- -----------------
Total liabilities 4,482 4,993
---------------- -----------------
Commitments (Note 6)
Shareholders' Equity:
Preferred stock, no par value:
Authorized: 2,000 shares in 1999 and 1998
Issued and outstanding: none in 1999 and 1998 - -
Common stock, no par value:
Authorized: 25,000 shares
Issued and outstanding: 4,641 shares in 1999
and 4,337 shares in 1998 29,002 29,255
Notes receivable for purchase of common stock - (274)
Deferred compensation (67) (120)
Accumulated deficit (24,915) (21,360)
---------------- -----------------
Total shareholders' equity 4,020 7,501
---------------- -----------------
Total liabilities and shareholders' equity $ 8,502 $ 12,494
================ =================
</TABLE>
F-2
The accompanying notes are an integral part of these financial statements.
<PAGE>
Castelle and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years Ended December 31
........................................................
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales $ 16,116 $ 21,746 $ 25,343
Cost of sales 7,712 10,148 11,836
----------------- ----------------- -----------------
Gross profit 8,404 11,598 13,507
----------------- ----------------- -----------------
Operating expenses:
Research and development 2,741 2,878 3,141
Sales and marketing 6,732 8,776 9,180
General and administrative 2,139 2,443 2,296
Amortization of intangible assets 40 120 574
Restructuring and other charges 402 1,124 6,224
----------------- ----------------- -----------------
12,054 15,341 21,415
----------------- ----------------- -----------------
Operating loss (3,650) (3,743) (7,908)
Interest income, net 126 170 288
Other income (expense), net (27) 4 (7)
----------------- ----------------- -----------------
Loss before provision for (benefit from)
income taxes (3,551) (3,569) (7,627)
Provision for (benefit from) income taxes 4 3,965 (732)
----------------- ----------------- -----------------
Net loss $ (3,555) $ (7,534) $ (6,895)
================= ================= =================
Net loss per common share - basic $ (0.78) $ (1.67) $ (1.54)
================= ================= =================
Shares used in per share calculation - basic 4,579 4,507 4,470
================= ================= =================
Net loss per common share - diluted $ (0.78) $ (1.67) $ (1.54)
================= ================= =================
Shares used in per share calculation - diluted 4,579 4,507 4,470
================= ================= =================
</TABLE>
F-3
The accompanying notes are an integral part of these financial statements.
<PAGE>
Castelle and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Notes
Receivable
for
Purchase
of
Common Stock Common Deferred Accumulated
..........................
Shares Amount Stock Compensation Deficit Total
------------ ------------ ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 4,420 $ 28,843 $ (296) $ - $ (6,931) $ 21,616
Issuance of common stock through:
exercise of stock options 70 112 - - - 112
Repayment of notes receivable - - 22 - - 22
Net loss - - - - (6,895) (6,895)
------------ ------------ ----------- ------------- ------------ ------------
Balances, December 31, 1997 4,490 $ 28,955 $ (274) $ - $ (13,826) $ 14,855
Repurchase of common stock (293) (384) - - - (384)
Issuance of common stock through
exercise of stock options 40 12 - - - 12
Issuance of common stock in
connection with acquisition 100 500 - - 500
Deferred compensation related to options - 160 - (160) -
issued to consultant
Amortization of deferred compensation - - - 40 - 40
Compensation expense related to fully vested
options granted to consultant - 12 - - 12
Net loss - - - - (7,534) (7,534)
------------ ------------ ----------- ------------- ------------ ------------
Balances, December 31, 1998 4,337 $ 29,255 $ (274) $ (120) $ (21,360) $ 7,501
Issuance of common stock through
exercise of stock options 17 10 - - - 10
Issuance of common stock in
connection with acquisition 340 0 - - 0
Amortization of deferred compensation 53 53
Repayment of notes receivable 11 11
Cancellation of notes receivable 263 263
Retirement of restricted stock (53) (263) - - (263)
Net loss - - - - (3,555) (3,555)
============ ============ =========== ============= ============ ============
Balances, December 31, 1999 4,641 $ 29,002 $ - $ (67) $ (24,915) $ 4,020
============ ============ =========== ============= ============ ============
</TABLE>
F-4
The accompanying notes are an integral part of these financial statements.
<PAGE>
Castelle and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
....................................................
1999 1998 1997
---------------- ---------------- ----------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ (3,555) $ (7,534) $ (6,895)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 440 640 967
Purchased in-process research and development - 1,124 -
Write-off of goodwill and other intangible assets - - 5,074
Provision for doubtful accounts and sales returns - 909 220
Provision for excess and obsolete inventory 1,579 418 412
Compensation expense related to grant of stock options 53 52 -
Loss on disposal of fixed assets 81 40 -
Changes in assets and liabilities:
Accounts receivable 1,947 (1,108) 2,289
Inventories 749 (371) (1,357)
Prepaid expenses and other current assets 136 175 53
Accounts payable (748) 772 (550)
Accrued liabilities 333 95 (1,205)
Deferred income taxes 0 3,934 (367)
---------------- ---------------- ----------------
Net cash (used in) provided by operating activities 1,015 (854) (1,359)
---------------- ---------------- ----------------
Cash flows from investing activities:
Acquisition of property and equipment (184) (223) (732)
Acquisition of Object-fax product line - (910) -
(Increase) decrease in other assets 34 24 (14)
---------------- ---------------- ----------------
Net cash used in investing activities (150) (1,109) (746)
---------------- ---------------- ----------------
Cash flows from financing activities:
(Increase) decrease in restricted cash - 142 (125)
Proceeds from notes payable - (87) 146
Repayment of notes payable (96) - (7)
Proceeds from collection of note receivable for stock 11 - 22
Proceeds from issuance of common stock and warrants, net of 10 (372) 112
repurchases
---------------- ---------------- ----------------
Net cash provided by financing activities (75) (317) 148
---------------- ---------------- ----------------
Net (decrease) increase in cash and cash equivalents 790 (2,280) (1,957)
Cash and cash equivalents, beginning of period 3,924 6,204 8,161
---------------- ---------------- ----------------
Cash and cash equivalents, end of period $ 4,714 $ 3,924 $ 6,204
================ ================ ================
Supplemental information:
Cash paid during the period for:
Interest $ 19 $ 27 $ 3
Income taxes $ 47 $ 5 $ 123
Noncash investing and financing activities:
Issuance of common stock for acquisition of Object-fax $ - $ 500 $ -
product line
</TABLE>
F-5
The accompanying notes are an integral part of these financial statements.
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Business and Organization of the Company
Castelle (The "Company") designs, develops, markets and supports server
appliances providing office messaging solutions and other shared
services. The Company's current products are focused on two areas: fax
messaging products, including a range of software enhancements, and print
servers. The Company's products consist of FaxPress, an integrated
hardware/software network faxing solution; InfoPress, an enterprise-level
fax-on-demand software product 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,
e-commerce retailers and other resellers in the United States, Europe and
the Pacific Rim. The Company also has relationships with selected
original equipment manufactures and sells software enhancements and
upgrades directly to end-users.
2. Summary of Significant Accounting Policies
Basis of consolidation
The consolidated financial statements include the accounts of Castelle
and its wholly owned subsidiaries in the United States and the United
Kingdom. All intercompany balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Financial instruments
Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
Amounts reported for cash equivalents, receivables and other financial
instruments 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 consist principally of 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 42% of accounts receivable at December 31, 1999 and three
customers accounted for 60% of accounts receivable at December 31, 1998.
F-6
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The Company's products include components subject to rapid technological
change. Significant technological change could adversely affect the
Company's operating results and subject the Company to returns of product
and inventory losses. While the Company has ongoing programs to minimize
the adverse effect of such changes and consider technological change in
estimating its allowances, such estimates could change in the future. In
addition, one of the Company's print server products is currently
manufactured by a single supplier and certain key components are
currently available from only single sources.
Inventories
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.
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. Gains and losses upon asset disposal are recognized in the
year of disposition.
Accounting for long-lived assets
The Company reviews property, equipment, goodwill and other intangible
assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability is measured by comparison of its carrying amount to future
net cash flows the assets are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceeds its fair
market value. Intangibles are amortized over their estimated useful lives
(typically one to five years).
Software production costs
Costs related to the conceptual formulation and design of software
products are expensed as research and development while costs incurred
subsequent to establishing technological feasibility of software products
are capitalized until general release of the product. Generally,
technological feasibility is established upon completion of a working
model. No significant costs subsequent to such point have been incurred,
and all such costs have been expensed.
Revenue recognition
Product revenue is recognized upon shipment if a signed contract exists,
the fee is fixed and determinable, collection of the resulting
receivables is probable and product returns are reasonably estimable. 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 and anticipated retroactive price
adjustments are recorded at the time products are shipped. The Company
recognizes revenue from the sale of extended warranty contracts ratably
over the period of the contracts.
Advertising costs
Advertising costs, included in sales and marketing expenses, are expensed
as incurred and were $889,100, $1,963,000 and $2,471,000 in 1999, 1998
and 1997, respectively.
F-7
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Foreign currency translation
The functional currency of the Company's foreign subsidiary is the U.S.
dollar. Foreign currency translation gains and losses, which have not
been material, are reported in the statement of operations.
Net income (loss) per share
Basic net income (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number of
common shares outstanding for that period. Diluted net income (loss) per
share is computed giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential shares
consist of incremental common shares issuable upon exercise of stock
options and warrants.
Restructuring
In September 1997, the Company announced and began to implement a
restructuring plan. The Company recorded a $1,150,000 restructuring
charge to account for the estimated costs of implementing and completing
the restructuring plan. Such charge was in addition to the write-off of
the Ibex goodwill and related intangibles as discussed in Note 3. These
costs consist of $402,000 to exit from certain lines of business,
$343,000 for employee termination costs and to exit from various leases
in connection with the relocation of the Company's European office,
$340,000 for estimated employee termination costs associated with
reductions in the workforce, and $65,000 for other estimated
restructuring costs. As of December 31, 1999, the Company had completed
most of its restructuring plan with actual payments made of $1,131,000.
The remaining balance of $19,000 will be used to complete the payment on
vacated leases.
In 1999, the Company also recognized a restructuring charge of $402,000
for expenses associated with the Company's exit from the ObjectFax NT
product line, including the disposition of excess inventory and assets of
$213,000, reductions in personnel of $43,000, the write-off of excess
office space of $63,000 and other costs of $83,000. As of December 31,
1999, the Company had made actual payments of $295,000.
Comprehensive income
Castelle has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. This statement requires the disclosure of comprehensive
income and its components in a full set of general-purpose financial
statements. Comprehensive income is the change in equity from
transactions and other events and circumstances other than those
resulting from investments by owners and distributions to owners. There
are no significant components of comprehensive income excluded from net
income, therefore, no separate statement of comprehensive income has been
presented.
Segment information
The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 31, 1997. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
changes current practice under SFAS No. 14 by establishing a new
framework on which to base segment reporting and introduces requirements
for interim reporting of segment information. The Company has determined
that it uses one measurement of profitability of its business for
internal reporting. The Company's international operations in 1999, 1998
and 1997 are analyzed in Note 11.
F-8
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position
and measures those instruments at fair value. Changes in fair value shall
be recognized currently in earnings. Management believes the impact of
SFAS No. 133 will not have a material on the financial position or
results of operations of the Company. The Company will adopt SFAS No. 133
as amended by SFAS 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133"
for its third quarterly filing of fiscal 2000.
In November 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 100
"Restructuring and Impairment Charges." The SAB discusses the accounting
for and disclosure of certain expenses commonly reported in connection
with exit activities and business combinations. Management believes the
impact of SAB 100 will not have a material impact on the financial
position or results of operations of the Company.
On December 1999 the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial
Statements" which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and
provides guidance for disclosures related to revenue recognition
policies. Management believes the impact of SAB 101 will not have a
material impact on the financial position or results of operations of the
Company.
3. Acquisition of Ibex Technologies, Restatement and Related Charges
In November 1996, the Company acquired Ibex Technologies, Inc. ("Ibex"),
a company which designed, developed and marketed fax-on-demand,
fax-gateway and fax broadcast applications. The Company issued 790,617
shares of its common stock in exchange for all of the outstanding common
stock of Ibex and accounted for the transaction as a purchase.
The total purchase price of Ibex, consisting of stock valued at
$5,534,000 (based on the closing price at the closing date) plus direct
costs of $1,430,000, was allocated to the net tangible and identified
intangible assets of Ibex, including in-process research and development,
in the amounts of $142,000, $2,739,000, and $1,079,000, respectively. The
identified intangible assets, consisting primarily of the fair value of
current technologies, customer lists, and the workforce were originally
assigned a five-year life. The excess of the purchase price over the fair
value of the assets acquired was approximately $3,004,000 and was
originally amortized on a straight-line basis over 5 years. The amount of
the purchase price allocated to in-process research and development
related to products for which technological feasibility had not been
established and for which there was no alternative future use.
Accordingly, the in-process research and development was written off at
the date of the acquisition and was included with restructuring and other
charges on the accompanying statement of operations.
In 1997 Ibex suffered significant losses on its current products due to
increasing competition from Internet based applications and determined
that its primary product under development was not economically feasible.
As a result, management determined that the value assigned to goodwill
and other intangible assets was not recoverable and such assets were
written off. Such 1997 charges, included as part of restructuring and
other charges, was $5,073,000, which amount was net of amortization
recorded in 1997 of $574,000.
F-9
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
4. Acquisition of the Object-Fax NT Product Line
In April 1998, the Company completed its acquisition of the Object-Fax NT
product line, a facsimile software application designed for LAN's, WAN's
and Internet-based networks, from Tolvusamskipti HF, an Icelandic
corporation. The acquisition has been accounted for as a purchase, valued
at approximately $1.4 million, included the exchange of $300,000 in cash,
100,000 shares of Castelle common stock, and the right to receive either
additional cash or the number of shares of Castelle common stock on the
date six months after the acquisition necessary to make the fair market
value of the common stock and additional cash received in the transaction
not less than $500,000. Since the value of the Castelle common stock
received in the transaction was less than $500,000 on the date six months
after the acquisition, an additional 339,560 shares of Castelle common
stock were issued to Tolvusamskepti HF on April 9, 1999. In connection
with the acquisition, Castelle also entered into asset acquisition
agreements with Traffic USA, Inc. and Traffic Software USA, Inc. in which
Castelle acquired fixed assets and intellectual property rights
associated with the marketing, sales, distribution and support of the
Object-Fax NT software. In exchange for these assets, Castelle paid
$135,000 and agreed to pay a royalty on sales of the Object-Fax NT
software, not to exceed $75,000 or to be paid beyond 24 months after the
Acquisition. Additionally, Castelle entered into consulting and
non-competition agreements with key employees of Traffic USA, Inc. and
Traffic Software USA, Inc. A portion of the purchase price was allocated
to in-process research and development, and, accordingly, the Company
recorded a one-time charge against earnings in 1998 of $1.1 million. The
amount of the purchase price allocated to in-process research and
development related to products for which technological feasibility had
not been established and for which there was no alternative future use.
Further, the Company recorded intangible assets of $160,000, which were
amortized over 12 months.
In 1999, the Company decided to discontinue the Object-FAX NT product
line and recorded a restructuring reserve of $402,000.
5. Balance Sheet Detail (in thousands)
<TABLE>
<CAPTION>
Inventories:
December 31,
..................................
1999 1998
---------------- ----------------
<S> <C> <C>
Raw material $ 136 $ 1,282
Work in process 300 130
Finished goods 975 2,327
---------------- ----------------
$ 1,411 $ 3,739
================ ================
</TABLE>
F-10
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Property and equipment:
December 31,
..................................
1999 1998
---------------- ----------------
<S> <C> <C>
Production, test and demonstration equipment $ 281 $ 495
Computer equipment 1,099 1,078
Office equipment 67 88
Leasehold improvements 118 107
---------------- ----------------
1,565 1,768
Less accumulated depreciation and amortization (1,178) (1,102)
---------------- ----------------
$ 387 $ 666
================ ================
</TABLE>
The Company recorded depreciation and amortization related to property and
equipment of $382,000 in 1999, $491,000 in 1998 and $340,000 in 1997
<TABLE>
<CAPTION>
Accrued liabilities:
December 31,
..................................
1999 1998
---------------- ----------------
<S> <C> <C>
Accrued compensation $ 990 $ 1,093
Accrued sales and marketing 368 499
Accrued professional fees 404 95
Deferred revenue 451 321
Accrued acquisition costs 0 125
Accrued taxes 225 217
Other 610 365
---------------- ----------------
$ 3,048 $ 2,715
================ ================
</TABLE>
6. Commitments
The Company leases facilities under noncancelable operating leases
expiring through 2001. The Company is responsible for certain maintenance
costs, taxes and insurance under the leases. Future minimum payments
under noncancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
2000 $ 381
2001 22
2002 7
---------------
$ 410
---------------
</TABLE>
Rent expense, including the facility lease and equipment rental, was
$466,000, $584,000, and $332,000 for 1999, 1998 and 1997, respectively.
F-11
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
7. Bank Borrowings
The Company has a $3.0 million secured revolving line of credit with a
bank, which expires in March 2000, pursuant to which the Company may
borrow 100% against pledges of cash at the bank's prime rate (8.50% at
December 31, 1999). Borrowings under this line of credit agreement are
collateralized by all of the assets of the Company. Under the terms of
the loan agreement, the Company is 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 was in compliance with the terms of the agreement, and at
December 31, 1999 had no borrowings under the line of credit.
8. Long-Term Debt
In December 1997, the Company entered into a loan and security agreement
with a finance company for an amount of $288,000. The amounts borrowed
are subject to interest of 10.11%, are repayable by December 2000, and
are partially collateralized by a certificate of deposit of $125,000,
which is included as restricted cash on the accompanying balance sheet.
At December 31, 1999, future minimum payments are $98,000, due in the
year 2000.
9. Common Stock
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 had the right to repurchase the shares
at cost in the event of termination of service. These rights lapsed
ratably through 1999. During 1999, the Company repurchased 52,500 shares
from the executives at $5.00 per share.
F-12
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (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, 1999, 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):
<TABLE>
<CAPTION>
Outstanding Options
..........................................................
Weighted
Average
Available Number Exercise Exercise
for Grant of Shares Price Total Price
------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 113 7 $8.00 $56 $8.00
Options granted (6) 6 $6.12 $37 $6.12
Options cancelled 3 (3) $6.12-$8.00 ($19) $7.00
------------- ------------- ------------- -------------
Balances, December 31, 1997 110 10 $6.12-$8.00 $74 $7.20
Options granted (11) 11 $2.37 - $2.38 26 $2.38
Options cancelled - -
------------- ------------- ------------- -------------
Balances, December 31, 1998 99 21 $2.37 - $8.00 $100 $4.69
Options granted (26) 26 $0.34 - $0.56 $10 $0.39
Options cancelled 8 (8) $0.56 - $8.00 ($24) $3.00
------------- ------------- ------------- -------------
Balances, December 31, 1999 81 39 $0.34-$8.00 $ 86 $2.20
============= ============= ============= =============
</TABLE>
At December 31, 1999 and 1998, 24,000 and 14,000 options, respectively,
were exercisable at an aggregate exercise price of $79,000 and $79,000,
respectively.
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, 1999, there
were no stock purchase rights outstanding, and no shares purchased
pursuant to stock purchase rights were subject to repurchase by the
Company.
F-13
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Option activity under the 1988 Plan was as follows (in thousands):
Outstanding Options
..........................................................
Weighted
Average
Available Number Exercise Exercise
for Grant of Shares Price Total Price
------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1997 290 387 $0.20-$7.75 $ 1,496 $3.87
Authorized 982
Options granted (1,184) 1,184 $4.50-$5.75 5,476 $4.62
Options cancelled 112 (112) $0.20-$6.88 (567) $5.09
Options exercised - (70) $0.20-$5.00 (112) $1.59
------------- ------------- ------------- -------------
Balances, December 31, 1997 200 1,389 $0.20-$7.75 $ 6,293 $4.53
Options granted (1,466) 1,466 $1.00-$3.50 2,426 $1.65
Options cancelled 1,448 (1,448) $0.20-$7.75 (6,494) $4.47
Options exercised - (40) $0.20-$1.55 (12) $0.29
------------- ------------- ------------- -------------
Balances, December 31, 1998 182 1,367 $0.20-$7.75 $ 2,210 $1.63
Options granted (657) 657 $0.88-$1.03 604 $0.92
Options cancelled 698 (698) $0.20-$6.88 (1,094) $1.57
Options exercised - (17) $0.20-$1.56 (11) $0.65
------------- ------------- ------------- -------------
Balances, December 31, 1999 223 1,309 $0.20-$1.56 $ 1,710 $1.13
============= ============= ============= =============
</TABLE>
At December 31, 1999 and 1998, 644,000 and 508,000 options outstanding,
respectively, were exercisable at an aggregate exercise price of $761,000
and $1,023,000, respectively.
In August 1998, the company offered employees the right to cancel certain
outstanding stock options at original exercise prices and receive new
options with a new exercise price. The new exercise price was $1.56 per
share, based on the closing price of common stock on the date employees
agreed to cancel their original outstanding stock options. Options to
purchase a total of 941,845 shares at original exercise prices ranging
from $2.50 to $7.75 per share were cancelled and new options were issued
in August 1998. In return for the lower exercise price, each optionee
agreed that no portion of a repriced option would be exercisable until
six (6) months after the effective date of the repricing.
In addition to the Plan, Castelle granted options to purchase common
stock to consultants under special arrangements. These options were
valued consistent with the provisions of SFAS No. 123 and as a result, a
compensation expense of $52,000 was recognized in 1998 and $53,000 in
1999. These options have an exercise price ranging from $1.56 to $1.63 in
1998 and $0.94 to $1.63 in 1999. There were 152,000 and 160,000 of these
options outstanding at December 31, 1998 and 1999 respectively, of which
27,000 were exercisable at an aggregate exercise price of $44,000 in 1998
and 77,000 were exercisable at an aggregate exercise price of $117,000 in
1999.
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.
F-14
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Had compensation cost for these Plans been determined based on the fair
value at the grant date for awards since January 1, 1995 consistent with
the provisions of SFAS No. 123, the Company's net income (loss) and net
income (loss) per share for 1999, 1998 and 1997 would have been reduced
to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- ----------------
<S> <C> <C> <C>
Net income - as reported $ (3,555) $ (7,534) $ (6,895)
Net income - pro forma (3,834) (8,690) (8,093)
Net income per share - basic - as reported (0.78) (1.67) (1.54)
Net income per share - basic - pro forma (0.84) (1.93) (1.81)
Net income per share - diluted - as reported (0.78) (1.67) (1.54)
Net income per share - diluted - pro forma (0.84) (1.93) (1.81)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes model with the following assumptions for 1999,
1998 and 1997:
1999 1998 1997
--------------- ---------------- ----------------
Risk-free interest rate 5.08%-5.98% 5.20% 4.88%-5.30%
Expected life 5.62 years 4.4 years 5.6 years
Expected dividends - - -
Volatility 143% 79% 100%
</TABLE>
The weighted average fair value of options granted in 1999, 1998 and 1997
was $0.85, $1.05 and $3.78 per share, respectively.
F-15
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows (in thousands, except years and per
share data):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
................................................................... .................................
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
---------------- ---------------- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.00-$0.20 18 1.3 $0.20 18 $0.20
$0.21-$0.50 20 9.3 $0.34 7 $0.34
$0.51-$0.75 2 8.6 $0.56 1 $0.56
$0.76-$1.00 793 6.0 $0.93 337 $0.92
$1.01-$1.50 117 6.2 $1.16 26 $1.25
$1.51-$2.00 541 5.3 $1.56 339 $1.57
$2.01-$3.00 9 6.4 $2.37 8 $2.37
$3.01-$8.00 8 0.4 $7.06 8 $7.06
---------------- ----------------
1,508 5.8 $1.2002 744 $1.2855
================ ================
</TABLE>
Warrants
The Company has outstanding fully exercisable warrants at December 31,
1999 as follows (in thousands except per share data):
<TABLE>
<CAPTION>
Expiration Stock Under Exercise Number of
Date Warrant Price Shares
-------------------- --------------- --------------- ----------------
<S> <C> <C> <C>
December 2000 Common $ 8.40 100
March 2000 Common $ 1.00 133
</TABLE>
The warrant holders have certain demand and registration rights as
specified in the warrant agreement. No warrants were exercised during
1999, 1998 and 1997.
Notes receivable
At December 31, 1998, the Company held notes receivable of $274,000,
which bear interest between 6.3% and 7.05% per annum, from two executive
officers, issued in connection with the purchase of common stock under
restricted stock purchase agreements. In 1999, the Company repurchased
52,500 shares of the Company's common stock from the executive officers
upon their termination of service and cancelled the notes receivable of
$263,000 with the remaining balance paid in cash.
F-16
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
9. Income Taxes
The Company's provision for (benefit from) income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
....................................................
1999 1998 1997
---------------- ---------------- ----------------
Current:
<S> <C> <C> <C>
Federal $ - $ - $ -
State 4 - -
Foreign - 1 -
---------------- ---------------- ----------------
4 1 -
---------------- ---------------- ----------------
Deferred:
Federal $ - 3,495 (732)
State - 469 -
---------------- ---------------- ----------------
- 3,964 (732)
---------------- ---------------- ----------------
$ 4 $ 3,965 $ (732)
================ ================ ================
</TABLE>
The Company's tax provision (benefit) differs from the provision
(benefit) computed using statutory income tax rates as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate $ (1,135) $ (754) $ (2,975)
Permanent difference due to
Non-deductible expenses 19 21 1,586
State taxes (benefit), net of federal benefit (98) (173) (91)
Change in valuation allowance 1,332 5,001 834
General business credits (114) (131) (86)
Other - 1 -
---------------- ---------------- ----------------
$ 4 $ 3,965 $ (732)
================ ================ ================
</TABLE>
F-17
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The components of the net deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
...................................
1999 1998
---------------- -----------------
<S> <C> <C>
Inventory allowances and adjustments $ 190 $ 243
Accounts receivable allowances 105 287
Other liabilities and allowances 788 1,097
Net operating loss carryforwards 4,987 3,127
Tax credit carryforwards 796 785
Depreciation and amortization 706 296
Valuation allowance (7,572) (5,835)
---------------- -----------------
Total net deferred tax assets $ - $ -
================ =================
</TABLE>
Due to the uncertainty surrounding the realization of favorable tax
attributes in future tax returns, the Company has placed a full valuation
allowance against its deferred tax asset balance.
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $13,900,000 and $4,300,000 available to offset future
federal and California taxable income, respectively. These loss
carryforwards expire from 2003 through 2019.
For federal and state income tax purposes, a portion of the Company's net
operating loss carryforward is subject to certain limitations on annual
utilization in case of changes in ownership, as defined by federal and
state tax laws.
The Company's loss before provision for income taxes is substantially all
from domestic operations.
10. 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 1999, 1998 and 1997, the Company made no
contributions to the plan.
F-18
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
11. Major Customers and Segment Information
Revenues by geographic area are determined by the location of the end
user and are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
...................................................
1999 1998 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
North America $ 11,199 $ 13,442 $ 13,443
Europe 1,605 2,148 3,000
Pacific Rim 3,312 6,156 8,900
---------------- ---------------- ---------------
$ 16,116 $ 21,746 $ 25,343
================ ================ ===============
</TABLE>
Customers that individually accounted for greater than 10% of net sales
are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
..............................................................................................
1999 1998 1997
Customer Amount Percentage Amount Percentage Amount Percentage
----------------- -------------- --------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
A $ 2,948 18% $ 5,596 26% $ 8,147 32%
B 1,998 12% 3,752 17% 3,629 14%
C - -% - -% 2,604 10%
</TABLE>
F-19
<PAGE>
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
12. Computation of Net Loss per Share
Basic and diluted earnings per share are calculated as follows for 1999,
1998 and 1997 (in thousands except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- ----------------
Basic:
<S> <C> <C> <C>
Weighted average shares 4,579 4,507 4,470
=============== ================ ================
Net loss $ (3,555) $ (7,534) $ (6,895)
=============== ================ ================
Net loss per share $ (0.78) $ (1.67) $ (1.54)
=============== ================ ================
Diluted:
Weighted average shares 4,579 4,507 4,470
Common equivalent shares from stock options - - -
--------------- ---------------- ----------------
Shares used in per share calculation 4,579 4,507 4,470
=============== ================ ================
Net loss $ (3,555) $ (7,534) $ (6,895)
=============== ================ ================
Net loss per share $ (0.78) $ (1.67) $ (1.54)
=============== ================ ================
</TABLE>
The calculation of diluted shares outstanding for 1999, 1998 and 1997
excludes 1,508,000, 1,540,000 and 1,399,000 stock options, respectively,
as their effect was antidilutive in the period.
F-20
<PAGE>
Report of Independent Accountants on Financial Statement Schedules
To the Board of Directors of Castelle:
Our audits of the consolidated financial statements of Castelle and subsidiaries
referred to in our report dated February 4, 2000 appearing on page F-1 of this
Form 10-K also included an audit of the financial statement schedules listed in
Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
San Jose, California
February 4, 2000
F-21
<PAGE>
Castelle and Subsidiaries Schedule II
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
F-22
Additional
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
---------------- ---------------- ---------------- ----------------
Year Ended December 31, 1997:
Deducted from asset accounts:
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 467 $ 107 $ 84 $ 490
Allowance for excess and obsolete inventory $ 807 $ 301 $ 713 $ 395
Year Ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 490 $ 257 $ 27 $ 720
Allowance for excess and obsolete inventory $ 395 $ 418 $ 22 $ 791
Year Ended December 31, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts $ 720 $ - $ 227 $ 493
Allowance for excess and obsolete inventory $ 791 $ 1,579 $ 1,911 $ 459
</TABLE>
F-22
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
CASTELLE
(A CALIFORNIA CORPORATION)
As amended through April 14, 1999
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
Article I Offices.........................................................................................1
Section 1. Principal Office................................................................................1
Section 2. Other Offices...................................................................................1
Article II Corporate Seal..................................................................................1
Section 3. Corporate Seal..................................................................................1
Article III Shareholders'Meetings And Voting Rights.........................................................1
Section 4. Place Of Meetings...............................................................................1
Section 5. Annual Meeting..................................................................................1
Section 6. Postponement Of Annual Meeting..................................................................2
Section 7. Special Meetings................................................................................2
Section 8. Notice Of Meetings..............................................................................2
Section 9. Manner Of Giving Notice.........................................................................3
Section 10. Quorum And Transaction Of Business..............................................................4
Section 11. Adjournment and Notice of Adjourned Meetings....................................................4
Section 12. Waiver Of Notice, Consent To Meeting Or Approval Or Minutes.....................................4
Section 13. Action By Written Consent Without A Meeting.....................................................5
Section 14. Voting..........................................................................................6
Section 15. Persons Entitled To Vote Or Consent.............................................................6
Section 16. Proxies.........................................................................................7
Section 17. Inspectors Of Election..........................................................................7
Article IV Board Of Directors..............................................................................8
Section 18. Powers..........................................................................................8
Section 19. Number Of Directors.............................................................................8
Section 20. Election Of Directors, Term, Qualifications.....................................................8
Section 21. Resignations....................................................................................8
Section 22. Removal.........................................................................................9
Section 23. Vacancies.......................................................................................9
Section 24. Regular Meetings................................................................................9
Section 25. Participation By Telephone.....................................................................10
Section 26. Special Meetings...............................................................................10
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 27. Notice Of Meetings.............................................................................10
Section 28. Place Of Meetings..............................................................................10
Section 29. Action By Written Consent Without A Meeting....................................................10
Section 30. Quorum And Transaction Of Business.............................................................10
Section 31. Adjournment....................................................................................10
Section 32. Organization...................................................................................11
Section 33. Compensation...................................................................................11
Section 34. Committees.....................................................................................11
Article V Officers.......................................................................................12
Section 35. Officers.......................................................................................12
Section 36. Appointment....................................................................................12
Section 37. Inability To Act...............................................................................12
Section 38. Resignations...................................................................................12
Section 39. Removal........................................................................................12
Section 40. Vacancies......................................................................................12
Section 41. Chairman Of The Board..........................................................................12
Section 42. President......................................................................................13
Section 43. Vice Presidents................................................................................13
Section 44. Secretary......................................................................................13
Section 45. Chief Financial Officer........................................................................14
Section 46. Compensation...................................................................................15
Article VI Contracts, Loans, Bank Accounts, Checks And Drafts.............................................15
Section 47. Execution Of Contracts And Other Instruments...................................................15
Section 48. Loans..........................................................................................15
Section 49. Bank Accounts..................................................................................15
Section 50. Checks, Drafts, Etc............................................................................15
Article VII Certificates For Shares And Their Transfer.....................................................16
Section 51. Certificate For Shares.........................................................................16
Section 52. Transfer On The Books..........................................................................16
Section 53. Lost, Destroyed And Stolen Certificates........................................................16
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 54. Issuance, Transfer And Registration Of Shares..................................................17
Article VIII Inspection Of Corporate Records................................................................17
Section 55. Inspection By Directors........................................................................17
Section 56. Inspection By Shareholders.....................................................................17
Section 57. Written Form...................................................................................18
Article IX Miscellaneous..................................................................................18
Section 58. Fiscal Year....................................................................................18
Section 59. Annual Report..................................................................................18
Section 60. Record Date....................................................................................18
Section 61. Bylaw Amendments...............................................................................19
Section 62. Construction And Definition....................................................................19
Article X Indemnification................................................................................19
Section 63. Indemnification Of Directors, Officers, Employees And Other Agents.............................19
Article XI Loans Of Officers And Others...................................................................23
Section 64. Certain Corporate Loans And Guaranties.........................................................23
</TABLE>
iii
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
CASTELLE
(A CALIFORNIA CORPORATION)
As amended through April 14, 1999
ARTICLE I
Offices
Section 1. Principal Office. The principal executive office of the corporation
shall be located at such place as the Board of Directors may from time to time
authorize. If the principal executive office is located outside this state, and
the corporation has one or more business offices in this state, the Board of
Directors shall fix and designate a principal business office in the State of
California.
Section 2. Other Offices. Additional offices of the corporation shall be located
at such place or places, within or outside the State of California, as the Board
of Directors may from time to time authorize.
ARTICLE II
Corporate Seal
Section 3. Corporate Seal. If the Board of Directors adopts a corporate seal
such seal shall have inscribed thereon the name of the corporation and the state
and date of its incorporation. If and when a seal is adopted by the Board of
Directors, such seal may be engraved, lithographed, printed, stamped, impressed
upon, or affixed to any contract, conveyance, certificate for shares, or other
instrument executed by the corporation.
ARTICLE III
Shareholders' Meetings And Voting Rights
Section 4. Place Of Meetings. Meetings of shareholders shall be held at the
principal executive office of the corporation, or at any other place, within or
outside the State of California, which may be fixed either by the Board of
Directors or by the written consent of all persons entitled to vote at such
meeting, given either before or after the meeting and filed with the Secretary
of the Corporation.
Section 5. Annual Meeting. The annual meeting of the shareholders of the
corporation shall be held on any date and time which may from time to time be
designated by the Board of Directors. At such annual meeting, directors shall be
elected and any other business may be transacted which may properly come before
the meeting.
1.
<PAGE>
Section 6. Postponement Of Annual Meeting. The Board of Directors and the
President shall each have authority to hold at an earlier date and/or time, or
to postpone to a later date and/or time, the annual meeting of shareholders.
Section 7. Special Meetings.
(a) Special meetings of the shareholders, for any purpose or purposes, may
be called by the Board of Directors, the Chairman of the Board of Directors, the
President, or the holders of shares entitled to cast not less than ten percent
(10%) of the votes at the meeting.
(b) Upon written request to the Chairman of the Board of Directors, the
President, any vice president or the Secretary of the corporation by any person
or persons (other than the Board of Directors) entitled to call a special
meeting of the shareholders, such officer forthwith shall cause notice to be
given to the shareholders entitled to vote, that a meeting will be held at a
time requested by the person or persons calling the meeting, such time to be not
less than thirty-five (35) nor more than sixty (60) days after receipt of such
request. If such notice is not given within twenty (20) days after receipt of
such request, the person or persons calling the meeting may give notice thereof
in the manner provided by law or in these bylaws. Nothing contained in this
Section 7 shall be construed as limiting, fixing or affecting the time or date
when a meeting of shareholders called by action of the Board of Directors may be
held.
Section 8. Notice Of Meetings. Except as otherwise may be required by law and
subject to subsection 7(b) above, written notice of each meeting of shareholders
shall be given to each shareholder entitled to vote at that meeting (see Section
15 below), by the Secretary, assistant secretary or other person charged with
that duty, not less than ten (10) (or, if sent by third-class mail, thirty (30))
nor more than sixty (60) days before such meeting.
Notice of any meeting of shareholders shall state the date, place and
hour of the meeting and,
(a) in the case of a special meeting, the general nature of the business to
be transacted, and no other business may be transacted at such meeting;
(b) in the case of an annual meeting, the general nature of matters which
the Board of Directors, at the time the notice is given, intends to present for
action by the shareholders;
(c) in the case of any meeting at which directors are to be elected, the
names of the nominees intended at the time of the notice to be presented by
management for election; and
(d) in the case of any meeting, if action is to be taken on any of the
following proposals, the general nature of such proposal:
(1) a proposal to approve a transaction within the provisions of California
Corporations Code, Section 310 (relating to certain transactions in which a
director has a direct or indirect financial interest);
2.
<PAGE>
(2) a proposal to approve a transaction within the provisions of California
Corporations Code, Section 902 (relating to amending the Articles of
Incorporation of the corporation);
(3) a proposal to approve a transaction within the provisions of California
Corporations Code, Sections 181 and 1201 (relating to reorganization);
(4) a proposal to approve a transaction within the provisions of California
Corporations Code, Section 1900 (winding up and dissolution);
(5) a proposal to approve a plan of distribution within the provisions of
California Corporations Code, Section 2007 (relating to certain plans
providing for distribution not in accordance with the liquidation rights of
preferred shares, if any).
At a special meeting, notice of which has been given in accordance with
this Section, action may not be taken with respect to business, the general
nature of which has not been stated in such notice. At an annual meeting, action
may be taken with respect to business stated in the notice of such meeting,
given in accordance with this Section, and, subject to subsection 8(d) above,
with respect to any other business as may properly come before the meeting.
Section 9. Manner Of Giving Notice. Notice of any meeting of shareholders shall
be given either personally or by first-class mail, or, if the corporation has
outstanding shares held of record by 500 or more persons (determined as provided
in California Corporations Code Section 605) on the record date for such
meeting, third-class mail, or telegraphic or other written communication,
addressed to the shareholder at the address of that shareholder appearing on the
books of the corporation or given by the shareholder to the corporation for the
purpose of notice. If no such address appears on the corporation's books or is
given, notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the
corporation's principal executive office, or if published at least once in a
newspaper of general circulation in the county where that office is located.
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, all future notices shall be deemed to have been duly given
without further mailing if these shall be available to the shareholder on
written demand by the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 9, executed by the Secretary, Assistant Secretary or
any transfer agent, shall be prima facie evidence of the giving of the notice.
3.
<PAGE>
Section 10. Quorum And Transaction Of Business.
(a) At any meeting of the shareholders, a majority of the shares entitled
to vote, represented in person or by proxy, shall constitute a quorum. If a
quorum is present, the affirmative vote of the majority of shares represented at
the meeting and entitled to vote on any matter shall be the act of the
shareholders, unless the vote of a greater number or voting by classes is
required by law or by the Articles of Incorporation, and except as provided in
subsection (b) below.
(b) The shareholders present at a duly called or held meeting of the
shareholders at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum, provided that any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
(c) In the absence of a quorum, no business other than adjournment may be
transacted, except as described in subsection (b) above.
Section 11. Adjournment and Notice of Adjourned Meetings. Any meeting of
shareholders may be adjourned from time to time, whether or not a quorum is
present, by the affirmative vote of a majority of shares represented at such
meeting either in person or by proxy and entitled to vote at such meeting.
In the event any meeting is adjourned, it shall not be necessary to
give notice of the time and place of such adjourned meeting pursuant to Sections
8 and 9 of these bylaws; provided that if any of the following three events
occur, such notice must be given:
(a) announcement of the adjourned meeting's time and place is not made at
the original meeting which it continues or
(b) such meeting is adjourned for more than forty-five (45) days from the
date set for the original meeting or
(c) a new record date is fixed for the adjourned meeting.
At the adjourned meeting, the corporation may transact any business
which might have been transacted at the original meeting.
Section 12. Waiver Of Notice, Consent To Meeting Or Approval Or Minutes.
(a) Subject to subsection (b) of this Section, the transactions of any
meeting of shareholders, however called and noticed, and wherever held, shall be
as valid as though made at a meeting duly held after regular call and notice, if
a quorum is present either in person or by proxy, and if, either before or after
the meeting, each of the persons entitled to vote but not present in person or
by proxy signs a written waiver of notice or a consent to holding of the meeting
or an approval of the minutes thereof.
4.
<PAGE>
(b) A waiver of notice, consent to the holding of a meeting or approval of
the minutes thereof need not specify the business to be transacted or transacted
at nor the purpose of the meeting; provided that in the case of proposals
described in subsection (d) of Section 8 of these bylaws, the general nature of
such proposals must be described in any such waiver of notice and such proposals
can only be approved by waiver of notice, not by consent to holding of the
meeting or approval of the minutes.
(c) All waivers, consents and approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
(d) A person's attendance at a meeting shall constitute waiver of notice of
and presence at such meeting, except when such person objects at the beginning
of the meeting to transaction of any business because the meeting is not
lawfully called or convened and except that attendance at a meeting is not a
waiver of any right to object to the consideration of matters which are required
by law or these bylaws to be in such notice (including those matters described
in subsection (d) of Section 8 of these bylaws), but are not so included if such
person expressly objects to consideration of such matter or matters at any time
during the meeting.
Section 13. Action By Written Consent Without A Meeting. Any action which may be
taken at any meeting of shareholders may be taken without a meeting and without
prior notice if written consents setting forth the action so taken are signed by
the holders of the outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted.
Directors may not be elected by written consent except by unanimous
written consent of all shares entitled to vote for the election of directors;
provided that any vacancy on the Board of Directors (other than a vacancy
created by removal) which has not been filled by the board of directors may be
filled by the written consent of a majority of outstanding shares entitled to
vote for the election of directors.
Any written consent may be revoked pursuant to California Corporations
Code Section 603(c) prior to the time that written consents of the number of
shares required to authorize the proposed action have been filed with the
Secretary. Such revocation must be in writing and will be effective upon its
receipt by the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of any corporate action approved by the shareholders without a meeting to
those shareholders entitled to vote on such matters who have not consented
thereto in writing. This notice shall be given in the manner specified in
Section 9 of these bylaws. In the case of approval of (i) a transaction within
the provisions of California Corporations Code, Section 310 (relating to certain
transactions in which a director has an interest), (ii) a transaction within the
provisions of California Corporations Code, Section 317 (relating to
indemnification of agents of the corporation), (iii) a transaction within the
provisions of California Corporations Code, Sections 181 and 1201 (relating to
reorganization), and (iv) a plan of distribution within the provisions of
California Corporations Code, Section 2007 (relating to certain plans providing
for distribution not in accordance with the liquidation rights of preferred
shares, if any), the notice shall be given at least ten (10) days before the
consummation of any action authorized by that approval.
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Section 14. Voting. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section 15
of these bylaws, subject to the provisions of Sections 702 through 704 of the
California Corporations Code (relating to voting shares held by a fiduciary, in
the name of a corporation, or in joint ownership). Voting at any meeting of
shareholders need not be by ballot; provided, however, that elections for
directors must be by ballot if balloting is demanded by a shareholder at the
meeting and before the voting begins.
Every person entitled to vote at an election for directors may cumulate
the votes to which such person is entitled, i.e., such person may cast a total
number of votes equal to the number of directors to be elected multiplied by the
number of votes to which such person's shares are entitled, and may cast said
total number of votes for one or more candidates in such proportions as such
person thinks fit; provided, however, no shareholder shall be entitled to so
cumulate such shareholder's votes unless the candidates for which such
shareholder is voting have been placed in nomination prior to the voting and a
shareholder has given notice at the meeting, prior to the vote, of an intention
to cumulate votes. In any election of directors, the candidates receiving the
highest number of votes, up to the number of directors to be elected, are
elected.
Except as may be otherwise provided in the Articles of Incorporation or
by law, and subject to the foregoing provisions regarding the cumulation of
votes, each shareholder shall be entitled to one vote for each share held.
Any shareholder may vote part of such shareholder's shares in favor of
a proposal and refrain from voting the remaining shares or vote them against the
proposal, other than elections to office, but, if the shareholder fails to
specify the number of shares such shareholder is voting affirmatively, it will
be conclusively presumed that the shareholder's approving vote is with respect
to all shares such shareholder is entitled to vote.
No shareholder approval, other than unanimous approval of those
entitled to vote, will be valid as to proposals described in subsection 8(d) of
these bylaws unless the general nature of such business was stated in the notice
of meeting or in any written waiver of notice.
Section 15. Persons Entitled To Vote Or Consent. The Board of Directors may fix
a record date pursuant to Section 60 of these bylaws to determine which
shareholders are entitled to notice of and to vote at a meeting or consent to
corporate actions, as provided in Sections 13 and 14 of these bylaws. Only
persons in whose name shares otherwise entitled to vote stand on the stock
records of the corporation on such date shall be entitled to vote or consent.
If no record date is fixed:
(a) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day notice is given or, if notice is waived, at
the close of business on the business day next preceding the day on which the
meeting is held;
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(b) The record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors has been taken, shall be the day on which the first written
consent is given;
(c) The record date for determining shareholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto, or the sixtieth (60th) day prior to the
date of such other action, whichever is later.
A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting;
provided, however, that the Board of Directors shall fix a new record date if
the meeting is adjourned for more than forty-five (45) days from the date set
for the original meeting.
Shares of the corporation held by its subsidiary or subsidiaries (as
defined in California Corporations Code, Section 189(b)) are not entitled to
vote in any matter.
Section 16. Proxies. Every person entitled to vote or execute consents may do so
either in person or by one or more agents authorized to act by a written proxy
executed by the person or such person's duly authorized agent and filed with the
Secretary of the corporation; provided that no such proxy shall be valid after
the expiration of eleven (11) months from the date of its execution unless
otherwise provided in the proxy. The manner of execution, suspension,
revocation, exercise and effect of proxies is governed by law.
Section 17. Inspectors Of Election. Before any meeting of shareholders, the
Board of Directors may appoint any persons, other than nominees for office, to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the majority of shares represented in
person or proxy shall determine whether one (1) or three (3) inspectors are to
be appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, the chairman of the meeting may, and upon the request of any
shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way arising in
connection with the right to vote;
(d) Count and tabulate all votes or consents;
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(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or vote
with fairness to all shareholders.
ARTICLE IV
Board Of Directors
Section 18. Powers. Subject to the provisions of law or any limitations in the
Articles of Incorporation or these bylaws, as to action required to be approved
by the shareholders or by the outstanding shares, the business and affairs of
the corporation shall be managed and all corporate powers shall be exercised, by
or under the direction of the Board of Directors. The Board of Directors may
delegate the management of the day-to-day operation of the business of the
corporation to a management company or other person, provided that the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised under the ultimate direction of the Board of Directors.
Section 19. Number Of Directors. The authorized number of directors of the
corporation shall be not less than a minimum of four (4) nor more than a maximum
of seven (7) (which maximum number in no case shall be greater than two times
said minimum, minus one) and the number of directors presently authorized is
four (4). The exact number of directors shall be set within these limits from
time to time (a) by approval of the Board of Directors, or (b) by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum) or by the written
consent of shareholders pursuant to Section 13 hereinabove.
Any amendment of these bylaws changing the maximum or minimum number of
directors may be adopted only by the affirmative vote of a majority of the
outstanding shares entitled to vote; provided, an amendment reducing the minimum
number of directors to less than five (5), cannot be adopted if votes cast
against its adoption at a meeting or the shares not consenting to it in the case
of action by written consent are equal to more than 16-2/3 % percent of the
outstanding shares entitled to vote.
No reduction of the authorized number of directors shall remove any
director prior to the expiration of such director's term of office.
Section 20. Election Of Directors, Term, Qualifications. The directors shall be
elected at each annual meeting of shareholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office either until the expiration of the term for which
elected or appointed and until a successor has been elected and qualified, or
until his death, resignation or removal. Directors need not be shareholders of
the corporation.
Section 21. Resignations. Any director of the corporation may resign effective
upon giving written notice to the Chairman of the Board, the President, the
Secretary or the Board of Directors of the corporation, unless the notice
specifies a later time for the effectiveness of such resignation. If the
resignation specifies effectiveness at a future time, a successor may be elected
pursuant to Section 23 of these bylaws to take office on the date that the
resignation becomes effective.
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Section 22. Removal. The Board of Directors may declare vacant the office of a
director who has been declared of unsound mind by an order of court or who has
been convicted of a felony.
The entire Board of Directors or any individual director may be removed
from office without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote on such removal; provided, however, that
unless the entire Board is removed, no individual director may be removed when
the votes cast against such director's removal, or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
at an election at which the same total number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director's
most recent election were then being elected.
Section 23. Vacancies. A vacancy or vacancies on the Board of Directors shall be
deemed to exist in case of the death, resignation or removal of any director, or
upon increase in the authorized number of directors or if shareholders fail to
elect the full authorized number of directors at an annual meeting of
shareholders or if, for whatever reason, there are fewer directors on the Board
of Directors, than the full number authorized. Such vacancy or vacancies, other
than a vacancy created by the removal of a director, may be filled by a majority
of the remaining directors, though less than a quorum, or by a sole remaining
director. A vacancy created by the removal of a director may be filled only by
the affirmative vote of a majority of the shares represented and voting at a
duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) or by
the written consent of shareholders pursuant to Section 13 hereinabove. The
shareholders may elect a director at any time to fill any vacancy not filled by
the directors. Any such election by written consent, other than to fill a
vacancy created by removal, requires the consent of a majority of the
outstanding shares entitled to vote. Any such election by written consent to
fill a vacancy created by removal requires the consent of all of the outstanding
shares entitled to vote.
If, after the filling of any vacancy by the directors, the directors
then in office who have been elected by the shareholders constitute less than a
majority of the directors then in office, any holder or holders of an aggregate
of five percent (5%) or more of the shares outstanding at that time and having
the right to vote for such directors may call a special meeting of shareholders
to be held to elect the entire Board of Directors. The term of office of any
director shall terminate upon such election of a successor.
Section 24. Regular Meetings. Regular meetings of the Board of Directors shall
be held at such times, places and dates as fixed in these bylaws or by the Board
of Directors; provided, however, that if the date for such a meeting falls on a
legal holiday, then the meeting shall be held at the same time on the next
succeeding full business day. Regular meetings of the Board of Directors held
pursuant to this Section 24 may be held without notice.
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Section 25. Participation By Telephone. Members of the Board of Directors may
participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear one another. Such participation constitutes presence in person at such
meeting.
Section 26. Special Meetings. Special meetings of the Board of Directors for any
purpose may be called by the Chairman of the Board or the President or any vice
president or the Secretary of the corporation or any two (2) directors.
Section 27. Notice Of Meetings. Notice of the date, time and place of all
meetings of the Board of Directors, other than regular meetings held pursuant to
Section 24 above shall be delivered personally, orally or in writing, or by
telephone or telegraph to each director, at least forty-eight (48) hours before
the meeting, or sent in writing to each director by first-class mail, charges
prepaid, at least four (4) days before the meeting. Such notice may be given by
the Secretary of the corporation or by the person or persons who called a
meeting. Such notice need not specify the purpose of the meeting. Notice of any
meeting of the Board of Directors need not be given to any director who signs a
waiver of notice of such meeting, or a consent to holding the meeting or an
approval of the minutes thereof, either before or after the meeting, or who
attends the meeting without protesting prior thereto or at its commencement such
director's lack of notice. All such waivers, consents and approvals shall be
filed with the corporate records or made a part of the minutes of the meeting.
Section 28. Place Of Meetings. Meetings of the Board of Directors may be held at
any place within or without the state which has been designated in the notice of
the meeting or, if not stated in the notice or there is no notice, designated in
the bylaws or by resolution of the Board of Directors.
Section 29. Action By Written Consent Without A Meeting. Any action required or
permitted to be taken by the Board of Directors may be taken without a meeting,
if all members of the Board of Directors individually or collectively consent in
writing to such action. Such written consent or consents shall be filed with the
minutes of the proceedings of the Board of Directors. Such action by written
consent shall have the same force and effect as a unanimous vote of such
directors.
Section 30. Quorum And Transaction Of Business. A majority of the authorized
number of directors shall constitute a quorum for the transaction of business.
Every act or decision done or made by a majority of the authorized number of
directors present at a meeting duly held at which a quorum is present shall be
the act of the Board of Directors, unless the law, the Articles of Incorporation
or these bylaws specifically require a greater number. A meeting at which a
quorum is initially present may continue to transact business, notwithstanding
withdrawal of directors, if any action taken is approved by at least a majority
of the number of directors constituting a quorum for such meeting. In the
absence of a quorum at any meeting of the Board of Directors, a majority of the
directors present may adjourn the meeting, as provided in Section 31 of these
bylaws.
Section 31. Adjournment. Any meeting of the Board of Directors, whether or not a
quorum is present, may be adjourned to another time and place by the affirmative
vote of a majority of the directors present. If the meeting is adjourned for
more than twenty-four (24) hours, notice of such adjournment to another time or
place shall be given prior to the time of the adjourned meeting to the directors
who were not present at the time of the adjournment.
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Section 32. Organization. The Chairman of the Board shall preside at every
meeting of the Board of Directors, if present. If there is no Chairman of the
Board or if the Chairman is not present, a Chairman chosen by a majority of the
directors present shall act as chairman. The Secretary of the corporation or, in
the absence of the Secretary, any person appointed by the Chairman shall act as
secretary of the meeting.
Section 33. Compensation. Directors and members of committees may receive such
compensation, if any, for their services, and such reimbursement for expenses,
as may be fixed or determined by the Board of Directors.
Section 34. Committees. The Board of Directors may, by resolution adopted by a
majority of the authorized number of directors, designate one or more
committees, each consisting of two (2) or more directors, to serve at the
pleasure of the Board of Directors. The Board of Directors, by a vote of the
majority of authorized directors, may designate one or more directors as
alternate members of any committee, to replace any absent member at any meeting
of such committee. Any such committee shall have authority to act in the manner
and to the extent provided in the resolution of the Board of Directors, and may
have all the authority of the Board of Directors in the management of the
business and affairs of the corporation, except with respect to:
(a) the approval of any action for which shareholders' approval or approval
of the outstanding shares also is required by the California Corporations Code;
(b) the filling of vacancies on the Board of Directors or any of its
committees;
(c) the fixing of compensation of directors for serving on the Board of
Directors or any of its committees;
(d) the adoption, amendment or repeal of these bylaws;
(e) the amendment or repeal of any resolution of the Board of Directors
which by its express terms is not so amendable or repealable;
(f) a distribution to shareholders, except at a rate or in a periodic
amount or within a price range determined by the Board of Directors; or
(g) the appointment of other committees of the Board of Directors or the
members thereof.
Any committee may from time to time provide by resolution for regular
meetings at specified times and places. If the date of such a meeting falls on a
legal holiday, then the meeting shall be held at the same time on the next
succeeding full business day. No notice of such a meeting need be given. Such
regular meetings need not be held if the committee shall so determine at any
time before or after the time when such meeting would otherwise have taken
place. Special meetings may be called at any time in the same manner and by the
same persons as stated in Sections 26 and 27 of these bylaws for meetings of the
Board of Directors. The provisions of Sections 25, 28, 29, 30, 31 and 32 of
these bylaws shall apply to committees, committee members and committee meetings
as if the words "committee" and "committee member" were substituted for the word
"Board of Directors", and "director", respectively, throughout such sections.
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ARTICLE V
Officers
Section 35. Officers. The corporation shall have a Chairman of the Board or a
President or both, a Secretary, a Chief Financial Officer and such other
officers with such titles and duties as the Board of Directors may determine.
Any two or more offices may be held by the same person.
Section 36. Appointment. All officers shall be chosen and appointed by the Board
of Directors; provided, however, the Board of Directors may empower the chief
executive officer of the corporation to appoint such officers, other than
Chairman of the Board, President, Secretary or Chief Financial Officer, as the
business of the corporation may require. All officers shall serve at the
pleasure of the Board of Directors, subject to the rights, if any, of an officer
under a contract of employment.
Section 37. Inability To Act. In the case of absence or inability to act of any
officer of the corporation or of any person authorized by these bylaws to act in
such officer's place, the Board of Directors may from time to time delegate the
powers or duties of such officer to any other officer, or any director or other
person whom it may select, for such period of time as the Board of Directors
deems necessary.
Section 38. Resignations. Any officer may resign at any time upon written notice
to the corporation, without prejudice to the rights, if any, of the corporation
under any contract to which such officer is a party. Such resignation shall be
effective upon its receipt by the Chairman of the Board, the President, the
Secretary or the Board of Directors, unless a different time is specified in the
notice for effectiveness of such resignation. The acceptance of any such
resignation shall not be necessary to make it effective unless otherwise
specified in such notice.
Section 39. Removal. Any officer may be removed from office at any time, with or
without cause, but subject to the rights, if any, of such officer under any
contract of employment, by the Board of Directors or by any committee to whom
such power of removal has been duly delegated, or, with regard to any officer
who has been appointed by the chief executive officer pursuant to Section 36
above, by the chief executive officer or any other officer upon whom such power
of removal may be conferred by the Board of Directors.
Section 40. Vacancies. A vacancy occurring in any office for any cause may be
filled by the Board of Directors, in the manner prescribed by this Article of
the bylaws for initial appointment to such office.
Section 41. Chairman Of The Board. The Chairman of the Board, if there be such
an officer, shall, if present, preside at all meetings of the Board of Directors
and shall exercise and perform such other powers and duties as may be assigned
from time to time by the Board of Directors or prescribed by these bylaws. If no
President is appointed, the Chairman of the Board is the general manager and
chief executive officer of the corporation, and shall exercise all powers of the
President described in Section 42 below.
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Section 42. President. Subject to such powers, if any, as may be given by the
Board of Directors to the Chairman of the Board, if there be such an officer,
the President shall be the general manager and chief executive officer of the
corporation and shall have general supervision, direction, and control over the
business and affairs of the corporation, subject to the control of the Board of
Directors. The President may sign and execute, in the name of the corporation,
any instrument authorized by the Board of Directors, except when the signing and
execution thereof shall have been expressly delegated by the Board of Directors
or by these bylaws to some other officer or agent of the corporation. The
President shall have all the general powers and duties of management usually
vested in the president of a corporation, and shall have such other powers and
duties as may be prescribed from time to time by the Board of Directors or these
bylaws. The President shall have discretion to prescribe the duties of other
officers and employees of the corporation in a manner not inconsistent with the
provisions of these bylaws and the directions of the Board of Directors.
Section 43. Vice Presidents. In the absence or disability of the President, in
the event of a vacancy in the office of President, or in the event such officer
refuses to act, the Vice President shall perform all the duties of the President
and, when so acting, shall have all the powers of, and be subject to all the
restrictions on, the President. If at any such time the corporation has more
than one vice president, the duties and powers of the President shall pass to
each vice president in order of such vice president's rank as fixed by the Board
of Directors or, if the vice presidents are not so ranked, to the vice president
designated by the Board of Directors. The vice presidents shall have such other
powers and perform such other duties as may be prescribed for them from time to
time by the Board of Directors or pursuant to Sections 35 and 36 of these bylaws
or otherwise pursuant to these bylaws.
Section 44. Secretary. The Secretary shall:
(a) Keep, or cause to be kept, minutes of all meetings of the corporation's
shareholders, Board of Directors, and committees of the Board of Directors, if
any. Such minutes shall be kept in written form.
(b) Keep, or cause to be kept, at the principal executive office of the
corporation, or at the office of its transfer agent or registrar, if any, a
record of the corporation's shareholders, showing the names and addresses of all
shareholders, and the number and classes of shares held by each. Such records
shall be kept in written form or any other form capable of being converted into
written form.
(c) Keep, or cause to be kept, at the principal executive office of the
corporation, or if the principal executive office is not in California, at its
principal business office in California, an original or copy of these bylaws, as
amended.
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(d) Give, or cause to be given, notice of all meetings of shareholders,
directors and committees of the Board of Directors, as required by law or by
these bylaws.
(e) Keep the seal of the corporation, if any, in safe custody.
(f) Exercise such powers and perform such duties as are usually vested in
the office of secretary of a corporation, and exercise such other powers and
perform such other duties as may be prescribed from time to time by the Board of
Directors or these bylaws.
If any assistant secretaries are appointed, the assistant secretary, or
one of the assistant secretaries in the order of their rank as fixed by the
Board of Directors or, if they are not so ranked, the assistant secretary
designated by the Board of Directors, in the absence or disability of the
Secretary or in the event of such officer's refusal to act or if a vacancy
exists in the office of Secretary, shall perform the duties and exercise the
powers of the Secretary and discharge such duties as may be assigned from time
to time pursuant to these bylaws or by the Board of Directors.
Section 45. Chief Financial Officer. The Chief Financial Officer shall:
(a) Be responsible for all functions and duties of the treasurer of the
corporation.
(b) Keep and maintain, or cause to be kept and maintained, adequate and
correct books and records of account for the corporation.
(c) Receive or be responsible for receipt of all monies due and payable to
the corporation from any source whatsoever; have charge and custody of, and be
responsible for, all monies and other valuables of the corporation and be
responsible for deposit of all such monies in the name and to the credit of the
corporation with such depositaries as may be designated by the Board of
Directors or a duly appointed and authorized committee of the Board of
Directors.
(d) Disburse or be responsible for the disbursement of the funds of the
corporation as may be ordered by the Board of Directors or a duly appointed and
authorized committee of the Board of Directors.
(e) Render to the chief executive officer and the Board of Directors a
statement of the financial condition of the corporation if called upon to do so.
(f) Exercise such powers and perform such duties as are usually vested in
the office of chief financial officer of a corporation, and exercise such other
powers and perform such other duties as may be prescribed by the Board of
Directors or these bylaws.
If any assistant financial officer is appointed, the assistant
financial officer, or one of the assistant financial officers, if there are more
than one, in the order of their rank as fixed by the Board of Directors or, if
they are not so ranked, the assistant financial officer designated by the Board
of Directors, shall, in the absence or disability of the Chief Financial Officer
or in the event of such officer's refusal to act, perform the duties and
exercise the powers of the Chief Financial Officer, and shall have such powers
and discharge such duties as may be assigned from time to time pursuant to these
bylaws or by the Board of Directors.
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Section 46. Compensation. The compensation of the officers shall be fixed from
time to time by the Board of Directors, and no officer shall be prevented from
receiving such compensation by reason of the fact that such officer is also a
director of the corporation.
ARTICLE VI
Contracts, Loans, Bank Accounts, Checks And Drafts
Section 47. Execution Of Contracts And Other Instruments. Except as these bylaws
may otherwise provide, the Board of Directors or its duly appointed and
authorized committee may authorize any officer or officers, agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation, and such authorization may be general or confined
to specific instances. Except as so authorized or otherwise expressly provided
in these bylaws, no officer, agent, or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or in any amount.
Section 48. Loans. No loans shall be contracted on behalf of the corporation and
no negotiable paper shall be issued in its name, unless and except as authorized
by the Board of Directors or its duly appointed and authorized committee. When
so authorized by the Board of Directors or such committee, any officer or agent
of the corporation may effect loans and advances at any time for the corporation
from any bank, trust company, or other institution, or from any firm,
corporation or individual, and for such loans and advances may make, execute and
deliver promissory notes, bonds or other evidences of indebtedness of the
corporation and, when authorized as aforesaid, may mortgage, pledge, hypothecate
or transfer any and all stocks, securities and other property, real or personal,
at any time held by the corporation, and to that end endorse, assign and deliver
the same as security for the payment of any and all loans, advances,
indebtedness, and liabilities of the corporation. Such authorization may be
general or confined to specific instances.
Section 49. Bank Accounts. The Board of Directors or its duly appointed and
authorized committee from time to time may authorize the opening and keeping of
general and/or special bank accounts with such banks, trust companies, or other
depositaries as may be selected by the Board of Directors, its duly appointed
and authorized committee or by any officer or officers, agent or agents, of the
corporation to whom such power may be delegated from time to time by the Board
of Directors. The Board of Directors or its duly appointed and authorized
committee may make such rules and regulations with respect to said bank
accounts, not inconsistent with the provisions of these bylaws, as are deemed
advisable.
Section 50. Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes, acceptances or other evidences of indebtedness issued
in the name of the corporation shall be signed by such officer or officers,
agent or agents, of the corporation, and in such manner, as shall be determined
from time to time by resolution of the Board of Directors or its duly appointed
and authorized committee. Endorsements for deposit to the credit of the
corporation in any of its duly authorized depositaries may be made, without
countersignature, by the President or any vice president or the Chief Financial
Officer or any assistant financial officer or by any other officer or agent of
the corporation to whom the Board of Directors or its duly appointed and
authorized committee, by resolution, shall have delegated such power or by
handstamped impression in the name of the corporation.
15.
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ARTICLE VII
Certificates For Shares And Their Transfer
Section 51. Certificate For Shares. Every holder of shares in the corporation
shall be entitled to have a certificate signed in the name of the corporation by
the Chairman or Vice Chairman of the Board or the President or a Vice President
and by the Chief Financial Officer or an assistant financial officer or by the
Secretary or an assistant secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any or all of the signatures
on the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if such person were an officer, transfer agent or registrar at
the date of issue.
In the event that the corporation shall issue any shares as only partly
paid, the certificate issued to represent such partly paid shares shall have
stated thereon the total consideration to be paid for such shares and the amount
paid thereon.
Section 52. Transfer On The Books. Upon surrender to the Secretary or transfer
agent (if any) of the corporation of a certificate for shares of the corporation
duly endorsed, with reasonable assurance that the endorsement is genuine and
effective, or accompanied by proper evidence of succession, assignment or
authority to transfer and upon compliance with applicable federal and state
securities laws and if the corporation has no statutory duty to inquire into
adverse claims or has discharged any such duty and if any applicable law
relating to the collection of taxes has been complied with, it shall be the duty
of the corporation, by its Secretary or transfer agent, to cancel the old
certificate, to issue a new certificate to the person entitled thereto and to
record the transaction on the books of the corporation.
Section 53. Lost, Destroyed And Stolen Certificates. The holder of any
certificate for shares of the corporation alleged to have been lost, destroyed
or stolen shall notify the corporation by making a written affidavit or
affirmation of such fact. Upon receipt of said affidavit or affirmation the
Board of Directors, or its duly appointed and authorized committee or any
officer or officers authorized by the Board so to do, may order the issuance of
a new certificate for shares in the place of any certificate previously issued
by the corporation and which is alleged to have been lost, destroyed or stolen.
However, the Board of Directors or such authorized committee, officer or
officers may require the owner of the allegedly lost, destroyed or stolen
certificate, or such owner's legal representative, to give the corporation a
bond or other adequate security sufficient to indemnify the corporation and its
transfer agent and/or registrar, if any, against any claim that may be made
against it or them on account of such allegedly lost, destroyed or stolen
certificate or the replacement thereof. Said bond or other security shall be in
such amount, on such terms and conditions and, in the case of a bond, with such
surety or sureties as may be acceptable to the Board of Directors or to its duly
appointed and authorized committee or any officer or officers authorized by the
Board of Directors to determine the sufficiency thereof. The requirement of a
bond or other security may be waived in particular cases at the discretion of
the Board of Directors or its duly appointed and authorized committee or any
officer or officers authorized by the Board of Directors so to do.
16.
<PAGE>
Section 54. Issuance, Transfer And Registration Of Shares. The Board of
Directors may make such rules and regulations, not inconsistent with law or with
these bylaws, as it may deem advisable concerning the issuance, transfer and
registration of certificates for shares of the capital stock of the corporation.
The Board of Directors may appoint a transfer agent or registrar of transfers,
or both, and may require all certificates for shares of the corporation to bear
the signature of either or both.
ARTICLE VIII
Inspection Of Corporate Records
Section 55. Inspection By Directors. Every director shall have the absolute
right at any reasonable time to inspect and copy all books, records, and
documents of every kind of the corporation and any of its subsidiaries and to
inspect the physical properties of the corporation and any of its subsidiaries.
Such inspection may be made by the director in person or by agent or attorney,
and the right of inspection includes the right to copy and make extracts.
Section 56. Inspection By Shareholders.
(a) Inspection Of Corporate Records.
(1) A shareholder or shareholders holding at least five (5%) percent in the
aggregate of the outstanding voting shares of the corporation or who hold
at least one percent of such voting shares and have filed a Schedule 14B
with the United States Securities and Exchange Commission relating to the
election of directors of the corporation shall have an absolute right to do
either or both of the following:
(i) Inspect and copy the record of shareholders' names and addresses
and shareholdings during usual business hours upon five (5) business
days' prior written demand upon the corporation; or
(ii) Obtain from the transfer agent, if any, for the corporation, upon
five business days' prior written demand and upon the tender of its
usual charges for such a list (the amount of which charges shall be
stated to the shareholder by the transfer agent upon request), a list
of the shareholders' names and addresses who are entitled to vote for
the election of directors and their shareholdings, as of the most
recent record date for which it has been compiled or as of a date
specified by the shareholder subsequent to the date of demand.
(2) The record of shareholders shall also be open to inspection and copying
by any shareholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the corporation, for a
purpose reasonably related to such holder's interest as a shareholder or
holder of a voting trust certificate.
17.
<PAGE>
(3) The accounting books and records and minutes of proceedings of the
shareholders and the Board of Directors and of any committees of the Board
of Directors of the corporation and of each of its subsidiaries shall be
open to inspection, copying and making extracts upon written demand on the
corporation of any shareholder or holder of a voting trust certificate at
any reasonable time during usual business hours, for a purpose reasonably
related to such holder's interests as a shareholder or as a holder of such
voting trust certificate.
(4) Any inspection, copying, and making of extracts under this subsection
(a) may be done in person or by agent or attorney.
(b) Inspection Of Bylaws. The original or a copy of these bylaws shall be
kept as provided in Section 44 of these bylaws and shall be open to inspection
by the shareholders at all reasonable times during office hours. If the
principal executive office of the corporation is not in California, and the
corporation has no principal business office in the state of California, a
current copy of these bylaws shall be furnished to any shareholder upon written
request.
Section 57. Written Form. If any record subject to inspection pursuant to
Section 56 above is not maintained in written form, a request for inspection is
not complied with unless and until the corporation at its expense makes such
record available in written form.
ARTICLE IX
Miscellaneous
Section 58. Fiscal Year. Unless otherwise fixed by resolution of the Board of
Directors, the fiscal year of the corporation shall end on the 31st day of
December in each calendar year.
Section 59. Annual Report. Subject to the provisions of Section 59(b) below, the
Board of Directors shall cause an annual report to be sent to each shareholder
of the corporation in the manner provided in Section 9 of these bylaws not later
than one hundred twenty (120) days after the close of the corporation's fiscal
year. Such report shall include a balance sheet as of the end of such fiscal
year and an income statement and statement of changes in financial position for
such fiscal year, accompanied by any report thereon of independent accountants
or, if there is no such report, the certificate of an authorized officer of the
corporation that such statements were prepared without audit from the books and
records of the corporation. When there are more than 100 shareholders of record
of the corporation's shares, as determined by Section 605 of the California
Corporations Code, additional information as required by Section 1501(b) of the
California Corporations Code shall also be contained in such report, provided
that if the corporation has a class of securities registered under Section 12 of
the United States Securities Exchange Act of 1934, that Act shall take
precedence. Such report shall be sent to shareholders at least fifteen (15) (or,
if sent by third-class mail, thirty-five (35)) days prior to the next annual
meeting of shareholders after the end of the fiscal year to which it relates.
Section 60. Record Date. The Board of Directors may fix a time in the future as
a record date for the determination of the shareholders entitled to notice of or
to vote at any meeting or entitled to receive payment of any dividend or other
distribution or allotment of any rights or entitled to exercise any rights in
respect of any change, conversion or exchange of shares or entitled to exercise
any rights in respect of any other lawful action. The record date so fixed shall
not be more than sixty (60) days nor less than ten (10) days prior to the date
of the meeting nor more than sixty (60) days prior to any other action or event
for the purpose of which it is fixed. If no record date is fixed, the provisions
of Section 15 of these bylaws shall apply with respect to notice of meetings,
votes, and consents and the record date for determining shareholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolutions relating thereto, or the sixtieth (60th) day
prior to the date of such other action or event, whichever is later.
18.
<PAGE>
Only shareholders of record at the close of business on the record date
shall be entitled to notice and to vote or to receive the dividend, distribution
or allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the Articles of Incorporation,
by agreement or by law.
Section 61. Bylaw Amendments. Except as otherwise provided by law or Section 19
of these bylaws, these bylaws may be amended or repealed by the Board of
Directors or by the affirmative vote of a majority of the outstanding shares
entitled to vote, including, if applicable, the affirmative vote of a majority
of the outstanding shares of each class or series entitled by law or the
Articles of Incorporation to vote as a class or series on the amendment or
repeal or adoption of any bylaw or bylaws; provided, however, after issuance of
shares, a bylaw specifying or changing a fixed number of directors or the
maximum or minimum number or changing from a fixed to a variable board or vice
versa may only be adopted by approval of the outstanding shares as provided
herein.
Section 62. Construction And Definition. Unless the context requires otherwise,
the general provisions, rules of construction, and definitions contained in the
California Corporations Code shall govern the construction of these bylaws.
Without limiting the foregoing, "shall" is mandatory and "may" is
permissive.
ARTICLE X
Indemnification
Section 63. Indemnification Of Directors, Officers, Employees And Other Agents.
(a) Directors And Executive Officers. The corporation shall indemnify its
directors and executive officers to the fullest extent not prohibited by the
California General Corporation Law; provided, however, that the corporation may
limit the extent of such indemnification by individual contracts with its
directors and executive officers; and, provided, further, that the corporation
shall not be required to indemnify any director or executive officer in
connection with any proceeding (or part thereof) initiated by such person or any
proceeding by such person against the corporation or its directors, officers,
employees or other agents unless (i) such indemnification is expressly required
to be made by law, (ii) the proceeding was authorized by the board of directors
of the corporation or (iii) such indemnification is provided by the corporation,
in its sole discretion, pursuant to the powers vested in the corporation under
the California General Corporation Law.
19.
<PAGE>
(b) Other Officers, Employees And Other Agents. The corporation shall have
the power to indemnify its other officers, employees and other agents as set
forth in the California General Corporation Law.
(c) Determination By The Corporation. Promptly after receipt of a request
for indemnification hereunder (and in any event within 90 days thereof) a
reasonable, good faith determination as to whether indemnification of the
director or executive officer is proper under the circumstances because such
director or executive officer has met the applicable standard of care shall be
made by:
(1) a majority vote of a quorum consisting of directors who are not parties
to such proceeding;
(2) if such quorum is not obtainable, by independent legal counsel in a
written opinion; or
(3) approval or ratification by the affirmative vote of a majority of the
shares of this corporation represented and voting at a duly held meeting at
which a quorum is present (which shares voting affirmatively also
constitute at least a majority of the required quorum) or by written
consent of a majority of the outstanding shares entitled to vote; where in
each case the shares owned by the person to be indemnified shall not be
considered entitled to vote thereon.
(d) Good Faith.
(1) For purposes of any determination under this bylaw, a director or
executive officer shall be deemed to have acted in good faith and in a
manner he reasonably believed to be in the best interests of the
corporation and its shareholders, and, with respect to any criminal action
or proceeding, to have had no reasonable cause to believe that his conduct
was unlawful, if his action is based on information, opinions, reports and
statements, including financial statements and other financial data, in
each case prepared or presented by:
(i) one or more officers or employees of the corporation whom the
director or executive officer believed to be reliable and competent in
the matters presented;
(ii) counsel, independent accountants or other persons as to matters
which the director or executive officer believed to be within such
person's professional competence; and
(iii) with respect to a director, a committee of the Board upon which
such director does not serve, as to matters within such committee's
designated authority, which committee the director believes to merit
confidence; so long as, in each case, the director or executive officer
acts without knowledge that would cause such reliance to be
unwarranted.
20.
<PAGE>
(2) The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not,
of itself, create a presumption that the person did not act in good faith
and in a manner which he reasonably believed to be in the best interests of
the corporation and its shareholders or that he had reasonable cause to
believe that his conduct was unlawful.
(3) The provisions of this paragraph (d) shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth by the
California General Corporation Law.
(e) Expenses. The corporation shall advance, prior to the final disposition
of any proceeding, promptly following request therefor, all expenses incurred by
any director or executive officer in connection with such proceeding upon
receipt of an undertaking by or on behalf of such person to repay said amounts
if it shall be determined ultimately that such person is not entitled to be
indemnified under this bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (f) of this bylaw, no advance shall be made by the corporation if a
determination is reasonably and promptly made by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to the
proceeding (or, if no such quorum exists, by independent legal counsel in a
written opinion) that the facts known to the decision making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in the
best interests of the corporation and its shareholders.
(f) Enforcement. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in the forum in
which the proceeding is or was pending or, if such forum is not available or a
determination is made that such forum is not convenient, in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. The corporation shall be entitled to raise as a
defense to any such action that the claimant has not met the standards of
conduct that make it permissible under the California General Corporation Law
for the corporation to indemnify the claimant for the amount claimed. Neither
the failure of the corporation (including its board of directors, independent
legal counsel or its shareholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he has met the applicable standard of conduct set
forth in the California General Corporation Law, nor an actual determination by
the corporation (including its board of directors, independent legal counsel or
its shareholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
21.
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(g) Non-Exclusivity Of Rights. To the fullest extent permitted by the
corporation's Articles of Incorporation and the California General Corporation
Law, the rights conferred on any person by this bylaw shall not be exclusive of
any other right which such person may have or hereafter acquire under any
statute, provision of the Articles of Incorporation, bylaws, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding office. The
corporation is specifically authorized to enter into individual contracts with
any or all of its directors, officers, employees or agents respecting
indemnification and advances, to the fullest extent permitted by the California
General Corporation Law and the corporation's Articles of Incorporation.
(h) Survival Of Rights. The rights conferred on any person by this bylaw
shall continue as to a person who has ceased to be a director or executive
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(i) Insurance. The corporation, upon approval by the board of directors,
may purchase insurance on behalf of any person required or permitted to be
indemnified pursuant to this bylaw.
(j) Amendments. Any repeal or modification of this bylaw shall only be
prospective and shall not affect the rights under this bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(k) Employee Benefit Plans. The corporation shall indemnify the directors
and officers of the corporation who serve at the request of the corporation as
trustees, investment managers or other fiduciaries of employee benefit plans to
the fullest extent permitted by the California General Corporation Law.
(l) Saving Clause. If this bylaw or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the corporation shall
nevertheless indemnify each director and executive officer to the fullest extent
permitted by any applicable portion of this bylaw that shall not have been
invalidated, or by any other applicable law.
(m) Certain Definitions. For the purposes of this bylaw, the following
definitions shall apply:
(1) The term "proceeding" shall be broadly construed and shall include,
without limitation, the investigation, preparation, prosecution, defense,
settlement and appeal of any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative, arbitrative or
investigative.
(2) The term "expenses" shall be broadly construed and shall include,
without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of
any nature or kind incurred in connection with any proceeding, including
expenses of establishing a right to indemnification under this bylaw or any
applicable law.
22.
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(3) The term the "corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify
its directors, officers, and employees or agents, so that any person who is
or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of this bylaw with respect
to the resulting or surviving corporation as he would have with respect to
such constituent corporation if its separate existence had continued.
(4) References to a "director," "officer," "employee," or "agent" of the
corporation shall include, without limitation, situations where such person
is or was serving at the request of the corporation as a director, officer,
employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
ARTICLE XI
Loans Of Officers And Others
Section 64. Certain Corporate Loans And Guaranties. If the corporation has
outstanding shares held of record by 100 or more persons on the date of approval
by the Board of Directors, the corporation may make loans of money or property
to, or guarantee the obligations of, any officer of the corporation or its
parent or any subsidiary, whether or not a director of the corporation or its
parent or any subsidiary, or adopt an employee benefit plan or plans authorizing
such loans or guaranties, upon the approval of the Board of Directors alone, by
a vote sufficient without counting the vote of any interested director or
directors, if the Board of Directors determines that such a loan or guaranty or
plan may reasonably be expected to benefit the corporation. Notwithstanding the
foregoing, the corporation shall have the power to make loans permitted by the
California Corporations Code.
23.
<PAGE>
Exhibit 10.1
CASTELLE
1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED ON NOVEMBER 15, 1995
APPROVED BY SHAREHOLDERS
ON DECEMBER 6, 1995
AMENDED BY THE BOARD ON JULY 16, 1996, FEBRUARY 23, 1999 AND FEBRUARY 24, 2000
1. PURPOSE.
(a) The purpose of the 1995 Non-Employee Directors' Stock Option Plan (the
"Plan") is to provide a means by which each director of Castelle (the "Company")
who is not otherwise at the time of grant an employee of or consultant to the
Company or of any Affiliate of the Company (each such person being hereafter
referred to as a "Non-Employee Director") will be given an opportunity to
purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation or
subsidiary corporation of the Company as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
from time to time (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of persons
now serving as Non-Employee Directors of the Company, to secure and retain the
services of persons capable of serving in such capacity, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors of the Company (the
"Board") unless and until the Board delegates administration to a committee, as
provided in subparagraph 2(b).
1.
<PAGE>
(b) The Board may delegate administration of the Plan to a committee composed of
not fewer than two (2) members of the Board (the "Committee"). If administration
is delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board,
subject, however, to such resolutions, not inconsistent with the provisions of
the Plan, as may be adopted from time to time by the Board. The Board may
abolish the Committee at any time and revest in the Board the administration of
the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 10 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to options granted under
the Plan shall not exceed in the aggregate one hundred and twenty thousand
(120,000) shares of the Company's common stock. If any option granted under the
Plan shall for any reason expire or otherwise terminate without having been
exercised in full, the stock not purchased under such option shall again become
available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired shares,
bought on the market or otherwise.
4. ELIGIBILITY.
Options shall be granted only to Non-Employee Directors of the Company.
5. NON-DISCRETIONARY GRANTS.
(a) Each person who is, after the effective date of the initial public offering
of the Company's common stock (the "IPO Date"), elected for the first time to be
a Non-Employee Director automatically shall, upon the date of his or her initial
election to be a Non-Employee Director by the Board or shareholders of the
Company, be granted an option to purchase ten thousand (10,000) shares of common
stock of the Company on the terms and conditions set forth herein.
2.
<PAGE>
(b) On April 1 of each year, commencing with April 1, 2000, each person who on
that date is then a Non-Employee Director (whether elected before or after the
IPO Date) automatically shall be granted an option to purchase ten thousand
(10,000) shares of common stock of the Company on the terms and conditions set
forth herein.
6. OPTION PROVISIONS.
Each option shall be subject to the following terms and conditions:
(a) The term of each option commences on the date it is granted and, unless
sooner terminated as set forth herein, expires on the date (the "Expiration
Date") ten (10) years from the date of grant. If the optionee's service as a
Non-Employee Director of the Company terminates for any reason or for no reason,
the option shall terminate on the earlier of the Expiration Date or the date
twelve (12) months following the date of termination of service; provided,
however, that if such termination of service is due to the optionee's death, the
option shall terminate on the earlier of the Expiration Date or eighteen (18)
months following the date of the optionee's death. In any and all circumstances,
an option may be exercised following termination of the optionee's service as a
Non-Employee Director of the Company only as to that number of shares as to
which it was exercisable as of the date of termination of such service under the
provisions of subparagraph 6(e).
(b) The exercise price of each option shall be one hundred percent (100%) of the
fair market value of the stock subject to such option on the date such option is
granted.
(c) The optionee may elect to make payment of the exercise price under one of
the following alternatives:
(i) Payment of the exercise price per share in cash at the time of
exercise; or
3.
<PAGE>
(ii) Provided that at the time of the exercise the Company's common stock
is publicly traded and quoted regularly in the Wall Street Journal, payment by
delivery of shares of common stock of the Company already owned by the optionee,
held for the period required to avoid a charge to the Company's reported
earnings, and owned free and clear of any liens, claims, encumbrances or
security interest, which common stock shall be valued at its fair market value
on the date preceding the date of exercise; or
(iii) Payment by a combination of the methods of payment specified in
subparagraph 6(c)(i) and 6(c)(ii) above.
Notwithstanding the foregoing, this option may be exercised pursuant to
a program developed under Regulation T as promulgated by the Federal Reserve
Board which results in the receipt of cash (or check) by the Company either
prior to the issuance of shares of the Company's common stock or pursuant to the
terms of irrevocable instructions issued by the optionee prior to the issuance
of shares of the Company's common stock.
(d) An option shall 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 option is granted only by such person or by his guardian or legal
representative. The person to whom the Option is granted may, by delivering
written notice to the Company, in a form satisfactory to the Company, designate
a third party who, in the event of the death of the Optionee, shall thereafter
be entitled to exercise the Option.
(e) The option shall become exercisable in installments over a period of two
years from the date of grant at the rate of one twenty-fourth of the total
number of shares subject to the option a month, in twenty-four (24) equal
monthly installments commencing on the date one month after the date of grant of
the option, provided that 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 Affiliate of the Company, whereupon such option
shall become fully exercisable in accordance with its terms with respect to that
portion of the shares represented by that installment.
4.
<PAGE>
(f) The Company may require any optionee, or any person to whom an option is
transferred under subparagraph 6(d), as a condition of exercising any such
option: (i) to give written assurances satisfactory to the Company as to the
optionee's knowledge and experience in financial and business matters; and (ii)
to give written assurances satisfactory to the Company stating that such person
is acquiring the stock subject to the option for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
These requirements, and any assurances given pursuant to such requirements,
shall be inoperative if (i) the issuance of the shares upon the exercise of the
option has been registered under a then-currently-effective registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
or (ii), as to any particular requirement, a determination is made by counsel
for the Company that such requirement need not be met in the circumstances under
the then applicable securities laws. The Company may require any optionee to
provide such other representations, written assurances or information which the
Company shall determine is necessary, desirable or appropriate to comply with
applicable securities laws as a condition of granting an option to the optionee
or permitting the optionee to exercise the option. The Company may, upon advice
of counsel to the Company, place legends on stock certificates issued under the
Plan as such counsel deems necessary or appropriate in order to comply with
applicable securities laws, including, but not limited to, legends restricting
the transfer of the stock.
5.
<PAGE>
(g) Notwithstanding anything to the contrary contained herein, an option may not
be exercised unless the shares issuable upon exercise of such option are then
registered under the Securities Act or, if such shares are not then so
registered, the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Securities Act.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under the Plan, the Company shall
keep available at all times the number of shares of stock required to satisfy
such options.
(b) The Company shall seek to obtain from each regulatory commission or agency
having jurisdiction over the Plan such authority as may be required to issue and
sell shares of stock upon exercise of the options granted under the Plan;
provided, however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any option granted under the
Plan, or any stock issued or issuable pursuant to any such option. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell stock upon exercise of
such options.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the Plan shall
constitute general funds of the Company.
9. MISCELLANEOUS.
(a) Neither an optionee nor any person to whom an option is transferred under
subparagraph 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to such option unless and
until such person has satisfied all requirements for exercise of the option
pursuant to its terms.
6.
<PAGE>
(b) Throughout the term of any option granted pursuant to the Plan, the Company
shall make available to the holder of such option, not later than one hundred
twenty (120) days after the close of each of the Company's fiscal years during
the option term, upon request, such financial and other information regarding
the Company as comprises the annual report to the shareholders of the Company
provided for in the Bylaws of the Company and such other information regarding
the Company as the holder of such option may reasonably request.
(c) Nothing in the Plan or in any instrument executed pursuant thereto shall
confer upon any Non-Employee Director any right to continue in the service of
the Company or any Affiliate in any capacity or shall affect any right of the
Company, its Board or shareholders or any Affiliate to remove any Non-Employee
Director pursuant to the Company's By-Laws and the provisions of the California
General Corporation Law (or the laws of the Company's state of incorporation
should that change in the future).
(d) No Non-Employee Director, individually or as a member of a group, and no
beneficiary or other person claiming under or through him, shall have any right,
title or interest in or to any option reserved for the purposes of the Plan
except as to such shares of common stock, if any, as shall have been reserved
for him pursuant to an option granted to him.
(e) In connection with each option made pursuant to the Plan, it shall be a
condition precedent to the Company's obligation to issue or transfer shares to a
Non-Employee Director, or to evidence the removal of any restrictions on
transfer, that such Non-Employee Director make arrangements satisfactory to the
Company to insure that the amount of any federal or other withholding tax
required to be withheld with respect to such sale or transfer, or such removal
or lapse, is made available to the Company for timely payment of such tax.
7.
<PAGE>
(f) As used in this Plan, fair market value means, as of any date, the value of
the common stock of the Company determined as follows:
(i) If the common stock is listed on any established stock exchange or a
national market system, including without limitation the National Market System
of the National Association of Securities Dealers, Inc. Automated Quotation
("NASDAQ") System, the Fair Market Value of a share of common stock shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in common stock) on the last market trading day prior
to the day of determination, as reporting in the Wall Street Journal or such
other source as the Board deems reliable;
(ii) If the common stock is quoted on the NASDAQ System (but not on the
National Market System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of common stock shall be the mean between the bid and asked prices for
the common stock on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
(iii) In the absence of an established market for the common stock, the
Fair Market Value shall be determined in good faith by the Board.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to any
option granted under the Plan (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan and outstanding options will be
appropriately adjusted in the class(es) and maximum number of shares subject to
the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding options. Such adjustments shall be made by the Board, the
determination of which shall be final, binding, and conclusive. (The conversion
of any convertible securities of the Company shall not be treated as a
"transaction not involving the receipt of consideration by the Company.")
8.
<PAGE>
(b) In the event of: (1) a dissolution, liquidation, or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise; or (4) the acquisition by any person, entity or groups within
the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any comparable successor provisions (excluding
any employee benefit plan, or related trust, approved or maintained by the
Company or any Affiliate of the Company) of the beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable
successor rule) of securities of the Company representing at least fifty percent
(50%) of the combined voting power entitled to vote in the election of
directors, then to the extent not prohibited by applicable law: the time during
which options outstanding under the Plan may be exercised shall be accelerated
prior to such event and the options terminated if not exercised after such
acceleration and at or prior to such event.
9.
<PAGE>
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan and/or some
or all outstanding options granted under the Plan, provided, however, that the
Board shall not amend the plan more than once every six (6) months, with respect
to the provisions of the Plan which relate to the amount, price and timing of
grants, other than to comport with changes in the Code, the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or the rules thereunder.
Except as provided in paragraph 10 relating to adjustments upon changes in
stock, 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:
(i) Increase the number of shares which may be issued under the Plan;
(ii) Modify the requirements as to eligibility for participation in the
Plan (to the extent such modification requires shareholder approval in order for
the Plan to comply with the requirements of Rule 16b-3); or
(iii) Modify the Plan in any other way if such modification requires
shareholder approval in order for the Plan to comply with the requirements of
Rule 16b-3.
(b) Rights and obligations under any option granted before any amendment of the
Plan shall not be or impaired by such amendment unless (i) the Company requests
the consent of the person to whom the option was granted and (ii) such person
consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on November 14, 2005. No options may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any option granted while the Plan is in effect
shall not be altered or impaired by suspension or termination of the Plan,
except with the consent of the person to whom the option was granted.
(c) The Plan shall terminate upon the occurrence of any of the events described
in Section 10(b) above.
10.
<PAGE>
13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.
(a) Upon adoption of the Plan by the Board of Directors and subject to the
condition subsequent that the Plan is approved by the shareholders of the
Company, the Plan shall become effective on the IPO Date.
(b) No option granted under the Plan shall be exercised or exercisable unless
and until the conditions of subparagraph 13(a) above has been met.
11.
<PAGE>
CASTELLE
1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
NONSTATUTORY STOCK OPTION
__________________, Optionee:
On ______________, 2000, (the "Grant Date") an option was automatically
granted to you pursuant to the Castelle (the "Company") 1995 Non-Employee
Directors' Stock Option Plan (the "Plan") to purchase shares of the common stock
of the Company ("Common Stock"). This option is not intended to qualify and will
not be treated as an "incentive stock option" within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for the Company's Non-Employee Directors (as
defined in the Plan).
The details of your option are as follows:
1. The total number of shares of Common Stock subject to this option is
( ). Subject to the limitations contained herein, this option shall vest and
become exercisable in twenty-four (24) equal monthly installments measured from
the Grant Date.
2. The exercise price of this option is ($___) per share, being the
Fair Market Value (as defined in the Plan) of the Common Stock on the Grant
Date.
3. (a) This option may be exercised, to the extent specified above, by
delivering a notice of exercise (in a form designated by the Company) together
with the exercise price, in one or a combination of the forms of payment
permitted under the Plan, to the Secretary of the Company, or to such other
person as the Company may designate, during regular business hours, together
with such additional documents as the Company may then require pursuant to
paragraph 6 of the Plan. This option may only be exercised for whole shares.
(b) The exercise price may be paid under one of the following
alternatives:
(i) Payment of the exercise price per share in cash or check;
(ii) Provided that at the time of the exercise the Common Stock
is publicly traded and quoted regularly in the Wall Street Journal, payment by
delivery of shares of Common Stock already owned by you, held for the period
required to avoid a charge to the Company's reported earnings, and owned free
and clear of any liens, claims, encumbrances or security interest, which Common
Stock shall be valued at its Fair Market Value on the date preceding the date of
exercise;
1.
<PAGE>
(iii) Payment pursuant to a program developed under Regulation T
as promulgated by the Federal Reserve Board which results in the receipt of cash
(or check) by the Company either prior to the issuance of shares of Common Stock
or pursuant to the terms of irrevocable instructions issued by you prior to the
issuance of shares of Common Stock; or
(iv) Payment by a combination of the methods of payment
specified in subparagraphs (i) through (iii) above.
(c) By exercising this option you agree that the Company may require
you to enter an arrangement providing for the cash payment by you to the Company
of any tax withholding obligation of the Company arising by reason of the
exercise of this option or the lapse of any substantial risk of forfeiture to
which the shares are subject at the time of exercise.
4. The term of this option is ten (10) years, commencing on the Grant
Date, unless sooner terminated as set forth in the Plan. In no event may this
option be exercised on or after the date on which it terminates.
5. This option is not transferable, except by will or by the laws of
descent and distribution, and is exercisable during your life only by you.
6. Any notices provided for in this option or the Plan shall be given
in writing and shall be deemed effectively given upon receipt or, in the case of
notices delivered by the Company to you, five (5) days after deposit in the
United States mail, postage prepaid, addressed to you at the address specified
below or at such other address as you hereafter designate by written notice to
the Company.
7. This option is subject to all the provisions of the Plan, a copy of
which is attached hereto and its provisions are hereby made a part of this
option, including without limitation the provisions of paragraph 6 of the Plan
relating to option provisions, and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the
provisions of this option and those of the Plan, the provisions of the Plan
shall control.
Dated the______________day of_______________, 19____.
Very truly yours,
CASTELLE
By:______________________
Duly authorized on behalf
of the Board of Directors
2.
<PAGE>
ATTACHMENT: Castelle 1995 Non-Employee Directors' Stock Option Plan
3.
<PAGE>
The undersigned:
(a) Acknowledges receipt of the foregoing option and the Plan and
understands that all rights and liabilities with respect to this option are set
forth in the option and the Plan;
(b) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the Company
and its affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of (i) only options previously granted and delivered to the
undersigned under stock option plans of the Company, and (ii) the following
agreements only:
NONE _______________________
(Initial)
OTHER _______________________
_______________________
_______________________
_______________________
Optionee
_______________________
Address
_______________________
4.
<PAGE>
NOTICE OF EXERCISE
Castelle
3255-3 Scott Boulevard
Santa Clara, CA 95054 Date of Exercise:________________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
Type of option: Nonstatutory
Stock option dated: _________________
Number of shares as to
which option is exercised: _________________
Certificates to be
issued in name of: _________________
Total exercise price: $_________________
Cash payment delivered: $_________________
Value of ______ shares
of common stock delivered(1): $_________________
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the Company's 1995 Non-Employee
Directors' Stock Option Plan and (ii) to provide for the payment by me to you
(in the manner designated by you) of your withholding obligation, if any,
relating to the exercise of this option.
Very truly yours,
_________________
- --------------------------------------------------------------------------------
(1) Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.
1.
<PAGE>
Exhibit 10.14
EXECUTIVE SEVERANCE AND
TRANSITION BENEFITS AGREEMENT
THIS EXECUTIVE SEVERANCE AND TRANSITION BENEFITS AGREEMENT (the
"Agreement") is entered into effective as of the 10th day of November, 1998
between DONALD L. RICH, ("Executive") and CASTELLE, a California corporation
(the "Company"). This Agreement is intended to provide Executive with the
compensation and benefits described herein upon the occurrence of specific
events. Certain capitalized terms used in this Agreement are defined in Article
5.
The Company and Executive hereby agree as follows:
ARTICLE 1
EMPLOYMENT BY THE COMPANY
1.1 The Company and Executive wish to set forth the compensation and benefits
which Executive shall be entitled to receive (i) in the event Executive's
employment with the Company terminates, or (ii) in the event there is a Change
in Control of the Company, under the circumstances described herein.
1.2 The duties and obligations of the Company to Executive under this Agreement
shall be in consideration for Executive's past services to the Company,
Executive's continued employment with the Company, and Executive's execution of
the general waiver and release described in Section 3.2.
1.3 This Agreement shall remain in full force and effect so long as Executive is
employed by the Company; provided, however, that Executive's rights to payments
and benefits under Article 2 shall continue until the Company's obligation to
provide such payments and benefits is satisfied.
1.4 This Agreement shall supersede any other agreements relating to Executive's
termination of employment with the Company.
ARTICLE 2
SEVERANCE, CHANGE IN CONTROL AND TRANSITION BENEFITS
2.1 Severance Benefits. If Executive's employment terminates due to an
Involuntary Termination Without Cause or a Voluntary Termination for Good Reason
after the date of execution of this Agreement, and without regard to any Change
in Control of the Company, the termination of employment will be a Covered
Termination. Executive shall receive Base Pay and bonus that have accrued but
are unpaid as of the date of such Covered Termination, and, within thirty (30)
days following such Covered Termination, Executive shall also receive a lump sum
payment equal to one hundred percent (100%) of Executive's Base Pay, all of the
foregoing subject to applicable tax withholding. In addition, following a
Covered Termination, Executive and Executive's covered dependents will be
eligible to continue their health care benefit coverage as permitted by COBRA
(Internal Revenue Code Section 4980B) at the same cost to Executive as in effect
immediately prior to the Covered Termination for the one (l)-year period
following the Covered Termination.
1.
<PAGE>
2.2 Transition Bonus.
(a) In the event there is a Change in Control of the Company and Executive
continues to render services to the Company for ninety (90) days following the
closing of the transaction resulting in such Change in Control, then, if:
(i) Executive's employment has been terminated and such termination is not
a Covered Termination, Executive shall be entitled to a lump-sum payment
equal to fifty percent (50%) of Executive's Base Pay, subject to applicable
withholding; or
(ii) Executive's employment has been terminated and such termination is a
Covered Termination, Executive shall be entitled to a lump-sum payment
equal to the Severance Benefits set forth in Section 2.1 of this Agreement,
subject to applicable withholding.
(b) If Executive does not terminate employment with the successor company
on or before the ninetieth (90th) day after the closing of the transaction
resulting in a Change in Control and continues to render services to the Company
from and after the ninetieth (90th) day following such closing, then Executive
shall be entitled to a lump-sum payment equal to fifty percent (50%) of
Executive's Base Pay, subject to applicable withholding, and without regard to
any payment that might be received by Executive with respect to a Covered
Termination.
2.3 Acceleration of Vesting of Outstanding Options.
(a) If Executive's employment terminates on a date that is less than
eighteen (18) months after the date Executive commences employment with the
Company and such termination is a Covered Termination, the vesting of any
options to purchase common stock of the Company then held by Executive shall
accelerate and such options shall become immediately vested as to fifty percent
(50%) of the total number of shares of common stock subject to such options.
(b) If Executive's employment terminates on a date that is eighteen (18)
months or more after the date Executive commences employment with the Company
and such termination is a Covered Termination, the vesting of any options to
purchase common stock of the Company then held by Executive shall accelerate and
such options shall become immediately vested as to one hundred percent (100%) of
the total number of shares of common stock subject to such options.
(c) Notwithstanding (a) and (b) above, if Executive's employment terminates
in connection with a Change in Control that is a transaction that is accounted
for as a pooling of interests for financial accounting purposes, then no portion
of any option to purchase common stock of the Company granted to Executive after
November 10, 1998 shall accelerate unless the Company receives reasonable
assurances from its independent public accountants (and from the acquiring
party's independent public accountants) that in their good faith judgment such
acceleration will not affect the pooling of interests accounting treatment of
such Change in Control transaction.
2.
<PAGE>
2.4 Mitigation. Executive shall not be required to mitigate damages or the
amount of any payment provided under this Agreement by seeking other employment
or otherwise, nor shall the amount of any payment provided for under this
Agreement be reduced by any compensation earned by Executive as a result of
employment by another employer or by any retirement benefits received by
Executive after the date of the Covered Termination, or otherwise.
2.5 Possible Outcomes. The chart attached hereto as Exhibit B is intended to
summarize the possible cash benefits payable under this Article 2 in the
circumstances indicated and is incorporated into this Agreement for the
convenience of the parties.
ARTICLE 3
LIMITATIONS AND CONDITIONS ON BENEFITS
3.1 Withholding of Taxes. The Company shall withhold appropriate federal, state,
local (and foreign, if applicable) income and employment taxes from any payments
hereunder.
3.2 Employee Agreement and Release Prior to Receipt of Benefits. Upon the
occurrence of a Covered Termination, and prior to the receipt of any benefits
under this Agreement on account of the occurrence of such Covered Termination,
Executive shall execute the Employee Agreement and Release (the "Release") in
the form attached hereto as Exhibit A. Such Release shall specifically relate to
all of Executive's rights and claims in existence at the time of such execution
and shall confirm Executive's obligations under the Company's standard form of
proprietary information agreement. It is understood that Executive has
twenty-one (21) days to consider whether to execute such Release, and Executive
may revoke such Release within seven (7) business days after execution. In the
event Executive does not execute such Release within the twenty-one (2l)-day
period, or if Executive revokes such Release within the subsequent seven (7)
business day period, no benefits shall be payable under this Agreement and this
Agreement shall be null and void.
ARTICLE 4
OTHER RIGHTS AND BENEFITS
4.1 Nonexclusivity. Except as otherwise expressly provided herein, nothing in
the Agreement shall prevent or limit Executive's continuing or future
participation in any benefit, bonus, incentive or other plans, programs,
policies or practices provided by the Company and for which Executive may
otherwise qualify, nor shall anything herein limit or otherwise affect such
rights as Executive may have under other agreements with the Company. Except as
otherwise expressly provided herein, amounts which are vested benefits or which
Executive is otherwise entitled to receive under any plan, policy, practice or
program of the Company at or subsequent to the date of a Covered Termination
shall be payable in accordance with such plan, policy, practice or program.
3.
<PAGE>
4.2 Parachute Payments. If the severance and other benefits provided to
Executive under this Agreement (i) constitute "parachute payments" within the
meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code") and (ii) but for this Section 4.2, such severance and other benefits
would be subject to the excise tax imposed by Section 4999 of the Code, then
Executive's benefits under this Agreement shall be payable either:
(a) in full; or
(b) as to such lesser amount which would result in no portion of such
severance and other benefits being subject to excise tax under Section 499 of
the Code, whichever of the foregoing amounts, taking into account the applicable
federal, state and local income taxes and the excise tax imposed by Section
4999, results in the receipt by Executive, on an after-tax basis, of the
greatest amount of severance benefits under this Agreement. Unless the Company
and Executive otherwise agree in writing, any determination required under this
Section 4.2 shall be made in writing by independent public accountants agreed to
by the Company and Executive (the "Accountants"), whose determination shall be
conclusive and binding upon Executive and the Company for all purposes. For
purposes of making the calculations required by this Section 4.2, the
Accountants may make reasonable, good faith interpretations concerning the
application of Sections 280G and 4999 of the Code. The Company and Executive
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section 4.2. The Company shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this Section 4.2.
ARTICLE 5
DEFINITIONS
For purposes of the Agreement, the following terms are defined as
follows:
5.1 "Base Pay" means Executive's annual base pay at the rate in effect during
the last regularly scheduled payroll period immediately preceding any
termination of Executive's employment or, if higher, Executive's annual base pay
in effect as of the date of this Agreement if subsequent to that time Executive
has agreed to a reduction in base pay in connection with a general reduction in
the base pay of other similarly situated employees of the Company.
5.2 "Change in Control" means (1) a dissolution, liquidation or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise; or (4) the acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any comparable successor provisions (excluding
any employee benefit plan, or related trust, sponsored or maintained by the
Company or any Affiliate of the Company) of the beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable
successor rule) of securities of the Company representing at least fifty percent
(50%) of the combined voting power entitled to vote in the election of
directors.
4.
<PAGE>
5.3 "Covered Termination" means an Involuntary Termination Without Cause or a
Voluntary Termination for Good Reason.
5.4 "Involuntary Termination Without Cause" means Executive's dismissal or
discharge for reasons other than fraud, misappropriation, embezzlement or
intentional misconduct on the part of Executive which resulted in material loss,
damage or injury to the Company. The termination of Executive's employment will
not be deemed to be an "Involuntary Termination Without Cause" if such
termination occurs as a result of Executive's death or disability. For purposes
of the foregoing, "disability" means a disability, as that term is defined in
the long term disability plan maintained by the Company that covers Executive,
that continues for ninety (90) days.
5.5 "Voluntary Termination For Good Reason" means that the Executive voluntarily
terminates employment within ninety (90) days after any of the following are
undertaken without Executive's express written consent:
(a) the assignment to Executive of any duties or responsibilities which
result in a material diminution or adverse change of Executive's position,
status or circumstances of employment;
(b) a reduction by the Company in Executive's Base Pay;
(c) any failure by the Company to continue in effect any benefit plan or
arrangement, including incentive plans or plans to receive securities of the
Company, in which Executive is participating (hereinafter referred to as
"Benefit Plans"), or the taking of any action by the Company which would
adversely affect Executive's participation in or reduce Executive's benefits
under any Benefit Plans or deprive Executive of any fringe benefit then enjoyed
by Executive, provided, however, that Executive may not terminate for Good
Reason if the Company offers a range of benefit plans and programs which, taken
as a whole, are comparable to the Benefit Plans as determined in good faith by
the Company;
(d) a relocation of Executive or the Company's principal business offices
to a location more than twenty (20) miles from the current location at which
Executive performs duties, except for required travel by Executive on the
Company's business to an extent substantially consistent with Executive's
business travel obligations;
(e) any breach by the Company of any provision of this Agreement or
Executive's Employment Agreement dated November 10, 1998; or
(f) any failure by the Company to obtain the assumption of this Agreement
by any successor or assign of the Company.
5.
<PAGE>
ARTICLE 6
GENERAL PROVISIONS
6.1 Employment Status. This Agreement does not constitute a contract of
employment or impose on Executive any obligation to remain as an employee, or
impose on the Company any obligation (i) to retain Executive as an employee,
(ii) to change the status of Executive as an at-will employee, or (iii) to
change the Company's policies regarding termination of employment.
6.2 Notices. Any notices provided hereunder must be in writing and such notices
or any other written communication shall be deemed effective upon the earlier of
personal delivery (including personal delivery by facsimile) or the third day
after mailing by first class mail, to the Company at its primary office location
and to Executive at Executive's address as listed in the Company's payroll
records. Any payments made by the Company to Executive under the terms of this
Agreement shall be delivered to Executive either in person or at the address as
listed in the Company's payroll records.
6.3 Severability. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
6.4 Waiver. If either party should waive any breach of any provisions of this
Agreement, he or it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provision of this Agreement.
6.5 Arbitration. Unless otherwise prohibited by law or specified below, all
disputes, claims and causes of action, in law or equity, arising from or
relating to this Agreement or its enforcement, performance, breach, or
interpretation shall be resolved solely and exclusively by final and binding
arbitration held in San Francisco, California through Judicial Arbitration &
Mediation Services/Endispute ("JAMS") under the then existing JAMS arbitration
rules. However, nothing in this section is intended to prevent either party from
obtaining injunctive relief in court to prevent irreparable harm pending the
conclusion of any such arbitration. Each party in any such arbitration shall be
responsible for its own attorneys' fees, costs and necessary disbursements;
provided, however, that in the event one party refuses to arbitrate and the
other party seeks to compel arbitration by court order, if such other party
prevails, it shall be entitled to recover reasonable attorneys' fees, costs and
necessary disbursements. Pursuant to California Civil Code Section 1717, each
party warrants that it was represented by counsel in the negotiation and
execution of this Agreement, including the attorneys' fees provision herein.
6.6 Complete Agreement. This Agreement, including Exhibit A, Exhibit B, and any
other written agreements referred to in this Agreement, constitutes the entire
agreement between Executive and the Company and it is the complete, final, and
exclusive embodiment of their agreement with regard to this subject matter. It
is entered into without reliance on any promise or representation other than
those expressly contained herein.
6.
<PAGE>
6.7 Amendment or Termination of Agreement. This Agreement may be changed or
terminated only upon the mutual written consent of the Company and Executive.
The written consent of the Company to a change or termination of this Agreement
must be signed by an executive officer of the Company after such change or
termination has been approved by the Compensation Committee of the Company's
Board of Directors.
6.8 Counterparts. This Agreement may be executed in separate counterparts, any
one of which need not contain signatures of more than one party, but all of
which taken together will constitute one and the same Agreement.
6.9 Headings. The headings of the Articles and Sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning hereof.
6.10 Successors and Assigns. This Agreement is intended to bind and inure to the
benefit of and be enforceable by Executive and the Company, and their respective
successors, assigns, heirs, executors and administrators, except that Executive
may not assign any duties hereunder and may not assign any rights hereunder
without the written consent of the Company, which consent shall not be withheld
unreasonably.
6.11 Attorneys' Fees. Except as otherwise provided in Section 6.5, if Executive
brings any action to enforce his rights hereunder, Executive shall be
responsible for his own attorneys' fees and costs incurred in connection with
such action, regardless of the outcome of such action.
6.12 Choice Of Law. All questions concerning the construction. validity and
interpretation of this Agreement will be governed by the law of the State of
California, without regard to such state's conflict of laws rules.
6.13 Non-Publication. The parties mutually agree not to disclose publicly the
terms of this Agreement except to the extent that disclosure is mandated by
applicable law or to respective personal advisors.
6.14 Construction Of Agreement. In the event of a conflict between the text of
the Agreement and any summary, description or other information regarding the
Agreement, the text of the Agreement shall control.
7.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year written above.
CASTELLE DONALD L. RICH
By: /s/ Jerome Burke /s/ Don. L. Rich
Name: Jerome Burke
Title: Executive Vice President
Exhibit A: Employee Agreement and Release
Exhibit B: Chart of Possible Outcomes
8.
<PAGE>
EXHIBIT A
EMPLOYEE AGREEMENT AND RELEASE
I understand and agree completely to the terms set forth in the
foregoing agreement.
I hereby confirm my obligations under the Company's proprietary
information agreement.
I acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A general release does not extend
to claims which the creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him must have materially
affected his settlement with the debtor." I hereby expressly waive and
relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to my release of any claims I may
have against the Company.
Except as otherwise set forth in this Agreement, I hereby release,
acquit and forever discharge the Company, its parents and subsidiaries, and
their officers, directors, agents, servants, employees, shareholders,
successors, assigns and affiliates, of and from any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys' fees, damages,
indemnities and obligations of every kind and nature, in law, equity, or
otherwise, known and unknown, suspected and unsuspected, disclosed and
undisclosed (other than any claim for indemnification I may have as a result of
any third party action against me based on my employment with the Company),
arising out of or in any way related to agreements, events, acts or conduct at
any time prior to and including the Effective Date of this Agreement, including
but not limited to: all such claims and demands directly or indirectly arising
out of or in any way connected with my employment with the Company or the
termination of that employment, including but not limited to, claims of
intentional and negligent infliction of emotional distress, any and all tort
claims for personal injury, claims or demands related to salary, bonuses,
commissions, stock, stock options, or any other ownership interests in the
Company, vacation pay, fringe benefits, expense reimbursements, severance pay,
or any other form of compensation; claims pursuant to any federal, state or
local law or cause of action including, but not limited to, the federal Civil
Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act
of 1967, as amended ("ADEA"); the federal Americans with Disabilities Act of
1990; the California Fair Employment and Housing Act, as amended; tort law;
contract law; wrongful discharge; discrimination; fraud; defamation; emotional
distress; and breach of the implied covenant of good faith and fair dealing;
provided, however, that nothing in this paragraph shall be construed in any way
to release the Company from its obligation to indemnify me pursuant to the
Company's indemnification obligation pursuant to agreement or applicable law or
to reduce or eliminate any coverage I may have under the Company's director and
officer liability policy, if any.
1.
<PAGE>
I acknowledge that I am knowingly and voluntarily waiving and releasing
any rights I may have under ADEA. I also acknowledge that the consideration
given for the waiver and release in the preceding paragraph hereof is in
addition to anything of value to which I was already entitled. I further
acknowledge that I have been advised by this writing, as required by the ADEA,
that: (A) my waiver and release do not apply to any rights or claims that may
arise after the Effective Date of this Agreement; (B) I have the right to
consult with an attorney prior to executing this Agreement; (C) I have
twenty-one (21) days to consider this Agreement (although I may choose to
voluntarily execute this Agreement earlier); (D) I have seven (7) days following
the execution of this Agreement by the parties to revoke the Agreement; and (E)
this Agreement shall not be effective until the date upon which the revocation
period has expired, which shall be the eighth day after this Agreement is
executed by me, provided that the Company has also executed this Agreement by
that date (the "Effective Date").
CASTELLE DONALD L. RICH
By: /s/ Jerome Burke /s/ Don L. Rich
Name: Jerome Burke Date: 11/10/98
Title: Executive Vice President
2.
<PAGE>
EXHIBIT B
POSSIBLE CASH PAYMENTS UNDER
EXECUTIVE SEVERANCE AND TRANSITION BENEFITS AGREEMENT
<TABLE>
<CAPTION>
- ---------------------------------------- -------------------------------------- --------------------------------------
Termination that Does Not Qualify as Termination that Qualifies as a
a Covered Termination Covered Termination
- ---------------------------------------- -------------------------------------- --------------------------------------
- ---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
Prior to Change in Control Cash: -0- Cash: 12 months base pay
- ---------------------------------------- -------------------------------------- --------------------------------------
- ---------------------------------------- -------------------------------------- --------------------------------------
0 - 89 days after Change in Control Cash: -0- Cash: 12 months base pay
- ---------------------------------------- -------------------------------------- --------------------------------------
- ---------------------------------------- -------------------------------------- --------------------------------------
90 days after Change in Control Cash: 6 months base pay Cash: 12 months base pay
- ---------------------------------------- -------------------------------------- --------------------------------------
- ---------------------------------------- -------------------------------------- --------------------------------------
90+ days after Change in Control Cash: 6 months base pay Cash: 18 months base pay
- ---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
<PAGE>
Castelle and Subsidiaries Exhibit 23.1
- --------------------------------------------------------------------------------
Consent of PricewaterhouseCoopers LLP
Independent Accountants
We consent to the incorporation by reference in the registration statements of
Castelle and Subsidiaries on form S-8 (File Numbers 333-75247, 333-21845 and
333-06083) of our report dated February 4, 2000, on our audits of the
consolidated financial statements of Castelle and subsidiaries as of December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999, and our report dated February 4, 2000 on our audit of the financial
statement schedule, which reports are included in this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 20, 2000
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Castelle and Subsidiaries Exhibit 27.1
Financial Data Schedule
- --------------------------------------------------------------------------------
This schedule contains summary financial information extracted from the
Company's Financial Statements for the twelve month period ending December 31,
1999 included in the Company's Form 10-K filed March 21, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,714
<SECURITIES> 0
<RECEIVABLES> 1,525
<ALLOWANCES> (493)
<INVENTORY> 1,411
<CURRENT-ASSETS> 8,037
<PP&E> 1,565
<DEPRECIATION> (1,178)
<TOTAL-ASSETS> 8,502
<CURRENT-LIABILITIES> 4,481
<BONDS> 1
0
0
<COMMON> 29,002
<OTHER-SE> (24,915)
<TOTAL-LIABILITY-AND-EQUITY> 8,502
<SALES> 0
<TOTAL-REVENUES> 16,116
<CGS> 7,712
<TOTAL-COSTS> 12,054
<OTHER-EXPENSES> 27
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (126)
<INCOME-PRETAX> (3,551)
<INCOME-TAX> 4
<INCOME-CONTINUING> (3,555)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,555)
<EPS-BASIC> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
