SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant |X| Filed by a Party other than the Registrant | | Check the appropriate box: | | Preliminary Proxy Statement | | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |X| Definitive Proxy Statement | | Definitive Additional Materials | | Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12 CASTELLE - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement if Other Than the Registrant) Payment of Filing Fee (Check the appropriate box) |X| No fee required. | | Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1. Title of each class of securities to which transaction applies: - -------------------------------------------------------------------------------- 2. Aggregate number of securities to which transaction applies: - -------------------------------------------------------------------------------- 3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): - -------------------------------------------------------------------------------- 4. Proposed maximum aggregate value of transaction: - -------------------------------------------------------------------------------- 5. Total fee paid: - -------------------------------------------------------------------------------- | | Fee paid previously with preliminary materials. | | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 6. Amount Previously Paid: - -------------------------------------------------------------------------------- 7. Form, Schedule or Registration Statement No.: - -------------------------------------------------------------------------------- 8. Filing Party: - -------------------------------------------------------------------------------- 9. Date Filed: - -------------------------------------------------------------------------------- CASTELLE 3255-3 SCOTT BOULEVARD SANTA CLARA, CALIFORNIA NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 25, 1999 TO THE SHAREHOLDERS OF CASTELLE: Notice is hereby given that the Annual Meeting of Shareholders of CASTELLE, a California corporation (the "Company"), will be held on Tuesday May 25, 1999 at 10:00 a.m. local time at the Company's corporate offices, located at 3255-3 Scott Boulevard, Santa Clara, California for the following purposes: 1. To elect directors to serve for the ensuing year and until their successors are elected. 2. To ratify the selection of PricewaterhouseCoopers LLP as independent auditors of the Company for its fiscal year ending December 31, 1999. 3. To transact such other business as may properly come before the meeting or any adjournment or postponement thereof. The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice. The Board of Directors has fixed the close of business on April 19, 1999, as the record date for the determination of shareholders entitled to notice of and to vote at this Annual Meeting and at any adjournment or postponement thereof. By Order of the Board of Directors /s/Laurie Gee Laurie Gee Vice President, Finance and Administration and Secretary Santa Clara, California April 28, 1999 All Shareholders are cordially invited to attend the meeting in person. Whether or not you expect to attend the meeting, please complete, date, sign and return the enclosed proxy as promptly as possible in order to ensure your representation at the meeting. A return envelope (which is postage prepaid if mailed in the United States) is enclosed for that purpose. Even if you have given your proxy, you may still vote in person if you attend the meeting. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain from the record holder a proxy issued in your name. CASTELLE 3255-3 SCOTT BOULEVARD SANTA CLARA, CALIFORNIA PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS May 25, 1999 INFORMATION CONCERNING SOLICITATION AND VOTING GENERAL The enclosed proxy is solicited on behalf of the Board of Directors (the "Board") of CASTELLE, a California corporation (the "Company"), for use at the Annual Meeting of Shareholders to be held on May 25, 1999, at 10:00 a.m. local time (the "Annual Meeting"), or at any adjournment or postponement thereof, for the purposes set forth herein and in the accompanying Notice of Annual Meeting. The Annual Meeting will be held at the Company's corporate offices, located at 3255-3 Scott Boulevard, Santa Clara California. The Company intends to mail this proxy statement and accompanying proxy card on or about April 28, 1999, to all shareholders entitled to vote at the Annual Meeting. SOLICITATION The Company will bear the entire cost of solicitation of proxies, including preparation, assembly, printing and mailing of this proxy statement, the proxy and any additional information furnished to shareholders. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding in their names shares of Common Stock beneficially owned by others to forward to such beneficial owners. The Company may reimburse persons representing beneficial owners of Common Stock for their costs of forwarding solicitation materials to such beneficial owners. Original solicitation of proxies by mail may be supplemented by telephone, telegram or personal solicitation by directors, officers or other regular employees of the Company. No additional compensation will be paid to directors, officers or other regular employees for such services. VOTING RIGHTS AND OUTSTANDING SHARES Only holders of record of Common Stock at the close of business on April 19, 1999 will be entitled to notice of and to vote at the Annual Meeting. At the close of business on April 19, 1999 the Company had outstanding and entitled to vote 4,685,435 shares of Common Stock. Each holder of record of Common Stock on such date will be entitled to one vote for each share held on all matters to be voted upon. With respect to the election of directors, shareholders may exercise cumulative voting rights. Under cumulative voting, each holder of Common Stock will be entitled to four (4) votes for each share held. Each shareholder may give one candidate, who has been nominated prior to voting, all the votes such shareholder is entitled to cast or may distribute such votes among as many such candidates as such shareholder chooses. (However, no shareholder will be entitled to cumulate votes unless the candidate's name has been placed in nomination prior to the voting and at least one shareholder has given notice at the meeting, prior to the voting, of his or her intention to cumulate votes). Unless the proxyholders are otherwise instructed, shareholders, by means of the accompanying proxy, will grant the proxyholders discretionary authority to cumulate votes. All votes will be tabulated by the inspector of election appointed for the meeting, who will separately tabulate affirmative and negative votes, abstentions and broker non-votes. Abstentions and broker non-votes are counted towards a quorum but are not counted for any purpose in determining whether a matter is approved. 1. REVOCABILITY OF PROXIES Any person giving a proxy pursuant to this solicitation has the power to revoke it at any time before it is voted. It may be revoked by filing with the Secretary of the Company at the Company's principal executive office, 3255-3 Scott Boulevard, Santa Clara, California 95054, a written notice of revocation or a duly executed proxy bearing a later date, or it may be revoked by attending the meeting and voting in person. Attendance at the meeting will not, by itself, revoke a proxy. SHAREHOLDER PROPOSALS The deadline for submitting a stockholder proposal for inclusion in the Company's proxy statement and form of proxy for the Company's 2000 annual meeting of shareholders pursuant to Rule 14a-8 of the Securities and Exchange Commission is December 30, 1999. Unless a shareholder who wishes to bring a matter before the shareholders at the Company's 2000 annual meeting of shareholders notifies the Company of such matter prior to March 15, 2000, management will have discretionary authority to vote all shares for which it has proxies in opposition to such matter. 2. PROPOSAL 1 ELECTION OF DIRECTORS The Board of Directors is presently composed of seven members however, as permitted by the Company's Articles of Incorporation and Bylaws, the Board of Directors has reduced the size of the Board to four members, effective at the commencement of the Annual Meeting. Three of the current directors of the Company, Arthur Bruno, John Freidenrich and Alan Kessman, have each decided not to stand for re-election to the Board. Each director to be elected will hold office until the next annual meeting of Shareholders and until his successor is elected and has qualified, or until such director's earlier death, resignation or removal. Each nominee listed below is currently a director of the Company, Robert Hambrecht having been elected by the shareholders, and the other three having been elected by the Board. Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the four nominees named below, subject to the discretionary power to cumulate votes. In the event that any nominee should be unavailable for election as a result of an unexpected occurrence, such shares will be voted for the election of such substitute nominee as management may propose. Each person nominated for election has agreed to serve if elected and management has no reason to believe that any nominee will be unable to serve. The four candidates receiving the highest number of affirmative votes cast at the meeting will be elected directors of the Company. THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF EACH NAMED NOMINEE Nominees The names of the nominees and certain information about them are set forth below: Name Age Position Donald L. Rich 57 President and Chief Executive Officer and Director Peter R. Tierney 54 Director and President and Chief Executive Officer of MarketFirst Software Inc Robert Hambrecht 32 Partner and Director of Distribution, W.R. Hambrecht & Company Scott C. McDonald 46 Director Set forth below is biographical information for each nominee whose term of office as a director will continue after the Annual Meeting. Donald L. Rich Mr. Rich joined the Company in November 1998 and has served as President and Chief Executive Officer from November 1998 to the present. From January 1997 until November 1998, Mr. Rich was an independent consultant providing services to emerging software firms. From 1993 through 1997, Mr. Rich was Chief Executive Officer and President of Talarian Corporation, a network management and communications middleware software firm. Earlier in his career Mr. Rich served as vice president of marketing and sales for Integrated Systems, Inc., a provider of embedded software and design automation tools and held various marketing and sales management positions with IBM Corporation, and was director of marketing for the IBM Western Region. 3. Peter R. Tierney Mr. Tierney has served as a director of the Company since April 1999. He has served as President and Chief Executive Officer of MarketFirst Software Inc., a privately held business focused on delivering software and services in the emerging field of marketing automation systems since July 1998. From 1991 to 1997, Mr. Tierney served as Chairman, President and CEO of Inference Corporation, a leading provider of self-service and knowledge management tools for the customer service and help desk industries. Prior to Inference, as senior vice president of Oracle Corporation, Tierney was responsible for worldwide marketing and served as a member of the Oracle Management Committee. Earlier in his career, Mr. Tierney served as vice president of marketing and sales for Relational Technology (Ingres) Corporation and was director of marketing for the IBM Northwestern Region. Mr. Tierney also currently serves on the Board of Directors of MarketFirst Software, PhotoAccess Corporation, and The SoftAd Group. Robert Hambrecht Mr. Hambrecht has served as a director of the Company since March 1998. He has been a partner and Director of Distribution for W.R. Hambrecht & Company, an investment banking firm, since January 1998, and was Vice President of H&Q Venture Partners, a venture capital firm, from April 1996 through January 1998. From January 1994 to March 1996, Mr. Hambrecht was employed by Unterberg Harris, an investment banking firm, most recently as an associate. Mr. Hambrecht attended Columbia University from September 1991 through December 1993 where he earned a master's degree in public administration. Mr. Hambrecht also serves on the Board of Directors of four privately held companies. Scott C. McDonald Mr. McDonald has served as a director of the Company since April 1999. From 1993 to 1998, Mr. McDonald was the senior operating and financial executive at CIDCO, an innovator in advanced telephony products, serving as Executive Vice President, Chief Operating Officer, Chief Financial Officer and Secretary. From 1989 to 1993 he was Chief Financial Officer and Vice President, Finance & Administration at Integrated Systems, Inc., a provider of embedded operating software and design automation tools. Prior to 1989, he has held financial management and investor relations positions with Computer Products, Inc., Compower Corporation, Monterey Federal Credit Union and the J.M. Smucker Company. Mr. McDonald currently serves on the Board of Directors for Digital Power Corporation and Octant Technologies, Inc. Board Committees and Meetings During the fiscal year ended December 31, 1998 the Board of Directors held nine meetings. The Board has an Audit Committee and a Compensation Committee. The Audit Committee meets with the Company's independent auditors at least annually to review the results of the annual audit and discuss the financial statements; recommends to the Board the independent auditors to be retained; and receives and considers the accountants' comments as to controls, adequacy of staff and management performance and procedures in connection with audit and financial controls. The Audit Committee is composed of two non-employee directors: Messrs. Freidenrich and Kessman. It met four times during the year. The Compensation Committee makes recommendations concerning salaries and incentive compensation, awards stock options to employees and consultants under the Company's stock option plans and otherwise determines compensation levels and performs such other functions regarding compensation as the Board may delegate. The Compensation Committee is composed of three non-employee directors: Messrs. Freidenrich, Hambrecht and Kessman. It met one time during such fiscal year. During the year ended December 31, 1998, each Board member attended 75% or more of the aggregate of the meetings of the Board and of the committee on which he served, held during the period for which he was a director or committee member, respectively. 4. PROPOSAL 2 RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS The Board of Directors has selected PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal year ended December 31, 1999 and has further directed that management submit the selection of independent auditors for ratification by the shareholders at the Annual Meeting. PricewaterhouseCoopers LLP has audited the Company's financial statements since its inception in 1987. Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions. Shareholder ratification of the selection of PricewaterhouseCoopers LLP as the Company's independent auditors is not required by the Company's Bylaws or otherwise. However, the Board is submitting the selection of PricewaterhosueCoopers LLP to the shareholders for ratification as a matter of good corporate practice. If the shareholders fail to ratify the selection, the Audit Committee and the Board will reconsider whether or not to retain that firm. Even if the selection is ratified, the Audit Committee and the Board in their discretion may direct the appointment of different independent auditors at any time during the year if they determine that such a change would be in the best interests of the Company and its shareholders. The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and voting at the Annual Meeting will be required to ratify the selection of PricewaterhouseCoopers LLP. THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF PROPOSAL 2 5. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of the Company's Common Stock as of February 22, 1999 by: (i) each director and nominee for director; (ii) each executive officer named in the Summary Compensation Table; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more than five percent of its Common Stock. BENEFICIAL OWNERSHIP TABLE ......................................................................... Beneficial Ownership (1) --------------------------- Number of Percent Beneficial Owner Shares of Total - ------------------------------------------- ------------ ---------- Entities Affiliated with: 865,587 20% Hambrecht & Quist Group (2) One Bush Street 18th Floor San Francisco, CA 94104 Tolvusamskipti HF (3) 439,560 9.4% Kringlunni 19 103 Reykjavik, Iceland Wellington Management Company, LLP (4) 415,000 9.6% 75 State Street Boston, MA 02109 Entities Affiliated with: 386,454 8.9% Bay Partners (5) 10600 North DeAnza Boulevard Suite 100 Cupertino, CA 95014 Arthur H. Bruno (6) 187,250 4.3% c/o Castelle 3255-3 Scott Boulevard Santa Clara, CA 95054 Jerome J. Burke (7) 139,814 3.2% John Freidenrich (8) 401,453 9.2% Alan Kessman (9) 18,932 * Robert H. Hambrecht (10) 9,627 * Scott C. McDonald 0 * Donald L. Rich 0 * Prasad A. Raje (11) 108,340 2.4% Peter R. Tierney 0 * All directors and executive officers as 865,416 18.9% a group (total of 9 persons) (12) See notes (6)(7)(8)(9)(10)(11) below -------------------- * Less than one percent of total shares. (1) This table is based upon information supplied by officers, directors and principal shareholders and Schedules 13D and 13G filed with the Securities and Exchange Commission (the "SEC"). Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, the Company believes that each of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 4,337,375 shares outstanding on February 22, 1999, adjusted as required by rules promulgated by the SEC. 6. (2) Includes 60,835 shares held by H & Q Ventures IV, 338,482 shares (and warrants exercisable within 60 days for 16,666 shares) held by H & Q London Ventures, 1,251 shares held by Hamquist, 182,517 shares held by Ivory & Sime Enterprise Capital PLC, 85,536 shares (and warrants exercisable within 60 days for 136,666 shares) held by Hambrecht & Quist California, and 43,634 shares held by the Hambrecht & Quist Venture Partners. The entities named above and the entities' respective general partners, directors, executive officers, members and/or managers, as applicable, disclaim beneficial ownership of any securities identified other than those directly held by such person. (3) Includes 339,560 shares of Common Stock to be issued within 60 days of February 22, 1999 pursuant to terms set forth in that certain acquisition agreement entered into by Tolvusamskipti HF and the Company in April 1998. (4) Wellington Management Company, LLP, a registered investment advisor under the Investment Advisors Act of 1940, shares voting and investment power over 415,000 shares of the Company's Common Stock with its clients. (5) Includes 15,453 shares held by California BPIV, L.P., 193,231 shares held by Bay Partners III and 177,770 shares held by Bay Partners IV. John Freidenrich, a director of the Company, and John Bosch are general partners of California BPIV, L.P., and of Bay Management Company, L.P. and Bay Management Company IV, L.P., the general partners of Bay Partners III and Bay Partners IV. Neal Dempsey is a general partner of California BPIV, L.P. and Bay Management Company IV, L.P. In such capacities, Messrs. Bosch, Dempsey and Freidenrich have shared voting and investment power over shares of the Company's Common Stock held by California BP IV, L.P., Bay Partners III and Bay Partners IV. They disclaim beneficial ownership as to these shares, except to the extent of their respective pecuniary interests therein. (6) Includes 45,000 shares of Common Stock subject to options exercisable within 60 days of February 22, 1999 and 10,000 shares of Common Stock held by Mr. Bruno's wife. (7) Includes 66,249 shares of Common Stock subject to options exercisable within 60 days of February 22, 1999. (8) Includes 15,453 shares held by California BP IV, L.P., 193,231 shares held by Bay Partners III and 177,770 shares held by Bay Partners IV. John Freidenrich, a director of the Company, and general partner of California BP IV, L.P. and of Bay Management Company, L.P. and Bay Management Company IV, L.P., the general partners of Bay Partners III and Bay Partners IV. Mr. Freidenrich disclaims beneficial ownership as to these shares, except to the extent of their respective pecuniary interests therein. Also includes 10,000 shares held by the Freidenrich Family Trust and 4,999 shares of Common Stock subject to options exercisable within 60 days of February 22, 1999. (9) Includes 14,373 shares of Common Stock subject to options exercisable within 60 days of February 22, 1999. (10) Includes 3,707 shares of Common Stock subject to options exercisable within 60 days of February 22, 1999. (11) Includes 108,340 shares of Common Stock subject to options exercisable within 60 days of February 22, 1999 (12) Includes shares described in the notes above, as applicable. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act") requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 1998, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with. 7. EXECUTIVE COMPENSATION Compensation of Directors Directors currently receive no cash compensation from the Company for their services as members of the Board. They are reimbursed for certain expenses in connection with attendance at Board and Committee meetings. Each non-employee director of the Company receives stock option grants under the 1995 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"). Only non-employee directors of the Company are eligible to receive options under the Directors' Plan. Options granted under the Directors' Plan are intended by the Company not to qualify as incentive stock options under the Code. Option grants under the Directors' Plan are non-discretionary. Upon initial election to be a non-employee director, a person is granted an option to purchase 5,000 shares of Common Stock of the Company. On April 1 of each year (or the next business day should such date be a legal holiday), each member of the Company's Board who is not an employee of the Company is automatically granted under the Directors' Plan, without further action by the Company, the Board or the shareholders of the Company, an option to purchase 2,000 shares of Common Stock of the Company. The exercise price of options granted under the Directors' Plan is 100% of the fair market value of the Common Stock subject to the option on the date of the option grant. Options granted under the Directors' Plan vest in 24 equal installments beginning one month after the date of grant provided the optionee has, during the entire period prior to such vesting date, continuously served as a non-employee director, employee or consultant of the Company or an affiliate of the Company. The term of options granted under the Directors' Plan is ten years. In the event of a merger of the Company with or into another corporation or a consolidation, acquisition of assets or other change-in-control transaction involving the Company, vesting will be accelerated and the option will terminate if not exercised prior to the consummation of the transaction. On March 20, 1998, pursuant to the terms of the Directors' Plan, Mr. Hambrecht received an initial option to purchase 5,000 shares of the Company's Common Stock at an exercise price per share of $2.37. On April 1, 1998, pursuant to the terms of the Directors' Plan, the Company granted options covering 2,000 shares of Common Stock of the Company to each non-employee director of the Company, at an exercise price per share of $2.38 which was the fair market value of such Common Stock on the date of grant. As of February 22, 1999, no options had been exercised under the Directors' Plan. Pursuant to an agreement, Mr. Kessman performs consulting services for the Company. In 1998, Mr. Kessman received $25,000 in consulting fees for services performed for the Company. 8. Compensation of Executive Officers Summary of Compensation The following table shows for the fiscal years ended December 31, 1998, 1997 and 1996, compensation awarded or paid to, or earned by, the Company's Chief Executive Officers and its other executive officers whose total annual salary and bonus exceeded $100,000 (the "Named Executive Officers"): SUMMARY COMPENSATION TABLE .................................................................................................................................... Long-Term Compensation Annual Compensation Awards ----------------------------------------- ---------------------------- Restricted Securities Name and Principal Other Annual Stock Underlying All Other Position Year Salary ($) Bonus ($) Compensation Award(s)($) Options (#) Compensation --------------------------- ------ ------------ ----------- ------------ ------------- ----------- ------------- Arthur H. Bruno (1) 1998 $150,000 -- -- -- -- -- Chairman of the Board and 1997 $183,462 $50,000 -- -- 45,000 -- Director, and 1996 $176,538 $50,000 -- -- -- -- Former Chief Executive Officer Donald L. Rich (2) 1998 $22,307 -- -- -- 300,000 -- President, Chief 1997 -- -- -- -- -- -- Executive Officer and 1996 -- -- -- -- -- -- Director Jerome J. Burke (3) 1998 $175,000 $69,456(4) -- -- 50,000 -- Executive Vice President 1997 $135,000 $118,584(5) -- -- 77,000 -- and Former President and 1996 $124,578 $120,720(6) -- -- -- -- Chief Operating Officer Randall I. Bambrough (7) 1998 $150,384 -- -- -- 25,000 -- Former Chief Financial 1997 $126,077 $15,000 -- -- 50,000 -- Officer, Vice President 1996 $112,188 $10,000 -- -- 5,000 -- of Finance and Administration and Secretary Prasad Raje 1998 $148,942 -- -- -- 50,000 -- Chief Technical Officer 1997 $75,807 -- -- -- 150,000 -- and Vice President of 1996 -- -- -- -- -- -- Engineering --------------- (1) Mr. Bruno served as the Company's Chairman of the Board since October 1993, as Chief Executive Officer from October 1993 through April 1997 and from November 1997 to November 1998, and as President from October 1993 through April 1997. From February 1996 to the present he has served as the Chairman (2) Mr. Rich joined the Company as President and Chief Executive Officer in November 1998. (3) Mr. Burke resigned as President and Chief Operating Officer in November 1998 and remained at the Company as an Executive Vice President. (4) Represents bonus and sales commissions paid by the Company for sales made in 1998. (5) Represents bonus and sales commissions paid by the Company for sales made in 1997. (6) Represents bonus and sales commissions paid by the Company for sales made in 1996. (7) Mr. Bambrough resigned as Chief Financial Officer, Vice President of Finance and Administration in January 1999 and resigned as Secretary on March 31, 1999. 9. Stock Option Grants and Exercises The Company grants options to its executive officers under its 1988 Equity Incentive Plan. As of December 31, 1998, options to purchase a total of 1,394,025 shares were outstanding under the Incentive Plan and options to purchase 182,091 shares remained available for grant thereunder. There were no stock option exercises during 1998 by any Named Executive Officer. The following tables show for the fiscal year ended December 31, 1998, certain information regarding options granted to, exercised by, and held at year-end by the Named Executive Officers: OPTION GRANTS IN LAST FISCAL YEAR ................................................................................................................................ Number of Potential Realizable Value (4) at Securities % of Total Assumed Annual Rates of Stock Price Underlying Options Exercise Appreciation for Option Term ----------------------------------- Name and Principal Position Options Granted in Price Expiration Granted (1) Fiscal Year Per Share(3) Date 5% ($) 10% ($) (2) - ---------------------------- ------------- ------------- ------------ ----------- ---------------- --------------- Arthur H. Bruno -- -- -- -- -- -- Chairman of the Board and Director, and Former Chief Executive Officer Donald L. Rich 300,000 46.2% $1.00 11/10/05 $125,400 $302,400 President, Chief Executive Officer and Director Jerome J. Burke 50,000 7.7% $1.50 08/04/05 $31,350 $75,600 Executive Vice President and Former President and Chief Operating Officer Randall I. Bambrough 25,000 3.8% $1.50 08/04/05 $15,675 $37,800 Former Chief Financial Officer, Vice President of Finance and Administration and Secretary Prasad Raje 50,000 7.7% $1.50 08/04/05 $31,350 $75,600 Chief Technical Officer and Vice President of Engineering -------------------- (1) Options granted to Messrs. Burke, Bambrough and Raje vest monthly in equal increments over a two-year period; one sixth of the options granted to Mr. Rich vest on May 11, 1999 and the remaining options vest monthly in equal increments over a 30 month period. (2) Based on an aggregate of 649,500 shares of Common Stock subject to options granted to employees in 1998. (3) The exercise price is equal to 100% of the fair market value of Common Stock at the date of grant. (4) The potential realizable value is calculated based on the term of the option at its date of grant. It is calculated based on the assumption that the stock price on the date of grant appreciates from the date of grant at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. The 5% and 10% assumed rates of appreciation are derived from the rules of the Commission and do not represent the Company's estimate or projection of future Common Stock price. 10. OPTION REPRICING INFORMATION Number of Market Price Exercise Length of Securities of Stock at Price at Original Option Underlying Time of Time of Term Remaining Options Repricing or Repricing or at Date of Name and Principal Position Repriced or Amendment ($) Amendment ($) New Exercise Repricing or Date Amended (#) Price Amendment - ---------------------------- ------------- ------------- ------------ ------------ -------------- ---------------- Arthur H. Bruno 08/21/98 45,000 $1.56 $5.75 $1.56 5.5 years Chairman of the Board and Director, and Former Chief Executive Officer Donald L. Rich -- -- -- -- -- -- President, Chief Executive Officer and Director Jerome J. Burke 08/21/98 30,000 $1.56 $5.75 $1.56 5.5 years Executive Vice President 08/21/98 47,000 $1.56 $4.50 $1.56 6 years and Former President and Chief Operating Officer Randall I. Bambrough 08/21/98 2,500 $1.56 $6.00 $1.56 4.25 years Former Chief Financial 08/21/98 7,500 $1.56 $5.00 $1.56 3.8 years Officer, Vice President 08/21/98 5,000 $1.56 $7.75 $1.56 4.8 years of Finance and 08/21/98 5,000 $1.56 $5.50 $1.56 5.5 years Administration 08/21/98 45,000 $1.56 $4.50 $1.56 6 years and Secretary Prasad Raje 08/21/98 150,000 $1.56 $4.50 $1.56 6 years Chief Technical Officer and Vice President of Engineering Termination of Employment Arrangements The Company has entered into severance and transition benefit agreements with Messrs. Bambrough, Burke, Rich and Raje pursuant to which the Company will pay the executive a lump sum equal to 100% of each officer's annualized salary and maintain the medical benefits enjoyed by him for one year following either a voluntary termination of employment for good reason (as defined in each agreement) by the executive or an involuntary termination of employment without cause (as defined in each agreement). Mr. Raje, however, will also receive such benefits in the event he resigns or voluntary terminates his employment with the Company after January 6, 1998. In addition, each of Messrs. Bambrough, Burke, Rich and Raje is eligible to earn an additional lump sum payment equal to six months of his base salary if he remains with the Company at least ninety days after a change in control and is terminated for cause or leaves voluntarily without good reason, or if he remains in excess of ninety days and his employment is subsequently terminated. Additionally, Mr. Rich and Mr. Raje are entitled to certain acceleration of the vesting of their options in the event either is involuntary terminated by the Company as set forth above. REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS(*1) The Compensation Committee of the Board is responsible for determining compensation policies for the Company's executive officers, including any stock-based awards to such individuals under the Company's 1988 Equity Incentive Plan. In determining executive officer compensation, the Compensation Committee considers corporate performance against the Company's objectives. In addition, the Compensation Committee structures executive compensation packages with two objectives: (1) to ensure that the compensation and incentives provided to the executive officers are closely aligned with the Company's financial performance and shareholder value, and (2) to attract and retain, through a competitive compensation structure, those key executives critical to the long-term success of the Company. - --------------------- *1 The material in this report is not "soliciting material," is not deemed "filed" with the SEC, and is not to be incorporated by reference into any filing of the Company under the Security Exhange Act of 1933 (the "1933 Act") or 1934 Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing. 11. In addressing the first objective, the Compensation Committee utilizes stock option grants to executive officers in lieu of higher salaries or cash bonuses to tie executive officer compensation directly to the Company's stock price performance. The Compensation Committee believes that the grant of an equity interest in the Company serves to link management interests with shareholder interests and to motivate executive officers to make decisions that are in the best interests of the Company and the shareholders. The Board considers stock option grants to executive officers based on various factors, including (i) each officer's responsibilities, (ii) any changes in such responsibilities, (iii) past option grants and each officer's current equity interest in the Company and (iv) performance. The second objective of the overall executive compensation policy is addressed by a salary and bonus policy which is based on (i) consideration of the salaries and total compensation of executive officers in similar positions with comparable companies in the industry (ii) the qualifications and experience of each executive officer, (iii) the Company's financial performance during the past year and (iv) each officer's performance against objectives related to their areas of responsibility. The Compensation Committee periodically reviews individual base salaries of executive officers, and adjusts salaries based on individual job performance and changes in the officer's duties and responsibilities. In making salary decisions, the Board exercises its discretion and judgment based on these factors. No specific formula is applied to determine the weight of each factor, although the mix among the compensation elements of salary, cash incentive and stock options are biased toward stock options to emphasize the link between executive incentives and the creation of shareholder value as measured by the equity markets. Consequently, salaries and cash incentives are set in the low-range as compared to the comparable companies in the industry while stock options are set in the mid to high-range compared to comparable companies. The Chief Executive Officer provides the Board with recommendations for individual executive officers based upon an evaluation of their performance against objectives and responsibilities. The Compensation Committee believes that another key element of executive compensation should be the variable portion provided by annual cash incentive plans. The cash incentive portion of the executive officers' compensation is dependent primarily on the Company's financial performance and achievement of specified corporate objectives as determined by the Compensation Committee. The Company's executive officer annual bonus plan is designed such that if the Company performs above its stated objectives, cash incentives awarded may be above the targeted amounts. If the Company performs below its stated objectives, cash awards may be significantly reduced, and may be eliminated altogether if performance is below defined thresholds. A substantially smaller portion of each executives' annual bonus is based on performance against individual objectives. The Board uses the same factors described above for the executive officers in setting the annual salary, stock option grant and cash incentives awarded to the Chief Executive Officer. As a result of the subjective evaluation of these factors and a reduction in responsibilities, the Board decreased Mr. Bruno's base salary for 1998 from the amount earned by him in 1997 and did not award Mr. Bruno a cash bonus or grant him options to purchase shares of Common Stock of the Company. In connection with the engagement of Mr. Rich as the new President and Chief Executive Officer of the Company in November 1998, the Board negotiated a compensation package with that individual which included an annualized base salary of $200,000 and is eligible to earn a bonus of $100,000 if specific performance criteria are met. Mr. Rich also received an option to purchase 300,000 shares of Common Stock of the Company at the fair market value on the date of grant. Mr. Rich is also entitled to the payment of certain additional benefits in the event he is terminated by the Company under certain circumstances. The compensation package received by Mr. Rich, including the severance component, was approved by the Compensation Committee based on the collective experience of the Compensation Committee and members with respect to the competitive labor market in the Silicon Valley, the opportunities available to qualified candidates such as Mr. Rich, and the terms of compensation packages typically offered to attract qualified executive officers. Compensation Committee of the Board of Directors Robert Hambrecht John Freidenrich Alan Kessman 12. PERFORMANCE MEASUREMENT COMPARISON(*2) The following graph shows the total shareholder return of an investment of $100 in cash on December 20, 1995 for (i) the Company's Common Stock, (ii) the Nasdaq Stock Market Index (US Companies) and (iii) the Nasdaq Computer Manufacturers Stock Index. All values assume reinvestment of the full amount of all dividends and are calculated as of December 31 of each year: PERFORMANCE MEASUREMENT TABLE ................................................................................ Nasdaq Stock Nasdaq Computer Market Index Manufacturers Date CASTELLE (US Companies) Stock Index - ------------- ------------------- ------------------- ------------------- 12/20/95 $100.000 $100.000 $100.000 12/29/95 $106.897 $102.668 $101.867 12/31/96 $79.310 $126.278 $136.783 12/31/97 $29.310 $154.996 $165.580 12/31/98 $13.793 $218.185 $357.972 - ----------------- *2 This Section is not "soliciting material," is not deemed "filed" with the SEC and is not to be incorporated by reference in any filing of the Company under the 1933 Act or the 1934 Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. 13. CERTAIN TRANSACTIONS The Company's Bylaws provide that the Company will indemnify its directors and executive officers to the fullest extent not prohibited by California law. Under the Company's Bylaws, indemnified parties are entitled to indemnification for negligence, gross negligence and otherwise to the fullest extent permitted by law. The Bylaws also require the Company to advance litigation expenses in the case of legal proceedings, against an undertaking by the indemnified party to repay such advances if it is ultimately determined that the indemnified party is not entitled to indemnification. 14. OTHER MATTERS The Board of Directors knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters are properly brought before the meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment. By Order of the Board of Directors /s/Laurie Gee Laurie Gee Vice President, Finance and Administration and Secretary April 28, 1999 A copy of the Company's Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 1998 is available without charge upon written request to: Corporate Secretary, Castelle, 3255-3 Scott Boulevard, Santa Clara, California 95054. 15. CASTELLE PROXY SOLICITED BY BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 25, 1999 The undersigned hereby appoints DONALD L. RICH and LAURIE GEE, and each of them, as attorneys and proxies of the undersigned, with full power of substitution, to vote all of the shares of stock of Castelle that the undersigned may be entitled to vote at the Annual Meeting of Shareholders of Castelle to be held on Tuesday, May 25, 1999, at 10:00 a.m. local time, at the Company's corporate offices, located at 3255-3 Scott Boulevard, Santa Clara, California, and at any and all continuations and adjournments thereof, with all powers that the undersigned would possess if personally present, upon and in respect of the following matters and in accordance with the following instructions, with discretionary authority as to any and all other matters that may properly come before the meeting. UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR ALL NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSAL 2, AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH. MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW. Proposal 1: To elect four directors whether by cumulative voting or otherwise, to hold office until the next Annual Meeting of Shareholders and until their successors are elected. | | FOR all nominees listed | | WITHHOLD AUTHORITY below (except as written to vote for all nominees below below) Nominees: Donald L. Rich, Robert Hambrecht, Scott C. McDonald and Peter R. Tierney To withhold authority to vote for any nominee(s), write such nominee(s)' name(s) below: --------------------------------------------------------------------- MANAGEMENT RECOMMENDS A VOTE FOR PROPOSALS 2. Proposal 2: To ratify the selection of PricewatershouseCoopers LLP as the Company's independent auditors for the fiscal year ending December 31, 1999. | | FOR | | AGAINST | | ABSTAIN Dated: , 1999 -------------------------------------- -------------------------------------- Signature(s) Please sign exactly as your name appears hereon. If the stock is registered in the names of two or more persons, each should sign. Executors, administrators, trustees, guardians and attorneys-in-fact should add their titles. If signer is a corporation, please give full corporate name and have a duly authorized officer sign, stating title. If signer is a partnership, please sign in partnership name by authorized person. PLEASE VOTE, DATE, SIGN AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.