SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material under Rule 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)(1) 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.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
CASTELLE
855 Jarvis Drive, Suite 100
Morgan Hill, CA 95037
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held On December 20, 2002
To The Shareholders Of Castelle:
Notice Is Hereby Given that the Annual Meeting of Shareholders of
Castelle, a California corporation, will be held on Tuesday, December 20, 2002,
at 2:00 p.m. local time at our corporate offices located at 855 Jarvis Drive,
Suite 100, Morgan Hill, California for the following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
2. To approve the adoption of the 2002 Equity Incentive Plan.
3. To approve an amendment to our Articles of Incorporation to authorize a
reverse stock split.
4. To ratify the selection of PricewaterhouseCoopers LLP as our
independent auditors for the fiscal year ending December 31, 2002.
5. 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 October 24,
2002, 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/ Paul Cheng
Paul Cheng
Chief Financial Officer and Secretary
Morgan Hill, California
November 25, 2002
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
2
CASTELLE
855 Jarvis Drive, Suite 100
Morgan Hill, CA 95037
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
December 20, 2002
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed proxy is solicited on behalf of the Board of Directors of
Castelle, a California corporation, for use at the Annual Meeting of
Shareholders to be held on December 20, 2002, at 2:00 p.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 our corporate offices, located at 855 Jarvis
Drive, Suite 100, Morgan Hill, California. We intend to mail this proxy
statement and accompanying proxy card on or about November 25, 2002 to all
shareholders entitled to vote at the Annual Meeting.
Solicitation
We will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
card 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 beneficially owned by others to
forward to such beneficial owners. We 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 Castelle. 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
October 24, 2002 (the "Record Date") will be entitled to notice of and to vote
at the Annual Meeting. At the close of business on October 24, 2002 we had
outstanding and entitled to vote 4,806,044 shares of common stock.
Each holder of record on the Record 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 votes
for each share held. Each shareholder may give one candidate 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 vote for a candidate unless the candidate's name has been placed in
nomination prior to the voting. No shareholder will be entitled to vote
cumulatively unless at least one shareholder has given notice at the meeting,
prior to the voting, of his or her intention to cumulate votes. Unless the
3
proxyholders are otherwise instructed, shareholders, by means of the
accompanying proxy, will grant the proxyholders discretionary authority to
cumulate votes.
All votes will be tabulated by the inspector of election appointed for
the meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions and broker non-votes are counted
towards a quorum but are not counted for any purpose in determining whether a
matter is approved.
Revocability of Proxies
Any person giving a proxy pursuant to this solicitation has the power
to revoke it at any time before it is voted. It may be revoked by filing with
Castelle's Secretary at our principal executive office, 855 Jarvis Drive, Suite
100, Morgan Hill, California 95037, 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. Please note, however, that if a shareholder's shares are held of
record by a broker, bank or other nominee and that shareholder wishes to vote at
the meeting, the shareholder must bring to the meeting a letter from the broker,
bank or other nominee confirming the shareholder's beneficial ownership of the
shares and that the broker, bank or other nominee is not voting the shares at
the meeting.
Shareholder Proposals
The deadline for submitting a shareholder proposal for inclusion in our
proxy statement and form of proxy for our 2003 annual meeting of shareholders
pursuant to Rule 14a-8 of the Securities and Exchange Commission is a reasonable
time before we begin to print and mail its proxy materials. Unless a shareholder
who wishes to bring a matter before the shareholders at our 2003 annual meeting
of shareholders notifies us of such matter prior to a reasonable time before we
mail our proxy materials, management will have discretionary authority to vote
all shares for which it has proxies in opposition to such matter.
4
Proposal 1
Election Of Directors
There are four nominees for the five Board positions presently
authorized in our Bylaws. Each director to be elected will hold office until the
next annual meeting of shareholders and until his successor is elected and
qualified, or until such director's earlier death, resignation or removal. Each
nominee listed below is currently a director of Castelle, having been elected by
the shareholders and 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, with
discretionary power with respect to any further nominees and 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 Castelle. The minimum
authorized number of directors is five. The Board of Directors currently has one
vacancy on the Board of Directors due to the recent resignation of Jack Howard
from the Board of Directors of Castelle in connection with our recent share
repurchase. Please refer to the section "Certain Relationships and Related
Transactions" for more information on this transaction. The Board of Directors
expects to appoint a director to fill the vacancy created by the resignation of
Mr. Howard in due course.
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 61 Chairman of the Board
Scott C. McDonald 49 President,
Chief Executive Officer and Director
Peter R. Tierney 57 Director, President and Chief
Executive Officer of Sawyer Media
Systems
Robert H. Hambrecht 36 Director and Managing Director of
Equity Capital Markets,
W.R. Hambrecht + Company
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 Castelle in November 1998 and served as Chief Executive
Officer and President from November 1998 to April 2002. Mr. Rich became Chairman
of the Board in
5
May 1999, and has continued in that role since retiring as Castelle's CEO in
April 2002. Mr. Rich served as Chief Financial Officer from April 1999 to March
2001 and Secretary from February 2000 to March 2001. From 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 real-time infrastructure software for the enterprise and the
Internet. 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.
Scott C. McDonald
Mr. McDonald has served as a director of Castelle since April 1999.
Since April 2002, Mr. McDonald has been our President and Chief Executive
Officer. From December 1999 to April 2001, Mr. McDonald served as the Chief
Financial and Administrative Officer at Conxion Corporation, a network and
internet services company. From 1993 to 1997, Mr. McDonald was the senior
operating and financial executive at CIDCO Incorporated, an innovator in
advanced telephony products, serving as Executive Vice President, Chief
Operating Officer, Chief Financial Officer and Secretary. From 1989 to 1993, Mr.
McDonald 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, Mr. McDonald 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 of
privately-held Octant Technologies, Inc.
Peter R. Tierney
Mr. Tierney has served as a director of Castelle since April 1999. He
currently serves as President and Chief Executive Officer of Sawyer Media
Systems, a privately held business focused on delivering next generation media.
Previously, Mr. Tierney spent four years as President and Chief Executive
Officer of MarketFirst Software Corporation, a company that specializes in
streamlining and maximizing the effectiveness of marketing programs. 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 the privately-held company, The SoftAd Group.
Robert H. Hambrecht
Mr. Hambrecht has served as a director of Castelle since March 1998.
Mr. Hambrecht was a founding partner of W.R. Hambrecht + Co., an investment
banking firm, founded in January 1998, and is presently its Managing Director of
Equity Capital Markets. From 1996 through January 1998, Mr. Hambrecht was Vice
President of H&Q Venture Partners, a venture capital firm. From 1994 to 1996,
Mr. Hambrecht was employed by Unterberg Harris, an investment banking firm. Mr.
Hambrecht earned a master's degree in public administration from
6
Columbia University in 1993. Mr. Hambrecht also serves on the Board of Directors
of six privately-held companies.
BOARD COMMITTEES AND MEETINGS
During 2001, the Board of Directors held four meetings and acted by
unanimous written consent four times. The Board has an Audit Committee and a
Compensation Committee.
During 2001, each Board member attended 75% or more of the aggregate
number of meetings of the Board and committees on which he served.
The Audit Committee meets at least annually with Castelle's management
and independent auditors to review the results of the annual audit and discuss
the financial statements, recommends to the Board the independent auditors to be
retained, oversees the independence of the independent auditors, evaluates the
independent auditors' performance and receives and considers the independent
auditors' comments as to controls, adequacy of staff and management performance
and procedures in connection with audit and financial controls. During fiscal
2001, the Audit Committee was composed of three non-employee directors: Messrs.
McDonald and Hambrecht and Jack L. Howard. The Audit Committee met once during
fiscal 2001 and took no action by unanimous written consent. All members of the
Audit Committee were independent in fiscal 2001 (as independence is defined by
The NASDAQ Stock Market).
The Compensation Committee makes recommendations concerning salaries
and incentive compensation, awards stock options to employees and consultants
under our 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 two outside directors: Messrs.
Hambrecht and Tierney. The Compensation Committee acted once by unanimous
written consent during fiscal 2001.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS 1
The Audit Committee has the responsibility, under delegated authority
from the Board of Directors, for providing independent, objective oversight of
our corporate accounting and reporting practices as well as the quality and
integrity of our financial statements and reports. The Audit Committee acts
under a written charter adopted and approved by the Board of Directors. During
fiscal 2001, the Audit Committee was composed of three non-employee directors,
whose names appear below.
Management is responsible for our internal controls and the financial
reporting process. The independent accountants are responsible for performing an
independent audit of our financial statements in accordance with generally
accepted auditing standards and to issue a report thereon. The Audit Committee's
responsibility is to monitor and oversee these processes.
____________________
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 castelle with the SEC under Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.
7
In this context, the Audit Committee has met and held discussions with
management and the independent accountants. Management represented to the Audit
Committee that our consolidated financial statements were prepared in accordance
with generally accepted accounting principles, and the Audit Committee has
reviewed and discussed our consolidated financial statements for the fiscal year
ended December 31, 2001 with management and the independent accountants. In
addition, the Audit Committee has discussed with the independent auditors the
matters required to be discussed by the Statement on Auditing Standards No. 61,
Communication with Audit Committees, as amended, has received and reviewed the
written disclosures and the letter from the independent public accountants
required by Independence Standard No. 1, Independence Discussions with Audit
Committees, as amended, and has discussed with the independent auditors their
independence.
Based on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the financial statements
referred to above be included in Castelle's Annual Report on Forms 10-K and
10-K/A for the year ended December 31, 2001, filed with the Securities and
Exchange Commission.
Audit Committee of the Board of Directors
ROBERT H. HAMBRECHT
SCOTT C. MCDONALD
JACK L. HOWARD
8
PROPOSAL NO. 2
ADOPTION OF 2002 EQUITY INCENTIVE PLAN
You are being asked to vote on a proposal to approve the adoption of
the 2002 Equity Incentive Plan, which we refer to as the 2002 Option Plan. The
2002 Option Plan was adopted by the Board of Directors on November 8, 2002,
subject to shareholder approval and with such changes as may be required by the
California Department of Corporations. The 2002 Option Plan will become
effective upon its approval by our shareholders and the issuance of a permit by
the California Department of Corporations. No grants have been made under the
2002 Option Plan.
Castelle established the 2002 Option Plan as a successor to its 1988
Equity Incentive Plan, as adopted in 1998, and its 1995 Non-Employee Directors'
Stock Option Plan, which we refer to collectively as the Prior Option Plan. The
2002 Option Plan was established to provide our employees, directors,
consultants and independent advisors the opportunity to acquire shares of common
stock through option grants, stock awards and other equity awards. Castelle's
Board of Directors believes that options and other equity-based incentives have
been important components of our success to date and that awards under the 2002
Option Plan will play an important role in our efforts to attract, employ and
retain highly qualified employees, directors and consultants. The adoption of
the 2002 Option Plan was necessitated by the use or expiration of all but an
insignificant amount of authorized shares under the Prior Option Plan. We issue
options to provide our employees an opportunity to acquire or increase their
ownership stake in Castelle, creating a stronger incentive to expend maximum
effort for our growth and success and encouraging our employees to continue
their employment with us.
If this proposal is approved by our shareholders, no additional option
grants will be made under the Prior Option Plan. Options outstanding under the
Prior Option Plan will remain outstanding until they are exercised or expire by
their terms. As of October 24, 2002, options to purchase 1,565,577 shares were
outstanding under the Prior Option Plan (at a weighted average exercise price
per share of $1.01), 241,295 shares had been issued on exercise of options and
22,797 shares were available for future grant. Upon approval of the 2002 Option
Plan, 850,000 shares will be available for future grant under the 2002 Option
Plan.
The principal terms and provisions of the 2002 Option Plan are
summarized below. The summary is not intended to be a complete description of
all the terms of the plan, and is qualified in its entirety by reference to the
text of the 2002 Option Plan, which is attached hereto as Exhibit A. To the
extent there is a conflict between this summary and the actual terms of the
plan, the terms of the 2002 Option Plan will govern.
Administration. The compensation committee of the Board (the
"Committee"), or the Board acting as the Committee, will administer the 2002
Option Plan. The Committee will satisfy the requirements of the Securities and
Exchange Commission in order to qualify awards under the 2002 Option Plan for
the exemption under Rule 16b-3 (or its successor) under the Securities Exchange
Act of 1934 and any other requirements specified under the tax laws to qualify
awards under the 2002 Option Plan for the exemption under Section 162(m) of the
Internal Revenue Code.
The Committee has authority, subject to the express provisions of the
2002 Option Plan, to determine the individuals who are eligible to receive
awards under the 2002 Option Plan, the number of shares to be covered by each
option or other award, the date or dates on which the
9
option or award is to vest, the maximum term for which the option or award is to
remain outstanding, whether an option will be an incentive stock option that
satisfies the requirements of Section 422 of the Internal Revenue Code or a
non-statutory option not intended to meet such requirements, and the other
provisions of the award.
Eligibility. Our employees, directors, consultants, independent
contractors and advisors, and those of our subsidiaries are eligible to receive
awards under the 2002 Option Plan.
As of October 31, 2002, approximately 55 persons (including 9 officers
and directors) were eligible to participate in the 2002 Option Plan.
Securities Subject to 2002 Option Plan. If the 2002 Option Plan is
approved by our shareholders, up to 850,000 shares of our common stock will
initially be available for issuance under the plan. No one person participating
in the 2002 Option Plan may receive options for more than 300,000 shares in any
single year.
Should an option under the 2002 Option Plan expire or terminate for any
reason prior to being exercised in full, the shares subject to the unexercised
portion of the option will be available for subsequent awards under the 2002
Option Plan. If restricted shares or shares issued upon exercise of options are
forfeited and if stock units are forfeited or terminate before exercise, such
shares will be available for subsequent awards under the 2002 Option Plan. If
stock units are settled in shares, the number of shares available for future
awards under the 2002 Option Plan will be reduced by only the actual number of
shares of common stock actually issued in settlement.
If an option under the Prior Option Plan expires or terminates for any
reason, the shares subject to the option will not be available for awards under
the 2002 Option Plan.
Option Grant Program
Price and Exercisability. The option exercise price per share in the
case of an incentive stock option may not be less than 100% of the fair market
value of the common stock on the grant date and, in the case of a non-statutory
option, 85% of the fair market value of the common stock on the grant date.
Options granted under the 2002 Option Plan become exercisable at such time or
times as the Committee may determine and provide in the option grant agreement.
The stock option agreement may provide for accelerated exercisability in the
event of an optionee's death, disability or retirement or other events.
The exercise price of a stock option may be paid in cash or in shares
of common stock. Options may also be exercised through a same-day sale program
or exercise and pledge program through a designated brokerage firm.
No optionee will have any shareholder rights with respect to the shares
issuable upon the exercise of options until the optionee has exercised the
option, paid the exercise price and become a holder of record of the shares.
During the optionee's lifetime, the option may be exercised only by the optionee
and options are not assignable or transferable other than by will or the laws of
descent and distribution. However, the Committee may allow an optionee to
transfer options to members of the optionee's immediate family or to trusts or
partnerships for the exclusive benefit of members of the optionee's immediate
family.
10
Termination of Service. Any option held by the optionee upon
termination of service will cease to be exercisable three months following
termination of service, unless otherwise provided in such person's option
agreement. Each such option will normally be exercisable only as to shares of
common stock in which the optionee is vested at the time of termination. The
Committee has complete discretion to extend the period following the optionee's
termination during which his or her outstanding options may be exercised, and to
accelerate the exercisability of such options in whole or in part. This
discretion may be exercised at any time while the options remain outstanding.
Incentive Stock Options. Incentive stock options may only be granted to
individuals who are employees of Castelle or our subsidiaries. During any
calendar year, the aggregate fair market value of the shares for which incentive
stock options granted to any employee under the 2002 Option Plan (or any other
Castelle option plan) first become exercisable will not exceed $100,000.
Option Grants to Outside Directors. Outside directors of Castelle will
receive automatic stock option grants under the 2002 Option Plan and will be
eligible to receive discretionary grants. Outside directors are those who are
not employees of Castelle or of any parent or subsidiary of Castelle and who are
not representatives of any investor who owns 10% or more of the common stock.
Options granted to outside directors under the 2002 Option Plan are not intended
by Castelle to qualify as incentive stock options under the Code.
Upon initial election to our Board of Directors, each person who is not
an employee of Castelle is automatically granted an option to purchase shares of
common stock. Under the terms of the 2002 Option Plan, on April 1 of each year
(or the next business day should such date be a legal holiday), each outside
director, without further action by Castelle, the Board, the Committee or our
shareholders, will be automatically granted an option to purchase additional
shares of common stock. These grants vest in 12 equal installments, beginning
one month after the date of grant. The exercise price of options granted to
outside directors under the 2002 Option Plan is 100% of the fair market value of
the common stock subject to the option on the date of the option grant. The term
of these options is ten years.
Corporate Transactions. In the event of a merger of Castelle with or
into another corporation or a consolidation, acquisition of assets or other
change-in-control transaction, the time during which outstanding options granted
under the 2002 Option Plan are exercisable may be accelerated at the Board's
discretion and the option may terminate prior to or within a prescribed period
after the consummation of the transaction. The Committee may also provide in its
sole discretion that the vesting of any options outstanding may become
exercisable in full upon consummation of the transaction, and may terminate if
not exercised prior to or within a prescribed time following consummation of the
transaction.
U.S. Federal Income Tax Information
The following is a general summary of some of the current federal
income tax consequences of the 2002 Option Plan to participants and to Castelle.
Tax laws often change, and actual tax consequences depend on a participant's
individual circumstances, as well as state and local tax laws. We encourage all
participants to seek tax advice regarding their participation in the 2002 Option
Plan.
11
Nonqualified Stock Options. Generally, a participant will not have
taxable income when we grant him or her an nonqualified stock option (an
"NQSO"). When a participant exercises a vested NQSO, the difference between the
exercise price and the fair market value of our stock on the date of exercise
(called the "spread") is taxable as ordinary income. Castelle withholds tax on
this income when a participant who is a current or former employee exercises an
NQSO. When the participant sells the shares, any additional gain or loss will be
a capital gain or loss.
Incentive Stock Options. As with NQSOs, an employee will generally not
have taxable income when she or he receives an incentive stock option (an
"ISO"). An employee will not have taxable income upon exercise of a vested ISO;
however, the spread on exercise is alternative minimum taxable income to the
participant in the year of exercise, unless she or he disposes of the shares in
the same tax year. If the participant holds the shares for the ISO holding
period, which is two years from the date of grant and one year from the date of
exercise, the difference between the amount the participant paid for the shares
on exercise and the sale price is capital gain or loss. If the participant
disposes of the shares before the ISO holding period, the spread on exercise
becomes taxable as ordinary income and the difference between the fair market
value on the date of exercise and the price at which the participant sells the
stock is capital gain or loss.
Restricted Stock. A participant will generally be taxed on restricted
stock when they receive stock or cash, unless there are restrictions on the
shares that enable the participant to defer the tax.
Tax Treatment of Castelle. When a participant recognizes ordinary
income on exercise of an NQSO or on receipt of restricted stock, Castelle will
generally be entitled to a deduction in the amount of the ordinary income
recognized by the participant. Castelle will also be entitled to a deduction if
the participant recognizes ordinary income by selling shares acquired on
exercise of an ISO before the ISO holding period is met.
Limitation on Number of Shares, and Required Vote to Approve Proposal No. 2
Pursuant to provisions contained in the California Corporate Securities
Law applicable to corporations such Castelle, the number of shares of common
stock issuable upon exercise of certain options and warrants issued or to be
issued from time to time by Castelle, including without limitation, options
issued or to be issued pursuant to the 2002 Option Plan, is limited to 30% of
the sum of the (i) shares of common stock outstanding and (ii) shares of
convertible preferred or convertible senior common, counted on an as if
converted basis, that are outstanding at the time the calculation is made (the
"30% Limit"). We may, however, issue options and warrants in excess of the 30%
Limit if a percentage higher than 30% is approved by at least two-thirds of the
outstanding shares entitled to vote. In calculating this 30% Limit, certain
options and warrants are excluded in accordance with applicable provisions of
California law.
Options to be granted in the future pursuant to the 2002 Option Plan
likely will be in excess of the 30% Limit. Accordingly, the affirmative vote of
the holders of a two-thirds of the outstanding shares of common stock entitled
to vote will be required to approve the 2002 Equity Incentive Plan and the
issuance of all of the options authorized in the 2002 Equity Incentive Plan.
Abstentions and broker non-votes will have the same effect as negative votes.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.
12
PROPOSAL NO. 3
Amendment to Articles of Incorporation
To Enable a Reverse Stock Split
Background
Castelle common stock is quoted on The NASDAQ Stock Market's SmallCap
Market (the "SmallCap Market"). In order for the common stock to continue to be
quoted on the SmallCap Market, Castelle must satisfy various listing maintenance
standards established by NASDAQ. Among other things, Castelle is required to
have a minimum bid price of at least $1.00 per share.
Under current listing maintenance standards, if the closing bid price
of shares of the common stock is under $1.00 per share for 30 consecutive
trading days and does not thereafter reach $1.00 per share or higher for a
minimum of ten consecutive trading days during the 180 calendar days following
notification by NASDAQ, NASDAQ may delist the common stock from trading on the
SmallCap Market. In that event, the common stock may trade on the OTC Bulletin
Board maintained by the National Quotation Bureau, Inc. For reasons described
below, this is generally considered to be less desirable than the SmallCap
Market.
In March 2002, we received a letter from NASDAQ advising us that
Castelle common stock had not met NASDAQ's minimum bid price requirement for 30
consecutive trading days and that it would be delisted if we were unable to
demonstrate compliance with this requirement for ten consecutive trading days
during the 180 days ending September 9, 2002. On September 10, 2002, we received
a letter from NASDAQ stating that our common stock had failed to meet the
minimum bid price requirement, and that if we did not appeal the decision of the
staff, then NASDAQ would delist our common stock. On September 16, 2002, we
requested a hearing to appeal this decision. At a hearing on October 17, 2002,
we presented our definitive plan to achieve compliance. Following the hearing,
NASDAQ has indicated (but has not yet issued a written determination) that we
would be permitted an extension to seek authorization for a reverse stock split
to increase our minimum bid price above $1.00, to avoid delisting from the
SmallCap Market. During the extension, any delisting would be held in abeyance.
Consequently, the Board of Directors considered and has authorized,
subject to shareholder approval, an amendment to the Articles of Incorporation
to enable a reverse stock split for the purpose of increasing the market price
of the common stock above the NASDAQ minimum bid requirement of $1.00. Under the
proposed amendment, each outstanding 2 to 3 shares of common stock would be
combined, converted and changed into one share of common stock with the Board to
determine, after shareholder approval, which conversion ratio within this range
will be used. The Board shall also have the authority, in its discretion, to
abandon and not effect the reverse stock split following shareholder approval if
the Board determines that the reverse stock split is no longer in the best
interests of Castelle and its shareholders. Approval of the reverse stock split
will authorize the Board in its discretion to effect the reverse stock split at
a conversion ratio of between 1-for-2 and 1-for-3. The Board believes that
shareholder approval of exchange ratios within a range (as opposed to approval
of a specified conversion ratio) provides the Board with maximum flexibility to
achieve the purposes of the reverse stock split and, therefore, is in the best
interests of Castelle and its shareholders.
If the reverse stock split is approved by the shareholders and
following such approval the Board determines the reverse stock split is in the
best interest of Castelle and its shareholders,
13
the Articles of Incorporation would be amended accordingly. The text of the form
of amendment to the Articles of Incorporation, which would be filed with the
Secretary of State of the State of California to effect the reverse stock split,
is set forth in Exhibit B to this proxy statement; provided, however, that such
text is subject to amendment to include the appropriate exchange ratio for the
reverse stock split and such other changes as may be required by the office of
the Secretary of State of the State of California and as the Board deems
necessary or advisable to effect the reverse stock split.
Reasons for the Reverse Stock Split
The Board believes that a reverse stock split is desirable because it
may allow Castelle to avoid having its common stock delisted from the SmallCap
Market, and may improve the marketability and liquidity of our common stock. The
reverse stock split is designed to increase the per share market price of the
common stock. Our common stock is currently quoted on the SmallCap Market under
the symbol "CSTL." During the period from January 1, 2002 to September 30, 2002,
the closing sales price per share of our common stock ranged from a high of
$1.05 to a low of $0.47. The closing sales price on October 24, 2002 was $1.02.
The Board of Directors anticipates that a reverse stock split would have the
effect of increasing trading prices of the common stock, which should result in
a share price high enough to satisfy this NASDAQ listing requirement.
The Board of Directors believes that the current low market price of
the common stock has had a negative effect on the marketability of the existing
shares. The Board believes there are several reasons for this effect. First,
certain institutional investors have internal policies preventing the purchase
of low-priced stocks. Additionally, a variety of policies and practices of
broker-dealers discourage individual brokers within those firms from dealing in
low-priced stocks. Second, because the brokers' commissions on low-priced stocks
generally represent a higher percentage of the stock price than commissions on
higher-priced stocks, the current share price of the common stock can result in
individual shareholders paying transaction costs (commissions, markups or
markdowns) which are a higher percentage of their total share value than would
be the case if the share price of the common stock were substantially higher.
This factor is also believed to limit the willingness of institutions to
purchase the common stock.
The Board believes that the anticipated increase in the price of the
common stock as a result of the reverse stock split could encourage interest in
the common stock. This might promote greater liquidity for shareholders, but a
countervailing factor is that liquidity could be adversely affected by the
reduced number of shares outstanding after the reverse stock split. It should be
noted that if the reverse stock split is implemented, some shareholders may
consequently own less than one hundred shares of common stock. A purchase or
sale of less than one hundred shares (an "odd lot" transaction) may result in
incrementally higher brokerage trading costs, particularly for "full service"
brokers. Therefore, those shareholders who own less than one hundred shares
following the reverse stock split incur higher transaction costs should they
then determine to sell their shares in Castelle.
Shareholders should note that the effect of the reverse stock split
upon the market prices for our common stock cannot be accurately predicted. In
particular, there is no assurance that prices for shares of the common stock
after the reverse stock split will be two to three times higher than the prices
for shares of the common stock immediately prior to the reverse stock split.
Furthermore, there can be no assurance that the market price of the common stock
immediately after the proposed reverse stock split will be maintained for any
period of time.
14
Even if an increased share price can be maintained, the reverse stock split may
not achieve the desired results which have been outlined above. Moreover,
because some investors may view the reverse stock split negatively, there can be
no assurance that the reverse stock split will not adversely impact the market
price of the common stock or, alternatively, that the market price following the
reverse stock split will either exceed or remain in excess of the current market
price.
Board Discretion to Implement Reverse Stock Split
If it is approved by our shareholders at the Annual Meeting, the
reverse stock split will be effected only upon a determination by the Board that
the reverse stock split (with a conversion ratio determined by the Board) is in
the best interests of Castelle and its shareholders. Such determination shall be
based upon certain factors, including meeting the continued listing requirements
for the SmallCap Market, existing and expected marketability and liquidity of
the common stock, prevailing market conditions and the likely effect on the
market price of the common stock. Notwithstanding approval of the reverse stock
split by the shareholders, the Board may, in its sole discretion, abandon the
proposed amendment and determine not to effect the reverse stock split, as
permitted under applicable California law. If the Board does not implement a
reverse stock split within the time frame authorized by shareholders, further
shareholder approval would be required prior to implementing a reverse stock
split thereafter. If the Board determines to effect the reverse stock split, it
would be implemented as soon as reasonably practicable after shareholder
approval.
Effect of the Reverse Stock Split on Registration and Voting Rights
The common stock is currently registered under Section 12(g) of the
Securities Exchange Act of 1934, and we are subject to the periodic reporting
and other requirements of the Exchange Act. The reverse stock split would not
affect the registration of the common stock under the Exchange Act. After the
reverse stock split, the common stock would continue to be listed on the
SmallCap Market under the symbol "CSTL" (although NASDAQ would likely add the
letter "D" to the end of the trading symbol for a period of 20 trading days to
indicate that the reverse stock split has occurred).
Proportionate voting rights and other rights of the holders of common
stock would not be affected by the reverse stock split (other than as a result
of the payment of cash in lieu of fractional shares as described below). For
example, a holder of 2% of the voting power of the outstanding shares of common
stock immediately prior to the effective time of the reverse stock split would
continue to hold 2% of the voting power of the outstanding shares of common
stock after the reverse stock split. Although the reverse stock split would not
affect the rights of shareholders or any shareholder's proportionate equity
interest in Castelle (subject to the treatment of fractional shares), the number
of authorized shares of common stock would not be reduced and would increase
significantly the ability of the Board to issue such authorized and unissued
shares without further shareholder action. The number of shareholders of record
would not be affected by the reverse stock split (except to the extent that any
shareholder holds only a fractional share interest and receives cash for such
interest after the reverse stock split).
Effect of the Reverse Stock Split on the Authorized but Unissued Shares
of Common Stock
The number of authorized shares of common stock will not change as a
result of the reverse stock split. Because the number of authorized and issued
shares of common stock will be decreased by the reverse stock split, the number
of authorized but unissued shares of common
15
stock will be increased significantly by the reverse stock split. As of October
24, 2002, there were 4,806,044 shares of common stock outstanding out of a total
of 25,000,000 shares of common stock authorized under the Articles of
Incorporation. The following table shows the aggregate number of authorized but
unissued shares of common stock after a reverse split of the ratios being
considered by this proposal:
Common Stock Authorized and
Reverse Split Ratio Outstanding (1) Unissued Common Stock (2)
------------------- --------------- -------------------------
current (no split) 4,806,044 20,193,956
1-for-2 2,403,022 22,596,978
1-for-3 1,602,014 23,397,986
(1) The figures in this table are calculated based 4,806,044 shares
outstanding on October 24, 2002. These figures do not take into account any
reduction in the number of outstanding shares of common stock resulting
from the procedures for cashing out fractional shares, and do not include
shares of common stock issuable upon exercise of outstanding options.
(2) These figures are based on a pre-reverse stock split number of
25,000,000 authorized shares as of October 24, 2002.
The future issuance of such additional authorized shares may have the effect of
diluting the earnings per share and book value per share, as well as the stock
ownership and voting rights, of the currently outstanding shares of common
stock. The increase in the number of authorized but unissued shares of common
stock may be construed as having an anti-takeover effect by permitting the
issuance of shares to purchasers who might oppose a hostile takeover bid or
oppose any efforts to amend or repeal certain provisions of the Articles of
Incorporation or our Amended and Restated Bylaws.
Effect of the Reverse Stock Split on Stock Options, Warrants and Par Value
The reverse stock split would reduce the number of shares of common
stock available for issuance under our 1988 Equity Incentive Plan and the 1995
Non-Employee Directors' Stock Option Plan in proportion to the conversion ratio
of the reverse stock split. The number of shares of common stock currently
authorized for issuance but unissued at October 24, 2002 under the 1988 Equity
Incentive Plan and the Directors' Stock Option Plan is 21,797 and 1,000,
respectively (prior to giving effect to the reverse stock split). Our common
stock would continue to have no par value per share following the effective time
of the reverse stock split, while the number of issued and outstanding shares of
common stock would be reduced.
Under the terms of Castelle's outstanding stock options, the reverse
stock split will effect a reduction in the number of shares of common stock
issuable upon exercise of such stock options in proportion to the exchange ratio
of the reverse stock split and will effect a proportionate increase in the
exercise price of such outstanding stock options. For example, after a 1-for-2
reverse stock split an original option grant to purchase 200 shares at $2.00 per
share would become an option grant to purchase 100 shares at $4.00 per share. In
connection with the reverse stock split, the number of shares of common stock
issuable upon exercise or conversion of outstanding stock options will be
rounded to the nearest whole share and no cash payment will be made in respect
of such rounding. No fractional shares of common stock will be issued in
connection with the proposed reverse stock split. Holders of common stock who
would otherwise receive a fractional share of common stock pursuant to the
reverse stock split will receive cash in lieu of the fractional share as
explained more fully below.
16
Effective Date
If the proposed reverse stock split is approved at the Annual Meeting
and the Board of Directors elects to proceed with the reverse stock split in one
of the approved conversion ratios, the reverse stock split would become
effective as of 5:00 p.m. Pacific time on the date of filing of the applicable
Certificate of Amendment to the Articles of Incorporation with the office of the
Secretary of State of the State of California. Except as explained below with
respect to fractional shares, on the effective date, shares of common stock
issued and outstanding immediately prior thereto will, automatically and without
any action on the part of the shareholders, be combined and converted into new
shares of common stock in accordance with the reverse stock split conversion
ratio determined by the Board within the limits set forth in this proposal.
Exchange of Stock Certificates
Shortly after the Effective Date, each holder of an outstanding
certificate theretofore representing shares of common stock will receive
instructions for the surrender of such certificate to ComputerShare Trust
Company, Castelle's exchange agent (the "Exchange Agent") for the reverse stock
split for the common stock. Such instructions will include a form of Transmittal
Letter to be completed and returned to the Exchange Agent. As soon as
practicable after the surrender to the Exchange Agent of any certificate that
prior to the reverse stock split represented shares of common stock, together
with a duly executed Transmittal Letter and any other documents the Exchange
Agent may specify, the Exchange Agent shall deliver to the person in whose name
such certificate had been issued certificates registered in the name of such
person representing the number of full shares of common stock into which the
shares of common stock previously represented by the surrendered certificate
shall have been converted and a check for any amounts to be paid in cash in lieu
of any fractional share.
Each certificate representing shares of common stock issued in
connection with the reverse stock split will continue to bear any legends
restricting the transfer of such shares that were borne by the surrendered
certificates representing the shares of common stock. Until surrendered as
contemplated herein, each certificate that immediately prior to the reverse
stock split represented any shares of common stock shall be deemed at and after
the reverse stock split to represent the number of full shares of common stock
as adjusted by the reverse stock split.
No service charges, brokerage commissions or transfer taxes shall be
payable by any holder of any certificate that prior to approval of the reverse
stock split represented any shares of common stock, except that if any
certificates of common stock are to be issued in a name other than that in which
the certificates for shares of common stock surrendered are registered, it shall
be a condition of such issuance that (i) the person requesting such issuance
shall pay to Castelle any transfer taxes payable by reason thereof (or prior to
transfer of such certificate, if any) or establish to our satisfaction that such
taxes have been paid or are not payable, (ii) such transfer shall comply with
all applicable federal and state securities laws and (iii) such surrendered
certificate shall be properly endorsed and otherwise be in proper form for
transfer.
No Appraisal Rights
Under California law, our shareholders would not be entitled to
dissenters' or appraisal rights with respect to the reverse stock split.
17
Cash Payment in Lieu of Fractional Shares
In lieu of any fractional shares to which a holder of common stock
would otherwise be entitled as a result of the reverse stock split, we will pay
cash equal to such fraction multiplied by the average of the high and low
trading prices of the common stock on the SmallCap Market during regular trading
hours for the five trading days immediately preceding the Effective Date.
United States Federal Income Tax Consequences
The following description of the material United States federal income
tax consequences of the reverse stock split is based on the United States
Internal Revenue Code of 1986, as amended (the "Code"), applicable Treasury
Regulations promulgated thereunder, judicial authority and current
administrative rulings and practices as in effect on the date of this Proxy
Statement. Changes to the laws could alter the tax consequences described below,
possibly with retroactive effect. We have not sought and will not seek an
opinion of counsel or a ruling from the Internal Revenue Service regarding the
United States federal income tax consequences of the reverse stock split. This
discussion is for general information only and does not discuss the tax
consequences which may apply to special classes of taxpayers (e.g., tax-exempt
entities, non-resident aliens, mutual funds, regulated investment companies,
broker/dealers or insurance companies). The state, local and foreign (non-United
States) tax consequences of the reverse stock split may vary significantly as to
each shareholder, depending upon the jurisdiction in which such shareholder
resides. Shareholders are urged to consult their own tax advisors to determine
the particular consequences to them.
In general, the United States federal income tax consequences of the
reverse stock split will vary among shareholders depending upon whether they
receive cash for fractional shares or solely a reduced number of shares of
common stock in exchange for their old shares of common stock. We believe that
because the reverse stock split is not part of a plan to increase periodically a
shareholder's proportionate interest in our assets or earnings and profits, the
reverse stock split will likely have the following United States federal income
tax effects: A shareholder who receives solely a reduced number of shares of
common stock will not recognize gain or loss. In the aggregate, such a
shareholder's basis in the reduced number of shares of common stock will equal
the shareholder's basis in its old shares of common stock. A shareholder who
receives cash in lieu of a fractional share as a result of the reverse stock
split will generally be required to recognize a taxable gain or dividend income,
depending on that shareholder's particular facts and circumstances. Generally, a
shareholder receiving such a payment will recognize a taxable gain or dividend
income in an amount equal to the lesser of (i) the amount of the cash payment
received by the shareholder, or (ii) the excess of (A) the aggregate fair market
value of the reduced number of shares of common stock received, plus the amount
of the cash payment received, over (B) the shareholder's basis in all of the
shareholder's old shares of common stock. In the aggregate, such a shareholder's
basis in the reduced number of shares of common stock will equal the
shareholder's basis in its old shares of common stock, and the holding period of
the post-reverse stock split shares received will include the holding period of
the pre-reverse stock split shares exchanged.
Castelle will not recognize any gain or loss as a result of the reverse
stock split.
18
Required Vote
The affirmative vote of the holders of a majority of the outstanding
shares of the common stock will be required to approve the reverse stock split
and the amendment to the Articles of Incorporation to effect the reverse stock
split. As a result, abstentions and broker non-votes will have the same effect
as negative votes.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3.
19
PROPOSAL 4
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors has selected PricewaterhouseCoopers LLP as our
independent auditors for the fiscal year ending December 31, 2002 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 our 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 our independent auditors is not required by our Bylaws or otherwise. However,
the Board is submitting the selection of PricewaterhouseCoopers 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 Castelle and
its shareholders.
The affirmative vote of the holders of a majority of the shares present
in person or represented by proxy and voting at the Annual Meeting (which shares
voting affirmatively also constitute at least a majority of the required quorum)
will be required to ratify the selection of PricewaterhouseCoopers LLP.
Abstentions and broker non-votes will not be counted for any purpose in
determining whether any matter has been approved.
Audit Fees. During the fiscal year ended December 31, 2001, the
aggregate fees billed by PricewaterhouseCoopers LLP for the audit of our
financial statements and for the review of our interim financial statements on
Form 10-Q for such fiscal year was $118,806, of which an aggregate of $37,806
had been billed through December 31, 2001.
Financial Information Systems Design and Implementation Fees. During
the fiscal year ended December 31, 2001, there were no information consulting
technology fees billed by PricewaterhouseCoopers LLP.
All Other Fees. During fiscal year ended December 31, 2001, there were
$15,000 in other professional service fees billed by PricewaterhouseCoopers LLP.
The Audit Committee has determined that the rendering of certain other
non-audit services by PricewaterhouseCoopers LLP is compatible with maintaining
the auditor's independence.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 4.
20
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the ownership of
Castelle's common stock as of October 24, 2002 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 Castelle as a group; and
(iv) all persons known by us to be beneficial owners of more than five percent
of our common stock.
Beneficial Ownership (1)
Number of Percent of
Beneficial Owner Shares Total
Jack Howard (2) 732,022 15.2%
Entities affiliated with:
J.P. Morgan Chase & Co., Inc. (3) 581,626 12.1
One Bush Street
18th Floor
San Francisco, CA 94104
Donald L. Rich (4) 500,000 9.4
Entities affiliated with:
WebFinancial Corporation(5) 439,560 9.2
150 E. 52nd Street
21st Floor
New York, NY 10022
Scott McDonald (4) 105,665 2.2
Michael Petrovich (4) 93,749 1.9
Eric Chen (4) 74,789 1.5
Paul Cheng (4) 45,415 *
Boris Elpiner(4) 1,124 *
Robert Hambrecht (4) 35,919 *
Peter Tierney (4) 29,999 *
All officers and directors as a group (9 persons)(6) 1,618,682 28.6
* Less than one percent.
(1) This table is based upon information supplied by officers, directors
and principal shareholders and Schedules 13D and 13G filed with the
Securities and Exchange Commission (the "SEC"). Unless otherwise
indicated in the footnotes to this table and subject to community
property laws where applicable, Castelle believes that each shareholder
named in this table has sole voting and investment power with respect
to the shares indicated as beneficially owned. Applicable percentages
are based on 4,806,044 shares outstanding on October 24, 2002, the
record date for this proxy, plus options exercisable within 60 days for
the person being measured.
(2) Based on correspondence from Mr. Howard dated November 12, 2002.
Includes 439,560 shares held of record by WebFinancial Corporation. Mr.
Howard is a director of WebFinancial Corporation. The table includes
10,832 shares of common stock subject to options beneficially held by
Mr. Howard that were exercisable within 60 days of October 24, 2002. On
November 12, 2002, Castelle repurchased all of the shares held by Mr.
Howard. As part of that transaction, all of Mr. Howard's options were
cancelled. In addition, Castelle repurchased all shares held by
WebFinancial Corporation on November 12, 2002. Please refer to the
section "Certain Relationships and Related Transactions".
21
(3) Includes 346,849 shares held by H&Q London Ventures, 60,835 shares held
by H&Q Ventures IV, 1,250 shares held by Hamquist, 43,633 shares held
by Hambrecht & Quist Venture Partners, and 129,059 shares held by
Hambrecht & Quist California. Each of 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 other than those directly held by such person.
(4) Includes shares subject to options exercisable within 60 days of
October 24, 2002 as follows: 69,789 shares for Mr. Chen, 40,415 for Mr.
Cheng, 29,999 for Mr. Hambrecht, 35,416 for Mr. McDonald, 88,749 for
Mr. Petrovich, 500,000 for Mr. Rich and 29,999 for Mr. Tierney.
Effective as of February 28, 2002, Mr. Elpiner was no longer employed
by or affiliated with Castelle.
(5) As a result of the transactions of November 12, 2002, described in
"Certain Relationships and Related Transactions", Castelle repurchased
all of the shares held by WebFinancial Corporation.
(6) As a result of the repurchase described under "Certain Relationships
and Related Transactions", as of November 12, 2002, the officers and
directors as a group represented 8 persons and held 21.8% of the
outstanding common stock.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires
Castelle's directors and executive officers, and persons who own more than ten
percent of the common stock, to file with the SEC initial reports of ownership
and to file reports of changes in ownership of common stock. Officers, directors
and greater than ten percent shareholders are required to furnish Castelle with
copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required, during the fiscal year ended December 31, 2001 all Section 16(a)
filing requirements applicable to Castelle's officers, directors and greater
than ten percent beneficial owners were complied with.
22
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Cash Compensation
In 2001, the members of the Board of Directors received no cash
compensation for their services as members of the Board, but were reimbursed for
their expenses incurred in connection with attending Board meetings. Beginning
in 2002, each non-employee director receives a quarterly retainer of $2,500 and
a per meeting fee of $1,000 for each quarterly board meeting attended.
Equity Compensation
Each non-employee director receives stock option grants under the
Directors' Plan. Options granted under the Directors' Plan are intended not to
qualify as incentive stock options under the Code.
The Directors' Plan provides that each non-employee member of the Board
of Directors, upon initial election to the Board, is automatically granted an
option to purchase 10,000 shares of common stock at an exercise price equal to
the then-current fair market value per share of our common stock. This initial
option grant vests monthly in 24 equal installments, beginning one month after
the date of grant provided that the optionee has continuously served as a
non-employee director. On April 1 of each year (or the next business day should
such date be a legal holiday), each member of the Board who is eligible for
participation in the Directors' Plan is automatically granted an option to
purchase 5,000 shares of common stock at an exercise price equal to the
then-current fair market value per share of our common stock, without further
action by Castelle, the Board or our shareholders. This annual grant to members
of the Board under the Directors' Plan vests monthly in 12 equal installments,
beginning one month after the date of grant provided that the optionee has,
during the entire period prior to such vesting date, continuously served as a
non-employee director. Prior to February 2002, the annual option grant was
10,000 shares to vest over 24 months. The exercise price of options granted
under the Directors' Plan is 100% of the fair market value of the common stock
on the date of the option grant. The term of options granted under the
Directors' Plan is ten years. In the event of a merger of Castelle with or into
another corporation or a consolidation, acquisition of assets or other
change-in-control transaction, vesting of option grants under the Directors'
Plan is accelerated and the option will terminate if not exercised prior to the
consummation of the transaction.
During fiscal 2001, we granted to each of Messrs. Hambrecht, Tierney
and McDonald options to purchase 10,000 shares at exercise prices of $1.063 per
share. The exercise prices were equal to the respective fair market values of
such common stock on the date of grant (based upon the closing sale price
reported on the NASDAQ SmallCap Market for the date of grant). As of October 24,
2002, 11,249 had been exercised under the Directors' Plan.
Upon approval of the 2002 Option Plan, non-employee directors will be
eligible to receive automatic grants under the 2002 Option Plan on substantially
the same terms as under the Directors' Plan. In addition, all directors will be
eligible to receive discretionary grants.
23
Compensation of Executive Officers
Summary of Compensation
The following table shows for the fiscal years ended December 31, 2001,
2000 and 1999, compensation awarded or paid to, or earned by, our Chief
Executive Officer and the four other most highly compensated executive officers
at December 31, 2001 whose total annual salary and bonus exceeded $100,000 (the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
Securities
Name and Principal Fiscal Underlying
-
Position Year Salary Bonus ($)(1) Other($) Options (#)
- -------- ---- ------ --------- -------- -----------
Donald L. Rich 2001 $202,600 $72,717 -- --
President, Chief Executive
Officer & Chairman of the
Board
2000 200,100 94,020 -- --
1999 200,000 100,000 -- 200,000
Eric Chen 2001 151,960 41,587 -- 15,000
Sr. Vice President, Engineering &
Product Marketing
2000 137,965 42,484 -- 30,000
1999 120,500 30,000 -- 20,000
Paul Cheng (2) 2001 126,950 30,002 -- 25,000
Chief Financial Officer and
Secretary
2000 97,191 26,320 -- 45,000
1999 -- -- -- --
Boris Elpiner (3) 2001 144,350 36,310 -- --
Vice President, Marketing
2000 135,100 39,797 -- --
1999 90,865 18,637 -- 78,000
Michael Petrovich 2001 134,523 -- $57,805 --
Vice President,
Sales, International
2000 106,622 -- 74,361 --
1999 249,813 -- 125,318 30,000
(1) Includes bonus amounts of $72,717 for Mr. Rich, $10,598 for Mr. Cheng,
$12,098 for Mr. Chen and $11,949 for Mr. Elpiner for services rendered
but not paid in fiscal 2001. Also includes bonus amounts of $94,020 for
Mr. Rich, $14,380 for Mr. Cheng, $11,259 for Mr. Chen and $10,949 for
Mr. Elpiner for services rendered in fiscal 2000 but paid in fiscal
2001.
(2) Mr. Cheng joined Castelle in March 2000.
(3) Mr. Elpiner joined Castelle in April 1999 and left in February 2002.
Stock Option Grants and Exercises
Castelle grants options to its executive officers under its Prior
Option Plan. As of December 31, 2001, options to purchase a total of 1,268,885
shares were outstanding under the Prior Option Plan and options to purchase
253,757 shares remained available for grant thereunder. Castelle did not grant
any stock appreciation rights, restricted stock awards or stock purchase rights
during 2001.
24
The following tables show for the fiscal year ended December 31, 2001,
information regarding options granted to, exercised by, and held at year-end by
the named executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of Percentage of
Securities Total Options Potential Realizable Value at
Underlying Granted to Assumed Annual Rates of Stock
Options Employees in Exercise or Price Appreciation
Name and Principal Granted (#) Fiscal Year Base Price Per Expiration for Option Term (4)
Position (1) (%)(2) Share($)(3) Date 5% ($) 10% ($)
- -------- --- ---------------- -------------- --------- ------ -------
Donald L. Rich 0 - - - - -
Eric Chen 15,000 9.9% $0.68 4/11/08 $4,156 $9,687
Paul Cheng 25,000 16.4 0.68 4/11/08 6,927 16,145
Boris Elpiner 0 - - - - -
Michael Petrovich 0 - - - - -
(1) One-fourth of these options vested on April 11, 2002, and the remaining
options vest monthly in equal installments over a 36-month period.
(2) Based on options to purchase an aggregate of 152,000 shares of common stock
granted to employees in 2001.
(3) The exercise price is equal to 100% of the fair market value of common
stock at the date of grant.
(4) The potential realizable value is calculated based on the assumption that
the stock price on the date of grant appreciates from the date of grant at
the indicated annual rate compounded annually for the entire 10-year term
of the option and that the option is exercised and sold on the last day of
its term for the appreciated stock price. The 5% and 10% assumed rates of
appreciation are derived from the rules of the Commission and do not
represent our estimate or projection of future common stock prices.
25
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth the number of shares of common stock
subject to exercisable and unexercisable stock options held as of December 31,
2001 by each of the named executive officers.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Acquired Value Options at FY-End (#) at FY-End ($)(1)
on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
-------------- ------------ ----------- ------------- ----------- -------------
Donald Rich............ - - 500,000 0 0 0
Eric Chen.............. - - 57,390 42,710 0 $1,050
Paul Cheng............. - - 18,749 51,251 0 1,750
Boris Elpiner.......... - - 54,660 23,340 0 0
Michael Petrovich...... - - 81,457 13,543 0 0
- -----------------
(1) Based on the fair market value of the common stock at December 31, 2001 of
$0.75 (closing sales price) minus the exercise price of the option.
26
EMPLOYMENT SEVERANCE AND CHANGE OF CONTROL AGREEMENTS
In November 1998, Castelle entered into an employment agreement with
Donald Rich, pursuant to which Mr. Rich agreed to serve as our Chief Executive
Officer. Mr. Rich resigned as Chief Executive Officer in April 2002. Mr. Rich's
employment agreement provided for an annual base salary of $200,000, plus an
annual bonus of up to a sum of $100,000, if certain performance criteria are
met, or above $100,000 in the discretion of the Compensation Committee if
performance criteria are exceeded. Performance criteria were evaluated
quarterly, and performance bonuses earned and paid (to the extent earned) on a
quarterly basis. Pursuant to his employment agreement, Mr. Rich was also granted
an initial incentive stock award to purchase 300,000 shares of the common stock,
one sixth of which vested after six months and the remainder vesting over the
next thirty months.
In November 1998, Castelle entered into a severance and transition
benefit agreement with Mr. Rich pursuant to which we agreed that if we terminate
Mr. Rich without cause or if Mr. Rich terminates his employment voluntarily for
good cause, we are required to pay Mr. Rich 100% of his annualized salary and
maintain the medical benefits conveyed to him for one year, and provide for the
accelerated vesting of 100% of his outstanding options. The agreement allowed
Mr. Rich to terminate his employment for good cause if his responsibilities were
materially diminished, base pay was reduced, if Castelle failed to continue any
benefit plan in which Mr. Rich was participating without comparable replacement,
our corporate headquarters was relocated more than 20 miles from its current
location or we breached this agreement or Mr. Rich's employment agreement. No
payment would be due if Mr. Rich were dismissed for cause. The agreement also
provided that Mr. Rich was eligible for a lump sum payment equal to six months
of his base salary, in addition to any benefits conveyed to Mr. Rich upon
termination, if he remained with Castelle at least 90 days after a change in
control and his employment was subsequently terminated for any reason.
In April 2002, Castelle entered into an employment agreement with Scott
C. McDonald, pursuant to which Mr. McDonald agreed to serve as our Chief
Executive Officer. The employment agreement is not for a specified term and is
terminable at will or without cause at any time upon written notice, subject to
the conveyance of certain severance benefits to Mr. McDonald upon termination,
as described below. The employment agreement provides for an annual base salary
of $200,000, plus an annual bonus of up to a sum of $100,000, if performance
criteria are met, or above $100,000 in the discretion of the Compensation
Committee if performance criteria are exceeded. Performance criteria will be
evaluated quarterly, and performance bonuses will be earned and paid (to the
extent earned) on a quarterly basis. The agreement also provides that during the
first four quarters of his employment, Mr. McDonald will receive guaranteed
bonus payments of $25,000 per quarter so long as he remains an employee in good
standing. Mr. McDonald was granted options to purchase 300,000 shares of the
common stock under our Prior Option Plan. The first option became one quarter
vested after six months, with the remainder vesting over the next eighteen
months. The second option becomes fully vested after three years.
Castelle has also entered into a severance and transition benefit
agreement with Mr. McDonald, pursuant to which we agreed that if we terminate
Mr. McDonald without cause or if Mr. McDonald terminates his employment
voluntarily for good cause, we are required to pay him 100% of his annualized
salary and maintain the medical benefits conveyed to him for one year. In
addition, 50% of Mr. McDonald's unvested options will become immediately
27
vested. The agreement allows Mr. McDonald to terminate his employment for good
cause if his responsibilities are materially diminished, base pay is reduced or
potential bonus payments are materially reduced, Castelle fails to continue any
benefit plan in which Mr. McDonald is participating without comparable
replacement, our corporate headquarters is relocated more than 20 miles from its
current location or we breach this agreement or Mr. McDonald's employment
agreement. No payment will be due if Mr. McDonald is dismissed for cause. In the
event of a change of control of Castelle, Mr. McDonald is eligible for a lump
sum payment equal to six months of his base salary, in addition to any benefits
that may be conveyed to Mr. McDonald upon termination, if he remains with us at
least ninety days after a change in control and his employment is subsequently
terminated for any reason.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Robert H. Hambrecht
and Peter R. Tierney, neither of whom has any interlocking relationships, as
defined by the Securities and Exchange Commission except as described below.
[The Remainder of this Page Intentionally Left Blank]
28
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION2
Our executive compensation program is administered by the Compensation
Committee of the Board of Directors. The Committee currently consists of Robert
Hambrecht and Peter Tierney, neither of whom is an employee of Castelle. The
Committee is responsible for determining compensation policies for our executive
officers, including any stock-based awards to such individuals under the Prior
Option Plan and, if approved, under the 2002 Option Plan. In determining
executive officer compensation, the Compensation Committee considers corporate
performance against Castelle's objectives.
The Compensation Committee structures executive compensation packages
with two objectives:
o to ensure that the compensation and incentives provided to the
executive officers are closely aligned with Castelle's
financial performance and shareholder value; and
o to attract and retain, through a competitive compensation
structure, those key executives critical to the long-term success
of Castelle.
For 2001, Castelle's executive compensation program included the
following components: (i) base salary, (ii) options to purchase shares of common
stock, and (iii) quarterly incentives in the form of cash bonuses.
Stock Options
In addressing the first objective, the Compensation Committee utilizes
stock option grants to executive officers to tie portion executive officer
compensation directly to Castelle's stock price performance. The Compensation
Committee believes that the grant of an equity interest in Castelle serves to
link management interests with shareholder interests and to motivate executive
officers to make decisions that are in the best interests of Castelle 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 Castelle and (iv) performance. In 2001, our
executive officers received options to purchase common stock at levels ranging
from 1,000 to 25,000 shares.
Base Salary and Cash Bonuses
The second objective of the overall executive compensation policy is
addressed by a salary and bonus policy which is based on:
o consideration of the salaries and total compensation of executive
officers in similar positions with comparable companies in the industry;
o the qualifications and experience of each executive officer;
- ----------------------
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 Castelle 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.
29
o Castelle's financial performance during the past year; and
o 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 may be in the
low-range as compared to the comparable companies in the industry while stock
options may be 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 base salaries paid to our executive
officers were not increased in 2001.
The Compensation Committee believes that another key element of
executive compensation should be the variable portion provided by cash incentive
plans. The cash incentive portion of the executive officers' compensation is
dependent primarily on our quarterly financial performance and achievement of
specified corporate objectives as determined by the Compensation Committee.
Castelle's executive officer compensation plan is designed such that if Castelle
meets its stated objectives, executive officers receive the cash incentive part
of their compensation. If Castelle performs below its stated objectives, the
cash incentive portion of the executive's compensation is significantly reduced,
and may be eliminated altogether if performance is below defined thresholds. A
substantially smaller portion of some executives' incentive compensation is
based on performance against individual objectives. The Board of Directors
approves quarterly performance objectives for executives of Castelle. The actual
cash bonus earned in 2001 by executive officers depended upon the extent to
which Castelle's objectives were achieved. As a result of Castelle obtaining a
certain percentage of such quarterly performance objectives, cash bonuses
ranging from $30,002 to $72,717 were paid to executive officers for services
performed during 2001.
Castelle uses the same factors described above for the executive
officers in setting the annual salary, stock option grant and cash incentives
awarded to its Chief Executive Officer, formerly Donald Rich. The base salary of
Mr. Rich included a mileage reimbursement of $2,600. Mr. Rich was eligible to
earn a quarterly bonus of up to a maximum of $25,000, if Castelle achieved
certain performance objectives outlined for Mr. Rich prior to the beginning of
each quarter of 2001. As a result of Castelle obtaining a certain percentage of
each quarterly financial target, Mr. Rich was awarded cash bonuses totaling
$72,717 in 2001. Because of the amount of previous option grants to Mr. Rich,
the Board did not award Mr. Rich any additional option grants during fiscal
2001.
Section 162(m)
Section 162(m) of the Internal Revenue Code, generally imposes an
annual corporate deduction limitation of $1 million on the compensation of
certain executive officers. Compensation in excess of $1 million may be deducted
if it is performance-based compensation within the meaning of the Code. The
Committee has determined that stock options granted under our Prior Option Plan
with an exercise price at least equal to the fair market value of the common
stock on the date of grant should, where practicable, be treated as
"performance-based
30
compensation," and the Prior Option Plan contains provisions designed to allow
compensation recognized by an executive officer as a result of the grant of a
stock option to be deductible by Castelle.
2001 Compensation Committee
ROBERT H. HAMBRECHT
PETER R. TIERNEY
31
PERFORMANCE MEASUREMENT COMPARISON 1
The following graph shows the total shareholder return of an investment
of $100 in cash on December 31, 1996 for (i) our common stock, (ii) the NASDAQ
Stock Market Index (US Companies) and (iii) the NASDAQ Computer Manufacturer
Stock Index. All values assume reinvestment of the full amount of all dividends
and are calculated as of December 31 of each year:
Comparison of 5 Year Cumulative Total Return*
AMONG CASTELLE, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER MANUFACTURER INDEX
12/96 12/97 12/98 12/99 12/00 12/01
----- ----- ----- ----- ----- -----
Castelle $100.00 $36.96 $17.39 $32.61 $18.49 $13.04
Nasdaq Stock Market (U.S.) $100.00 $122.48 $172.68 $320.89 $193.01 $153.15
Nasdsaq Computer Manufacturer $100.00 $120.83 $262.78 $557.80 $314.18 $216.53
* $100 invested on 12/31/96 on stock or index - including reinvestment of
dividends
- --------------------
1 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 Castelle 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.
32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than the relationships described below, and in the sections
entitled "Executive Compensation" and "Employment Severance and Change of
Control Agreements", since January 1, 2001, there has not been, nor is there
currently proposed, any transaction or series of similar transactions to which
we were or will be a party in which the amount involved exceeded or will exceed
$60,000 and in which any director, executive officer, holder of more than 5% of
our common stock or any member of his or her immediate family had or will have a
direct or indirect material interest.
In January 2001, we engaged W.R. Hambrecht + Co. ("WRH + Co."), an
investment bank in which Mr. Hambrecht, one of our directors, is a partner, to
provide certain financial advisory services. As of December 31, 2001, WRH + Co.
had rendered an insignificant level of services to Castelle under this
arrangement, and the agreement has now been terminated. Also, WRH + Co. has been
selected to perform certain stock repurchase services for Castelle, as part of
our common stock repurchase program announced on October 16, 2002. As of
November 12, 2002, WRH + Co. had rendered an insignificant level of services to
Castelle through these services.
In November 2002, Castelle repurchased 1,600,000 shares of its common
stock at a price of $1.10 per share in a private transaction. Of the 1,600,000
shares repurchased, 439,560 shares were repurchased from WebFinancial
Corporation, which is a beneficial holder of more than 5% of the common stock,
and 281,630 shares were repurchased from Jack L. Howard, who was a member of the
Board of Directors of Castelle and a beneficial holder of more than 5% of the
common stock. As part of the transaction, Mr. Howard agreed, pursuant to
standstill provisions within the agreement, that for five years neither he nor
any of his affiliates would: acquire any of Castelle's assets; purchase
Castelle's shares; pursue a tender offer or exchange offer relating to Castelle;
participate in any recapitalization, restructuring or extraordinary transaction
with respect to Castelle; solicit any proxies or consents to vote any securities
of Castelle; form or participate in a group with respect to the voting
securities of Castelle; or nominate any person as a member of the Board of
Directors of Castelle. WebFinancial Corporation and its affiliates agreed to
similar restrictions for a period of one year. In addition, Castelle received
proxies to vote all 1,600,000 of the repurchased shares, and Mr. Howard resigned
from Castelle's Board of Directors.
Our Bylaws provide that Castelle will indemnify directors and executive
officers to the fullest extent permitted by California law. Under our Bylaws,
indemnified parties are entitled to indemnification for negligence, gross
negligence and otherwise to the fullest extent permitted by law. The Bylaws also
require us 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.
33
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information, as of December 31,
2001, concerning securities authorized for issuance under all equity
compensation plans of Castelle:
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
Plan category outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security holders 1,393,725 $1.08 274,797 (1)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security holders -- -- --
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 1,393,725 $1.08 274,797
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(1) Includes 21,797 shares available for issuance under our 1988 Equity
Incentive Plan and 1,000 shares available for issuance under the Director's
Plan.
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/ Paul Cheng
Paul Cheng
Chief Financial Officer and Secretary
November 25, 2002
A copy of Castelle's Annual Report to the Securities and Exchange Commission on
Form 10-K for the fiscal year ended December 31, 2001 is available without
charge upon written request to: Corporate Secretary, Castelle, 855 Jarvis Drive,
Suite 100, Morgan Hill, CA 95037.
34
CASTELLE
Annual Meeting of Shareholders to be held on December 20, 2002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Scott C. McDonald and Paul Cheng, and
each of them, as the Proxyholders, each with full powers of substitution and
resubstitution, and hereby authorizes them to represent and to vote, as
designated below, all shares of common stock of Castelle (the "Corporation")
that the undersigned is entitled to vote at the Annual Meeting of Shareholders
of the Corporation to be held on December 20, 2002, at 2:00 p.m. local time, at
the Corporation's corporate offices located at 855 Jarvis Drive, Suite 100,
Morgan Hill, California 95037, and at any and all postponements, continuations
and adjournments thereof.
This Proxy, when properly executed and returned in a timely manner,
will be voted at the Meeting and any adjournment or postponement thereof in the
manner described herein. If no contrary indication is made, the proxy will be
voted FOR the Board of Director nominees, FOR Proposals 2, 3 and 4 and in
accordance with the judgment and in the discretion of the persons named as
Proxyholders herein on any other business that may properly come before the
Meeting or any adjournment or postponement thereof, to the extent authorized by
Rule 14a-4(c) promulgated under the Securities Exchange Act of 1934. In
exercising this proxy to elect members of the Board of Directors, the proxy
holders may vote shares cumulatively in such fashion as they determine in their
discretion.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
- --------- --------
SEE CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE SEE
REVERSE REVERSE
SIDE SIDE
- --------- --------
DETACH HERE
|X| Please mark
votes as in
this example.
The Board of Directors unanimously recommends that you vote FOR the Board of
Director nominees and FOR Proposals 2, 3 and 4.
|_| MARK HERE FOR ADDRESS
CHANGE AND NOTE BELOW
1. Election of Directors.
Nominees: Donald Rich, Scott McDonald,Peter Tierney and Robert H. Hambrecht
|_| FOR all nominees |_| WITHHOLD from all nominees
To withhold authority to vote for any individual nominee, strike a
line through that nominee's name.
2. Proposal to approve the adoption of the 2002 Equity Incentive Plan.
FOR AGAINST ABSTAIN
|_| |_| |_|
3. Proposal to approve an amendment to the Corporation's Articles of
Incorporation to authorize a reverse stock split at a ratio of
between 1-for-2 and 1-for-3, to be executed at the Board's
discretion.
FOR AGAINST ABSTAIN
|_| |_| |_|
4. Proposal to ratify the appointment of PricewaterhouseCoopers as
independent auditors for 2002.
FOR AGAINST ABSTAIN
|_| |_| |_|
Please sign exactly as your name appears on this Proxy. If more than one name
appears, all persons so designated should sign. Attorneys, executors,
administrators, trustees and guardians should indicate their capacities. If the
signer is a corporation, please print full corporate name and indicate capacity
of duly authorized officer executing on behalf of the corporation. If the signer
is a partnership, please print full partnership name and indicate capacity of
duly authorized person executing on behalf of the partnership. Please date this
Proxy.
Signature: Date:
- ------------------------------------------ -----------------------
Printed Name:
- ------------------------------------------
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN
THIS PROXY CARD AND RETURN IT PRIOR TO THE MEETING IN THE ENCLOSED ENVELOPE.
(Reverse Side)
Exhibit A
CASTELLE
2002 EQUITY INCENTIVE PLAN
As Adopted ____________, 2002
1. PURPOSE. The purpose of this Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options and Restricted Stock. Capitalized
terms not defined in the text are defined in Section 23 ("Definitions).
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available. Subject to Sections 2.2
("Adjustment of Shares") and 17 ("Corporate Transactions"), the total number of
Shares reserved and available for grant and issuance pursuant to this Plan will
be 850,000 Shares plus Shares that are subject to: (a) issuance upon exercise of
an Option but cease to be subject to such Option for any reason other than
exercise of such Option; (b) an Award granted hereunder but are forfeited or are
repurchased by the Company at the original issue price; and (c) an Award that
otherwise terminates without Shares being issued.
2.2 Adjustment of Shares. In the event that the number of
outstanding shares of the Company's Common Stock is changed by a stock dividend,
recapitalization, stock split, reverse stock split, subdivision, combination,
reclassification or similar change in the capital structure of the Company
without consideration, then (a) the number of Shares reserved for issuance under
this Plan, (b) the number of Shares that may be granted pursuant to Sections 3
("Eligibility"), 5.10 ("No Disqualification") and 8 ("Automatic Grants to
Outside Directors") below, (c) the Exercise Prices of and number of Shares
subject to outstanding Options, and (d) the number of Shares subject to other
outstanding Awards may, upon approval of the Board in its discretion, be
proportionately adjusted in compliance with applicable securities laws;
provided, however, that fractions of a Share will not be issued but will either
be replaced by a cash payment equal to the Fair Market Value of such fraction of
a Share or will be rounded up to the nearest whole Share, as determined by the
Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 ("Options") below) may be
granted only to employees (including officers and directors who are also
employees) of the Company or of a Parent or Subsidiary of the Company. All other
Awards may be granted to employees, officers, directors, consultants,
independent contractors and advisors of the Company or any Parent or Subsidiary
of the Company; provided such consultants, independent contractors and advisors
render bona fide services not in connection with the offer and sale of
securities in a capital-raising transaction. No person will be eligible to
receive more than 300,000 Shares in any calendar year under this Plan pursuant
to the grant of Awards hereunder. A person may be granted more than one Award
under this Plan.
EA-1
4. ADMINISTRATION.
4.1 Committee Authority. This Plan will be administered by the
Committee or by the Board acting as the Committee. Except to the extent which
may otherwise be required by the terms of Section 8 ("Automatic Grants to
Outside Directors") hereof, and subject to the general purposes, terms and
conditions of this Plan, and to the direction of the Board, the Committee will
have full power to implement and carry out this Plan. The Committee will have
the authority to:
(a) construe and interpret this Plan, any Award Agreement
and any other agreement or document executed pursuant
to this Plan;
(b) prescribe, amend and rescind rules and regulations
relating to this Plan or any Award;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration
subject to Awards;
(f) determine whether Awards will be granted singly, in
combination with, in tandem with, in replacement of,
or as alternatives to, other Awards under this Plan
or any other incentive or compensation plan of the
Company or any Parent or Subsidiary of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of
Awards;
(i) correct any defect, supply any omission or reconcile
any inconsistency in this Plan, any Award or any
Award Agreement;
(j) determine whether an Award has been earned;
(k) initiate an Awards Exchange Program; and
(l) make all other determinations necessary or advisable
for the administration of this Plan.
4.2 Committee Discretion. Except for automatic grants to
Outside Directors pursuant to Section 8 ("Automatic Grants to Outside
Directors") hereof, any determination made by the Committee with respect to any
Award will be made in its sole discretion at the time of grant of the Award or,
unless in contravention of any express term of this Plan or the Award, at any
later time, and such determination will be final and binding on the Company and
on all persons having an interest in any Award under this Plan. The Committee
may delegate to one or more officers of the Company the authority to grant an
Award under this Plan to Participants who are not Insiders of the Company.
EA-2
5. OPTIONS. The Committee may grant Options to eligible persons and
will determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan
will be evidenced by an Award Agreement which will expressly identify the Option
as an ISO or an NQSO ("Stock Option Agreement"), and, except to the extent which
may otherwise be required by the terms of Section 8 ("Automatic Grants to
Outside Directors") hereof, will be in such form and contain such provisions
(which need not be the same for each Participant) as the Committee may from time
to time approve, and which will comply with and be subject to the terms and
conditions of this Plan.
5.2 Date of Grant. The date of grant of an Option will be the
date on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable within the
times or upon the events determined by the Committee as set forth in the Stock
Option Agreement governing such Option; provided, however, that no Option will
be exercisable after the expiration of ten (10) years from the date the Option
is granted; and provided further that no ISO granted to a person who directly or
by attribution owns more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of any Parent or Subsidiary of
the Company ("Ten Percent Shareholder") will be exercisable after the expiration
of five (5) years from the date the ISO is granted. The Committee also may
provide for Options to become exercisable at one time or from time to time,
periodically or otherwise, in such number of Shares or percentage of Shares as
the Committee determines.
5.4 Exercise Price. The Exercise Price of an Option will be
determined by the Committee when the Option is granted and may not be less than
eighty-five percent (85%) of the Fair Market Value of the Shares on the date of
grant; provided that: (i) the Exercise Price of an ISO will be not less than
100% of the Fair Market Value of the Shares on the date of grant; and (ii) the
Exercise Price of any ISO granted to a Ten Percent Shareholder will not be less
than 110% of the Fair Market Value of the Shares on the date of grant. Payment
for the Shares purchased may be made in accordance with Section7 ("Payment for
Share Purchases").
5.5 Method of Exercise. Options may be exercised only by
delivery to the Company of a written stock option exercise agreement (the
"Exercise Agreement") in a form approved by the Committee (which need not be the
same for each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding the Participant's
investment intent and access to information and other matters, if any, as may be
required by or desirable to the Company to comply with applicable securities
laws, together with payment in full of the Exercise Price for the number of
Shares being purchased.
EA-3
5.6 Termination. Notwithstanding the exercise periods set
forth in the Stock Option Agreement, the exercise of an Option will always be
subject to the following:
(a) If the Participant is Terminated for any reason
except the Participant's death or Disability, then
the Participant may exercise such Participant's
Options only to the extent that such Options would
have been exercisable by the Participant on the
Termination Date no later than three (3) months after
the Termination Date (or such shorter or longer time
period not exceeding five (5) years as may be
determined by the Committee, with any exercise beyond
three (3) months after the Termination Date deemed to
be an NQSO), but in any event no later than the
expiration date of the Options.
(b) If the Participant is Terminated because of
Participant's death or Disability (or the
Participant dies within three (3) months after a
Termination other than for Cause or
because of the Participant's Disability), then
the Participant's Options may be exercised only
to the extent that such Options would have been
exercisable by the Participant on the Termination
Date and must be exercised by the Participant
(or the Participant's legal representative or
authorized assignee) no later than twelve (12)
months after the Termination Date (or such shorter
or longer time period not exceeding five (5) years
as may be determined by the Committee, with any
exercise beyond (a) three (3) months after the
Termination Date when the Termination is for any
reason other than the Participant's death or
Disability, or (b) twelve (12) months after the
Termination Date when the Termination is for the
Participant's death or Disability, deemed to be an
NQSO), but in any event no later than the
expiration date of the Options.
(c) If the Participant is terminated for Cause, then
Participant's Options shall expire on such
Participant's Termination Date, or at such later time
and on such conditions as are determined by the
Committee.
5.7 Limitations on Exercise. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of an
Option, provided that such minimum number will not prevent any Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
5.8 Limitations on ISOs. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year (under
this Plan or under any other incentive stock option plan of the Company or any
Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair
Market Value of Shares on the date of grant with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year exceeds
$100,000, then the Options for the first $100,000 worth of Shares to become
exercisable in such calendar year will be ISOs and the Options for the amount in
excess of $100,000 that become exercisable in such calendar year will be NQSOs.
In the event that the Code or the regulations promulgated thereunder are
EA-4
amended after the Effective Date to provide for a different limit on the Fair
Market Value of Shares permitted to be subject to ISOs, such different limit
will be automatically incorporated herein and will apply to any Options granted
after the effective date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may
modify, extend or renew outstanding Options and authorize the grant of new
Options in substitution therefor, provided that any such action may not, without
the written consent of a Participant, impair any of such Participant's rights
under any Option previously granted. Any outstanding ISO that is modified,
extended, renewed or otherwise altered will be treated in accordance with
Section 424(h) of the Code. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected by a written
notice to them; provided, however, that the Exercise Price may not be reduced
below the minimum Exercise Price that would be permitted under Section 5.4
("Exercise Price") for Options granted on the date the action is taken to reduce
the Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision
in this Plan, no term of this Plan relating to ISOs will be interpreted, amended
or altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code. In no event shall the total number of Shares issued
(counting each reissuance of a Share that was previously issued and then
forfeited or repurchased by the Company as a separate issuance) under the Plan
upon exercise of ISOs exceed 10,000,000 Shares (adjusted in proportion to any
adjustments under Section 2.2 ("Adjustment of Shares") hereof) over the term of
the Plan.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the
Company to sell to an eligible person Shares that are subject to restrictions.
The Committee will determine to whom an offer will be made, the number of Shares
the person may purchase, the price to be paid (the "Purchase Price"), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a
Restricted Stock Award made pursuant to this Plan will be evidenced by an Award
Agreement ("Restricted Stock Purchase Agreement") that will be in such form and
contain such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and will comply with and be subject to
the terms and conditions of this Plan. The offer of Restricted Stock Awards will
be accepted by the Participant's execution and delivery of the Restricted Stock
Purchase Agreement and full payment for the Shares to the Company within thirty
(30) days from the date the Restricted Stock Purchase Agreement is delivered to
the person. If such person does not execute and deliver the Restricted Stock
Purchase Agreement along with full payment for the Shares to the Company within
thirty (30) days, then the offer will terminate, unless otherwise determined by
the Committee.
6.2 Purchase Price. The Purchase Price will be determined by
the Committee on the date the Restricted Stock Award is granted or at the time
the purchase is consummated, except in the case of a sale to a Ten Percent
Shareholder, in which case the Purchase Price will be one hundred percent (100%)
of the Fair Market Value on the date the Restricted Stock Award
EA-5
is granted or at the time the purchase is consummated. Payment of the Purchase
Price may be made in accordance with Section 7 ("Payment for Share Purchases").
6.3 Terms of Restricted Stock Awards. Restricted Stock Awards
shall be subject to such restrictions as the Committee may impose. These
restrictions may be based upon completion of a specified number of years of
service with the Company or upon completion of the performance goals as set out
in advance in the Participant's individual Restricted Stock Purchase Agreement.
Restricted Stock Awards may vary from Participant to Participant and between
groups of Participants. Prior to the grant of a Restricted Stock Award, the
Committee shall: (a) determine the nature, length and starting date of any
Performance Period for the Restricted Stock Award; (b) select from among the
Performance Factors to be used to measure performance goals, if any; and (c)
determine the number of Shares that may be awarded to the Participant. Prior to
the payment of any Restricted Stock Award, the Committee shall determine the
extent to which such Restricted Stock Award has been earned. Performance Periods
may overlap and Participants may participate simultaneously with respect to
Restricted Stock Awards that are subject to different Performance Periods and
having different performance goals and other criteria.
6.4 Termination During Performance Period. If a Participant is
terminated during a Performance Period for any reason, then such Participant
will be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Restricted Stock Award only to the extent earned as of the date of
Termination in accordance with the Restricted Stock Purchase Agreement, unless
the Committee determines otherwise.
7. PAYMENT FOR SHARE PURCHASES.
7.1 Payment. Payment for Shares purchased pursuant to this
Plan may be made in cash (by check) or, where expressly approved for the
Participant by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that either: (1) have been
owned by the Participant for more than six (6) months
and have been paid for within the meaning of SEC Rule
144 (and, if such shares were purchased from the
Company by use of a promissory note, such note has
been fully paid with respect to such shares); or (2)
were obtained by the Participant in the public
market;
(c) by waiver of compensation due or accrued to the
Participant for services rendered to the Company or a
Parent or Subsidiary of the Company;
(d) with respect only to purchases upon exercise of an
Option, and provided that a public market for the
Company's Common Stock exists:
(1) through a "same day sale" commitment from
the Participant and a broker-dealer that is
a member of the National Association of
Securities Dealers (an "NASD Dealer")
whereby the Participant irrevocably elects
to exercise the Option and to sell a portion
of the
EA-6
Shares so purchased to pay for the
Exercise Price, and whereby the NASD Dealer
irrevocably commits upon receipt of such
Shares to forward the Exercise Price
directly to the Company; or
(2) through a "margin" commitment from the
Participant and an NASD Dealer whereby the
Participant irrevocably elects to exercise
the Option and to pledge the Shares so
purchased to the NASD Dealer in a margin
account as security for a loan from the NASD
Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably
commits upon receipt of such Shares to
forward the Exercise Price directly to the
Company; or
(e) by any combination of the foregoing.
7.2 Loan Guarantees. The Committee may, subject to its express
approval and where permitted by law, help the Participant pay for Shares
purchased under this Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
8. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS.
8.1 Types of Options and Shares. Options granted under this
Plan and subject to this Section 8 shall be NQSOs.
8.2 Eligibility. Options subject to this Section 8 shall
be granted only to Outside Directors.
8.3 Initial Grant. Each Outside Director who first becomes a
member of the Board on or after the Effective Date will automatically be granted
an option for that fixed number of Shares which the Committee has established
for initial grants to Outside Directors as of the date of each grant (an
"Initial Grant") on the date such Outside Director first becomes a member of the
Board, unless such Outside Director received a grant of options before the
Effective Date.
8.4 Succeeding Grant. On April 1 of each year (or the next
business day should such date be a legal holiday), each Outside Director will
automatically be granted an option for that fixed number of Shares which the
Committee has established for succeeding grants to Outside Directors as of the
date of each grant (a "Succeeding Grant"), provided, that the Outside Director
is a member of the Board on such date and has served continuously as a member of
the Board for a period of at least twelve (12) months since the last option
grant (whether an Initial Grant or a Succeeding Grant) to such Outside Director.
If less than twelve (12) months has passed, then the number of shares subject to
the Succeeding Grant will be pro-rated based on the number of days passed since
the last option grant to such Outside Director, divided by 365 days.
8.5 Vesting. The date an Outside Director receives an Initial
Grant or a Succeeding Grant is referred to in this Plan as the "Start Date" for
such option.
EA-7
(a) Initial Grant. Each Initial Grant will vest and be
exercisable as to 8.33333% of the Shares at the end
of each full succeeding month after the Start Date,
so long as the Outside Director continuously remains
a director or a consultant of the Company.
(b) Succeeding Grant. Each Succeeding Grant will vest and
be exercisable as to 8.33333% of the Shares at the
end of each full succeeding month after the Start
Date, so long as the Outside Director continuously
remains a director or a consultant of the Company.
8.6 Exercise Price. The exercise price of an option pursuant
to an Initial Grant or a Succeeding Grant shall be the Fair Market Value of the
Shares at the time that such option is granted.
8.7 Termination. Except as provided below in this Section, the
options granted under this Section 8 shall terminate and may not be exercised if
the Outside Director ceases to be a member of the Board or a consultant of the
Company. The date on which the Outside Director ceases to be a member of the
Board or ceases to remain a consultant of the Company shall be referred to as
the "Termination Date."
(a) Termination Generally. If Outside Director ceases to
be a member of the Board or a consultant of the
Company for any reason except death, Disability or
Cause, the options granted under this Section 8, to
the extent (and only to the extent) that it would
have been exercisable by such Outside Director on the
Termination Date, may be exercised by the Outside
Director within three (3) months after the
Termination Date, but in no event later than the
expiration date.
(b) Death or Disability. If the Outside Director ceases
to be a member of the Board or a consultant of the
Company because of the death or Disability of the
Outside Director, the options granted under this
Section 8, to the extent (and only to the extent)
that it would have been exercisable by the Outside
Director on the Termination Date, may be exercised by
the Outside Director within twelve (12) months after
the Termination Date, but in no event later than the
expiration date.
(c) Cause. If the Outside Director is terminated for
Cause, then the options granted under this Section 8
shall expire on such Outside Director's Termination
Date, or at such later time and on such conditions as
are determined by the Committee.
9. WITHHOLDING TAXES.
9.1 Withholding Generally. Whenever Shares are to be issued in
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements
EA-8
prior to the delivery of any certificate or certificates for such Shares.
Whenever, under this Plan, payments in satisfaction of Awards are to be made in
cash, such payment will be net of an amount sufficient to satisfy federal,
state, and local withholding tax requirements.
9.2 Stock Withholding. When, under applicable tax laws, a
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated to
pay the Company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to be
withheld is to be determined. All elections by a Participant to have Shares
withheld for this purpose will be made in accordance with the requirements
established by the Committee and be in writing in a form acceptable to the
Committee.
10. TRANSFERABILITY. Awards granted under this Plan, and any interest
therein, will not be transferable or assignable by Participant, other than by
will or by the laws of descent and distribution, and may not be made subject to
execution, attachment or similar process. During the lifetime of the Participant
an Award will be exercisable only by the Participant or Participant's legal
representative and any elections with respect to an Award may be made only by
the Participant or Participant's legal representative.
11. PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES.
11.1 Voting and Dividends. No Participant will have any of the
rights of a shareholder with respect to any Shares until the Shares are issued
to the Participant. After Shares are issued to the Participant, the Participant
will be a shareholder and have all the rights of a shareholder with respect to
such Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
Shares are restricted stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
restricted stock; provided, further, that the Participant will have no right to
retain such stock dividends or stock distributions with respect to Shares that
are repurchased at the Participant's Purchase Price or Exercise Price pursuant
to Section 11.2 ("Restrictions on Shares").
11.2 Restrictions on Shares. At the discretion of the
Committee, the Company may reserve to itself and/or its assignee(s) in the Award
Agreement a right to repurchase a portion of or all Unvested Shares held by a
Participant following such Participant's Termination at any time within ninety
(90) days after the later of the Participant's Termination Date and the date the
Participant purchases Shares under this Plan, for cash and/or cancellation of
purchase money indebtedness, at the Participant's Exercise Price or Purchase
Price, as the case may be.
12. CERTIFICATES. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal,
EA-9
state or foreign securities law, or any rules, regulations and other
requirements of the SEC or any stock exchange or automated quotation system upon
which the Shares may be listed or quoted.
13. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of the Participant's obligation to
the Company under the promissory note; provided, however, that the Committee may
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, the Participant will be required to execute and deliver a written
pledge agreement in such form as the Committee will from time to time approve.
The Shares purchased with the promissory note may be released from the pledge on
a pro rata basis as the promissory note is paid.
14. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or
from time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards, including but not limited to an exchange
pursuant to an Award Exchange Program and including but not limited to an
exchange for a new option at a lower exercise price, whether or not such
exchange is simultaneous. The Committee may at any time buy from a Participant
an Award previously granted with payment in cash, Shares (including restricted
stock) or other consideration, based on such terms and conditions as the
Committee and the Participant may agree.
15. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. This Plan is
intended to comply with the California Corporations Code. Any provision of this
Plan which is inconsistent with the California Corporations Code shall, without
further act or amendment by the Company or the Board, be reformed to comply with
the requirements of the California Corporations Code. An Award will not be
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance. Notwithstanding
any other provision in this Plan, the Company will have no obligation to issue
or deliver certificates for Shares under this Plan prior to: (a) obtaining any
approvals from governmental agencies that the Company determines are necessary
or advisable; and/or (b) compliance with any exemption, completion of any
registration or other qualification of such Shares under any state or federal
law or ruling of any governmental body that the Company determines to be
necessary or advisable. The Company will be under no obligation to register the
Shares with the SEC or to effect compliance with the exemption, registration,
qualification or listing requirements of any state
EA-10
securities laws, stock exchange or automated quotation system, and the Company
will have no liability for any inability or failure to do so.
16. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the right
of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
Cause.
17. CORPORATE TRANSACTIONS.
17.1 Assumption or Replacement of Awards by Successor. In the
event of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation of
the Company in a different jurisdiction, or other transaction in which there is
no substantial change in the shareholders of the Company or their relative stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the shareholders of the Company immediately prior to such merger
(other than any shareholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, (d) the sale of substantially
all of the assets of the Company, or (e) the acquisition, sale, or transfer of
more than 50% of the outstanding shares of the Company by tender offer or
similar transaction (each, a "Corporate Transaction"), any or all outstanding
Awards may be assumed, converted or replaced by the successor corporation (if
any), which assumption, conversion or replacement will be binding on all
Participants. In the alternative, the successor corporation may substitute
equivalent Awards or provide substantially similar consideration to Participants
as was provided to shareholders (after taking into account the existing
provisions of the Awards). The successor corporation may also issue, in place of
outstanding Shares of the Company held by the Participants, substantially
similar shares or other property subject to repurchase restrictions no less
favorable to the Participant. In the event such successor corporation (if any)
refuses to assume or substitute Awards, as provided above, pursuant to a
transaction described in this Subsection 17.1, such Awards will expire on such
transaction at such time and on such conditions as the Committee will determine.
Notwithstanding anything in this Plan to the contrary, the Committee may, in its
sole discretion, provide that the vesting of any or all Awards granted pursuant
to this Plan will accelerate upon a transaction described in this Section 17. If
the Committee exercises such discretion with respect to Options, such Options
will become exercisable in full prior to the consummation of such event at such
time and on such conditions as the Committee determines, and if such Options are
not exercised prior to the consummation of the corporate transaction, they shall
terminate at such time as determined by the Committee.
17.2 Other Treatment of Awards. Subject to any greater rights
granted to Participants under the foregoing provisions of this Section 17, in
the event of the occurrence of any Corporate Transaction described in Section
17.1, any outstanding Awards will be treated as
EA-11
provided in the applicable agreement or plan of merger, consolidation,
dissolution, liquidation, or sale of assets.
17.3 Assumption of Awards by the Company. The Company, from
time to time, also may substitute or assume outstanding awards granted by
another company, whether in connection with an acquisition of such other company
or otherwise, by either; (a) granting an Award under this Plan in substitution
of such other company's award; or (b) assuming such award as if it had been
granted under this Plan if the terms of such assumed award could be applied to
an Award granted under this Plan. Such substitution or assumption will be
permissible if the holder of the substituted or assumed award would have been
eligible to be granted an Award under this Plan if the other company had applied
the rules of this Plan to such grant. In the event the Company assumes an award
granted by another company, the terms and conditions of such award will remain
unchanged (except that the exercise price and the number and nature of Shares
issuable upon exercise of any such option will be adjusted appropriately
pursuant to Section 424(a) of the Code). In the event the Company elects to
grant a new Option rather than assuming an existing option, such new Option may
be granted with a similarly adjusted Exercise Price.
18. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become effective
on the date on which the registration statement filed by the Company with the
SEC under the Securities Act registering the initial public offering of the
Company's Common Stock is declared effective by the SEC (the "Effective Date").
This Plan shall be approved by the shareholders of the Company (excluding Shares
issued pursuant to this Plan), consistent with applicable laws, within twelve
(12) months before or after the date this Plan is adopted by the Board. Upon the
Effective Date, the Committee may grant Awards pursuant to this Plan; provided,
however, that: (a) no Option may be exercised prior to initial shareholder
approval of this Plan; (b) no Option granted pursuant to an increase in the
number of Shares subject to this Plan approved by the Board will be exercised
prior to the time such increase has been approved by the shareholders of the
Company; (c) in the event that initial shareholder approval is not obtained
within the time period provided herein, all Awards granted hereunder shall be
cancelled, any Shares issued pursuant to any Awards shall be cancelled, and any
purchase of Shares issued hereunder shall be rescinded; and (d) in the event
that shareholder approval of such increase shall not be obtained within the time
period provided herein, all Awards granted pursuant to such increase shall be
cancelled, any Shares issued pursuant to any Awards granted pursuant to such
increase will be cancelled, and any purchase of Shares pursuant to such increase
shall be rescinded.
19. TERM OF PLAN/GOVERNING LAW. Unless earlier Terminated as provided
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of shareholder approval. This Plan
and all agreements thereunder shall be governed by and construed in accordance
with the laws of the State of California.
20. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time
terminate or amend this Plan in any respect, including, without limitation,
amendment of any form of Award Agreement or instrument to be executed pursuant
to this Plan; provided, however, that the Board will not, without the approval
of the shareholders of the Company, amend this Plan in any manner that requires
such shareholder approval pursuant to the
EA-12
California Corporations Code, the Code or the regulations promulgated thereunder
as such provisions apply to this Plan.
21. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by
the Board, the submission of this Plan to the shareholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options otherwise than under this Plan, and such arrangements
may be either generally applicable or applicable only in specific cases.
22. INSIDER TRADING POLICY. Each Participant and Outside Director who
receives an Award shall comply with any policy adopted by the Company from time
to time covering transactions in the Company's securities by employees, officers
and/or directors of the Company.
23. DEFINITIONS. As used in this Plan, the following terms will have
the following meanings:
"Award" means any award under this Plan, including any Option
or Restricted Stock Award.
"Award Agreement" means, with respect to each Award, the
signed written agreement between the Company and the Participant setting forth
the terms and conditions of the Award.
"Awards Exchange Program" is a program whereby outstanding (a)
Options are exchanged for new Options with a lower exercise price and (b)
Restricted Stock Awards are exchanged for new Restricted Stock Awards with a
lower purchase price.
"Board" means the Board of Directors of the Company.
"Cause" means (a) the commission of an act of theft,
embezzlement, fraud, dishonesty, (b) a breach of fiduciary duty to the Company
or a Parent or Subsidiary of the Company, or (c) a failure to materially perform
the customary duties of employee's employment.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Compensation Committee of the Board.
"Company" means Corporation, Inc. or any successor corporation.
"Disability" means a disability, whether temporary or
permanent, partial or total, as determined by the Committee.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exercise Price" means the price at which a holder of an
Option may purchase the Shares issuable upon exercise of the Option.
EA-13
"Fair Market Value" means, as of any date, the value of a
share of the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq
National Market, its closing price on the Nasdaq
National Market on the date of determination as
reported in The Wall Street Journal;
(b) if such Common Stock is publicly traded and is then
listed on a national securities exchange, its closing
price on the date of determination on the principal
national securities exchange on which the Common
Stock is listed or admitted to trading as reported in
The Wall Street Journal;
(c) if such Common Stock is publicly traded but is not
quoted on the Nasdaq National Market nor listed or
admitted to trading on a national securities
exchange, the average of the closing bid and asked
prices on the date of determination as reported in
The Wall Street Journal (or, if not so reported, as
otherwise reported by any newspaper or other source
as the Board may determine);
(d) in the case of an Award made on the Effective Date,
the price per share at which shares of the Company's
Common Stock are initially offered for sale to the
public by the Company's underwriters in the initial
public offering of the Company's Common Stock
pursuant to a registration statement filed with the
SEC under the Securities Act; or
(e) if none of the foregoing is applicable, by the
Committee in good faith.
"Insider" means an officer or director of the Company or any
other person whose transactions in the Company's Common Stock are subject to
Section 16 of the Exchange Act.
"Option" means an award of an option to purchase Shares
pursuant to Section 5 ("Options").
"Outside Director" means a member of the Board who is (a) not
an employee of the Company or any Parent or Subsidiary of the Company and (b)
not a representative of any venture capital funds or corporate investors who own
10% or more of Company's Common Stock.
"Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if each of such
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
"Participant" means a person who receives an Award under this
Plan.
"Performance Factors" means the factors selected by the
Committee from among the following measures to determine whether the performance
goals established by the Committee and applicable to Awards have been satisfied:
EA-14
(a) Net revenue and/or net revenue growth;
(b) Earnings before income taxes and amortization and/or
earnings before income taxes and amortization growth;
(c) Operating income and/or operating income growth;
(d) Net income and/or net income growth;
(e) Earnings per share and/or earnings per share growth;
(f) Total shareholder return and/or total shareholder
return growth;
(g) Return on equity;
(h) Operating cash flow return on income;
(i) Adjusted operating cash flow return on income;
(j) Economic value added; and
(k) Individual confidential business objectives.
"Performance Period" means the period of service determined by
the Committee, not to exceed five years, during which years of service or
performance is to be measured for Restricted Stock Awards.
"Plan" means this Corporation, Inc. 2002 Equity Incentive
Plan, as amended from time to time.
"Restricted Stock Award" means an award of Shares pursuant to
Section 6 ("Restricted Stock").
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's Common Stock reserved
for issuance under this Plan, as adjusted pursuant to Sections 2 ("Shares
Subject to the Plan") and 17 ("Corporate Transactions"), and any successor
security.
"Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
"Termination" or "Terminated" means, for purposes of this Plan
with respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor or advisor to the Company or a Parent or
EA-15
Subsidiary of the Company. An employee will not be deemed to have ceased to
provide services in the case of (i) sick leave, (ii) military leave, or (iii)
any other leave of absence approved by the Committee; provided, that such leave
is for a period of not more than 90 days, unless reemployment upon the
expiration of such leave is guaranteed by contract or statute or unless provided
otherwise pursuant to formal policy adopted from time to time by the Company and
issued and promulgated to employees in writing. In the case of any employee on
an approved leave of absence, the Committee may make such provisions respecting
suspension of vesting of the Award while on leave from the employ of the Company
or a Parent or Subsidiary of the Company as it may deem appropriate, except that
in no event may an Option be exercised after the expiration of the term set
forth in the Stock Option Agreement. The Committee will have sole discretion to
determine whether a Participant has ceased to provide services and the effective
date on which the Participant ceased to provide services (the "Termination
Date").
"Unvested Shares" means "Unvested Shares" as defined in the
Award Agreement.
"Vested Shares" means "Vested Shares" as defined in the
Award Agreement.
EA-16
Exhibit B
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CASTELLE
The undersigned certify that:
1. They are the President and Secretary, respectively, of CASTELLE, a
California corporation.
2. Article III of the Articles of Incorporation of this corporation is
hereby amended and restated to read in its entirety as follows:
"This corporation is authorized to issue two classes of stock
to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the corporation is authorized to issue
is twenty-seven million (27,000,000) shares. Twenty-five million
(25,000,000) shares will be Common Stock. Two million (2,000,000)
shares shall be Preferred Stock. Effective upon the filing of this
Certificate of Amendment, each [2 to 3] outstanding shares of Common
Stock of the corporation will be combined into and automatically become
one (1) outstanding share of Common Stock of the corporation. No
fractional share shall be issued in connection with the foregoing
reverse stock split; all shares of capital stock so combined that are
held by a shareholder will be aggregated subsequent to the foregoing
reverse stock split and each fractional share resulting from such
aggregation held by a shareholder shall be paid in cash the value of
such fractional shares.
The Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized, to fix or
alter the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, and the liquidation
preferences of any wholly unissued series of Preferred Stock, and the
number of shares constituting any such series and the designation
thereof, or any of them; and to increase or decrease the number of
shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally
fixing the number of shares of such series."
3. The foregoing amendment of Articles of Incorporation has been duly
approved by the board of directors.
EB-1
4. The foregoing amendment of Articles of Incorporation has been duly
approved by the required vote of shareholders in accordance with Section 902 of
the California Corporations Code. The total number of outstanding shares of the
corporation is 4,806,044 shares of Common Stock and no shares of Preferred
Stock. The number of shares voting in favor of the amendment equaled or exceeded
the vote required. The percentage vote required was more than 50% of the
outstanding shares of Common Stock.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Dated: ____________, 2002
Scott C. McDonald, President
Paul Cheng, Secretary
EB-2