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 Friday, 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
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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.
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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 29, 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
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.
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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 our 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.
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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.
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 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.
5
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 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
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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.
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
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1.The material in this report is not "soliciting material," with the SEC, and is
not to be incorporated by reference into any diling of Castelle wiht the SEC
under teh Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended.
7
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 99.1. 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
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.
8
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.
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.
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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.
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
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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 regardless of whether a reverse stock
split is conducted pursuant to Proposal 3 below. 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.
11
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.
On November 18, 2002, we received a written decision from NASDAQ
counsel reporting that the NASDAQ Listing Qualifications Panel has granted
Castelle a temporary exception through January 17, 2003, to NASDAQ's minimum bid
price - subject to Castelle meeting certain conditions during the term of the
exception. Castelle common stock will remain listed on the NASDAQ SmallCap
Market during the term of the exception, and subsequent to January 17, 2003, so
long as all of the listing requirements are met. Commencing at the latest on
January 17, 2003, Castelle common stock must have a closing bid price of at
least $1.00 per share for ten consecutive days. NASDAQ has reserved the right to
require Castelle to meet the $1.00 bid requirement for a period longer than ten
days, if NASDAQ views such action as necessary. The closing bid price for
Castelle's common stock on November 22, 2002, was $0.92 per share.
During the exception, Castelle's NASDAQ symbol is changed from CSTL
to CSTLC.
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 or 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 of these two conversion ratios 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 either 1-for-2 or 1-for-3. The Board believes that
shareholder approval of these two alternative exchange ratios, and two
corresponding Certificates of Amendment to Castelle's Articles of Incorporation
(as opposed to approval of a only one conversion ratio and one Certificate of
Amendment) 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.
12
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, the Articles of Incorporation
would be amended accordingly. The text of the forms of amendment to the Articles
of Incorporation, one of which would be filed with the Secretary of State of the
State of California to effect the reverse stock split, are set forth in Exhibits
99.2 and 99.3 to this proxy statement; Exhibit 99.2 sets forth a Certificate of
Amendment to effect a 1-for-2 reverse stock split, and Exhibit 99.3 sets forth a
Certificate of Amendment to effect a 1-for-3 reverse stock split. Provided,
however, that such text (but not the exchange ratios) is subject to amendment to
include such 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. A Certificate of Amendment not filed with the
Secretary of State will be abandoned and have no force or effect.
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. Castelle's common stock is currently quoted on the SmallCap Market
under the symbol "CSTLC" as a result of the temporary exception from the listing
standards of the NASDAQ SmallCap market. After January 17, 2003, we expect the
trading symbol to return to "CSTL." However, if a reverse split is authorized
and conducted, we expect the symbol to change to "CSTLD" for a period of 20
trading days following the reverse split as described below. During the period
from January 1, 2002 to November 22, 2002, the closing sales price per share of
our common stock ranged from a high of $1.15 to a low of $0.47. The closing
sales price on November 22, 2002 was $0.92. 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
13
be maintained for any period of time. 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 one of the two shareholder approved conversion
ratios selected 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. If a reverse
split is authorized , Castelle expects the symbol to change to "CSTLD" for a
period of 20 trading days following the reverse split. After 20 trading days
have elapsed following the reverse stock split, we expect that the symbol would
revert to "CSTL," Castelle's pre-exception common stock symbol on the NASDAQ
SmallCap market.
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 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:
14
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.
Effective Date
If the proposed reverse stock split is approved at the Annual Meeting,
the Board of Directors will consider whether to effect the reverse stock split
and will select one of the two exchange ratios approved by shareholders. If so
approved by the Board of Directors, 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. A Certificate of Amendment not
filed with the Secretary of State will be abandoned and have no force or effect.
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.
15
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.
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)
16
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.
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.
17
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. The aggregate fees billed by PricewaterhouseCoopers LLP for
the audit of our financial statements for the fiscal year ended December 31,
2001, and for the review of our interim financial statements on Form 10-Q for
such fiscal year was $118,806.
Financial Information Systems Design and Implementation Fees.
PricewaterhouseCoopers LLP did not bill us for any information technology
consulting in 2001.
All Other Fees. The aggregate fees billed by PricewaterhouseCoopers LLP
for other professional service fees during fiscal year ended December 31, 2001
were $15,000.
The Audit Committee has determined that the rendering by
PricewaterhouseCoopers LLP of non-audit services is compatible with maintaining
the auditor's independence.
THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 4.
18
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".
(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
19
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.
20
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.
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 $100,000 (the
"Named Executive Officers"):
21
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
Securities
Name and Principal Fiscal Underlying
Position Year Salary Bonus ($)(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 $10,949 for
Mr. Elpiner for services rendered in fiscal 2000 but paid in fiscal
2001.
(2) Mr. Cheng joined Castelle in March 2000.
(3) Mr. Elpiner joined Castelle in April 1999 and left in February 2002.
Stock Option Grants and Exercises
Castelle grants options to its executive officers under its Prior
Option Plan. As of December 31, 2001, options to purchase a total of 1,268,885
shares were outstanding under the Prior Option Plan and options to purchase
253,757 shares remained available for grant thereunder. Castelle did not grant
any stock appreciation rights, restricted stock awards or stock purchase rights
during 2001.
22
The following tables show for the fiscal year ended December 31, 2001,
information regarding options granted to, exercised by, and held at year-end by
the named executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of Percentage of Potential Realizable Value at
Securities Total Options Assumed Annual Rates of Stock
Underlying Granted to Price Appreciation
Options Employees in Exercise or Base for Option Term (4)
Name and Principal Granted (#) Fiscal Year Price Per Share Expiration -------------------
Position (1) (%) (2) ($) (3) Date 5% ($) 10% ($)
- -------- --- ------- ------- ---- ------ -------
Donald L. Rich 0 - - - - -
Eric Chen 15,000 9.9% $0.68 4/11/08 $4,156 $9,687
Paul Cheng 25,000 16.4 0.68 4/11/08 6,927 16,145
Boris Elpiner 0 - - - - -
Michael Petrovich 0 - - - - -
- ------------------------------
(1) One-fourth of these options vested on April 11, 2002, and the remaining
options vest monthly in equal installments over a 36-month period.
(2) Based on options to purchase an aggregate of 152,000 shares of common
stock granted to employees in 2001.
(3) The exercise price is equal to 100% of the fair market value of common
stock at the date of grant.
(4) The potential realizable value is calculated based on the assumption
that the stock price on the date of grant appreciates from the date of
grant at the indicated annual rate compounded annually for the entire
10-year term of the option and that the option is exercised and sold
on the last day of its term for the appreciated stock price. The 5%
and 10% assumed rates of appreciation are derived from the rules of
the Commission and do not represent our estimate or projection of
future common stock prices.
23
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth the number of shares of common stock
subject to exercisable and unexercisable stock options held as of December 31,
2001 by each of the named executive officers.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End (#) at FY-End ($)(1)
Shares Acquired Value --------------------- ----------------
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.
24
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
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
25
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]
26
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;
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
- --------------------
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.
27
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 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
28
PERFORMANCE MEASUREMENT COMPARISON1
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.
29
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.
30
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.
31
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
|_| |_| |_|
In addition, this proxy csrd grants discretionary authority on such other
matters that may be presented at the annual meeting for a vote of the
shareholders.
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)