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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-220-20
CASTELLE
(Exact name of Registrant as specified in its charter)
California 77-0164056
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3255-3 Scott Boulevard,
Santa Clara, California 95054
(Address of principal executive offices,
including zip code)
(408) 496-0474
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in any amendment to this Form 10-K. ___
The approximate aggregate market value of the voting common equity held by
non-affiliates of the Registrant, based upon the last sale price of the Common
Stock reported on the Nasdaq National Market was $2,821,000 as of February 22,
1999.
The number of shares of Common Stock outstanding as of February 22, 1999 was
4,337,575.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits filed with the Registrant's Registration Statement on Form SB-2
(Registration No. 33-99628-LA-), as amended, are incorporated herein by
reference into Part IV of this Annual Report on Form 10-K and portions of the
proxy statement to be filed in connection with the annual meeting to be held May
25, 1999 are incorporated herein by reference into Part III of this Report.
CASTELLE
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I ....................................................................................................1
ITEM 1. BUSINESS........................................................................................1
ITEM 2. PROPERTIES.....................................................................................25
ITEM 3. LEGAL PROCEEDINGS..............................................................................25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........................................25
PART II ...................................................................................................26
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...........................26
ITEM 6. SELECTED FINANCIAL DATA........................................................................27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION..........28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........34
PART III ...................................................................................................35
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................35
ITEM 11. EXECUTIVE COMPENSATION.........................................................................35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................35
PART IV ...................................................................................................36
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................36
SIGNATURES ...................................................................................................38
PART I
ITEM 1. BUSINESS
The following summary should be read in conjunction with, and is
qualified in its entirety by, the more detailed information and Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Annual Report
on Form 10-K.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Castelle's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein under "Risk Factors" as
well as in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
INTRODUCTION
Castelle (the "Company") designs, develops, markets and supports
network enhancement products, both software and hardware, that improve the
productivity, performance and functionality of local area networks ("LANs") and
enhance the LAN user's ability to communicate. The Company's products consist
of: FaxPress, an integrated hardware/software network faxing solution;
Object-Fax, an enterprise-level Windows NT fax server software product;
InfoPress an enterprise-level fax-on-demand software product and LANpress print
servers.
In recent years, organizations have increasingly interconnected
personal computers into LANs. Originally, these LANs consisted of a dedicated
personal computer, called a file server, on which the network operating system
was installed, and multiple personal computers on which the users of the LAN ran
their applications. The network operating system on the file server provided the
server administration and basic file and print sharing. As networks have
proliferated throughout organizations and client/server architectures have
gained acceptance, LANs have become increasingly complex, the size and
multimedia intensity of files being communicated have increased and the
applications operating on the LAN have become more critical to the success of
the business enterprise. These factors have caused network administrators to
seek network enhancement products which can improve network performance, enhance
the functionality of the current installed base of network hardware and convert
single-user resources such as stand-alone printers and telephone lines into
shared LAN resources in a cost-effective manner. The Company has developed its
line of network enhancement products to address these needs.
The Company's objective is to be a leading worldwide supplier of
network enhancement solutions. Key elements of the Company's strategy to achieve
this objective include: maintaining market focus in order to provide the Company
with a competitive edge in innovation and time-to-market relative to its larger
competitors; broadening its software offerings to leverage its installed base of
fax products and print servers; continuing to develop products that are widely
compatible with leading network operating systems and adapting those products
for remote access and Internet connectivity capabilities; strengthening and
maintaining its domestic and international distribution network; and expanding
existing relationships and fostering new alliances to augment the Company's
product offerings that enable the Company to respond quickly to technological
changes.
The Company has adapted its products for use with the Internet and on
the World Wide Web (the "Web"), and will continue to focus on the effect the
Internet has had on network productivity. For example, the Company has developed
Internet fax capability with its FaxPress and Object-Fax fax servers and
Internet print capability with its LANpress print servers.
1.
The Company distributes its products primarily through a two-tier,
domestic and international distribution network, with its distributors selling
Castelle's products to value-added resellers ("VARs"), retailers and other
resellers. The Company's three major domestic distributors include Ingram Micro,
Inc. ("Ingram"), Tech Data Corporation ("Tech Data") and Merisel, Inc.
("Merisel"). The Company's major international distributor is Macnica
Corporation ("Macnica") in Japan. The Company also has relationships with
certain original equipment manufacturers and sells software and upgrades
directly to end-users.
In April 1998, the Company completed its acquisition of the Object-Fax
NT products, a facsimile software application designed for LANs, wide area
networks ("WANs") and Internet-based networks, from Tolvusamskipti HF, an
Icelandic corporation.
The Company was incorporated in California in 1987, and its principal
offices are located at 3255-3 Scott Boulevard, Santa Clara, California 95054.
The Company's telephone number is (408) 496-0474. Castelle(R), LANpress(R) and
JetPress(R) are registered trademarks and FaxPressTM, InfoPressTM and
Object-FaxTM are trademarks of the Company. This Annual Report on Form 10-K
includes trademarks and trade names of other companies.
RISK FACTORS
Shareholders or investors considering the purchase of shares of the
Company's Common Stock should carefully consider the following risk factors, in
addition to other information in this Annual Report on Form 10-K.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed herein as well as in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Fluctuations in Operating Results
The Company's revenue and operating results have fluctuated in the past
and the Company's future revenues and operating results are likely to do so in
the future, particularly on a quarterly basis.
The Company's operating results may vary significantly from quarter to
quarter due to a variety of factors, including changes in the Company's product
and customer mix, constraints in the Company's manufacturing and assembling
operations, shortages or increases in the prices of raw materials and
components, changes in pricing policy by the Company or its competitors, a
slowdown in the growth of the networking market, seasonality, timing of
expenditures and economic conditions in the United States, Europe and Asia. The
Company's backlog at any given time is not necessarily indicative of actual
sales for any succeeding period. The Company's sales will often reflect orders
shipped in the same quarter in which they are received. In addition, significant
portions of the Company's expenses are relatively fixed in nature, and planned
expenditures are based primarily on sales forecasts. Therefore, if the Company
inaccurately forecasts demand for its products, the impact on net income may be
magnified by the Company's inability to adjust spending quickly enough to
compensate for the net sales shortfall. The Company's performance in any quarter
is not necessarily indicative of its performance in any subsequent quarter.
2.
Other factors contributing to fluctuations in the Company's quarterly
operating results include changes in the demand for the Company's products,
customer order deferrals in anticipation of new versions of the Company's
products, the introduction of new products and product enhancements by the
Company or its competitors, the effects of filling the distribution channels
following such introductions, potential delays in the availability of announced
or anticipated products, the mix of license and service revenue, the
commencement or conclusion of significant development contracts, changes in
foreign currency exchange rates, the timing of acquisitions and associated
costs, and the timing of significant marketing and sales promotions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
History of Losses; Accumulated Deficit
The Company has experienced significant operating losses and, as of
December 31, 1998, had an accumulated deficit of $21.4 million. The development
and marketing by the Company of new products will continue to require
substantial product development and other expenditures. Although the Company had
been profitable in 1996 and 1995, the Company has sustained losses in 1998 and
1997 and there can be no assurance that growth in net sales or profitability
will be achieved or sustained in future years. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Threat of Delisting from The Nasdaq National Market System
The Company participated in a hearing with The Nasdaq Listing
Qualifications Panel on March 5, 1999 for the purpose of determining whether the
Company's common stock will continue to be listed on The Nasdaq National Market.
The hearing was scheduled because the market value of the public float of the
Company's outstanding common stock failed to meet the $5.0 million minimum as
required by The Nasdaq National Market listing maintenance standards. The
Company anticipates a decision on this matter by The Nasdaq Stock Market within
the next several weeks. If The Nasdaq Stock Market should determine to delist
the Company's stock, the decision would be communicated after the close of the
market and would be effective immediately. Should the Company's common stock be
delisted from The Nasdaq National Market System, it might be approved by The
Nasdaq Stock Market for listing on The Nasdaq SmallCap Market, but the Company
can give no assurance that such approval may be granted. In the absence of such
approval, the Company's common stock may be listed on the OTC Bulletin Board.
There can be no assurance that an active trading market for the Company's common
stock will develop following listing on either The Nasdaq SmallCap Market or the
OTC Bulletin Board, or, if it develops, that it will be sustained. Lack of an
active trading market would have an adverse effect on a shareholder's ability to
liquidate an investment in the Company's common stock easily and quickly at a
reasonable price. It might also contribute to volatility in the market price of
the Company's common stock. Delisting from The Nasdaq National Market System
could adversely affect the Company's ability to raise additional equity or debt
financing on reasonable terms or at all. Failure to obtain desired financing on
acceptable terms could adversely affect the Company's business, financial
condition and results of operations.
3.
Rapid Technological Change; Risks Associated with New Products
The market for the Company's products is affected by rapidly changing
networking technology and evolving industry standards. The Company believes that
its future success will depend upon its ability to enhance its existing products
and to develop and introduce new products which conform to or support emerging
network telecommunications standards, are compatible with a growing array of
computer and peripheral devices, support popular computer and network operating
systems and applications, meet a wide range of evolving user needs and achieve
market acceptance. There can be no assurance that the Company will be successful
in these efforts. The Company has incurred, and the Company expects to continue
to incur, substantial expenses associated with the introduction and promotion of
new products. There can be no assurance that the expenses incurred will not
exceed research and development budgets or that new products will achieve market
acceptance and generate sales sufficient to offset development costs. In order
to develop new products successfully, the Company is dependent upon timely
access to information about new technological developments and standards. There
can be no assurance that the Company will have such access or that it will be
able to develop new products successfully and respond effectively to
technological change or new product announcements by others. Furthermore, the
Company expects that printer and other peripheral manufacturers will add
features to their products that make them more network accessible, which may
reduce demand for the Company's network enhancement devices. There can be no
assurance that products or technologies developed by others will not render the
Company's products non-competitive or obsolete. The fax-on-demand market in
general has been negatively affected by the growth of the Web and the Internet.
Although the Company has new Web/fax/e-mail products in development, there can
be no assurance these products will compete successfully. Complex products such
as those offered by the Company may contain undetected or unresolved hardware
defects or software errors when they are first introduced or as new versions are
released. Changes in the Company's or its suppliers' manufacturing processes or
the inadvertent use of defective components by the Company or its suppliers
could adversely affect the Company's ability to achieve acceptable manufacturing
yields and product reliability. The Company has in the past discovered hardware
defects and software errors in certain of its new products and enhancements
after their introduction. Although the Company has not experienced material
adverse effects resulting from any such errors to date, there can be no
assurance that despite testing by the Company and by third-party test sites,
errors will not be found in future releases of the Company's products, which
would result in adverse product reviews and negatively affect market acceptance
of these products.
The introduction of new or enhanced products requires the Company to
manage the transition from older products. The Company must manage new product
introductions so as to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate supplies
of new products can be delivered to meet customer demands. The Company has from
time to time experienced delays in the shipment of new products. There can be no
assurance that future product transitions will be managed successfully by the
Company. See "Business -- Products," "-- Research and Product Development," and
"-- Sales, Marketing and Distribution."
Key Personnel
The Company's success depends to a significant degree upon the
continued contributions of the Company's key management, marketing, product
development and operational personnel. The success of the Company will depend to
a large extent upon its ability to retain and continue to attract highly skilled
personnel. Competition for employees in the computer industry is intense, and
there can be no assurance that the Company will be able to attract and retain
enough qualified employees. If the business of the Company grows, it may become
increasingly difficult for it to hire, train and assimilate the new employees
needed. The Company's inability to retain and attract key employees could have a
material adverse effect on the Company's product development, business,
operating results and financial condition. The Company does not carry key person
life insurance with respect to any of its personnel. See "Business -- Research
and Product Development."
4.
Competition and Price Erosion
The network enhancement products and computer software markets are
highly competitive, and the Company believes that such competition will
intensify in the future. The competition is characterized by rapid change and
improvements in technology along with constant pressure to reduce prices. The
Company currently competes principally in the market for network fax servers and
network print servers and fax-on-demand software. Increased competition, direct
and indirect, could adversely affect the Company's business and operating
results through pricing pressure, loss of market share and other factors. In
particular, the Company expects that, over time, average-selling prices for its
print server products will continue to decline, as the market for these products
becomes increasingly competitive. Any material reduction in the average selling
prices of the Company's products would require the Company to increase unit
sales in order to avoid a reduction in net sales and would adversely affect
gross margins. There can be no assurance the Company will be able to maintain
the current average selling prices of its products or the related gross margins.
The principal competitive factors affecting the market for the
Company's products include product functionality, performance, quality,
reliability, ease of use, quality of customer training and support, name
recognition, price, and compatibility and conformance with industry standards
and changing operating system environments. Several of the Company's existing
and potential competitors, most notably the Hewlett-Packard Company
("Hewlett-Packard") and Intel Corporation ("Intel"), have substantially greater
financial, engineering, manufacturing and marketing resources than does the
Company. The Company also experiences competition from a number of other
companies. In addition to its current competitors, the Company may face
substantial competition from new entrants into the network enhancement market,
including established and emerging computer, computer peripherals,
communications and software companies. As the Company develops and introduces
more fax server software products, it is experiencing increasing competition
from companies such as Applied Voice Technology, Inc., Omtool, Ltd. and Computer
Associates International, Inc. There can be no assurance that competitors will
not introduce products incorporating technology more advanced than that of the
Company. In addition, certain competing methods of communications such as the
Internet or electronic mail could adversely affect the market for fax products.
Certain of the Company's existing and potential competitors are manufacturers of
printers and other peripherals, and these competitors may develop closed systems
accessible only through their own proprietary servers. There can be no assurance
that the Company will be able to compete successfully or that competition will
not have a material adverse effect on the Company's business, operating results
and financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
International Sales
Sales to customers located outside Canada and the United States
accounted for approximately 38% and 47% of the Company's net sales in 1998 and
1997, respectively. The Company sells its products in 39 foreign countries
through approximately 73 international distributors. Macnica, the Company's
principal Japanese distributor, and Azlan Group PLC ("Azlan"), the Company's
largest United Kingdom distributor, accounted for approximately 67% and 9% of
the Company's international sales in 1998, respectively, and 68% and 11% of the
Company's international sales in 1997, respectively. In October 1998, the
Company terminated its agreement with Azlan. As a result, Ingram Micro (UK) Ltd.
("Ingram-UK") in the future will now generate a major portion of the sales
previously created with Azlan in the past. The Company expects that
international sales will continue to represent a significant portion of the
Company's product revenues and that the Company will be subject to the normal
risks of international sales, such as export laws, currency fluctuations, longer
payment cycles, greater difficulties in accounts receivable collections and the
requirement of complying with a wide variety of foreign laws. See also
"Dependence on Proprietary Rights; Uncertainty of Obtaining Licenses." Although
the Company has not previously experienced any difficulties under foreign law in
exporting its products to other countries, there can be no assurance that the
Company will not experience such difficulties in foreign countries in the
future. In addition, because the Company primarily invoices its foreign sales in
U.S. dollars, fluctuations in exchange rates could affect demand for the
Company's products by causing its prices to be out of line with products priced
in the local currency. Additionally, any such difficulties would have a material
adverse effect on the Company's international sales and a resulting material
adverse effect on the Company's business, operating results and financial
condition. The Company may experience fluctuations in European sales on a
quarterly basis because European sales may be weaker during the third quarter
than the second quarter due to extended holiday shutdowns in July and August.
See "Business -- Sales, Marketing and Distribution."
5.
Lack of Product Revenue Diversification
The Company derives substantially all of its sales from its fax and
print server products. During 1998 and 1997, both products represented 100% of
total net sales. The Company expects that these hardware and software products
will continue to account for a majority of the Company's sales in the future. A
decline in demand for these products as a result of competition, technological
change or other factors would have a material adverse effect on the Company's
business, operating results and financial condition.
Product Transition; Risk of Product Returns and Inventory Obsolescence
From time to time, the Company may announce new products, product
versions, capabilities or technologies that have the potential to replace or
shorten the life cycles of existing products. The release of a new product or
product version may result in the write-down of product in inventory if such
inventory becomes obsolete. The Company has in the past experienced increased
returns of a particular product version following the announcement of a planned
release of a new version of that product. Although the Company provides an
allowance for anticipated returns, and believes its existing policy results in
the establishment of an allowance that is currently adequate, there can be no
assurance that product returns will not exceed such allowance in the future and
will not have a material adverse effect on the Company's business, operating
results and financial condition.
Concentration of Distributors; Distribution Risks
The Company sells its products primarily through a two-tier domestic
and international distribution network, with the Company's distributors selling
the Company's products to VARs, retailers and other resellers. The personal
computer and networking products distribution industry has been characterized by
rapid change, including consolidations due to the financial difficulties of
distributors and the emergence of alternative distribution channels. In
addition, an increasing number of companies are competing for access to these
channels. The Company's five largest distributors accounted for 57% of its net
sales in 1998 and 68% of the Company's net sales in 1997. Macnica, the Company's
principal Japanese distributor, and Ingram, the Company's largest domestic
distributor, accounted for approximately 26% and 17% of the Company's net sales
in 1998, respectively, and 32% and 14% of the Company's net sales in 1997. The
Company's distributors typically represent other products that are complementary
to, or compete with, those of the Company. While the Company attempts to
encourage its distributors to focus on its products through marketing and
support programs, these distributors may give higher priority to products of
other suppliers, thereby reducing the efforts they devote to selling the
Company's products. In particular, certain of its competitors, including
Hewlett-Packard and Intel, sell a substantially higher total dollar volume of
products through several of the Company's large United States distributors and,
as a result, the Company believes such distributors give higher priority to
products offered by such competitors. The Company's distributors are not
contractually committed to future purchases of the Company's products and could
discontinue carrying the Company's products at any time for any reason. In
addition, because the Company is dependent on a small number of distributors for
a significant portion of the sales of its products, the loss of any of the
Company's major distributors or their inability to satisfy their payment
obligations to the Company could have a significant adverse effect on the
Company's business, operating results and financial condition. The Company has a
stock rotation policy with certain of its distributors that allows them to
return marketable inventory against offsetting orders. Should the Company reduce
its prices, the Company credits certain of its distributors for the difference
between the purchase price of products remaining in their inventory and the
Company's reduced price for such products. In addition, due to industry
conditions or the actions of competitors, inventory levels of the Company's
products held by distributors could become excessive resulting in product
returns and inventory write-downs. There can be no assurance that in the future
returns and price protection will not have a material adverse effect on the
Company's business, operating results and financial condition. See "Business --
Sales, Marketing and Distribution" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
6.
Dependence on Suppliers and Subcontractors
The Company's products incorporate or require components or
sub-assemblies procured from third-party suppliers. Certain of these components
or sub-assemblies are available only from a single source, and others are
available only from limited sources. Certain key components of the Company's
products, including a modem chip set from Rockwell International Corporation
("Rockwell") and a microprocessor from Motorola, Inc. ("Motorola"), are
currently available from only single sources. Other components of the Company's
products are currently available from only a limited number of sources. In
addition, the Company subcontracts a substantial portion of its manufacturing to
third parties, and there can be no assurance that these subcontractors will be
able to support the manufacturing requirements of the Company. The Company does
not have material long-term supply contracts with these or any other sole or
limited source vendors and subcontractors other than an agreement with SerComm
Corporation ("SerComm"), and otherwise purchases components or sub-assemblies on
a purchase order basis. The Company's ability to obtain these components and
sub-assemblies is dependent upon its ability to accurately forecast customer
demand for its products and to anticipate shortages of critical components or
sub-assemblies created by competing demands upon suppliers. If the Company were
unable to obtain a sufficient supply of high-quality components or
sub-assemblies from its current sources, the Company could experience delays in
obtaining such components or sub-assemblies from other sources. Resulting delays
or reductions in product shipments could adversely affect the Company's
business, operating results and financial condition and damage customer
relationships. Furthermore, a significant increase in the price of one or more
of these components or sub-assemblies or the Company's inability to lower
component or sub-assembly prices in response to competitive price reductions
could adversely affect the Company's business, operating results and financial
condition.
The Company augments its product offerings by obtaining access to
third-party products and technologies in areas outside of its core competencies
or where the Company believes internal development of products and technologies
is not cost-effective. The Company's third-party product supplier is SerComm for
certain of the Company's print server products. There can be no assurance that
these products will produce gross margins comparable to those of the Company's
internally generated products. There can be no assurance that the parties with
which the Company contracts will continue to provide the quantities and quality
of products needed by the Company or they will upgrade their respective products
on a timely basis. The termination of the Company's relationships with
third-party product suppliers and with SerComm, in particular, could result in
delays or reductions in product shipments, which could have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Manufacturing."
Government Regulation
Certain aspects of the networking industry in which the Company
competes are regulated both in the United States and in foreign countries.
Imposition of public carrier tariffs, taxation of telecommunications services
and the necessity of incurring substantial costs and expenditure of managerial
resources to obtain regulatory approvals, particularly in foreign countries
where telecommunications standards differ from those in the United States, or
the inability to obtain regulatory approvals within a reasonable period of time,
could have a material, adverse effect on the Company's business, operating
results and financial condition. The Company's products must comply with a
variety of equipment, interface and installation standards promulgated by
communications regulatory authorities in different countries. Changes in
government policies, regulations and interface standards could require the
redesign of products and result in product shipment delays which could have a
material, adverse impact on the Company's business, operating results and
financial condition.
7.
Dependence on Proprietary Rights; Uncertainty of Obtaining Licenses
The Company's success depends to a certain extent upon its
technological expertise and proprietary software technology. The Company relies
upon a combination of contractual rights and copyright, trademark and trade
secret laws to establish and protect its technologies. Despite the precautions
taken by the Company, it may be possible for unauthorized third parties to copy
the Company's products or to reverse engineer or obtain and use information that
the Company regards as proprietary. In addition, the laws of some foreign
countries either do not protect the Company's proprietary rights or offer only
limited protection. Given the rapid evolution of technology and uncertainties in
intellectual property law in the United States and internationally, there can be
no assurance that the Company's current or future products will not be subject
to third-party claims of infringement. Any litigation to determine the validity
of any third-party claims could result in significant expense to the Company and
divert the efforts of the Company's technical and management personnel, whether
or not such litigation is determined in favor of the Company. In the event of an
adverse result in any such litigation, the Company could be required to expend
significant resources to develop non-infringing technology or to obtain licenses
to the technology that is the subject of the litigation. There can be no
assurance that the Company would be successful in such development or that any
such licenses would be available. The Company also relies on technology licenses
from third parties. There can be no assurance that these licenses will continue
to be available to the Company upon reasonable terms, if at all. Any impairment
or termination of the Company's relationship with third-party licensors could
have a material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company's precautions
will be adequate to deter misappropriation or infringement of its proprietary
technologies. Furthermore, while the Company has obtained federal registration
for many of its trademarks in the United States, certain of its trademarks have
not been registered in the United States, and the Company has registered some of
its trademarks in foreign jurisdictions. There can be no assurance that the
Company's use of such registered trademarks will not be contested by third
parties in the future. See "Business-Research and Product Development" and
"-Proprietary Rights."
The Company has received, and may receive in the future, communications
asserting that its products infringe the proprietary rights of third parties or
seeking indemnification against such infringement. The Company is not aware that
any of its products, trademarks, or other proprietary rights infringe the
property rights of third parties. However, there can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future products or that any such assertion may not
require the Company to enter into royalty arrangements or result in costly
litigation. As the number of software products in the industry increases and the
functionality of these products further overlap, the Company believes that
software developers may become increasingly subject to infringement clams. Any
such claims, with or without merit, can be time consuming and expensive to
defend. There can be no assurance that any such intellectual property litigation
that may be brought in the future will not have a material adverse effect on the
Company's business, operating results and financial condition. As a result of
such claims or litigation, it may become necessary or desirable in the future
for the Company to obtain licenses relating to one or more of its products or
relating to current or future technologies, and there can be no assurance that
it would be able to do so on commercially reasonable terms. See
"Business-Research and Product Development" and "-Proprietary Rights."
8.
Possible Volatility of the Company's Common Stock Price
The price of the Company's Common Stock has fluctuated widely in the
past. Sales of substantial amounts of the Company's Common Stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices for the Company's Common Stock. The management of the Company believes
that such past fluctuations may have been caused by the factors identified above
as well as announcements of new products, quarterly fluctuations in the results
of operations and other factors, including changes in the condition of the
personal computer industry in general. These fluctuations, as well as general
economic, political and market conditions, such as recessions or international
currency fluctuations, may adversely affect the market price of the Company's
Common Stock. Stock markets have experienced extreme price volatility in recent
years. This volatility has had a substantial effect on the market prices of
securities issued by the Company and other high technology companies, often for
reasons unrelated to the operating performance of the specific companies. The
Company anticipates that prices for Castelle Common Stock may continue to be
volatile. Such future stock price volatility for Castelle Common Stock may
provoke the initiation of securities litigation which may divert substantial
management resources and have an adverse effect on the Company's business,
operating results and financial condition.
Future Capital Requirements
Although the Company believes that its existing capital resources,
expected cash flows from operations and available lines of credit will be
sufficient to meet its anticipated capital requirements at least through the
next 12 months, the Company may be required to seek additional equity or debt
financing. The timing and amount of such capital requirements cannot be
determined at this time and will depend on a number of factors, including demand
for the Company's existing and new products and changes in technology in the
networking industry. There can be no assurance that such additional financing
will be available on satisfactory terms when needed, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Voting Control by Officers, Directors and Affiliates
At February 22, 1999, the Company's officers and directors and their
affiliates beneficially owned approximately 35% of the outstanding shares of
Common Stock. Accordingly, together they had the ability to significantly
influence the election of the Company's directors and other corporate actions
requiring shareholder approval. Such concentration of ownership may have the
effect of delaying, deferring or preventing a change in control of the Company.
Certain Charter Provisions
The Company's Board of Directors has authority to issue up to 2,000,000
shares of Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further vote
or action by the shareholders. The rights of the holders of the Company's Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, such Preferred Stock
may have other rights, including economic rights, senior to the Common Stock,
and as a result, the issuance thereof could have a material adverse effect on
the market value of the Company's Common Stock.
9.
BUSINESS
General
Castelle designs, develops, markets and supports network enhancement
products, both software and hardware, that improve the productivity, performance
and functionality of LANs and enhance the LAN user's ability to communicate. The
Company's current products include: FaxPress, an integrated hardware/software
network faxing solution; Object-Fax, an enterprise-level Windows NT fax server
software product; InfoPress an enterprise-level fax-on-demand software product
and LANpress print servers. See "Business -- Research and Product Development."
In April 1998, the Company completed its acquisition of the Object-Fax
NT products, a facsimile software application designed for LANs, WANs and
Internet-based networks, from Tolvusamskipti HF, an Icelandic corporation, in
exchange for $300,000 in cash and 100,000 shares of Castelle common stock and
the right, at Castelle's option, to receive the number of additional shares of
Castelle common stock on the date six months after the acquisition necessary to
make the fair market value of the common stock received in the transaction not
less than $500,000, or the cash equivalent of such additional shares. The value
of the common stock received in the transaction was less than $500,000 six
months after the acquisition. The Company is in the process of determining
whether an additional cash payment will be made or whether additional shares
will be issued. The option is equivalent to either a cash payment of
approximately $386,000, representing the difference between $500,000 and the
fair market value of 100,000 shares six months after the acquisition or an
additional 339,000 shares of the Company's common stock.
Industry Background
In the mid-1980s, organizations began to interconnect personal
computers into LANs in order to allow work groups to share files and peripherals
such as printers. Originally, these LANs consisted of a dedicated personal
computer, called a file server, on which the network operating system was
installed, and multiple personal computers on which users of the LAN ran their
applications. The network operating system on the file server provided the
server administration and basic file and print sharing. As networks have
proliferated throughout organizations and client/server architectures have
gained acceptance, LANs have become increasingly complex, the size and
multimedia intensity of files being transmitted has increased and the
applications operating on the LAN have become more critical to the success of
the business enterprise. These factors have caused network administrators to
seek network enhancement products which can improve network performance, enhance
the functionality of the current installed base of network hardware and convert
single-user resources such as stand-alone printers and telephone lines into
shared LAN resources in a cost-effective manner. Fax servers and print servers
are two of the primary network enhancement solutions that have emerged to
provide cost-effective improvements in network performance and functionality.
10.
Fax Products: Fax machines typically used in business environments are
characterized by relatively low quality transmissions, low data
transmission rates and the inability to send and receive faxes
simultaneously. Fax machines also require labor-intensive sorting,
copying and routing of faxes in paper form. Alternatively, a dedicated
personal computer with a fax modem, while able to store incoming faxes
electronically and improve fax quality, is not economical in a LAN
environment because each user must have his or her own fax modem and
dedicated telephone line. Fax servers have emerged as an economical
alternative for providing high performance faxing capability to network
users. A fax server connects a LAN to one or more telephone lines,
enabling a large number of users to share dedicated telephone lines.
Users are able to send faxes directly from their computers or
workstations, eliminating the need to print a document, take it to a
stand-alone fax machine and wait for its transmission. In addition, a
fax server can sort incoming faxes and route them electronically and
confidentially directly to the electronic mailboxes of the intended
recipients and store non-urgent outgoing faxes for automatic
transmission at an "off-peak" time when telephone rates are lower. In
addition to fax servers, the Company also has fax-on-demand products.
Fax-on-Demand is the ability to use a touch-tone phone and a fax
machine to request and receive hard copies of documents on demand.
Although there are a wide variety of applications installed, the two
most common applications are customer support and literature
fulfillment applications. The largest industry using fax-on-demand is
the high-technology sector, with applications also installed in travel,
government, newspapers, manufacturing and non-profit organizations.
Essentially, any company with information to disseminate publicly is a
potential fax-on-demand customer.
Print Servers: The sharing of printers, a basic benefit of a LAN, has
traditionally been provided by connecting a printer either to a network
file server or to a dedicated personal computer on the network.
However, direct connection to the file server has several
disadvantages, including the risk of the file server being overburdened
by the processing required to print large or graphically complex files,
lower print transfer speeds and location inflexibility. Similarly,
printer connection to a dedicated personal computer, while providing
better location flexibility, is more costly and offers substantially
lower print file transfer speed than a dedicated print server can
provide. A print server directly connects one or more printers to a
LAN, providing a cost-effective, high-speed solution to the demand for
shared print resources on a LAN. In addition to providing location
flexibility and convenience, print servers improve network performance
by relieving the burden on the file server. Furthermore, print servers
enable users to access essential information about the status of the
printer and their print files and to select their desired printer
configuration.
Network enhancement solutions, such as fax servers and print servers,
have emerged to gain significant market acceptance due to their ability to
improve network performance and personal productivity, enhance network
functionality and preserve the investment many companies have made in network
hardware. The Company believes that as the client/server computing model
continues to gain acceptance and applications which are critical to the business
enterprise continue to be ported from mainframes and minicomputers to LANs,
corporate processes will become more dependent on the LAN and the performance
enhancement that can be achieved on the corporate LAN will more directly impact
overall productivity. As LAN users and network managers continue to recognize
the benefits of network enhancement products, and as additional network
functionality such as facsimile/document communication across the Internet,
remote access, scanning, electronic mail and multimedia communications continue
to emerge, the Company believes that the demand for such network enhancement
products will increase.
Castelle Strategy
Castelle's objective is to be a leading worldwide supplier of network
enhancement solutions. The Company intends to continue to provide innovative
products focused on enhancing the LAN user's ability to communicate. Key
elements of the Company's strategy include:
11.
Focus on Network Enhancement Products - The Company focuses exclusively
on providing innovative, reliable, easy-to-use network enhancement
products. Since its inception, the Company has focused on developing
networking products that utilize advanced software to tightly integrate
proprietary hardware systems with standard computing platforms. As a
result, the Company believes it has developed a high level of expertise
in networking, software development, hardware design and telephony
technology. The Company plans to capitalize on these attributes by
continuing to focus on providing network enhancement products that
enable users to communicate more effectively.
Broaden Software Offerings - In order to leverage its significant
installed base of fax and print servers, the Company is developing a
range of value-added software options which increase the functionality
of Castelle's products and enable them to address specialized
applications because customers are interested in obtaining more value
from the fax products, Castelle will continue to enhance the current
base of product and create new software options. Additionally, to
increase product functionality, Castelle will continue partnering with
other software companies to provide key product options like Internet
fax capability, operating system interfaces, and contact management
software. Examples of applications currently available include
electronic mail gateways, optical character recognition/image
enhancement software and billing/analysis and other management utility
software. Utilizing an extensive internal database of over 6,000
corporate end-users of Castelle products, the Company is marketing
these products through a direct telemarketing team.
Expand Product Line - The Company is leveraging its expertise in
easy-to-use, cost-effective enhancement solutions to offer new network
and communications enhancement products. The Company continues to
expand both its fax and print server products.
Strengthen and Maintain Distribution Channels - The Company has
established a two-tier domestic and international distribution network
of leading national and regional network product distributors and
resellers. The Company has launched its "global partner program" in an
effort to expand the reseller channel and to strengthen relationships
with existing VARs. The global partner program offers enhanced
benefits, which will allow VARs to increase the sale of Castelle
products. The Company also sells through OEM vendors such as Fujitsu
Ltd. ("Fujitsu"). The Company is focused on maintaining and
strengthening its current distribution network in North America,
Europe, and Asia-Pacific regions.
Leverage Strategic Relationships - The Company augments its product
offering by establishing relationships with companies able to provide
products in areas outside of the Company's core technical competencies
or in instances where internal development of such products is not
cost-effective. The Company also establishes relationships with
numerous leaders in hardware and software technology to enable it to
keep abreast of, and respond quickly to, technological changes that may
affect the network enhancement market.
Products
The Company develops and markets a broad range of products that enhance
network productivity, performance and functionality. The Company's current
products include: FaxPress, an integrated hardware/software network faxing
solution; Object-Fax, an enterprise-level Windows NT fax server software
product; InfoPress an enterprise-level fax-on-demand software product; LANpress
print servers and a range of software enhancements for its fax and print server
products.
12.
Fax Products
The Company's fax products include FaxPress fax
hardware/software server systems, Object-Fax fax server software and
InfoPress fax-on-demand software. The Company's fax server products
allow network users to send, receive, route, print, store, edit and
retrieve fax transmissions from their own personal computers on a LAN.
These fax server products enable all network users to access fax
services without requiring a large investment in stand-alone fax
machines, fax modem boards or additional telephone lines. Network-based
fax capability is a logical extension of network printing capability,
enabling users to transmit documents directly to a fax device as easily
as if they were printing to a laser printer or sending an electronic
mail message. Applications running on a LAN user's personal computer or
workstation can send a native document. The fax software then converts
the file to fax format and sends the fax to the intended recipient. The
fax products also provide network administration features like control,
monitoring, logging, configuration, etc. The Company's fax server
products are designed to comply with regulatory standards in the United
States as well as countries in Europe and the Pacific Rim. During 1998
and 1997, fax products represented 68% and 58%, respectively, of total
net sales.
FaxPress Systems - Castelle's FaxPress fax server systems are
turnkey network-based fax solutions consisting of fax server
hardware and software. FaxPress is a compact, self-contained
fax server that connects directly to a LAN and contains fax
modem hardware that is accompanied by software that is
installed from any personal computer or workstation on the
LAN. FaxPress system products are available in configurations
that support one, two, four or eight dedicated telephone
lines. Key features of the FaxPress products (configured with
its current software versions) include:
o Ability to send faxes from many applications: Easy
faxing from within any Windows, Windows 95/98 and
Windows NT application through a print driver. Also
faxing of native documents for many popular formats
like Microsoft Office, Lotus Smart Suite and HTML.
o Broad networking support: FaxPress servers install and
operate in both TCP/IP and SPX/IPX network
environments. FaxPress also support file servers with
Windows NT and Novell NetWare operating systems. The
server supports multiple simultaneous clients on the
network.
o Electronic routing of faxes: Electronic routing of
faxes enhances efficiency and confidentiality through
electronic delivery direct to the fax inbox of the
intended recipient.
o Full 32-bit Windows features: A full featured 32-bit
Windows application for user activities like fax send,
receive, queue, status, fax viewing, saving, printing,
phone books, etc.
o Full administrative controls: Through a 32-bit
interface, FaxPress provides server configuration,
user management, transaction logs, phonebook setup and
printer setup, etc.
o Ability to integrate with multiple e-mail
environments: FaxPress has the ability to integrate
e-mail environments to send and receive faxes as
e-mail messages from Exchange, Notes, ccMail and SMTP
systems.
13.
o Ability to use fax servers in tandem: Load sharing
between fax servers provides the capability to stack
up to three fax server units and share up to 24 modems
for outbound faxing.
o Group broadcasts/scheduled transmission: Delayed
sending feature allows users to send faxes during
"off-peak" hours, facilitating low-cost communications
for group broadcast and other uses.
o FaxPress hardware: FaxPress hardware units are
complete, self contained networking devices that
contain a main board consisting of a CPU, memory,
controls, a network interface (10 or 100 BaseT). There
are optionally 1-2 fax boards consisting of a CPU and
2-4 modem lines per board.
The Company offers a family of FaxPress fax server
systems ranging from entry-level products to high-end fax
solutions capable of supporting over 500 users. The suggested
U.S. list prices for FaxPress fax server products range from
$1,695 to $7,495. The server pricing is based on hardware
model, with no per user costs. The following table summarizes
the Company's FaxPress system products:
-----------------------------
Network Environment
----------------------------------------------------------------------------------------------------------
Number of Number of NetWare Windows NT
Modems Micro- Memory Network 3.x, 4.x, 5.x (IPX,IP)
Processors (Megabytes) Topology (IPX)
Product Model
----------------------------------------------------------------------------------------------------------
OfficeConnect Fax 1 1 4 Ethernet |X| |X|
FaxPress 1500-N 1 or 2 1 8 Ethernet |X| |X|
FaxPress 3500 2 or 4 2-3 8 Ethernet / |X| |X|
Token Ring
FaxPress 5000 4 or 8 2-3 32 Ethernet / |X| |X|
Fast
Ethernet
----------------------------------------------------------------------------------------------------------
FaxPress Software - The Company's line of FaxPress software
includes client applications and interfaces for use with
FaxPress systems and software enhancements and options.
o Client Applications and Interfaces: The Company has
developed fax applications which reside on the LAN
user's personal computer and are included as part of
the Company's FaxPress products. The client
application allows a user to send and receive faxes,
includes support for user authentication, as well as
personal and corporate cover pages and phone books.
o SDK: The Company's FaxPress SDK application consists
of a set of utility functions that send, receive, and
manage faxes from a FaxPress sever on the network. A
"C-based" API is also available, which allows
programmers to integrate faxing functions into their
current applications or to create new customized
applications that use the FaxPress server.
14.
o Software Options: The Company offers a range of
value-added software options which increase the
functionality of Castelle's FaxPress systems and
enable the FaxPress to address specialized
applications. Software upgrades and options are
available to the installed base of FaxPress units at
prices ranging from $99 to $1,375. The following table
describes the available software options:
------------------------------------------------------------------------------
Software Option Description
------------------------------------------------------------------------------
Castelle Internet Faxing Castelle Internet Faxing provides the
ability to send faxes to other FaxPress
units via the Internet.
Microsoft Exchange Gateway Integrates the FaxPress into Microsoft
Outlook, enabling users to send and receive
faxes from Outlook in addition to sending
documents in native format as fax
attachments.
Lotus Notes Gateway Integrates the FaxPress into Lotus Notes,
enabling users to send and receive faxes
from Lotus Notes.
STMP Gateway Allows users to send and receive faxes from
any e-mail application in an
Internet-standard STMP environment.
Embedded Codes Gateway Enables mainframe computer users to send
faxes using the FaxPress server.
Optical Character Recognition/ Enables an incoming fax to be converted into
Image Enhancement an editable format. Image enhancement
capability enables the electronic editing of
a fax image to correct visual defects.
Billing and Analysis Software Analyzes and allocates cost of faxing by
user, department or customer and creates
"ready to print" reports.
------------------------------------------------------------------------------
Object-Fax Software - Object-Fax runs on the Microsoft Windows
NT 4.0 platform. It is a 32bit multi-threaded distributed fax
server that is designed to handle up to 60 fax ports per
server and supports Windows and e-mail clients. The clients
may run on any 16 or 32 bit Windows platform. The system also
supports integration of custom applications running on other
platforms through a file-based API. The Object-Fax server uses
intelligent fax boards that are installed on the Windows NT
platform as an interface to fax protocols and the telephone
systems.
The Object-Fax product consists of the following major
components.
o The Object-Fax Server: The Object-Fax server is
designed to be robust and scalable. It integrates with
advanced Windows NT platform technologies like DCOM,
RPC, ODBC and SQL. Each Object-Fax server PC can
operate up to 60 fax lines at a time, which can be
analog, DID, ISDN, or T1 phone lines. Each fax line
can be separately configured to send and/or receive
faxes. If not configured specifically, Object-Fax will
detect which lines are free and send and receive
through the available lines.
o Object-Fax E-mail Integration: The Object-Fax server
provides a true integration into Microsoft Exchange
with an optional add-on module. The Object-Fax
Exchange Connector allows users to send faxes as they
would send e-mail and to receive faxes in their inbox.
A customer can use their corporate global cover pages
in faxes. Object-Fax also integrates into any other
e-mail system that supports SMTP with an optional SMTP
Gateway (cc: Mail, Lotus Notes, GroupWise), enabling
e-mail users to fax e-mail messages in the same way
they send Internet mail.
15.
o Object-Fax Windows Client: Object-Fax offers an
ease-of-use feature that enables end users to send and
receive from the desktop. It is designed with a 32-bit
client interface for Windows 95/98 and Windows NT and
a 16-bit client interface for Windows 3.1. The
Object-Fax Windows client is intuitive and has
received many awards in the past for being one of the
easiest fax interfaces to use. Features include the
floating tool bar, fax merge, fax enveloping,
on-screen notifications and TOM.
o Object-Fax Broadcast Client: The Broadcast Client is a
high-performance, 32-bit application that enables
broadcasts to a large group of recipients stored in
any ODBC or SQL database. No importing is required
since the Broadcast Client attaches directly to the
database and there are no size limitations on each
group. The Broadcast Client is a Windows 95/98 and
Windows NT 4.0 application that "looks and feels" like
Microsoft Explorer. Equipped with an area code parser,
there is no need to add a 1 in front of long distance
fax numbers or removing the local area code from the
fax broadcast list, as that function is automatically
performed.
o Object-Fax Administration Client: Network
administrators can oversee and manage all Object-Fax
users from their workstation with the Object-Fax
Administrator, and these user accounts can be imported
from Novell or Windows NT file server. The Object-Fax
administrator also gives complete control over routing
of outgoing and incoming faxes through an intelligent
routing manager.
o Object-Fax Report Manager: The Report Manager provides
access to statistical reports about the Object-Fax
system. These reports can be organized hierarchically,
and each report is connected directly to the
Object-Fax SQL database for live updates. Users can
easily add new reports to the library of reports since
the report manager supports Crystal Reports, a widely
used database tool of Seagate Technology, Inc.
o Integration Tools: Object-Fax FAPI 2.0 enables
corporate developers to easily add fax capabilities to
their applications no matter on what platform they
run. This powerful integration tool is an ASCII-based
integration tool that allows an application running on
any platform to fax ASCII, TIFF, PCL5, and PostScript
files.
16.
InfoPress Software - Castelle's InfoPress fax-on-demand
product suite consists of numerous software components that
are designed to operate together in a robust and scalable
manner which runs on the Microsoft Windows NT platform. The NT
server also requires voice and fax processing hardware, as
well as, telephone system interface (analog or T1) hardware
with as few as 2 and as many as 288 ports that are actually
deployed at a customer site.
InfoPress replaces an older Ibex product, FactsLine.
InfoPress software enables the access of information via a
phone and a fax machine and allows the dissemination of
information via "broadcasting" to a select database of fax
numbers. InfoPress allows companies to use one source of
documents in a Castelle document library and to automatically
publish the documents using either the fax-on-demand and/or
e-mail-on-demand methods.
o Fax-on-Demand: Fax-on-Demand allows a user to request
and receive information on demand by dialing a
telephone number. Then the user will interact with a
series of voice prompts to select specific documents,
by simply using the telephone keypad, and requesting
delivery of these documents to a fax number.
o E-mail-on-Demand: E-mail-on-Demand is the ability to
use e-mail (local or Internet) to request and receive
information on demand. Auto-reply e-mail exists today,
but is limited to receiving one document, usually in
text format. The main benefit of e-mail-on-demand is
the ability to utilize a document library common to
the fax-on-demand library.
o Web Integration: InfoPress supports Web HTML documents
in the document library. The Web documents are
automatically rendered into a fax document when
required.
Print Servers
The Company's print server products perform network-printing
services otherwise handled by a file server or a dedicated personal
computer. The Company offers a family of multi-protocol external and
internal print servers that enhance overall network performance by
reducing the burden on the file server or a dedicated personal
computer. During 1998 and 1997, print server (LANpress and JetPress)
products represented 32% and 42%, respectively, of total net sales.
The Company believes its print servers provide a superior
method of connecting printers to a LAN for a number of reasons,
including:
o Network performance enhancement: The Company's print
servers enable substantially higher print file
transfer speeds than file servers while reducing the
data transfer and processing burden on file servers.
o Plug-and-play in a multi-protocol environment: The
Company's print servers offer easy installation and
configuration, with multiple protocols enabling a
seamless integration into a mixed network environment.
This is not possible using either a dedicated personal
computer or a file server.
o Location flexibility: The Company's print servers are
self-contained, can be located anywhere on a network
and can support printer-clustering as well as single
printer connectivity.
17.
o Cost-effectiveness: The Company's print servers are
more cost-effective than dedicated personal computers
or direct file server connections.
o Compatibility: The Company's print servers are
compatible with printers from virtually all major
printer vendors and support leading network operating
systems on both the Ethernet (100 Base-T or 10 Base-T)
and Token Ring networks.
LANpress Products - The Company's LANpress products are
external print servers that are independent nodes on a
network. They represent superior methods of connecting
printers to a LAN due to their multi-protocol capabilities.
With a variety of configurations for a single printer or up to
4 printers, and support for NetWare (true NDS), UNIX, Windows
NT, Windows 95/98, Windows for Workgroups and AppleTalk,
LANpress is compatible with printers with standard parallel or
serial interfaces and is targeted at the large installed base
of stand-alone printers. LANpress has remote management and
configuration features enabling the network administrator to
check for print queues and status, locate sources of problems
and reconfigure units within the network from anywhere on the
LAN. LANpress selectively routes to all networked printers and
thereby improves the productivity of all printers across the
network. LANpress products can serve up to 56 print queues on
up to 16 file servers. LANpress was recently enhanced to
provide Internet printing capability. This allows the PCs to
submit e-mails and attachments to LANpress for printing via
the Internet. The suggested U.S. list price for LANpress print
servers ranges from $149 to $549.
The following table summarizes the Company's line of LANpress external
print servers:
-----------------------------------------------------
Network Environment
- ----------------------------------------.....................................................-------------------------
Ethernet Windows Flash
Product Configuration Network NetWare 3.x, UNIX TCP/IP 3.11 / 95 Apple Upgrade Internet
Interface 4.x, 5.x / 98 / NT Ethertalk Capability Printing
- ----------------------------------------------------------------------------------------------------------------------
LANpress 1P/100 MP (1) |X| |X| |X| |X| |X| |X| |X|
LANpress 3P/100 (2) |X| |X| |X| |X| |X| |X| |X|
LANpress Jr. MP (3) |X| |X| |X| |X| |X| |X| |X|
LANpress 1P MP (1) |X| |X| |X| |X| |X| |X| |X|
LANpress 2+1 MP (4) |X| |X| |X| |X| |X| |X| |X|
LANpress 3+1 MP (2) |X| |X| |X| |X| |X| |X| |X|
OfficeConnect Print (5) |X| |X| |X| |X| |X|
- ----------------------------------------------------------------------------------------------------------------------
--------------------
(1)1 Centronics parallel port
(2)Numbers refer to the number of parallel and serial port connections,
respectively.
(3)Connects directly to port on Printer
(4)Numbers refer to the number of parallel and serial port
connections, respectively. The LANpress 2+1 MP also comes
with a Token Ring network interface.
(5)2 Centronics parallel ports
18.
Research and Product Development
The Company has made substantial investments in research and product
development. The Company believes its future performance will depend in large
part on its ability to enhance its current products, maintain technological
competitiveness and meet an expanding range of customer requirements.
Castelle continues to invest in enhancing the FaxPress products by
developing new versions of client and server software and server hardware. The
product feature set is driven by the increasing complexity of user needs. The
increasing complexity of user needs results from the proliferation of client and
network environments, the continued importance of Windows NT based systems and
the increasing importance of Internet faxing.
New versions of hardware are in development to enable 100mbps and
higher performance at the lower end of the product group. Further, new versions
of the client software will have enhancements in:
o Improved administrative convenience
o Management of user login/authorization via existing network
mechanisms (NDS, NT)
o Integration with 3rd Party applications, such as contact managers
o Integration with corporate ODBC databases
o Enhanced fax archiving and storage capabilities
o Support for e-commerce and Web integration
The server software will have enhanced performance, including support
for Simple Network Management Protocol (SNMP) network management. Castelle will
continue to further its strategy of supporting Internet Faxing through its own
FaxPress-to-FaxPress communication and interfaces to third party Internet Fax
providers. Castelle is also investing in developing a new generation of the
FaxPress hardware platform.
In the Object-Fax products, enhancements are planned to enable other
fax board manufacturers and new board types from existing manufacturers to be
supported. This will allow more cost effective solutions for high capacity T1
lines, support for ISDN PRI in Europe, etc. Development plans also include
greater enhancements of Internet fax features, more efficient e-mail
integration, higher performance clustering features, etc.
The InfoPress product line is being enhanced to improved integration
with the Object-Fax product while providing increased robustness and ease of
installation.
There can be no assurance that the Company will be successful in
developing and marketing the new software and hardware product versions or in
responding to other emerging technological developments or that any development
will achieve commercial acceptance. The Company is seeking and will continue to
seek to hire additional skilled development engineers. Such engineers are likely
to be in short supply, and the Company's business, operating results and
financial condition could be adversely affected if it encounters delays in
hiring or fails to retain the required skilled engineers. See "Business -- Risk
Factors -- Key Personnel."
19.
Sales, Marketing and Distribution
Castelle sells its products through multiple channels, the channel used
being determined by the product, market and customer need. The Company has an
established two-tier domestic and international distribution network of leading
national and regional network product distributors and resellers. The Company
also sells through OEM vendors such as Fujitsu. Software enhancements and
options that complement the FaxPress products are primarily marketed directly by
the Company to registered end-users. The direct sales group works closely with
the distributors and VARs in qualifying sales opportunities for the fax and
print server products. The Company is maintaining its distribution network in
North America, Europe, and Asia-Pacific regions. The Company's European
headquarters provides sales and support services primarily to the United
Kingdom.
Demand for Castelle's products is created through a variety of
marketing programs. These programs include targeted and active participation in
industry networking and communication trade shows, as well as advertising in
associated publications. The Company increases awareness of Company products by
advertising, conducting direct mail campaigns, sending Company newsletters,
offering seminars, trade shows and conferences and other forms of public
relations efforts. The Company also employs Internet marketing tools to attract
new customers. The Company's entire Web site has been updated and designed to
assist perspective customers obtain information about products of Castelle and
to be able to contact sales personnel. The Company has launched sales and
marketing efforts designed to encourage VARs and other resellers to promote and
sell the Company's products.
The Company's five largest distributors accounted for approximately 57%
of the Company's net sales in 1998 and 68% of its net sales in 1997. Macnica,
the Company's principal Japanese distributor, and Ingram, the Company's largest
domestic distributor, accounted for approximately 26% and 17%, respectively, of
the Company's net sales in 1998 and 32% and 14%, respectively, of its net sales
in 1997. Sales to customers located in the Pacific Rim and Europe made up
approximately 38% and 47% of the Company's net sales in 1998 and 1997,
respectively. The Company's distributors typically represent other products that
are complementary to or compete with, those of the Company. While the Company
attempts to encourage its distributors to focus on its products through
marketing and support programs, these distributors may give higher priority to
products of other suppliers, thereby reducing the efforts they devote to selling
the Company's products. In particular, certain of its competitors, including
Hewlett-Packard and Intel, sell a substantially higher total dollar volume of
products through several of the Company's large United States distributors and,
as a result, the Company believes such distributors give higher priority to
products offered by such competitors. The Company's distributors are not
contractually committed to future purchases of the Company's products and could
discontinue carrying the Company's products at any time for any reason. In
addition, because the Company is dependent on a small number of distributors for
a significant portion of the sales of its products, the loss of any of the
Company's major distributors or their inability to satisfy their payment
obligations to the Company could have a significant adverse effect on the
Company's business, operating results and financial condition. The Company has a
stock rotation policy with certain of its distributors that allows them to
return marketable inventory against offsetting orders. Should the Company reduce
its prices, the Company credits certain of its distributors for the difference
between the purchase price of products remaining in their inventory and the
Company's reduced price for such products. In addition, due to industry
conditions or the actions of competitors, inventory levels of the Company's
products held by distributors could become excessive resulting in product
returns and inventory write downs.
20.
Customer Service and Support
The Company provides customers with support services, which are
available to assist customers with installation, use and operation issues that
will ensure smooth and reliable operation of Castelle products. The Company's
network engineers, located at corporate headquarters, provide technical support
via telephone, fax and e-mail during normal Company business days from 6:00 a.m.
to 6:00 p.m. (Pacific Time). As part of the Company's global partner program,
VARs have access to "priority technical support" via a special toll free number
that provides immediate access to Castelle network engineers. Support is
provided under warranty as well as with different extended software and hardware
support agreements sold directly to the customer by the Company. The Company
also has other customer support activities, including a Web site as well as an
internal help desk system. The Company has a call management automated call
distribution system to provide improved levels of support to help resolve
customer issues.
Manufacturing
The Company's current in-house manufacturing operations consist
primarily of material planning, final test and assembly, quality control and
service repair. Certain of the Company's manufacturing operations are performed
by third party manufacturers that provide customized, integrated manufacturing
services, including procurement, manufacturing and associated printed circuit
board assembly. The Company also relies on SerComm to provide it with certain of
its print server products. These arrangements enable the Company to shift
certain costs to such providers, thereby allowing the Company to focus resources
on its product development efforts. The failure of such manufacturers,
particularly SerComm, to meet their contractual commitments to the Company could
cause delays in product shipments, thereby potentially adversely affecting the
Company's business, operating results and financial condition.
The Company does not currently have any material long-term supply
contracts with any of its manufacturing subcontractors or component suppliers
other than an agreement with SerComm relating to the manufacture of print
servers. Other than its relationship with SerComm, the Company purchases
components on a purchase order basis. The Company owns all engineering, sourcing
documentation, functional test equipment and tooling used in manufacturing its
products, except for the products which are produced by SerComm, and believes
that it could shift product assembly to alternate suppliers if necessary.
Certain key components of the Company's products, including a modem chip set
from Rockwell, and a microprocessor from Motorola, are currently available from
only single sources. Other components of the Company's products are currently
available from only a limited number of sources. In addition, the Company
subcontracts a substantial portion of its manufacturing to third parties, and
there can be no assurance that these subcontractors will be able to support the
manufacturing requirements of the Company. The Company's ability to obtain these
components or sub-assemblies is dependent upon its ability to accurately
forecast customer demand for its products and to anticipate shortages of
critical components or sub-assemblies created by competing demands upon
suppliers. If the Company were unable to obtain a sufficient supply of
high-quality components or sub-assemblies from its current sources, the Company
could experience delays in obtaining such components or sub-assemblies from
other sources. Resulting delays or reductions in product shipments could
adversely affect the Company's business, operating results and financial
condition and damage customer relationships. See "Business -- Risk Factors
Dependence on Suppliers and Subcontractors." Furthermore, a significant increase
in the price of one or more of these components or sub-assemblies or the
Company's inability to lower component or sub-assembly prices in response to
competitive price reductions could adversely affect the Company's business
operating results and financial condition.
21.
Competition
See "Business -- Risk Factors -- Competition and Price Erosion" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
Proprietary Rights
The Company's success depends to a certain extent upon its
technological expertise and proprietary software technology. The Company relies
upon a combination of contractual rights and copyright, trademark and trade
secret laws to establish and protect its technologies. Additionally, the Company
generally enters into confidentiality agreements with those employees,
distributors, customers and suppliers who have access to sensitive information
and limits access to and distribution of its software documentation and other
proprietary information. Because of the rapid pace of technological change in
the LAN product industry, the Company believes that patent protection for its
products is less significant to its success than the knowledge, ability and
experience of its employees, the frequent introduction and market acceptance of
new products and product enhancements, and the timeliness and quality of support
services provided by the Company. See "Risk Factors -- Dependence on Proprietary
Rights; Uncertainty of Obtaining Licenses."
Despite the precautions taken by the Company, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
to reverse engineer or obtain and use information that the Company regards as
proprietary. There can be no assurance that the Company's precautions will be
adequate to deter misappropriation or infringement of its proprietary
technologies. Furthermore, while the Company has obtained federal registration
for many of its trademarks in the United States, certain of its trademarks have
not been registered in the United States and the Company has registered some of
its trademarks in foreign jurisdictions. There can be no assurance that the
Company's use of such unregistered trademarks will not be contested by third
parties in the future. In addition, the laws of some foreign countries either do
not protect the Company's proprietary rights or offer only limited protection.
Given the rapid evolution of technology and uncertainties in intellectual
property law in the United States and internationally there can be no assurance
that the Company's current or future products will not be subject to third-party
claims of infringement. Any litigation to determine the validity of any
third-party claims could result in significant expense to the Company and divert
the efforts of the Company's technical and management personnel, whether or not
such litigation is determined in favor of the Company. In the event of an
adverse result in any such litigation, the Company could be required to expend
significant resources to develop non-infringing technology or to obtain licenses
to the technology that is the subject of the litigation. There can be no
assurance that the Company would be successful in such development or that any
such licenses would be available. The Company also relies on technology licenses
from third parties. There can be no assurance that these licenses will continue
to be available to the Company upon reasonable terms, if at all. Any impairment
or termination of the Company's relationship with third-party licensors could
have a material adverse effect on the Company's business, operating results and
financial condition.
Government Regulation
See "Business -- Risk Factors -- Government Regulations."
22.
Employees
As of December 31, 1998, the Company employed a total of 96 full-time
equivalent personnel, 22 in manufacturing, 28 in sales and marketing, 19 in
engineering, 15 in customer service and 12 in finance and administration. The
Company intends to continue to hire additional personnel in connection with the
expansion of its operations. The Company has never had a work stoppage, no
employees are represented by a labor organization and the Company considers its
employee relations to be good.
The Company has entered into confidentiality agreements with all its
employees (including its officers) that prohibit disclosure of information
confidential to the company to anyone outside of the Company both during and
subsequent to employment and require disclosure to the Company of ideas,
discoveries or inventions relating to or resulting from the employee's work for
the Company and assignment to the Company of all proprietary rights to such
ideas, discoveries or inventions.
23.
EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Executive Officers
The names of the executive officers of the Company and their ages as of
February 22, 1999 are set forth below:
Name Age Position
Arthur H. Bruno 65 Chairman of the Board
Donald L. Rich 57 President and Chief Executive Officer
Jerome J. Burke 58 Executive Vice President
Prasad Raje 33 Chief Technical Officer, Vice President of Engineering
Arthur H. Bruno
Mr. Bruno served as the Company's Chairman of the Board since October 1993,
as Chief Executive Officer from October 1993 through April 1997 and from
November 1997 to November 1998, and as President from October 1993 through
April 1997. From February 1996 to the present he has served as the Chairman
of the Board and as a director of Ashlar, a privately held maker of
computer-aided design software. From 1991 to 1993, he was Chairman of the
Board and Chief Executive Officer of White Pine Software Inc., a desktop
connectivity company. From 1989 to 1991, he was the Chairman of the Board
and Chief Executive Officer of Wellsley Medical Management Corporation, a
primary care medical service provider. From 1986 to 1989, he was the
Chairman of the Board and Chief Executive Officer of Visual Technology
Incorporated, the predecessor to White Pine Software Inc. Mr. Bruno has
served as a director of White Pine Software, Inc. since February 1994 and
is also a director of several privately held companies.
Donald L. Rich
Mr. Rich joined the Company in November 1998 and has served as Chief
Executive Officer and President from November 1998 to the present. From
January 1997 until November 1998, Mr. Rich was self-employed. From 1993
through 1997, Mr. Rich was Chief Executive Officer and President of
Talarian Corporation. Prior to that, he held various sales and marketing
management positions at Integrated Systems, Inc. and International Business
Machines Corporation.
Jerome J. Burke
Mr. Burke joined the Company in December 1993 and has served as Executive
Vice President from November 1998 to the present. He served as the
Company's President and Chief Operating Officer from November 1997 to
November 1998 and Executive Vice President from December 1993 to November
1997. From 1988 through November 1993, Mr. Burke was Executive Vice
President of Sales and Marketing of White Pine Software Inc. and its
predecessor, Visual Technology Incorporated.
Prasad Raje
Dr. Raje joined the Company in May 1997 and was appointed to the position
of Vice President of Engineering and Chief Technical Officer. Prior to
joining the Company, Dr. Raje was an engineering manager with
Hewlett-Packard Company from 1995 to 1997 and a member of the technical
staff from 1991 to 1995. Dr. Raje was a founder of Internet Information
Systems, one of the early Web site development companies in 1994 and has
served as its President from that date through the present. Dr. Raje
received his Ph.D. and MS degrees, both in Electrical Engineering, from
Stanford University.
24.
Other Key Employees
In addition to directors and executive officers, the Company has the
following key employee:
Donald Masulis, a founder of the Company, has served as Director of
Technology since October 1993. Mr. Masulis is responsible for the software
development of various versions of the FaxPress and LANpress products and
directs the Company's product quality assurance program. Mr. Masulis holds a
Master of Science degree in Industrial Engineering and Operations Research from
the University of California at Berkeley and a Bachelor of Science degree in
Information and Computer Science from the University of California at Irvine.
ITEM 2. PROPERTIES
The Company's headquarters, including its executive offices and
corporate administration, development, manufacturing, marketing, sales and
technical services/support facilities, are located in Santa Clara, California
with an aggregate of approximately 21,400 square feet of floor space. The
Company occupies this facility under a lease, the term of which expires in
October 2000. The Company also occupies an additional 2,000 square feet of floor
space that is located in El Dorado Hills, California. This facility is under a
lease, the term of which expires in March 2001. In addition, the Company rents
office space for sales and customer support offices in Illinois, Pennsylvania
and the United Kingdom. The Company believes its existing facilities will be
adequate to meet its requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware
of any pending or threatened litigation against the Company that could have a
material adverse effect on the Company's business, operating results and
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable.
25.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock (Nasdaq symbol "CSTL") began trading on the
Nasdaq National Market on December 20, 1995. Listed below are the high and low
sale prices on the Nasdaq National Market for the periods indicated. Such
quotations do not include retail markups, markdowns or commissions.
FISCAL 1997 HIGH LOW
First Quarter $8 1/2 $5 1/4
Second Quarter $6 3/4 $3 7/8
Third Quarter $5 1/16 $3 1/2
Fourth Quarter $6 1/4 $1 5/8
FISCAL 1998 HIGH LOW
First Quarter $3 3/8 $2
Second Quarter $4 $1 1/2
Third Quarter $2 1/2 $ 7/8
Fourth Quarter $1 5/8 $ 1/2
As of December 31, 1998, there were 127 holders of record of the
Company's Common Stock, which does not include those who held in street or
nominee name. On February 22, 1998, the last sale price reported on the Nasdaq
National Market for the Company's Common Stock was $1 per share.
Dividend Policy
The Company has not paid cash dividends on its Common Stock. It is
currently the intention of the Board of Directors to retain any and all earnings
for use in the Company's business and the Company does not anticipate paying
cash dividends in the foreseeable future.
26.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from the
audited Consolidated Financial Statements. The information set forth below is
not necessarily indicative of results of future operations, and should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
Notes thereto included elsewhere in this Annual Report on Form 10-K.
Years ended December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- -------------- ------------- -------------
(in thousands, except per share amounts)
INCOME STATEMENT DATA:
Net Sales $21,746 $25,343 $29,461 $25,082 $19,486
Gross Profit $11,598 $13,507 $14,468 $11,511 $7,983
Gross Profit as a % of Net Sales 53% 53% 49% 46% 41%
Net income/(loss) ($7,534) ($6,895) $5,724 $2,024 ($378)
Net income/(loss) as a % of Net Sales (35%) (27%) 19% 8% (2%)
Net income/(loss) per share - diluted ($1.67) ($1.54) $1.45 $0.78 ($0.16)
BALANCE SHEET DATA:
Cash and Cash Equivalents $3,924 $6,204 $8,161 $7,268 $907
Working Capital $6,763 $10,816 $13,163 $8,912 $884
Total Assets $12,494 $18,926 $27,303 $14,728 $7,124
Long-term Liabilities $98 $52 -- $75 $354
Stockholders Equity $7,501 $14,855 $21,616 $9,289 $1,355
Net loss for 1998 and 1997 included net charges for restructuring and
other non-recurring items of $5.1 million and $6.1 million, respectively, and a
net benefit of $2.5 million in 1996. For detailed information on these
transactions see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Restructuring and Other Charges and Amortization of
Intangible Assets" and the Consolidated Financial Statements and related Notes
thereto included elsewhere in this Annual Report on Form 10-K. Excluding the
restructuring and other items referenced above, net income (loss) and net income
(loss) per share on a diluted basis would have been has follows:
Years ended December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- -------------- ------------- -------------
(in thousands, except per share amounts)
Net income/(loss) excluding restructuring
and non-recurring items ($2,445) ($829) $3,215 $2,024 ($378)
Net income/(loss) per share, diluted,
excluding restructuring and
non-recurring items ($0.54) ($0.19) $0.82 $0.78 ($0.16)
27.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Castelle's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section as well as in
the section entitled "Business - Risk Factors".
Results of Operations
Net Sales
Net sales decreased 14% to $21.7 million in 1998 from $25.3
million in 1997. The decline of $3.6 million in net sales resulted
primarily from lower sales of the Company's print server products in
Japan, increases in the sales return allowance during the fourth
quarter of 1998 of approximately $1.0 million which allowed the Company
to better manage the level of inventory in the distribution channel and
increases in local competition in Europe. Print server product sales
declined 35% to $7.0 million in 1998 from $10.7 million during 1997.
In 1997, net sales decreased 14% to $25.3 million from $29.5
million in 1996. The $4.2 million decline in net sales resulted
primarily from lower sales of the Company's print server products in
Japan and Europe due to increased local competition, price erosion and
a component shortage in the fourth quarter of 1997 which impacted the
ability of the Company to fill orders for print servers. Print server
product sales declined 25% to $10.7 million in 1997 from $14.2 million
during 1996. Approximately $800,000 of the shortfall is attributed to
the component shortage.
International sales were $8.3 million, $11.9 million, and
$15.5 million in 1998, 1997 and 1996, respectively, representing 38%,
47% and 53%, respectively, of net sales in 1998, 1997 and 1996. Lower
international sales in 1998 and 1997 were the result of a reduction in
general demand for the Company's products in Asia and increased local
competition in Europe. Most of the Company's international sales to
date have been denominated in U.S. dollars. Such sales could be
adversely affected by changes in demand resulting from fluctuations in
currency exchange rates.
Cost of Sales
Cost of sales includes cost of materials, including
components, manuals, diskettes, packaging materials, assembly and
shipping, as well as certain royalties. Cost of sales also includes
compensation costs and overhead related to the Company's manufacturing
operations and warranty expenses. Cost of sales were $10.1 million,
$11.8 million and $15.0 million in 1998, 1997 and 1996, respectively,
and represented 47%, 47% and 51% of net sales for those years. Most
significantly, cost of sales as a percentage of net sales remained
constant in 1998 when compared to 1997. This was the result of a higher
proportion of net sales being derived from higher margin fax products,
including Object-Fax, offset by a lower gross margin percentage on
sales of print servers and unfavorable manufacturing overhead
absorption rates due to lower volumes.
From 1996 to 1997, the decrease in cost of sales as a
percentage of net sales was primarily attributable to changes in
product mix resulting in a higher proportion of net sales being derived
from higher margin fax products. Further, in 1997, sales of products
acquired from Ibex, principally software, helped to favorably impact
gross margins. This improvement was somewhat offset by unfavorable
overhead absorption rates, due to lower volumes.
28.
Research & Development
Research and product development expenses were $2.9 million,
$3.1 million and $2.4 million in 1998, 1997 and 1996, respectively, and
represented 13%, 12% and 8% of net sales for those periods. Most of the
Company's product development efforts during these periods were focused
on fax-related products, although much of the resultant technology has
application to the further development of the Company's print server
products. A significant percentage of the Company's research and
product development expenses are related to software development. The
absolute dollar amount of research and product development expense
decreased slightly in 1998 due to improved expense controls. However,
the Company continues to be committed to the development of highly
competitive new products and services through the efficient utilization
of its engineering resources.
The increase in research and development expenses in 1997
compared to 1996 was mainly due to the integration of Ibex development
efforts.
Sales & Marketing
Sales and marketing expenses were $8.8 million, $9.2 million
and $7.4 million for 1998, 1997 and 1996, respectively, and represented
40%, 36% and 25% of net sales for those periods. The expense decline in
1998 compared to 1997 was due to a reorganization of the sales and
marketing activities implemented in the fourth quarter of 1997,
resulting in more efficient operations and a smaller staff, which was
partially offset by the integration of Object-Fax sales efforts.
Sales and marketing expenses increased in 1997 compared to
1996 due to the integration of the Ibex sales organization and an
increase in the number of sales and marketing personnel.
General & Administrative
General and administrative expenses were $2.4 million, $2.3
million and $1.6 million for 1998, 1997 and 1996, respectively, or 11%,
9% and 5% of net sales for those periods. The increase in expenses in
1998 was due to an increase in the Company's allowance for doubtful
accounts and severance costs associated with executives who left the
Company, which was only partially offset by expense reductions
resulting from the Company's restructuring implemented in the fourth
quarter of 1997.
The increase in 1997 expenses over 1996 expenses was due to
increased utilization of professional services and Ibex-related
expenses.
29.
Restructuring and Other Charges & Amortization of Intangible Assets
In April 1998, the Company completed its acquisition of the
Object-Fax NT products from Tolvusamskipti HF, an Icelandic
corporation. A portion of the purchase price was allocated to
in-process research and development, and, accordingly, the Company
recorded a one-time charge against earnings in the second quarter of
1998 of $1.1 million, as the technology acquired had not reached
technological feasibility and had no alternative future use. The
Company also recorded intangible assets of $160,000, which are being
amortized over 12 months, resulting in a $120,000 charge in 1998. In
determining the amount of in-process research and development, we
engaged an independent valuation firm to conduct an appraisal of the
acquired assets. The intangible assets acquired, including in-process
research and development, were valued based on estimates of future cash
flows discounted to their present value at risk-adjusted rates of
return. In September 1998, the Chief Accountant of the SEC expressed
concerns about the methodologies many companies were using in
determining the amount of in-process research and development. An SEC
working group has been formed to study this issue, however at this time
it is unknown what guidelines this group will generate and whether
these guidelines will differ from the valuation methods traditionally
employed. The SEC's concerns appear to focus on excluding from the
valuation the costs of any effort to complete development currently
underway and an apportionment of cash flow estimates based on the stage
of completion of in-process technology. The Company reviewed the
original valuation in light of the guidelines suggested by the SEC, and
does not believe, at this time, that there would be a material change
if such guidelines were applied. See the Company's Consolidated
Financial Statements and related Notes thereto included elsewhere in
this Annual Report on Form 10-K.
In the third quarter of 1997, the Company recorded a total
restructuring charge of $6.2 million to restructure its operations to
streamline activities and focus on key products to reduce ongoing
costs. Of the total restructuring charge, $1.2 million was to account
for implementing and completing the restructuring plan which included
relocation of the Company's European office, exit from certain lines of
business, a workforce reduction, the write-off of certain assets
relating to Ibex and other estimated restructuring costs. This was in
addition to a charge of $5.0 million associated with the write-off of
the Ibex goodwill and related intangibles. Further, the Company
recorded amortization expense of $574,000 in 1997 related to intangible
assets associated with the write-down to fair market value of assets
acquired in the merger with Ibex in November 1996.
In the fourth quarter of 1996, a total of $1.2 million in
other charges was booked due to a $1.1 million write-off of Ibex's
in-process research and development, and $96,000 of amortization for
the intangible assets and goodwill associated with the Company's
acquisition of Ibex in November 1996.
Interest Income, net
Net interest income was $170,000, $288,000 and $340,000 in
1998, 1997 and 1996, respectively. The decrease in interest income in
1998 and 1997 versus the prior years is due to declining cash balances
as a result of the losses realized in 1998 and 1997.
Provision for (Benefit from) Income Taxes
In the fourth quarter of 1998, due to the uncertainty
surrounding the realization of favorable tax attributes in future tax
returns, the Company provided a full valuation allowance against its
deferred tax asset, resulting in a non-recurring, non-cash charge of
$4.0 million.
The Company recorded a net benefit from income taxes in 1997
and 1996 of $732,000 and $3.5 million, respectively. At the time, these
amounts reflected the recognition of various deductible deferred
assets, including prior years' net operating loss carry forwards,
business tax credits and various temporary accounting differences. See
Note 9 of the Notes to Consolidated Financial Statements for a
discussion of the Company's provision for income taxes.
30.
Liquidity and Capital Resources
Since its inception in 1987, Castelle has funded its operations
primarily through the issuance of capital stock and the assumption of bank debt.
As of December 31, 1998, the Company had $3.9 million of cash and cash
equivalents, down from $6.2 million for the same period in 1997. Working capital
decreased to $6.8 million at December 31, 1998 from $10.8 million at December
31, 1997. The decrease in cash, cash equivalents and working capital is
primarily due to the operating loss incurred in 1998, cash required to acquire
the Object-Fax products and cash utilized to repurchase 292,500 shares of the
Company's common stock during the fourth quarter of 1998.
The Company has a $3.0 million secured revolving line of credit with a
bank, which expired in December 1998, pursuant to which the Company may borrow
100% against pledges of cash at the bank's prime rate (8.50% at December 31,
1998). Borrowings under this line of credit agreement were collateralized by all
of the assets of the Company. Under the terms of the loan agreement, the Company
was restricted from loaning money or assets or entering into any mergers or
acquisitions where the total consideration exceeds $15,000,000, without the
bank's consent. The Company was in compliance with the terms of the agreement,
and at December 31, 1998 had no borrowings under the line of credit. The Company
is currently negotiating an extension of this line of credit.
In December 1997, as a source of capital asset financing, the Company
entered into a loan and security agreement with a finance company for an amount
up to $288,000. As of December 31, 1998, the Company had drawn $288,000 against
this amount of which $194,000 is outstanding at December 31, 1999. The loan is
subject to an interest rate of 10.11%, is repayable by December 2000 and is
collateralized by a certificate of deposit of $125,000, which is classified as
restricted cash on the Company's balance sheet.
As of December 31, 1998, , net accounts receivable were $3.5 million,
up from $3.3 million for the same period in 1997. In 1998 the average DSO was 87
versus 55 at the end of 1997. This is the result of a lower proportion of net
sales from Japan, which historically paid promptly, and an increase by other
customers in the amount of time it takes them to pay their bills.
Net inventories as of December 31, 1998 were $3.7 million, down
slightly from $3.8 million in 1997. Inventory turnover for the year-ended 1998
was 1.9, down from 2.8 in 1997.
Castelle acquired additional capital equipment of $271,000, $732,000
and $364,000 in 1998, 1997 and 1996, respectively. The decline in capital
equipment spending in 1998 was primarily the result of large one-time purchases
in 1997 for the Company's customer support system and an upgrade to the internal
network infrastructure.
Although the Company believes that its existing capital resources and
expected cash flows from operations will be sufficient to meet its anticipated
capital requirements at least through the next 12 months, the Company may be
required to seek additional equity or debt financing. The timing and amount of
such capital requirements cannot be determined at this time and will depend on a
number of factors, including demand for the Company's existing and new products
and changes in technology in the networking industry. There can be no assurance
that such additional financing will be available on satisfactory terms when
needed, if at all.
31.
Year 2000 Issue
The Company has completed a comprehensive review of its business
applications, computer systems and infrastructure and products. In addition,
Castelle is in the process of conducting a comprehensive review of its key
business partners to identify those that could be adversely affected by the Year
2000 issue and is developing and implementing a plan to resolve issues
identified. The Year 2000 issue refers to the inability of many computer systems
to process accurately dates later than December 31, 1999. Date codes in many
programs are abbreviated to allow only two digits for the year, e.g. "98" for
the year 1998. Unless these programs are modified to handle the century date
change, they will likely interpret the year "00", that is, the year 2000, as the
year 1900. The Year 2000 issue creates risk for the Company from unforeseen
problems in its own computer systems as well as in computer systems of third
parties with whom the Company does business worldwide, including banks and
credit processing entities, factories, customers and others.
Business Applications, Computer Systems and Infrastructure
Castelle has completed a comprehensive review and inventory of
its business applications and computer systems, including servers and
network infrastructure, to insure that they are Year 2000 compliant. To
date, the Company has installed and/or upgraded all computer network
file servers and infrastructure (hubs, switches, modems and access
devices) to hardware and software that is certified to be Year 2000
compliant by its vendors. In addition, Castelle's main business
application from Computer Associates International, Inc. (Computer
Associates) has been upgraded to a Year 2000 compliant version as
certified by Computer Associates. During the next three months the
Company expects to complete an upgrade of all desktop (including
laptop) computers to Microsoft NT software certified by Microsoft
Corporation as Year 2000 compliant. The Company presently believes that
the Year 2000 issue will not pose significant operational problems for
the Company due to planned modifications to existing software and
conversions to new software which have been implemented or are being
implemented by the Company over the next year.
Key business partners
The Company is in the process of conducting a comprehensive
review of its key business partners, including customers, suppliers and
vendors, to identify those critical to the success of the Company's
operations that may have Year 2000 issues which could adversely affect
the operations of the Company. The Company presently believes that the
Year 2000 issue will not pose significant operational problems for the
Company due to planned modifications by our key business partners to
their existing systems and conversions to new software which have been
implemented or are being implemented by the Company's key business
partners over the next year. However, if such modifications and
conversions are not completed in a timely manner, the Year 2000 issue
may have a material adverse impact on the operations of the Company.
The Company cannot give assurance the third parties with whom it does
business will address any Year 2000 issues in their own systems on a
timely basis.
32.
Costs
The total cost associated with required modifications to
become Year 2000 compliant is not expected to be material to the
Company's financial position. At the present time, all costs associated
with the installation and upgrading of equipment and software have been
related to routine upgrades of the Company's business systems, which to
date have been approximately $90,000. However, the Company cannot give
any assurance that significant costs associated with unforeseen
circumstances will not significantly affect the future results of the
Company.
Products
The Company has completed a comprehensive review of its
products, both firmware and software, to insure that they are Year 2000
compliant. This was done to insure that the Company's products are free
of any Year 2000 issues discussed above. The Company believes that the
more recent versions of its products are Year 2000 compliant, meaning
the products will perform functions correctly when processing dates
later than December 31, 1999. In order to avoid difficulties, users
will need to install the versions of the Company's software that are
Year 2000 compliant. For example, FaxPress systems require the use of a
software and firmware release of at least version 3.7.3 and InfoPress
requires that at least version 2.0 be installed for compliance with
Year 2000 requirements. Full details on Year 2000 compliance of the
Company's products are available on the Company's Web site. The Company
provides upgrade kits to allow customers to install these versions. The
Company's products work in conjunction with network operating systems
such as Novell NetWare and Microsoft Windows 95/98/NT, and while these
products appear to be Year 2000 compliant, the Company cannot accept
responsibility for Year 2000 compliance of any network operating
system. If modifications or upgrades to these network operating systems
are not completed in a timely fashion, the Year 2000 issue may have a
material adverse impact on the Company's business, operating results
and financial condition.
Contingency Plans
The Company is in the process of developing contingency plans
in the event that the Company's systems or products prove to not be
Year 2000 compliant. The Company is currently reviewing its key
business activities to develop plans to support ongoing business
operations in the event of a disruption and expects these plans to be
completed shortly. However, the Company cannot give any assurance that
these contingency plans will be effective in preventing Year 2000
related disruptions in the business which could have a material adverse
impact on the Company's business, operating results and financial
condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company considered the provision of Financial Reporting Release No.
48 "Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments". The Company
had no holdings of derivative financial or commodity instruments at December 31,
1998. However, the Company is exposed to financial market risks, including
changes in interest rates and foreign currency exchange rates. While much of the
Company's revenue is transacted in U.S dollars, some revenues and capital
spending are transacted in Pounds Sterling. These amounts are not currently
material to the financial statements of Castelle, therefore we believe that
foreign currency exchange rates should not materially affect the Company's
overall financial position, results of operations or cash flows. The fair value
of the Company's money market account or related income would not be
significantly impacted by increases or decreases in interest rates due mainly to
the highly liquid nature of this investment. However, sharp declines in interest
rates could seriously harm interest earnings on this account.
33.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following financial statements of the Company and the
report of the Company's independent accountants are included
in Item 14:
Page in
Form 10-K
Report of Independent Accountants............................................. F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997.................. F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996......................................... F-3
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996......................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996......................................... F-5
Notes to Consolidated Financial Statements.................................... F-6
(b) The following financial statement schedules of Castelle for
the years ended December 31, 1998, 1997 and 1996 are filed as
part of this Form 10-K and should be read in conjunction with
the Company's Financial Statements.
Page in
Form 10-K
Report of Independent Accountants............................................. F-1
Schedule II - Valuation and Qualifying Accounts............................... F-21
Schedules not listed above have been omitted because they are
not applicable or are not required or because the required
information is included in the Financial Statements or Notes
thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
34.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to executive officers is set forth in
Part I of this Annual Report on Form 10-K. Additional information required by
this Item is incorporated herein by reference to the sections entitled
"Directors" and "Compliance with Section 16(a) of the Securities and Exchange
Act of 1934" of the Proxy Statement related to the Company's 1999 Annual Meeting
of Stockholders to be filed by the Company with the Securities and Exchange
Commission (the "Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the sections entitled "Executive Compensation" and "Certain
Transactions" in the Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the sections entitled "Security Ownership of Certain Beneficial
Owners and Management" in the Company's Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the sections entitled "Certain Transactions" and "Compensation
Committee Interlocks and Insider Participation" in the Company's Definitive
Proxy Statement.
35.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. Consolidated Financial Statements required to be filed by
Item 8 of Form 10-K. See the list of Financial Statements
contained in Item 8 of this Report.
2. Financial Statement Schedules required to be filed by Item 8
of Form 10-K. See the list of Financial Statement Schedules
contained in Item 8 of this Report.
(b) A Form 8-K was filed on November 28, 1998 reporting, under Item 5
of the Form 8-K, the appointment of Donald L. Rich as President
and Chief Executive Officer.
(c) Exhibits
2.1(1) Agreement and Plan of Merger, dated as of August 22,
1996 among Castelle, Ibex Technologies, Inc. and Certain
Shareholders of Ibex Technologies, Inc.
3.1(2) Amended and Restated Articles of Incorporation of the
Company.
3.4(3) Amended and Restated Bylaws of the Company.
4.1 Reference is made to Exhibits 3.1 and 3.4.
4.2 Fifth Amended and Restated Registration Rights Agreement
dated November 20, 1996 by and among the Registrant and
certain holders of the Company's Common Stock and
Warrants to purchase Common Stock.
10.2(2)* 1995 Non-Employee Directors' Stock Option Plan, and form
of Director Stock Option Agreement.
10.3(4) Warrant for Common Stock issued to Unterberg Harris.
10.4(2)* Form of Indemnity Agreement between the Registrant and
each of its directors and executive officers.
10.7(2) OEM Purchase Agreement dated May 23, 1995, by and
between the Registrant and SerComm Corporation.
10.8(2) Distribution Agreement dated February 26, 1990, by and
between the Registrant and Ingram Micro D Inc.
10.9(2) Distributor Contract dated June 25, 1991, as amended
June 25, 1991, by and between the Registrant and Tech
Data Corporation.
10.10(2) Distribution Agreement dated March 26, 1992, as amended
March 26, 1992, by and between the Registrant and
Merisel, Inc.
10.11(2) Distributor Agreement dated October 1, 1990, by and
between the Registrant and Vitek.
10.12(2) International Distributor Agreement dated February 24,
1994, by and between the Registrant and Macnica.
------------------
(1) Filed as an exhibit to the Company's Form 8-K dated August 22, 1996 and
incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form
SB-2 (Reg. No. 33-99628-LA-) or amendments thereto and incorporated
herein by reference.
(3) Filed herewith.
(4) Filed as an exhibit to the Company's Form 10-KSB for the fiscal
year-ended December 31, 1995 and incorporated herein by reference.
* Indicates management contracts or compensatory plans or arrangements
filed pursuant to Item 601(b)(10) of Regulation S-K.
36.
10.14(5)* 1988 Equity Incentive Plan, as amended.
10.15(4) Warrant for Common Stock issued to RvR Securities Corp.
10.16(6)*Form of Executive Severance and Transition Benefits
Agreement between the Company and Messier. P. Raje.
10.17(6)*Form of Executive Severance and Transition Benefits
Agreement between the Company and Messier. J. Burke.
10.19(3)*Employment agreement between the Company and Messier.
D. Rich.
11.1(3) Computation of Net Income (Loss) Per Share. Reference is
made to page F-19 of the Notes to Consolidated Financial
Statements.
23.1(3) Consent of PricewaterhouseCoopers LLP.
24.1(3) Power of Attorney. Reference is made to the signature
page (page 38). 27.1(3) Financial data schedule.
------------------
(1) Filed as an exhibit to the Company's Form 8-K dated August 22, 1996 and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form
SB-2 (Reg. No. 33-99628-LA-) or amendments thereto and incorporated
herein by reference.
(3) Filed herewith.
(4) Filed as an exhibit to the Company's Form 10-KSB for the fiscal
year-ended December 31, 1996 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form
S-8, dated March 29, 1999, (File No. 333-75247)
(6) Filed as an exhibit to the Company's Form 10-Q for the period ended
September 26, 1997 and incorporated herein by reference.
* Indicates management contracts or compensatory plans or arrangements
filed pursuant to Item 601(b)(10) of Regulation S-K.
37.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
By: /S/ DONALD L. RICH
Donald L. Rich
Chief Executive Officer and President
March 30, 1999
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Arthur H. Bruno, Donald L. Rich and
Laurie Gee, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution for him, and in his name in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, and any of them, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date
/S/ ARTHUR H. BRUNO Chairman of the Board and Director March 26, 1999
-------------------
Arthur H. Bruno
/S/ DONALD L. RICH Chief Executive Officer, President March 30, 1999
------------------ and Director
Donald L. Rich (principal executive officer)
/s/ LAURIE GEE Vice President, Finance and March 30, 1999
------------------ Administration
Laurie Gee (principal financial and accounting officer)
/s/ JOHN FREIDENRICH Director March 26, 1999
- ---------------------
John Freidenrich
/s/ ALAN KESSMAN Director March 26, 1999
- ------------------
Alan Kessman
Director March 26, 1999
- ---------------------
Robert Hambrecht
38.
Castelle and Subsidiaries
Consolidated Financial Statements
as of December 31, 1998 and 1997
and for each of the three years in the
period ended December 31, 1998
Report of Independent Accountants
To the Board of Directors and
Shareholders of Castelle
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the consolidated financial position of
Castelle and subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
February 5, 1999
F-1
Castelle and Subsidiaries
Consolidated Balance Sheets
(in thousands)
- --------------------------------------------------------------------------------------------------------------------
December 31,
....................................
1998 1997
----------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 3,924 $ 6,204
Restricted cash 125 125
Accounts receivable, net of allowance for doubtful accounts
of $720 in 1998 and $490 in 1997 3,472 3,273
Inventories 3,739 3,786
Prepaid expenses and other current assets 398 573
Deferred income taxes - 874
----------------- -----------------
Total current assets 11,658 14,835
Property and equipment, net 666 938
Other, net 170 93
Deferred income taxes - 3,060
----------------- -----------------
Total assets $ 12,494 $ 18,926
================= =================
Liabilities and Shareholders' Equity
Current liabilities:
Long-term debt, current portion $ 96 $ 87
Accounts payable 2,084 1,312
Accrued liabilities 2,715 2,620
----------------- -----------------
Total current liabilities 4,895 4,019
Other long-term liabilities 98 52
----------------- -----------------
Total liabilities 4,993 4,071
----------------- -----------------
Commitments (Note 6)
Shareholders' Equity:
Preferred stock, no par value:
Authorized: 2,000 shares in 1998 and 1997
Issued and outstanding: none in 1998 and 1997 - -
Common stock, no par value:
Authorized: 25,000 shares
Issued and outstanding: 4,337 shares in 1998
and 4,490 shares in 1997 29,255 28,955
Notes receivable for purchase of common stock (274) (274)
Deferred compensation (120) -
Accumulated deficit (21,360) (13,826)
----------------- -----------------
Total shareholders' equity 7,501 14,855
----------------- -----------------
Total liabilities and shareholders' equity $ 12,494 $ 18,926
================= =================
F-2
The accompanying notes are an integral part of these financial statements.
Castelle and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------------------
Years Ended December 31
........................................................
1998 1997 1996
------------------ ----------------- -----------------
Net sales $ 21,746 $ 25,343 $ 29,461
Cost of sales 10,148 11,836 14,993
------------------ ----------------- -----------------
Gross profit 11,598 13,507 14,468
------------------ ----------------- -----------------
Operating expenses:
Research and development 2,878 3,141 2,357
Sales and marketing 8,776 9,180 7,357
General and administrative 2,443 2,296 1,566
Amortization of intangible assets 120 574 96
Restructuring and other charges 1,124 6,224 1,079
------------------ ----------------- -----------------
15,341 21,415 12,455
------------------ ----------------- -----------------
Operating income (loss) (3,743) (7,908) 2,013
Interest income, net 170 288 340
Other income (expense), net 4 (7) (157)
------------------ ----------------- -----------------
Income (loss) before provision for (benefit from)
income taxes (3,569) (7,627) 2,196
Provision for (benefit from) income taxes 3,965 (732) (3,528)
------------------ ----------------- -----------------
Net income (loss) $ (7,534) $ (6,895) $ 5,724
================== ================= =================
Net income (loss) per common share - basic $ (1.67) $ (1.54) $ 1.55
================== ================= =================
Shares used in per share calculation - basic 4,507 4,470 3,701
================== ================= =================
Net income (loss) per common share - diluted $ (1.67) $ (1.54) $ 1.45
================== ================= =================
Shares used in per share calculation - diluted 4,507 4,470 3,942
================== ================= =================
F-3
The accompanying notes are an integral part of these financial statements.
Castelle and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1998 and 1997
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Notes
Receivable
for
Purchase
of
Common Stock Common Deferred Accumulated
..........................
Shares Amount Stock Compensation Deficit Total
------------ ------------ ----------- ------------- ------------ ------------
Balances, December 31, 1995 3,456 $ 22,323 $ (379) $ - $ (12,655) $ 9,289
Issuance of common stock through:
Exercise of stock options 23 10 - - - 10
Exercise of underwriter's
overallotment option 150 976 - - - 976
Issuance of common stock in
connection with acquisition 791 5,535 - - - 5,535
Repurchase of common stock - (1) - - - (1)
Repayment of notes receivable - - 83 - - 83
Net income - - - - 5,724 5,724
------------ ------------ ----------- ------------- ------------ ------------
Balances, December 31, 1996 4,420 $ $ (296) $ - $ (6,931) $
28,843 21,616
Issuance of common stock through
exercise of stock options 70 112 - - - 112
Repayment of notes receivable - - 22 - - 22
Net loss - - - - (6,895) (6,895)
------------ ------------ ----------- ------------- ------------ ------------
Balances, December 31, 1997 4,490 $ $ (274) $ - $ (13,826) $
28,955 14,855
Repurchase of common stock (293) (384) - - - (384)
Issuance of common stock through
exercise of stock options 40 12 - - - 12
Issuance of common stock in
connection with acquisition 100 500 - - 500
Deferred compensation related to options
issued to consultant - 160 - (160) -
Amortization of deferred compensation - - - 40 - 40
Compensation expense related to fully
vested options granted to consultant - 12 - - 12
Net loss - - - - (7,534) (7,534)
------------ ------------ ----------- ------------- ------------ ------------
Balances, December 31, 1998 4,337 $ 29,255 $ (274) $ (120) $ (21,360) $ 7,501
------------ ------------ ----------- ------------- ------------ ------------
F-4
The accompanying notes are an integral part of these financial statements.
Castelle and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
....................................................
1998 1997 1996
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income (loss) $ (7,534) $ (6,895) $ 5,724
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 640 967 346
Purchased in-process research and development 1,124 - 1,079
Write-off of goodwill and other intangible assets - 5,074 -
Provision for doubtful accounts and sales returns 909 220 (11)
Provision for excess and obsolete inventory 418 412 29
Compensation expense related to grant of stock options 52 - -
Loss on disposal of fixed assets 40 - -
Changes in assets and liabilities:
Accounts receivable (1,108) 2,289 (2,280)
Inventories (371) (1,357) 795
Prepaid expenses and other current assets 175 53 (19)
Accounts payable 772 (550) (876)
Accrued liabilities 95 (1,205) 311
Deferred income taxes 3,934 (367) (3,567)
---------------- ---------------- ----------------
Net cash (used in) provided by operating activities (854) (1,359) 1,531
---------------- ---------------- ----------------
Cash flows from investing activities:
Acquisition of property and equipment (223) (732) (364)
Cash portion of Ibex acquisition, net of cash acquired - - (1,159)
Acquisition of Object-fax product line (910) - -
(Increase) decrease in other assets 24 (14) 41
---------------- ---------------- ----------------
Net cash used in investing activities (1,109) (746) (1,482)
---------------- ---------------- ----------------
Cash flows from financing activities:
(Increase) decrease in restricted cash 142 (125) -
Proceeds from notes payable (87) 146 -
Repayment of notes payable - (7) (193)
Principal payments on capitalized leases - - (31)
Proceeds from collection of note receivable for stock - 22 83
Proceeds from issuance of common stock and warrants, net of (372) 112 985
repurchases
---------------- ---------------- ----------------
Net cash provided by financing activities (317) 148 844
---------------- ---------------- ----------------
Net (decrease) increase in cash and cash equivalents (2,280) (1,957) 893
Cash and cash equivalents, beginning of period 6,204 8,161 7,268
---------------- ---------------- ----------------
Cash and cash equivalents, end of period $ 3,924 $ 6,204 $ 8,161
================ ================ ================
Supplemental information:
Cash paid during the period for:
Interest $ 27 $ 3 $ 6
Income taxes $ 5 $ 123 $ 86
Noncash investing and financing activities:
Conversion of preferred stock to common stock in connection
with merger $ - $ - $ 300
Issuance of common stock for acquisition of Ibex $ - $ - $ 5,535
Issuance of common stock for acquisition of Object-fax
product line $ 500 $ - $ -
F-5
The accompanying notes are an integral part of these financial statements.
Castelle and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Business and Organization of the Company
Castelle (the "Company") designs, develops, markets and supports network
enhancement products, both software and hardware, that improve the
productivity, performance and functionality of local area networks
("LAN") and enhance the LAN user's ability to communicate. The Company's
products consist of: FaxPress, an integrated hardware/software network
faxing solution; Object-Fax, an enterprise-level Windows NT fax server
software product; InfoPress an enterprise-level fax-on-demand software
product and LANpress print servers. The Company distributes its products
primarily through a two-tier, domestic and international distribution
network, with its distributors selling Castelle's products to value-added
resellers, system integrators, retailers and other resellers in the
United States, Europe and the Pacific Rim. The Company also has
relationships with selected original equipment manufacturers and sells
software enhancements and upgrades directly to end users.
2. Summary of Significant Accounting Policies
Basis of consolidation
The consolidated financial statements include the accounts of Castelle
and its wholly owned subsidiaries in the United States and the United
Kingdom. All intercompany balances and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Financial instruments
Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
Amounts reported for cash equivalents, receivables and other financial
instruments approximate fair values based upon comparable market
information available at the respective balance sheet dates.
Financial instruments that potentially subject the Company to
concentrations of credit risks consist principally of cash, notes
receivable and trade accounts receivable. The Company maintains its cash
balances at a variety of financial institutions and has not experienced
any losses relating to any of its money market funds or bank deposits.
Certain risks and concentrations
Ongoing customer credit evaluations are performed by the Company, and
collateral is not required. The Company maintains allowances for
potential returns and credit losses, and such returns and losses have
generally been within management's expectations. Three customers
accounted for 60% of accounts receivable at December 31, 1998 and three
customers accounted for 67% of accounts receivable at December 31, 1997.
F-6
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The Company's products include components subject to rapid technological
change. Significant technological change could adversely affect the
Company's operating results and subject the Company to returns of product
and inventory losses. While the Company has ongoing programs to minimize
the adverse effect of such changes and consider technological change in
estimating its allowances, such estimates could change in the future. In
addition, one of the Company's print server products is currently
manufactured by a single supplier and certain key components are
currently available from only single sources.
Inventories
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is provided using the straight-line method
over the estimated useful lives of the respective assets, generally three
to seven years. Amortization of leasehold improvements is provided on a
straight-line basis over the life of the related asset or the lease term,
if shorter. Gains and losses upon asset disposal are taken into income in
the year of disposition.
Accounting for long-lived assets
The Company reviews property, equipment, goodwill and other intangible
assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability is measured by comparison of its carrying amount to future
net cash flows the assets are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the asset exceeds its fair
market value. Intangibles are amortized over their estimated useful lives
(typically one to five years).
Software production costs
Costs related to the conceptual formulation and design of software
products are expensed as research and development while costs incurred
subsequent to establishing technological feasibility of software products
are capitalized until general release of the product. Generally,
technological feasibility is established upon completion of a working
model. No significant costs subsequent to such point have been incurred,
and all such costs have been expensed.
Revenue recognition
Product revenue is recognized upon shipment if a signed contract exists,
the fee is fixed and determinable, collection of the resulting
receivables is probable and product returns are reasonably estimable. The
Company enters into agreements with certain of its distributors which
permit limited stock rotation rights. These stock rotation rights allow
the distributor to return products for credit but require the purchase of
additional products of equal value. Revenues subject to stock rotation
rights are reduced by management's estimates of anticipated exchanges.
Provisions for estimated warranty costs and anticipated retroactive price
adjustments are recorded at the time products are shipped. The Company
recognizes revenue from the sale of extended warranty contracts ratably
over the period of the contracts.
Advertising costs
Advertising costs, included in sales and marketing expenses, are expensed
as incurred and were $1,963,000, $2,471,000 and $2,304,000 in 1998, 1997
and 1996, respectively.
F-7
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Foreign currency translation
The functional currency of the Company's foreign subsidiary is the U.S.
dollar. Foreign currency gains and losses, which have not been material,
are reported in the statement of operations.
Net income (loss) per share
Basic net income (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number of
common shares outstanding for that period. Diluted net income (loss) per
share is computed giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential shares
consist of incremental common shares issuable upon exercise of stock
options and warrants.
Restructuring
In the quarter ended September 26, 1997, the Company announced and began
to implement a restructuring plan. The Company recorded a $1,150,000
restructuring charge to account for the estimated costs of implementing
and completing the restructuring plan. Such charge was in addition to the
write-off of the Ibex goodwill and related intangibles as discussed in
Note 3. These costs consist of $402,000 to exit from certain lines of
business, $343,000 for employee termination costs and to exit from
various leases in connection with the relocation of the Company's
European office, $340,000 for estimated employee termination costs
associated with reductions in the workforce, and $65,000 for other
estimated restructuring costs. As of December 31, 1998, the Company had
completed most of its restructuring plan with actual payments made of
$1,122,000. The remaining balance of $28,000 will be used to complete the
payment on vacated leases.
Comprehensive income
Castelle has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1,
1998. This statement requires the disclosure of comprehensive income and
its components in a full set of general-purpose financial statements.
Comprehensive income is the change in equity from transactions and other
events and circumstances other than those resulting from investments by
owners and distributions to owners. There are no significant components
of comprehensive income excluded from net income, therefore, no separate
statement of comprehensive income has been presented.
Segment information
The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 31, 1997. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
changes current practice under SFAS No. 14 by establishing a new
framework on which to base segment reporting and introduces requirements
for interim reporting of segment information. The Company has determined
that it uses one measurement of profitability of its business for
internal reporting. The Company's international operations in 1998, 1997
and 1996 are analyzed in Note 11.
F-8
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
New accounting pronouncements
In June of 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair
value. Management has not yet evaluated the effects of this change on its
operations. The Company will adopt SFAS No. 133 as required for its first
quarterly filing of fiscal 2000.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
released Statement of Position 98-9, or SOP 98-9, Modification of SOP
97-2, "Software Revenue Recognition," with Respect to Certain
Transactions. SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence
("VSOE") of the fair values of all the undelivered elements that are not
accounted for by means of long-term contract accounting, (2) VSOE of fair
value does not exist for one or more of the delivered elements, and (3)
all revenue recognition criteria of SOP 97-2 (other than the requirement
for VSOE of the fair value of each delivered element) are satisfied.
The provisions of SOP 98-9 that extend the deferral of certain paragraphs
of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP
97-2 and SOP 98-9 will be effective for transactions that are entered
into in fiscal years beginning after March 15, 1999. Retroactive
application is prohibited. The Company is evaluating the requirements of
SOP 98-9 and the effects, if any, on the Company's current revenue
recognition policies.
3. Acquisition of Ibex Technologies, Restatement and Related Charges
In November 1996, the Company acquired Ibex Technologies, Inc. ("Ibex"),
a company which designed, developed and marketed fax-on-demand,
fax-gateway and fax broadcast applications. The Company issued 790,617
shares of its common stock in exchange for all of the outstanding common
stock of Ibex and accounted for the transaction as a purchase.
The total purchase price of Ibex, consisting of stock valued at
$5,534,000 (based on the closing price at the closing date) plus direct
costs of $1,430,000, was allocated to the net tangible and identified
intangible assets of Ibex, including in-process research and development,
in the amounts of $142,000, $2,739,000, and $1,079,000, respectively. The
identified intangible assets, consisting primarily of the fair value of
current technologies, customer lists, and the workforce were originally
assigned a five-year life. The excess of the purchase price over the fair
value of the assets acquired was approximately $3,004,000 and was
originally amortized on a straight-line basis over 5 years. The amount of
the purchase price allocated to in-process research and development
related to products for which technological feasibility had not been
established and for which there was no alternative future use.
Accordingly, the in-process research and development was written off at
the date of the acquisition and was included with restructuring and other
charges on the accompanying statement of operations.
In 1997 Ibex suffered significant losses on its current products due to
increasing competition from Internet based applications and determined
that its primary product under development was not economically feasible.
As a result, management determined that the value assigned to goodwill
and other intangible assets was not recoverable and such assets were
written off. Such 1997 charges, included as part of restructuring and
other charges, was $5,073,000, which amount was net of amortization
recorded in 1997 of $574,000.
F-9
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
4. Acquisition of the Object-Fax NT Product Line
In April 1998, the Company completed its acquisition of the Object-Fax NT
product line, a facsimile software application designed for LAN's, WAN's
and Internet-based networks, from Tolvusamskipti HF, an Icelandic
corporation, in exchange for $300,000 in cash, 100,000 shares of Castelle
common stock and the right to receive either additional cash or the
number of additional shares of Castelle common stock on the date six
months after the acquisition necessary to make the fair market value of
the common stock and additional cash received in the transaction not less
than $500,000 (the "Acquisition"). In connection with the Acquisition,
Castelle also entered into asset acquisition agreements with Traffic USA,
Inc. and Traffic Software USA, Inc. in which Castelle acquired fixed
assets and intellectual property rights associated with the marketing,
sales, distribution and support of the Object-Fax NT software. In
exchange for these assets, Castelle paid $135,000 and agreed to pay a
royalty on sales of the Object-Fax NT software, not to exceed $75,000 or
to be paid beyond 24 months after the Acquisition. Additionally, Castelle
entered into consulting and non-competition agreements with key employees
of Traffic USA, Inc. and Traffic Software USA, Inc. The Acquisition has
been accounted for as a purchase of assets and is valued at approximately
$1.4 million, including acquisition-related expenses. A portion of the
purchase price was allocated to in-process research and development
relating to certain projects which had not reached technological
feasibility and for which there was no alternative future use, and,
accordingly, the Company recorded, a one-time charge against earnings in
the second quarter of 1998 of $1.1 million. Further, the Company recorded
intangible assets of $160,000, which are being amortized over 12 months.
The value of the common stock received in the transaction was less than
$500,000 six months after the acquisition. The Company is in the process
of determining whether an additional cash payment will be made or whether
additional shares will be issued. The option is equivalent to either a
cash payment of approximately $386,000, representing the difference
between $500,000 and the fair market value of 100,000 shares six months
after the acquisition or an additional 339,000 shares of the Company's
common stock.
5. Balance Sheet Detail (in thousands)
Inventories:
December 31,
..................................
1998 1997
---------------- ----------------
Raw material $ 1,282 $ 1,544
Work in process 130 486
Finished goods 2,327 1,756
---------------- ----------------
$ 3,739 $ 3,786
================ ================
F-10
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Property and equipment:
December 31,
..................................
1998 1997
---------------- ----------------
Production, test and demonstration equipment $ 495 $ 746
Computer equipment 1,078 2,740
Office equipment 88 361
Leasehold improvements 107 127
---------------- ----------------
1,768 3,974
Less accumulated depreciation and amortization (1,102) (3,036)
---------------- ----------------
$ 666 $ 938
================ ================
Accrued liabilities:
December 31,
..................................
1998 1997
---------------- ----------------
Accrued compensation $ 1,093 $ 870
Accrued sales and marketing 499 444
Accrued professional fees 95 126
Deferred revenue 321 252
Accrued income tax 217 234
Accrued acquisition costs 125 -
Other 365 694
---------------- ----------------
$ 2,715 $ 2,620
================ ================
6. Commitments
The Company leases facilities under noncancelable operating leases
expiring through 2001. The Company is responsible for certain maintenance
costs, taxes and insurance under the leases. Future minimum payments
under noncancelable operating leases are as follows (in thousands):
1999 $ 387
2000 357
2001 89
2002 8
---------------
$ 841
---------------
Rent expense, including the facility lease and equipment rental, was
$584,000, $332,000, and $374,000 for 1998, 1997 and 1996, respectively.
F-11
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
7. Bank Borrowings
The Company had a $3.0 million revolving line of credit with a bank that
expired in December 1998. There were no borrowings outstanding under this
line of credit at December 31, 1998. The Company is currently negotiating
an extension of this line of credit.
8. Long-Term Debt
In December 1997, the Company entered into a loan and security agreement
with a finance company for an amount of $288,000. The amounts borrowed
are subject to interest of 10.11%, are repayable by December 2000, and
are partially collateralized by a certificate of deposit of $125,000,
which is included as restricted cash on the accompanying balance sheet.
At December 31, 1998, future minimum payments are as follows (in
thousands):
Years Ending December 31,
1999 $ 96
2000 98
---------------
$ 194
===============
9. Common Stock
In connection with the sale of common stock to two executives (152,815
shares at $0.20 per share in October 1994 and 52,500 shares at $5.00 per
share in April 1995), the Company had the right to repurchase the shares
at cost in the event of termination of service. These rights lapse
ratably through 1999. At December 31, 1998, 9,800 shares were subject to
the Company's repurchase rights.
F-12
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Non-Employee Directors' Stock Option Plan
In November 1995, the Company's Board of Directors adopted the 1995
Non-Employee Directors' Stock Option Plan ("Directors Plan"). As of
December 31, 1998, 120,000 shares of the Company's common stock have been
reserved for issuance under the Directors Plan and activity under the
Plan is as follows (in thousands):
Outstanding Options
..........................................................
Weighted
Average
Available Number Exercise Exercise
for Grant of Shares Price Total Price
------------- ------------- --------------- ------------- -------------
Balances, January 1, 1996 120 - - $ - $0.00
Options granted (10) 10 $8.00 80 $8.00
Options cancelled 3 (3) $8.00 (24) $8.00
------------- ------------- ------------- -------------
Balances, December 31, 1996 113 7 $8.00 56 $8.00
Options granted (6) 6 $6.12 37 $6.12
Options cancelled 3 (3) $6.12-$8.00 (19) $7.00
------------- ------------- ------------- -------------
Balances, December 31, 1997 110 10 $6.12-$8.00 74 $7.20
Options granted (11) 11 $2.37-$2.38 26 $2.38
Options cancelled - - - - -
------------- ------------- ------------- -------------
Balances, December 31, 1998 99 21 $2.37-$8.00 $ 100 $4.69
============= ============= ============= =============
At December 31, 1998 and 1997, 14,000 and 7,000 options, respectively,
were exercisable at an aggregate exercise price of $79,000 and $50,000,
respectively.
1988 Incentive Stock Plan
Under the 1988 Incentive Stock Plan ("1988 Plan"), the Board of Directors
may grant either the right to purchase shares or options to purchase
shares of the Company's common stock at prices not less than the fair
market value at the date of grant for incentive stock options and 85% of
the fair market value for non-qualified options and purchase rights.
Options granted under the 1988 Plan generally become exercisable, and the
Company's right to repurchase shares issued and sold pursuant to stock
purchase rights lapses, at a rate of one-quarter of the shares under
option or purchased under stock purchase rights at the end of the first
year and thereafter ratably over the next three years and generally
expire seven years from the date of grant. As of December 31, 1998, there
were no stock purchase rights outstanding, and no shares purchased
pursuant to stock purchase rights were subject to repurchase by the
Company.
F-13
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Option activity under the 1988 Plan was as follows (in thousands):
Outstanding Options
..........................................................
Weighted
Average
Available Number Exercise Exercise
for Grant of Shares Price Total Price
------------- ------------- --------------- ------------- -------------
Balances, January 1, 1996 422 264 $0.20-$6.00 $ 857 $3.26
Options granted (197) 197 $0.96-$7.75 1,075 $5.46
Options cancelled 65 (65) $0.20-$7.75 (426) $6.54
Options exercised - (9) $0.20-$1.55 (10) $1.24
------------- ------------- ------------- -------------
Balances, December 31, 1996 290 387 $0.20-$7.75 1,496 $3.87
Authorized 982
Options granted (1,184) 1,184 $4.50-$5.75 5,476 $4.62
Options cancelled 112 (112) $0.20-$6.88 (5,677) $5.09
Options exercised - (70) $0.20-$5.00 (112) $1.59
------------- ------------- ------------- -------------
Balances, December 31, 1997 200 1,389 $0.20-$7.75 1,183 $4.53
Options granted (1,466) 1,466 $1.00-$3.50 2,426 $1.65
Options cancelled 1,448 (1,448) $0.20-$7.75 (6,473) $4.47
Options exercised - (40) $0.20-$1.55 (12) $0.29
------------- ------------- ------------- -------------
Balances, December 31, 1998 182 1,367 $0.20-$6.88 (2,876) $1.63
============= ============= ============= =============
At December 31, 1998 and 1997, 508,000 and 694,000 options outstanding,
respectively, were exercisable at an aggregate exercise price of
$1,023,000 and $2,992,000, respectively.
In August 1998, the company offered employees the right to cancel certain
outstanding stock options at original exercise prices and receive new
options with a new exercise price. The new exercise price was $1.56 per
share, based on the closing price of common stock on the date employees
agreed to cancel their original outstanding stock options. Options to
purchase a total of 941,845 shares at original exercise prices ranging
from $2.50 to $7.75 per share were cancelled and new options were issued
in August 1998. In return for the lower exercise price, each optionee
agreed that no portion of a repriced option would be exercisable until
six (6) months after the effective date of the repricing.
In addition to the Plan, Castelle granted options to purchase common
stock to consultants under special arrangements. These options were
valued consistent with the provisions of SFAS No. 123 and as a result, a
compensation expense of $52,000 was recognized in 1998. These options
have an exercise price ranging from $1.56 to $1.63. There were 152,056 of
these options outstanding at December 31, 1998 of which 27,056 were
exercisable at an aggregate exercise price of $44,000.
Stock Option Plans
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the Non-Employee Directors' Stock Option Plan or the 1988
Incentive Stock Plan.
F-14
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Had compensation cost for these Plans been determined based on the fair
value at the grant date for awards in 1998, 1997 and 1996 consistent with
the provisions of SFAS No. 123, the Company's net income (loss) and net
income (loss) per share for 1998, 1997 and 1996 would have been reduced
to the pro forma amounts indicated below (in thousands):
1998 1997 1996
--------------- ---------------- ----------------
Net income - as reported $ (7,534) $ (6,895) $ 5,724
Net income - pro forma (8,690) (8,093) 5,586
Net income per share - basic - as reported (1.67) (1.54) 1.55
Net income per share - basic - pro forma (1.93) (1.81) 1.51
Net income per share - diluted - as reported (1.67) (1.54) 1.45
Net income per share - diluted - pro forma (1.93) (1.81) 1.42
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes model with the following assumptions for 1998,
1997 and 1996:
1998 1997 1996
--------------- ---------------- ----------------
Risk-free interest rate 5.20% 4.88%-5.30% 5.38%-6.75%
Expected life 4.4 years 5.6 years 3 years
Expected dividends - - -
Volatility 79% 100% 60%
Average turnover 8% 8% 8%
The weighted average fair value of options granted in 1998, 1997 and 1996
was $1.05, $3.78 and $3.41 per share, respectively.
F-15
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The options outstanding and currently exercisable by exercise price at
December 31, 1998 are as follows (in thousands, except years and per
share data):
Options Outstanding Options Exercisable
................................................................... .................................
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
---------------- ---------------- --------------- ---------------- ---------------- ----------------
$0.00-$0.20 30 2.3 $0.20 30 $0.20
$0.51-$1.00 300 6.9 $1.00 - $0.00
$1.50-$1.70 1,097 5.7 $1.55 417 $1.56
$2.00-$3.00 12 8.5 $2.41 5 $2.46
$3.01-$5.00 80 - $4.50 80 $4.50
$5.01-$6.00 1 3.9 $6.00 1 $6.00
$6.01-$7.00 14 5.3 $6.63 10 $6.58
$7.01-$8.00 6 5.1 $8.00 6 $8.00
---------------- ----------------
1,540 5.6 $1.65 549 $2.09
================ ================
Warrants
The Company has outstanding fully exercisable warrants at December 31,
1998 as follows (in thousands except per share data):
Expiration Stock Under Exercise Number of
Date Warrant Price Shares
-------------------- --------------- --------------- ----------------
December 2000 Common $ 8.40 100
March 2000 Common $ 1.00 133
March 1999 Common $ 3.00 15
The warrant holders have certain demand and registration rights as
specified in the warrant agreement. No warrants were exercised during
1998, 1997 and 1996.
Notes receivable
At December 31, 1998, the Company held notes receivable of $274,000,
which bear interest between 6.3% and 7.05% per annum, from two executive
officers, issued in connection with the purchase of common stock under
restricted stock purchase agreements. The principal and accrued interest
on these notes are due at various dates from October 1999 through
September 2000.
F-16
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
9. Income Taxes
The Company's provision for (benefit from) income taxes consists of the
following (in thousands):
Year Ended December 31,
....................................................
1998 1997 1996
---------------- ---------------- ----------------
Current:
Federal $ - $ - $ 793
State - - 130
Foreign 1 - 20
---------------- ---------------- ----------------
1 - 943
---------------- ---------------- ----------------
Deferred:
Federal 3,495 (732) (4,062)
State 469 - (409)
---------------- ---------------- ----------------
3,964 (732) (4,471)
---------------- ---------------- ----------------
$ 3,965 $ (732) $ (3,528)
================ ================ ================
The Company's tax provision (benefit) differs from the provision
(benefit) computed using statutory income tax rates as follows (in
thousands):
1998 1997 1996
---------------- ---------------- ----------------
Federal tax (benefit) at statutory rate $ (754) $ (2,975) $ 778
Permanent difference due to
non-deductible expenses 21 1,586 228
State taxes (benefit), net of federal benefit (173) (91) 251
Utilization of net operating loss carryforwards - - (1,829)
Change in valuation allowance 5,001 834 (2,519)
General business credits (131) (86) (123)
Other 1 - (314)
---------------- ---------------- ----------------
$ 3,965 $ (732) $ (3,528)
================ ================ ================
F-17
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The components of the net deferred tax assets are as follows (in
thousands):
December 31,
...................................
1998 1997
---------------- -----------------
Inventory allowances and adjustments $ 243 $ 158
Accounts receivable allowances 287 475
Other liabilities and allowances 1,097 428
Net operating loss carryforwards 3,127 2,680
Tax credit carryforwards 785 1,027
Depreciation and amortization 296 -
Valuation allowance (5,835) (834)
---------------- -----------------
Total net deferred tax assets $ - $ 3,934
================ =================
Due to the uncertainty surrounding the realization of favorable tax
attributes in future tax returns, the Company has placed a full valuation
allowance against its deferred tax asset balance.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $8,800,000 and $2,200,000 available to offset future
federal and California taxable income, respectively. These loss
carryforwards expire from 2003 through 2018.
For federal and state income tax purposes, a portion of the Company's net
operating loss carryforward is subject to certain limitations on annual
utilization in case of changes in ownership, as defined by federal and
state tax laws.
The Company's income (loss) before provision for income taxes is
substantially all from domestic operations.
10. Retirement Plan
The Company has a voluntary 401(k) plan covering substantially all
employees. The plan provides for employer contributions at the discretion
of the Board of Directors. In 1998, 1997 and 1996, the Company made no
contributions to the plan.
11. Major Customers and Segment Information
Revenues by geographic area are determined by the location of the end
user and are summarized as follows (in thousands):
Years Ended December 31,
...................................................
1998 1997 1996
---------------- ---------------- ---------------
Europe $ 2,148 $ 3,000 $ 4,800
Pacific Rim 6,156 8,900 10,700
---------------- ---------------- ---------------
$ 8,304 $ 11,900 $ 15,500
================ ================ ===============
F-18
Castelle and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Customers that individually accounted for greater than 10% of net sales
are as follows (in thousands):
Years Ended December 31,
..............................................................................................
1998 1997 1996
Customer Amount Percentage Amount Percentage Amount Percentage
----------------- -------------- --------------- --------------- --------------- --------------- -------------
A $ - -% $ 2,604 10% $ 3,833 13%
B 3,752 17% 3,629 14% 4,419 15%
C 5,596 26% 8,147 32% 9,711 33%
12. Computation of Net (Loss) Income per Share
Basic and diluted earnings per share are calculated as follows for 1998,
1997 and 1996 (in thousands except per share amounts):
1998 1997 1996
--------------- ---------------- ----------------
Basic:
Weighted average shares 4,507 4,470 3,701
=============== ================ ================
Net (loss) income $ (7,534) $ (6,895) $ 5,724
=============== ================ ================
Net (loss) income per share $ (1.67) $ (1.54) $ 1.55
=============== ================ ================
Diluted:
Weighted average shares 4,507 4,470 3,701
Common equivalent shares from stock options - - 241
--------------- ---------------- ----------------
Shares used in per share calculation 4,507 4,470 3,942
=============== ================ ================
Net (loss) income $ (7,534) $ (6,895) $ 5,724
=============== ================ ================
Net (loss) income per share $ (1.67) $ (1.54) $ 1.45
=============== ================ ================
The calculation of diluted shares outstanding for 1998 and 1997 excludes
1,540,000 and 1,399,000 stock options, respectively, as their effect was
antidilutive in the period.
F-19
Report of Independent Accountants on Financial Statement Schedules
To the Board of Directors of Castelle:
Our audits of the consolidated financial statements referred to in our report
dated February 5, 1999 appearing on page F-1 of this Form 10-K also included an
audit of the financial statement schedules listed in Item 14(a)(2) of this Form
10-K. In our opinion, these financial statement schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Jose, California
February 5, 1999
F-20
Castelle and Subsidiaries Schedule II
Valuation and Qualifying Accounts
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Additional
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
---------------- ---------------- ---------------- ----------------
Year Ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 429 $ 149 $ 111 $ 467
Allowance for excess and obsolete inventory $ 778 $ 443 $ 414 $ 807
Year Ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 467 $ 107 $ 84 $ 490
Allowance for excess and obsolete inventory $ 807 $ 301 $ 713 $ 395
Year Ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 490 $ 257 $ 27 $ 720
Allowance for excess and obsolete inventory $ 395 $ 418 $ 22 $ 791
F-21
Castelle and Subsidiaries
Index To Exhibits
- -------------------------------------------------------------------------------
Exhibit
Number Description
3.4 Amended and Restated Bylaws of the Company.
10.19 Employment agreement between the Company and Messier. D. Rich.
11.1 Computation of Net Income (Loss) Per Share. Reference is made
to page F-19 of the Notes to Consolidated Financial Statements.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney. Reference is made to the signature page,
(page 38).
27.1 Financial data schedule.
Exhibit 3.4
AMENDED AND RESTATED BYLAWS
OF
CASTELLE
(A CALIFORNIA CORPORATION)
As amended through February 23, 1999
TABLE OF CONTENTS
PAGE
Article I Offices.........................................................................................1
Section 1. Principal Office................................................................................1
Section 2. Other Offices...................................................................................1
Article II Corporate Seal..................................................................................1
Section 3. Corporate Seal..................................................................................1
Article III Shareholders'Meetings And Voting Rights.........................................................1
Section 4. Place Of Meetings...............................................................................1
Section 5. Annual Meeting..................................................................................1
Section 6. Postponement Of Annual Meeting..................................................................2
Section 7. Special Meetings................................................................................2
Section 8. Notice Of Meetings..............................................................................2
Section 9. Manner Of Giving Notice.........................................................................3
Section 10. Quorum And Transaction Of Business..............................................................4
Section 11. Adjournment and Notice of Adjourned Meetings....................................................4
Section 12. Waiver Of Notice, Consent To Meeting Or Approval Or Minutes.....................................4
Section 13. Action By Written Consent Without A Meeting.....................................................5
Section 14. Voting..........................................................................................6
Section 15. Persons Entitled To Vote Or Consent.............................................................6
Section 16. Proxies.........................................................................................7
Section 17. Inspectors Of Election..........................................................................7
Article IV Board Of Directors..............................................................................8
Section 18. Powers..........................................................................................8
Section 19. Number Of Directors.............................................................................8
Section 20. Election Of Directors, Term, Qualifications.....................................................9
Section 21. Resignations....................................................................................9
Section 22. Removal.........................................................................................9
Section 23. Vacancies.......................................................................................9
Section 24. Regular Meetings...............................................................................10
Section 25. Participation By Telephone.....................................................................10
Section 26. Special Meetings...............................................................................10
i
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 27. Notice Of Meetings.............................................................................10
Section 28. Place Of Meetings..............................................................................10
Section 29. Action By Written Consent Without A Meeting....................................................10
Section 30. Quorum And Transaction Of Business.............................................................11
Section 31. Adjournment....................................................................................11
Section 32. Organization...................................................................................11
Section 33. Compensation...................................................................................11
Section 34. Committees.....................................................................................11
Article V Officers.......................................................................................12
Section 35. Officers.......................................................................................12
Section 36. Appointment....................................................................................12
Section 37. Inability To Act...............................................................................12
Section 38. Resignations...................................................................................12
Section 39. Removal........................................................................................13
Section 40. Vacancies......................................................................................13
Section 41. Chairman Of The Board..........................................................................13
Section 42. President......................................................................................13
Section 43. Vice Presidents................................................................................13
Section 44. Secretary......................................................................................14
Section 45. Chief Financial Officer........................................................................14
Section 46. Compensation...................................................................................15
Article VI Contracts, Loans, Bank Accounts, Checks And Drafts.............................................15
Section 47. Execution Of Contracts And Other Instruments...................................................15
Section 48. Loans..........................................................................................15
Section 49. Bank Accounts..................................................................................16
Section 50. Checks, Drafts, Etc............................................................................16
Article VII Certificates For Shares And Their Transfer.....................................................16
Section 51. Certificate For Shares.........................................................................16
Section 52. Transfer On The Books..........................................................................17
Section 53. Lost, Destroyed And Stolen Certificates........................................................17
ii
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 54. Issuance, Transfer And Registration Of Shares..................................................17
Article VIII Inspection Of Corporate Records................................................................17
Section 55. Inspection By Directors........................................................................17
Section 56. Inspection By Shareholders.....................................................................18
Section 57. Written Form...................................................................................19
Article IX Miscellaneous..................................................................................19
Section 58. Fiscal Year....................................................................................19
Section 59. Annual Report..................................................................................19
Section 60. Record Date....................................................................................19
Section 61. Bylaw Amendments...............................................................................20
Section 62. Construction And Definition....................................................................20
Article X Indemnification................................................................................20
Section 63. Indemnification Of Directors, Officers, Employees And Other Agents.............................20
Article XI Loans Of Officers And Others...................................................................24
Section 64. Certain Corporate Loans And Guaranties.........................................................24
iii
AMENDED AND RESTATED BYLAWS
OF
CASTELLE
(A CALIFORNIA CORPORATION)
As amended through February 23, 1999
ARTICLE I
Offices
Section 1. Principal Office. The principal executive office of the corporation
shall be located at such place as the Board of Directors may from time to time
authorize. If the principal executive office is located outside this state, and
the corporation has one or more business offices in this state, the Board of
Directors shall fix and designate a principal business office in the State of
California.
Section 2. Other Offices. Additional offices of the corporation shall be located
at such place or places, within or outside the State of California, as the Board
of Directors may from time to time authorize.
ARTICLE II
Corporate Seal
Section 3. Corporate Seal. If the Board of Directors adopts a corporate seal
such seal shall have inscribed thereon the name of the corporation and the state
and date of its incorporation. If and when a seal is adopted by the Board of
Directors, such seal may be engraved, lithographed, printed, stamped, impressed
upon, or affixed to any contract, conveyance, certificate for shares, or other
instrument executed by the corporation.
ARTICLE III
Shareholders' Meetings And Voting Rights
Section 4. Place Of Meetings. Meetings of shareholders shall be held at the
principal executive office of the corpora-tion, or at any other place, within or
outside the State of California, which may be fixed either by the Board of
Directors or by the written consent of all persons entitled to vote at such
meeting, given either before or after the meeting and filed with the Secretary
of the Corporation.
Section 5. Annual Meeting. The annual meeting of the shareholders of the
corporation shall be held on any date and time which may from time to time be
designated by the Board of Directors. At such annual meeting, directors shall be
elected and any other business may be transacted which may properly come before
the meeting.
1.
Section 6. Postponement Of Annual Meeting. The Board of Directors and the
President shall each have authority to hold at an earlier date and/or time, or
to postpone to a later date and/or time, the annual meeting of shareholders.
Section 7. Special Meetings.
(a) Special meetings of the shareholders, for any purpose or purposes, may
be called by the Board of Directors, the Chairman of the Board of Directors, the
President, or the holders of shares entitled to cast not less than ten percent
(10%) of the votes at the meeting.
(b) Upon written request to the Chairman of the Board of Directors, the
President, any vice president or the Secretary of the corporation by any person
or persons (other than the Board of Directors) entitled to call a special
meeting of the share-holders, such officer forthwith shall cause notice to be
given to the shareholders entitled to vote, that a meeting will be held at a
time requested by the person or persons calling the meeting, such time to be not
less than thirty-five (35) nor more than sixty (60) days after receipt of such
request. If such notice is not given within twenty (20) days after receipt of
such request, the person or persons calling the meeting may give notice thereof
in the manner provided by law or in these bylaws. Nothing contained in this
Section 7 shall be construed as limiting, fixing or affecting the time or date
when a meeting of share-holders called by action of the Board of Directors may
be held.
Section 8. Notice Of Meetings. Except as otherwise may be required by law and
subject to subsection 7(b) above, written notice of each meeting of shareholders
shall be given to each shareholder entitled to vote at that meeting (see Section
15 below), by the Secretary, assistant secretary or other person charged with
that duty, not less than ten (10) (or, if sent by third class mail, thirty (30))
nor more than sixty (60) days before such meeting.
Notice of any meeting of shareholders shall state the date, place and
hour of the meeting and,
(a) in the case of a special meeting, the general nature of the business to
be transacted, and no other business may be transacted at such meeting;
(b) in the case of an annual meeting, the general nature of matters which
the Board of Directors, at the time the notice is given, intends to present for
action by the shareholders;
(c) in the case of any meeting at which directors are to be elected, the
names of the nominees intended at the time of the notice to be presented by
management for election; and
(d) in the case of any meeting, if action is to be taken on any of the
following proposals, the general nature of such proposal:
(1) a proposal to approve a transaction within the provisions of
California Corporations Code, Section 310 (relating to certain
transactions in which a director has a direct or indirect financial
interest);
2.
(2) a proposal to approve a transaction within the provisions of
California Corporations Code, Section 902 (relating to amending the
Articles of Incorporation of the corporation);
(3) a proposal to approve a transaction within the provisions of
California Corporations Code, Sections 181 and 1201 (relating to
reorganization);
(4) a proposal to approve a transaction within the provisions of
California Corporations Code, Section 1900 (winding up and dissolution);
(5) a proposal to approve a plan of distribution within the provisions of
California Corporations Code, Section 2007 (relating to certain plans
providing for distribution not in accordance with the liquidation rights
of preferred shares, if any).
At a special meeting, notice of which has been given in accordance with
this Section, action may not be taken with respect to business, the general
nature of which has not been stated in such notice. At an annual meeting, action
may be taken with respect to business stated in the notice of such meeting,
given in accordance with this Section, and, subject to sub-section 8(d) above,
with respect to any other business as may properly come before the meeting.
Section 9. Manner Of Giving Notice. Notice of any meeting of shareholders shall
be given either personally or by first-class mail, or, if the corporation has
outstanding shares held of record by 500 or more persons (determined as provided
in California Corporations Code Section 605) on the record date for such
meeting, third-class mail, or telegraphic or other written communication,
addressed to the shareholder at the address of that shareholder appearing on the
books of the corporation or given by the shareholder to the corporation for the
purpose of notice. If no such address appears on the corporation's books or is
given, notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the
corporation's principal executive office, or if published at least once in a
newspaper of general circulation in the county where that office is located.
Notice shall be deemed to have been given at the time when delivered personally
or deposited in the mail or sent by telegram or other means of written
communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, all future notices shall be deemed to have been duly given
without further mailing if these shall be available to the shareholder on
written demand by the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance with the
provisions of this Section 9, executed by the Secretary, Assistant Secretary or
any transfer agent, shall be prima facie evidence of the giving of the notice.
3.
Section 10. Quorum And Transaction Of Business.
(a) At any meeting of the shareholders, a majority of the shares entitled
to vote, represented in person or by proxy, shall constitute a quorum. If a
quorum is present, the affirma-tive vote of the majority of shares represented
at the meeting and entitled to vote on any matter shall be the act of the
shareholders, unless the vote of a greater number or voting by classes is
required by law or by the Articles of Incorporation, and except as provided in
subsection (b) below.
(b) The shareholders present at a duly called or held meeting of the
shareholders at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum, provided that any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
(c) In the absence of a quorum, no business other than adjournment may be
transacted, except as described in sub-section (b) above.
Section 11. Adjournment and Notice of Adjourned Meetings. Any meeting of
shareholders may be adjourned from time to time, whether or not a quorum is
present, by the affirmative vote of a majority of shares represented at such
meeting either in person or by proxy and entitled to vote at such meeting.
In the event any meeting is adjourned, it shall not be necessary to
give notice of the time and place of such adjourned meeting pursuant to Sections
8 and 9 of these bylaws; provided that if any of the following three events
occur, such notice must be given:
(a) announcement of the adjourned meeting's time and place is not made at
the original meeting which it continues or
(b) such meeting is adjourned for more than forty- five (45) days from the
date set for the original meeting or
(c) a new record date is fixed for the adjourned meeting.
At the adjourned meeting, the corporation may transact any business
which might have been transacted at the original meeting.
Section 12. Waiver Of Notice, Consent To Meeting Or Approval Or Minutes.
(a) Subject to subsection (b) of this Section, the transactions of any
meeting of shareholders, however called and noticed, and wherever held, shall be
as valid as though made at a meeting duly held after regular call and notice, if
a quorum is present either in person or by proxy, and if, either before or after
the meeting, each of the persons entitled to vote but not present in person or
by proxy signs a written waiver of notice or a consent to holding of the meeting
or an approval of the minutes thereof.
4.
(b) A waiver of notice, consent to the holding of a meeting or approval of
the minutes thereof need not specify the business to be transacted or transacted
at nor the purpose of the meeting; provided that in the case of proposals
described in subsection (d) of Section 8 of these bylaws, the general nature of
such proposals must be described in any such waiver of notice and such proposals
can only be approved by waiver of notice, not by consent to holding of the
meeting or approval of the minutes.
(c) All waivers, consents and approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
(d) A person's attendance at a meeting shall con-stitute waiver of notice
of and presence at such meeting, except when such person objects at the
beginning of the meeting to transaction of any business because the meeting is
not lawfully called or convened and except that attendance at a meeting is not a
waiver of any right to object to the consideration of matters which are required
by law or these bylaws to be in such notice (including those matters described
in subsection (d) of Section 8 of these bylaws), but are not so included if such
person expressly objects to consideration of such matter or matters at any time
during the meeting.
Section 13. Action By Written Consent Without A Meeting. Any action which may be
taken at any meeting of shareholders may be taken without a meeting and without
prior notice if written consents setting forth the action so taken are signed by
the holders of the outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted.
Directors may not be elected by written consent except by unanimous
written consent of all shares entitled to vote for the election of directors;
provided that any vacancy on the Board of Directors (other than a vacancy
created by removal) which has not been filled by the board of directors may be
filled by the written consent of a majority of outstanding shares entitled to
vote for the election of directors.
Any written consent may be revoked pursuant to California Corporations
Code Section 603(c) prior to the time that written consents of the number of
shares required to authorize the proposed action have been filed with the
Secretary. Such revocation must be in writing and will be effective upon its
receipt by the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of any corporate action approved by the shareholders without a meeting to
those share-holders entitled to vote on such matters who have not consented
thereto in writing. This notice shall be given in the manner specified in
Section 9 of these bylaws. In the case of approval of (i) a transaction within
the provisions of California Corporations Code, Section 310 (relating to certain
transactions in which a director has an interest), (ii) a transaction within the
provisions of California Corporations Code, Section 317 (relating to
indemnification of agents of the corporation), (iii) a transaction within the
provisions of California Corpora-tions Code, Sections 181 and 1201 (relating to
reorganization), and (iv) a plan of distribution within the provisions of
California Corporations Code, Section 2007 (relating to certain plans providing
for distribution not in accordance with the liquidation rights of preferred
shares, if any), the notice shall be given at least ten (10) days before the
consummation of any action authorized by that approval.
5.
Section 14. Voting. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section 15
of these bylaws, subject to the provisions of Sections 702 through 704 of the
California Corporations Code (relating to voting shares held by a fiduciary, in
the name of a corporation, or in joint ownership). Voting at any meeting of
shareholders need not be by ballot; provided, however, that elections for
directors must be by ballot if balloting is demanded by a shareholder at the
meeting and before the voting begins.
Every person entitled to vote at an election for directors may cumulate
the votes to which such person is entitled, i.e., such person may cast a total
number of votes equal to the number of directors to be elected multiplied by the
number of votes to which such person's shares are entitled, and may cast said
total number of votes for one or more candidates in such proportions as such
person thinks fit; provided, however, no shareholder shall be entitled to so
cumulate such shareholder's votes unless the candidates for which such
shareholder is voting have been placed in nomination prior to the voting and a
shareholder has given notice at the meeting, prior to the vote, of an intention
to cumulate votes. In any election of directors, the candidates receiving the
highest number of votes, up to the number of directors to be elected, are
elected.
Except as may be otherwise provided in the Articles of Incorporation or
by law, and subject to the foregoing provisions regarding the cumulation of
votes, each shareholder shall be entitled to one vote for each share held.
Any shareholder may vote part of such shareholder's shares in favor of
a proposal and refrain from voting the remaining shares or vote them against the
proposal, other than elections to office, but, if the shareholder fails to
specify the number of shares such shareholder is voting affirmatively, it will
be conclusively presumed that the shareholder's approving vote is with respect
to all shares such shareholder is entitled to vote.
No shareholder approval, other than unanimous approval of those
entitled to vote, will be valid as to proposals described in subsection 8(d) of
these bylaws unless the general nature of such business was stated in the notice
of meeting or in any written waiver of notice.
Section 15. Persons Entitled To Vote Or Consent. The Board of Directors may fix
a record date pursuant to Section 60 of these bylaws to determine which
shareholders are entitled to notice of and to vote at a meeting or consent to
corporate actions, as provided in Sections 13 and 14 of these bylaws. Only
persons in whose name shares otherwise entitled to vote stand on the stock
records of the corporation on such date shall be entitled to vote or consent.
If no record date is fixed:
(a) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day notice is given or, if notice is waived, at
the close of business on the business day next preceding the day on which the
meeting is held;
6.
(b) The record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors has been taken, shall be the day on which the first written
consent is given;
(c) The record date for determining shareholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto, or the sixtieth (60th) day prior to the
date of such other action, whichever is later.
A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting;
provided, however, that the Board of Directors shall fix a new record date if
the meeting is adjourned for more than forty-five (45) days from the date set
for the original meeting.
Shares of the corporation held by its subsidiary or subsidiaries (as
defined in California Corporations Code, Section 189(b)) are not entitled to
vote in any matter.
Section 16. Proxies. Every person entitled to vote or execute consents may do so
either in person or by one or more agents authorized to act by a written proxy
executed by the person or such person's duly authorized agent and filed with the
Secretary of the corporation; provided that no such proxy shall be valid after
the expiration of eleven (11) months from the date of its execution unless
otherwise provided in the proxy. The manner of execution, suspension,
revocation, exercise and effect of proxies is governed by law.
Section 17. Inspectors Of Election. Before any meeting of shareholders, the
Board of Directors may appoint any persons, other than nominees for office, to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the majority of shares represented in
person or proxy shall determine whether one (1) or three (3) inspectors are to
be appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, the chairman of the meeting may, and upon the request of any
shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any way arising in
connection with the right to vote;
(d) Count and tabulate all votes or consents;
7.
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or vote
with fairness to all shareholders.
ARTICLE IV
Board Of Directors
Section 18. Powers. Subject to the provisions of law or any limitations in the
Articles of Incorporation or these bylaws, as to action required to be approved
by the shareholders or by the outstanding shares, the business and affairs of
the corpora-tion shall be managed and all corporate powers shall be exer-cised,
by or under the direction of the Board of Directors. The Board of Directors may
delegate the management of the day-to-day operation of the business of the
corporation to a management company or other person, provided that the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised under the ultimate direction of the Board of Directors.
Section 19. Number Of Directors. The authorized number of directors of the
corporation shall be not less than a minimum of four (4) nor more than a maximum
of seven (7) (which maximum number in no case shall be greater than two times
said minimum, minus one) and the number of directors presently authorized is
five (5). The exact number of directors shall be set within these limits from
time to time (a) by approval of the Board of Directors, or (b) by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum) or by the written
consent of shareholders pursuant to Section 13 hereinabove.
Any amendment of these bylaws changing the maximum or minimum number of
directors may be adopted only by the affirma-tive vote of a majority of the
outstanding shares entitled to vote; provided, an amendment reducing the minimum
number of directors to less than five (5), cannot be adopted if votes cast
against its adoption at a meeting or the shares not consenting to it in the case
of action by written consent are equal to more than 16-2/3 percent of the
outstanding shares entitled to vote.
No reduction of the authorized number of directors shall remove any
director prior to the expiration of such director's term of office.
Section 20. Election Of Directors, Term, Qualifications. The directors shall be
elected at each annual meeting of shareholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office either until the expiration of the term for which
elected or appointed and until a successor has been elected and qualified, or
until his death, resignation or removal. Directors need not be shareholders of
the corporation.
Section 21. Resignations. Any director of the corporation may resign effective
upon giving written notice to the Chairman of the Board, the President, the
Secretary or the Board of Directors of the corporation, unless the notice
specifies a later time for the effectiveness of such resignation. If the
resignation specifies effectiveness at a future time, a successor may be elected
pursuant to Section 23 of these bylaws to take office on the date that the
resignation becomes effective.
8.
Section 22. Removal. The Board of Directors may declare vacant the office of a
director who has been declared of unsound mind by an order of court or who has
been convicted of a felony.
The entire Board of Directors or any individual director may be removed
from office without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote on such removal; provided, however, that
unless the entire Board is removed, no individual director may be removed when
the votes cast against such director's removal, or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
at an election at which the same total number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director's
most recent election were then being elected.
Section 23. Vacancies. A vacancy or vacancies on the Board of Directors shall be
deemed to exist in case of the death, resignation or removal of any director, or
upon increase in the authorized number of directors or if shareholders fail to
elect the full authorized number of directors at an annual meeting of
shareholders or if, for whatever reason, there are fewer directors on the Board
of Directors, than the full number authorized. Such vacancy or vacancies, other
than a vacancy created by the removal of a director, may be filled by a majority
of the remaining directors, though less than a quorum, or by a sole remaining
director. A vacancy created by the removal of a director may be filled only by
the affirmative vote of a majority of the shares represented and voting at a
duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum) or by
the written consent of shareholders pursuant to Section 13 herein-above. The
shareholders may elect a director at any time to fill any vacancy not filled by
the directors. Any such election by written consent, other than to fill a
vacancy created by removal, requires the consent of a majority of the
outstanding shares entitled to vote. Any such election by written consent to
fill a vacancy created by removal requires the consent of all of the outstanding
shares entitled to vote.
If, after the filling of any vacancy by the directors, the directors
then in office who have been elected by the share-holders constitute less than a
majority of the directors then in office, any holder or holders of an aggregate
of five percent (5%) or more of the shares outstanding at that time and having
the right to vote for such directors may call a special meeting of shareholders
to be held to elect the entire Board of Directors. The term of office of any
director shall terminate upon such election of a successor.
Section 24. Regular Meetings. Regular meetings of the Board of Directors shall
be held at such times, places and dates as fixed in these bylaws or by the Board
of Directors; provided, however, that if the date for such a meeting falls on a
legal holiday, then the meeting shall be held at the same time on the next
succeeding full business day. Regular meetings of the Board of Directors held
pursuant to this Section 24 may be held without notice.
9.
Section 25. Participation By Telephone. Members of the Board of Directors may
participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear one another. Such participation constitutes presence in person at such
meeting.
Section 26. Special Meetings. Special meetings of the Board of Directors for any
purpose may be called by the Chairman of the Board or the President or any vice
president or the Secretary of the corporation or any two (2) directors.
Section 27. Notice Of Meetings. Notice of the date, time and place of all
meetings of the Board of Directors, other than regular meetings held pursuant to
Section 24 above shall be delivered personally, orally or in writing, or by
telephone or telegraph to each director, at least forty-eight (48) hours before
the meeting, or sent in writing to each director by first-class mail, charges
prepaid, at least four (4) days before the meeting. Such notice may be given by
the Secretary of the corporation or by the person or persons who called a
meeting. Such notice need not specify the purpose of the meeting. Notice of any
meeting of the Board of Directors need not be given to any director who signs a
waiver of notice of such meeting, or a consent to holding the meeting or an
approval of the minutes thereof, either before or after the meeting, or who
attends the meeting without protesting prior thereto or at its commencement such
director's lack of notice. All such waivers, consents and approvals shall be
filed with the corporate records or made a part of the minutes of the meeting.
Section 28. Place Of Meetings. Meetings of the Board of Directors may be held at
any place within or without the state which has been designated in the notice of
the meeting or, if not stated in the notice or there is no notice, designated in
the bylaws or by resolution of the Board of Directors.
Section 29. Action By Written Consent Without A Meeting. Any action required or
permitted to be taken by the Board of Directors may be taken without a meeting,
if all members of the Board of Directors individually or collectively consent in
writing to such action. Such written consent or consents shall be filed with the
minutes of the proceedings of the Board of Directors. Such action by written
consent shall have the same force and effect as a unanimous vote of such
directors.
Section 30. Quorum And Transaction Of Business. A majority of the authorized
number of directors shall constitute a quorum for the transaction of business.
Every act or decision done or made by a majority of the authorized number of
directors present at a meeting duly held at which a quorum is present shall be
the act of the Board of Directors, unless the law, the Articles of Incorporation
or these bylaws specifically require a greater number. A meeting at which a
quorum is initially present may continue to transact business, notwithstanding
withdrawal of directors, if any action taken is approved by at least a majority
of the number of directors constituting a quorum for such meeting. In the
absence of a quorum at any meeting of the Board of Directors, a majority of the
directors present may adjourn the meeting, as provided in Section 31 of these
bylaws.
Section 31. Adjournment. Any meeting of the Board of Directors, whether or not a
quorum is present, may be adjourned to another time and place by the affirmative
vote of a majority of the directors present. If the meeting is adjourned for
more than twenty-four (24) hours, notice of such adjournment to another time or
place shall be given prior to the time of the adjourned meeting to the directors
who were not present at the time of the adjournment.
10.
Section 32. Organization. The Chairman of the Board shall preside at every
meeting of the Board of Directors, if present. If there is no Chairman of the
Board or if the Chairman is not present, a Chairman chosen by a majority of the
directors present shall act as chairman. The Secretary of the corporation or, in
the absence of the Secretary, any person appointed by the Chairman shall act as
secretary of the meeting.
Section 33. Compensation. Directors and members of committees may receive such
compensation, if any, for their services, and such reimbursement for expenses,
as may be fixed or determined by the Board of Directors.
Section 34. Committees. The Board of Directors may, by resolution adopted by a
majority of the authorized number of directors, designate one or more
committees, each consisting of two (2) or more directors, to serve at the
pleasure of the Board of Directors. The Board of Directors, by a vote of the
majority of authorized directors, may designate one or more directors as
alternate members of any committee, to replace any absent member at any meeting
of such committee. Any such committee shall have authority to act in the manner
and to the extent provided in the resolution of the Board of Directors, and may
have all the authority of the Board of Directors in the management of the
business and affairs of the corporation, except with respect to:
(a) the approval of any action for which shareholders' approval or approval
of the outstanding shares also is required by the California Corporations Code;
(b) the filling of vacancies on the Board of Directors or any of its
committees;
(c) the fixing of compensation of directors for serving on the Board of
Directors or any of its committees;
(d) the adoption, amendment or repeal of these bylaws;
(e) the amendment or repeal of any resolution of the Board of Directors
which by its express terms is not so amendable or repealable;
(f) a distribution to shareholders, except at a rate or in a periodic
amount or within a price range determined by the Board of Directors; or
(g) the appointment of other committees of the Board of Directors or the
members thereof.
Any committee may from time to time provide by resolution for regular
meetings at specified times and places. If the date of such a meeting falls on a
legal holiday, then the meeting shall be held at the same time on the next
succeeding full business day. No notice of such a meeting need be given. Such
regular meetings need not be held if the committee shall so determine at any
time before or after the time when such meeting would otherwise have taken
place. Special meetings may be called at any time in the same manner and by the
same persons as stated in Sections 26 and 27 of these bylaws for meetings of the
Board of Directors. The provisions of Sections 25, 28, 29, 30, 31 and 32 of
these bylaws shall apply to committees, committee members and committee meetings
as if the words "committee" and "committee member" were substituted for the word
"Board of Directors", and "director", respectively, throughout such sections.
11.
ARTICLE V
Officers
Section 35. Officers. The corporation shall have a Chairman of the Board or a
President or both, a Secretary, a Chief Financial Officer and such other
officers with such titles and duties as the Board of Directors may determine.
Any two or more offices may be held by the same person.
Section 36. Appointment. All officers shall be chosen and appointed by the Board
of Directors; provided, however, the Board of Directors may empower the chief
executive officer of the corporation to appoint such officers, other than
Chairman of the Board, President, Secretary or Chief Financial Officer, as the
business of the corporation may require. All officers shall serve at the
pleasure of the Board of Directors, subject to the rights, if any, of an officer
under a contract of employment.
Section 37. Inability To Act. In the case of absence or inability to act of any
officer of the corporation or of any person authorized by these bylaws to act in
such officer's place, the Board of Directors may from time to time delegate the
powers or duties of such officer to any other officer, or any director or other
person whom it may select, for such period of time as the Board of Directors
deems necessary.
Section 38. Resignations. Any officer may resign at any time upon written notice
to the corporation, without prejudice to the rights, if any, of the corporation
under any contract to which such officer is a party. Such resignation shall be
effective upon its receipt by the Chairman of the Board, the President, the
Secretary or the Board of Directors, unless a different time is specified in the
notice for effectiveness of such resignation. The acceptance of any such
resignation shall not be necessary to make it effective unless otherwise
specified in such notice.
Section 39. Removal. Any officer may be removed from office at any time, with or
without cause, but subject to the rights, if any, of such officer under any
contract of employment, by the Board of Directors or by any committee to whom
such power of removal has been duly delegated, or, with regard to any officer
who has been appointed by the chief executive officer pursuant to Section 36
above, by the chief executive officer or any other officer upon whom such power
of removal may be conferred by the Board of Directors.
Section 40. Vacancies. A vacancy occurring in any office for any cause may be
filled by the Board of Directors, in the manner prescribed by this Article of
the bylaws for initial appointment to such office.
Section 41. Chairman Of The Board. The Chairman of the Board, if there be such
an officer, shall, if present, preside at all meetings of the Board of Directors
and shall exercise and perform such other powers and duties as may be assigned
from time to time by the Board of Directors or prescribed by these bylaws. If no
President is appointed, the Chairman of the Board is the general manager and
chief executive officer of the corporation, and shall exercise all powers of the
President described in Section 42 below.
12.
Section 42. President. Subject to such powers, if any, as may be given by the
Board of Directors to the Chairman of the Board, if there be such an officer,
the President shall be the general manager and chief executive officer of the
corporation and shall have general supervision, direction, and control over the
business and affairs of the corporation, subject to the control of the Board of
Directors. The President may sign and execute, in the name of the corporation,
any instrument authorized by the Board of Directors, except when the signing and
execution thereof shall have been expressly delegated by the Board of Directors
or by these bylaws to some other officer or agent of the corpora-tion. The
President shall have all the general powers and duties of management usually
vested in the president of a corporation, and shall have such other powers and
duties as may be prescribed from time to time by the Board of Directors or these
bylaws. The President shall have discretion to prescribe the duties of other
officers and employees of the corporation in a manner not inconsistent with the
provisions of these bylaws and the directions of the Board of Directors.
Section 43. Vice Presidents. In the absence or disability of the President, in
the event of a vacancy in the office of President, or in the event such officer
refuses to act, the Vice President shall perform all the duties of the President
and, when so acting, shall have all the powers of, and be subject to all the
restrictions on, the President. If at any such time the corporation has more
than one vice president, the duties and powers of the President shall pass to
each vice president in order of such vice president's rank as fixed by the Board
of Directors or, if the vice presidents are not so ranked, to the vice president
designated by the Board of Directors. The vice presidents shall have such other
powers and perform such other duties as may be prescribed for them from time to
time by the Board of Directors or pursuant to Sections 35 and 36 of these bylaws
or otherwise pursuant to these bylaws.
Section 44. Secretary. The Secretary shall:
(a) Keep, or cause to be kept, minutes of all meetings of the corporation's
shareholders, Board of Directors, and committees of the Board of Directors, if
any. Such minutes shall be kept in written form.
(b) Keep, or cause to be kept, at the principal executive office of the
corporation, or at the office of its transfer agent or registrar, if any, a
record of the corpora-tion's shareholders, showing the names and addresses of
all shareholders, and the number and classes of shares held by each. Such
records shall be kept in written form or any other form capable of being
converted into written form.
(c) Keep, or cause to be kept, at the principal executive office of the
corporation, or if the principal executive office is not in California, at its
principal business office in California, an original or copy of these bylaws, as
amended.
13.
(d) Give, or cause to be given, notice of all meetings of shareholders,
directors and committees of the Board of Directors, as required by law or by
these bylaws.
(e) Keep the seal of the corporation, if any, in safe custody.
(f) Exercise such powers and perform such duties as are usually vested in
the office of secretary of a corporation, and exercise such other powers and
perform such other duties as may be prescribed from time to time by the Board of
Directors or these bylaws.
If any assistant secretaries are appointed, the assistant secretary, or
one of the assistant secretaries in the order of their rank as fixed by the
Board of Directors or, if they are not so ranked, the assistant secretary
designated by the Board of Directors, in the absence or disability of the
Secretary or in the event of such officer's refusal to act or if a vacancy
exists in the office of Secretary, shall perform the duties and exercise the
powers of the Secretary and discharge such duties as may be assigned from time
to time pursuant to these bylaws or by the Board of Directors.
Section 45. Chief Financial Officer. The Chief Financial Officer shall:
(a) Be responsible for all functions and duties of the treasurer of the
corporation.
(b) Keep and maintain, or cause to be kept and maintained, adequate and
correct books and records of account for the corporation.
(c) Receive or be responsible for receipt of all monies due and payable to
the corporation from any source whatsoever; have charge and custody of, and be
responsible for, all monies and other valuables of the corporation and be
responsible for deposit of all such monies in the name and to the credit of the
corporation with such depositaries as may be designated by the Board of
Directors or a duly appointed and authorized committee of the Board of
Directors.
(d) Disburse or be responsible for the disbursement of the funds of the
corporation as may be ordered by the Board of Directors or a duly appointed and
authorized committee of the Board of Directors.
(e) Render to the chief executive officer and the Board of Directors a
statement of the financial condition of the corporation if called upon to do so.
(f) Exercise such powers and perform such duties as are usually vested in
the office of chief financial officer of a corporation, and exercise such other
powers and perform such other duties as may be prescribed by the Board of
Directors or these bylaws.
If any assistant financial officer is appointed, the assistant
financial officer, or one of the assistant financial officers, if there are more
than one, in the order of their rank as fixed by the Board of Directors or, if
they are not so ranked, the assistant financial officer designated by the Board
of Directors, shall, in the absence or disability of the Chief Financial Officer
or in the event of such officer's refusal to act, perform the duties and
exercise the powers of the Chief Financial Officer, and shall have such powers
and discharge such duties as may be assigned from time to time pursuant to these
bylaws or by the Board of Directors.
14.
Section 46. Compensation. The compensation of the officers shall be fixed from
time to time by the Board of Directors, and no officer shall be prevented from
receiving such compensation by reason of the fact that such officer is also a
director of the corporation.
ARTICLE VI
Contracts, Loans, Bank Accounts, Checks And Drafts
Section 47. Execution Of Contracts And Other Instruments. Except as these bylaws
may otherwise provide, the Board of Directors or its duly appointed and
authorized committee may authorize any officer or officers, agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation, and such authorization may be general or confined
to specific instances. Except as so authorized or otherwise expressly provided
in these bylaws, no officer, agent, or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or in any amount.
Section 48. Loans. No loans shall be contracted on behalf of the corporation and
no negotiable paper shall be issued in its name, unless and except as authorized
by the Board of Directors or its duly appointed and authorized committee. When
so authorized by the Board of Directors or such committee, any officer or agent
of the corporation may effect loans and advances at any time for the corporation
from any bank, trust company, or other institution, or from any firm,
corporation or individual, and for such loans and advances may make, execute and
deliver promissory notes, bonds or other evidences of indebtedness of the
corporation and, when authorized as aforesaid, may mortgage, pledge, hypothecate
or transfer any and all stocks, securities and other property, real or personal,
at any time held by the corporation, and to that end endorse, assign and deliver
the same as security for the payment of any and all loans, advances,
indebtedness, and liabilities of the corporation. Such authoriza-tion may be
general or confined to specific instances.
Section 49. Bank Accounts. The Board of Directors or its duly appointed and
authorized committee from time to time may authorize the opening and keeping of
general and/or special bank accounts with such banks, trust companies, or other
depositaries as may be selected by the Board of Directors, its duly appointed
and authorized committee or by any officer or officers, agent or agents, of the
corporation to whom such power may be delegated from time to time by the Board
of Directors. The Board of Directors or its duly appointed and authorized
committee may make such rules and regulations with respect to said bank
accounts, not inconsistent with the provisions of these bylaws, as are deemed
advisable.
Section 50. Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes, acceptances or other evidences of indebtedness issued
in the name of the corporation shall be signed by such officer or officers,
agent or agents, of the corporation, and in such manner, as shall be determined
from time to time by resolution of the Board of Directors or its duly appointed
and authorized committee. Endorsements for deposit to the credit of the
corporation in any of its duly authorized depositaries may be made, without
counter-signature, by the President or any vice president or the Chief Financial
Officer or any assistant financial officer or by any other officer or agent of
the corporation to whom the Board of Directors or its duly appointed and
authorized committee, by resolution, shall have delegated such power or by
hand-stamped impression in the name of the corporation.
15.
ARTICLE VII
Certificates For Shares And Their Transfer
Section 51. Certificate For Shares. Every holder of shares in the corporation
shall be entitled to have a certificate signed in the name of the corporation by
the Chairman or Vice Chairman of the Board or the President or a Vice President
and by the Chief Financial Officer or an assistant financial officer or by the
Secretary or an assistant secretary, certifying the number of shares and the
class or series of shares owned by the share-holder. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if such person were an officer, transfer agent or
registrar at the date of issue.
In the event that the corporation shall issue any shares as only partly
paid, the certificate issued to represent such partly paid shares shall have
stated thereon the total considera-tion to be paid for such shares and the
amount paid thereon.
Section 52. Transfer On The Books. Upon surrender to the Secretary or transfer
agent (if any) of the corporation of a certificate for shares of the corporation
duly endorsed, with reasonable assurance that the endorsement is genuine and
effective, or accompanied by proper evidence of succession, assignment or
authority to transfer and upon compliance with applicable federal and state
securities laws and if the corpora-tion has no statutory duty to inquire into
adverse claims or has discharged any such duty and if any applicable law
relating to the collection of taxes has been complied with, it shall be the duty
of the corporation, by its Secretary or transfer agent, to cancel the old
certificate, to issue a new certificate to the person entitled thereto and to
record the transaction on the books of the corporation.
Section 53. Lost, Destroyed And Stolen Certificates. The holder of any
certificate for shares of the corporation alleged to have been lost, destroyed
or stolen shall notify the corpora-tion by making a written affidavit or
affirmation of such fact. Upon receipt of said affidavit or affirmation the
Board of Directors, or its duly appointed and authorized committee or any
officer or officers authorized by the Board so to do, may order the issuance of
a new certificate for shares in the place of any certificate previously issued
by the corporation and which is alleged to have been lost, destroyed or stolen.
However, the Board of Directors or such authorized committee, officer or
officers may require the owner of the allegedly lost, destroyed or stolen
certificate, or such owner's legal representative, to give the corporation a
bond or other adequate security sufficient to indemnify the corporation and its
transfer agent and/or registrar, if any, against any claim that may be made
against it or them on account of such allegedly lost, destroyed or stolen
certificate or the replacement thereof. Said bond or other security shall be in
such amount, on such terms and conditions and, in the case of a bond, with such
surety or sureties as may be acceptable to the Board of Directors or to its duly
appointed and authorized committee or any officer or officers authorized by the
Board of Directors to determine the sufficiency thereof. The requirement of a
bond or other security may be waived in particular cases at the discretion of
the Board of Directors or its duly appointed and authorized committee or any
officer or officers authorized by the Board of Directors so to do.
16.
Section 54. Issuance, Transfer And Registration Of Shares. The Board of
Directors may make such rules and regulations, not inconsistent with law or with
these bylaws, as it may deem advisable concerning the issuance, transfer and
registration of certificates for shares of the capital stock of the corporation.
The Board of Directors may appoint a transfer agent or registrar of transfers,
or both, and may require all certificates for shares of the corporation to bear
the signature of either or both.
ARTICLE VIII
Inspection Of Corporate Records
Section 55. Inspection By Directors. Every director shall have the absolute
right at any reasonable time to inspect and copy all books, records, and
documents of every kind of the corporation and any of its subsidiaries and to
inspect the physical properties of the corporation and any of its sub-sidiaries.
Such inspection may be made by the director in person or by agent or attorney,
and the right of inspection includes the right to copy and make extracts.
Section 56. Inspection By Shareholders.
(a) Inspection Of Corporate Records.
(1) A shareholder or shareholders holding at least five (5%) percent in the
aggregate of the outstanding voting shares of the corporation or who hold
at least one percent of such voting shares and have filed a Schedule 14B
with the United States Securities and Exchange Commission relating to the
election of directors of the corporation shall have an absolute right to do
either or both of the following:
(i) Inspect and copy the record of share-holders' names and addresses
and shareholdings during usual business hours upon five (5) business
days' prior written demand upon the corporation; or
(ii) Obtain from the transfer agent, if any, for the corporation, upon
five business days' prior written demand and upon the tender of its
usual charges for such a list (the amount of which charges shall be
stated to the shareholder by the transfer agent upon request), a list
of the shareholders' names and addresses who are entitled to vote for
the election of directors and their shareholdings, as of the most
recent record date for which it has been compiled or as of a date
specified by the shareholder subsequent to the date of demand.
(2) The record of shareholders shall also be open to inspection and copying
by any shareholder or holder of a voting trust certificate at any time
during usual business hours upon written demand on the corporation, for a
purpose reasonably related to such holder's interest as a shareholder or
holder of a voting trust certificate.
17.
(3) The accounting books and records and minutes of proceedings of the
shareholders and the Board of Directors and of any committees of the Board
of Directors of the corporation and of each of its subsidiaries shall be
open to inspection, copying and making extracts upon written demand on the
corpora-tion of any shareholder or holder of a voting trust certificate at
any reasonable time during usual business hours, for a purpose reasonably
related to such holder's interests as a shareholder or as a holder of such
voting trust certificate.
(4) Any inspection, copying, and making of extracts under this subsection
(a) may be done in person or by agent or attorney.
(b) Inspection Of Bylaws. The original or a copy of these bylaws shall be
kept as provided in Section 44 of these bylaws and shall be open to inspection
by the shareholders at all reasonable times during office hours. If the
principal executive office of the corporation is not in California, and the
corporation has no principal business office in the state of California, a
current copy of these bylaws shall be furnished to any shareholder upon written
request.
Section 57. Written Form. If any record subject to inspection pursuant to
Section 56 above is not maintained in written form, a request for inspection is
not complied with unless and until the corporation at its expense makes such
record available in written form.
ARTICLE IX
Miscellaneous
Section 58. Fiscal Year. Unless otherwise fixed by resolution of the Board of
Directors, the fiscal year of the corporation shall end on the 31st day of
December in each calendar year.
Section 59. Annual Report. Subject to the provisions of Section 59(b) below, the
Board of Directors shall cause an annual report to be sent to each shareholder
of the corporation in the manner provided in Section 9 of these bylaws not later
than one hundred twenty (120) days after the close of the corporation's fiscal
year. Such report shall include a balance sheet as of the end of such fiscal
year and an income statement and statement of changes in financial position for
such fiscal year, accompanied by any report thereon of independent accountants
or, if there is no such report, the certificate of an authorized officer of the
corpora-tion that such statements were prepared without audit from the books and
records of the corporation. When there are more than 100 shareholders of record
of the corporation's shares, as determined by Section 605 of the California
Corporations Code, additional information as required by Section 1501(b) of the
California Corporations Code shall also be contained in such report, provided
that if the corporation has a class of securit-ies registered under Section 12
of the United States Securities Exchange Act of 1934, that Act shall take
precedence. Such report shall be sent to shareholders at least fifteen (15) (or,
if sent by third-class mail, thirty-five (35)) days prior to the next annual
meeting of shareholders after the end of the fiscal year to which it relates.
Section 60. Record Date. The Board of Directors may fix a time in the future as
a record date for the determination of the shareholders entitled to notice of or
to vote at any meeting or entitled to receive payment of any dividend or other
distribution or allotment of any rights or entitled to exercise any rights in
respect of any change, conversion or exchange of shares or entitled to exercise
any rights in respect of any other lawful action. The record date so fixed shall
not be more than sixty (60) days nor less than ten (10) days prior to the date
of the meeting nor more than sixty (60) days prior to any other action or event
for the purpose of which it is fixed. If no record date is fixed, the provisions
of Section 15 of these bylaws shall apply with respect to notice of meetings,
votes, and consents and the record date for determining shareholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolutions relating thereto, or the sixtieth (60th) day
prior to the date of such other action or event, whichever is later.
18.
Only shareholders of record at the close of business on the record date
shall be entitled to notice and to vote or to receive the dividend, distribution
or allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided in the Articles of Incorpora-tion,
by agreement or by law.
Section 61. Bylaw Amendments. Except as otherwise provided by law or Section 19
of these bylaws, these bylaws may be amended or repealed by the Board of
Directors or by the affirmative vote of a majority of the outstanding shares
entitled to vote, including, if applicable, the affirmative vote of a majority
of the outstanding shares of each class or series entitled by law or the
Articles of Incorporation to vote as a class or series on the amendment or
repeal or adoption of any bylaw or bylaws; provided, however, after issuance of
shares, a bylaw specifying or changing a fixed number of directors or the
maximum or minimum number or changing from a fixed to a variable board or vice
versa may only be adopted by approval of the outstanding shares as provided
herein.
Section 62. Construction And Definition. Unless the context requires otherwise,
the general provisions, rules of construction, and definitions contained in the
California Corporations Code shall govern the construction of these bylaws.
Without limiting the foregoing, "shall" is mandatory and "may" is
permissive.
ARTICLE X
Indemnification
Section 63. Indemnification Of Directors, Officers, Employees And Other Agents.
(a) Directors And Executive Officers. The corporation shall indemnify its
directors and executive officers to the fullest extent not prohibited by the
California General Corporation Law; provided, however, that the corporation may
limit the extent of such indemnification by individual contracts with its
directors and executive officers; and, provided, further, that the corporation
shall not be required to indemnify any director or executive officer in
connection with any proceeding (or part thereof) initiated by such person or any
proceeding by such person against the corporation or its directors, officers,
employees or other agents unless (i) such indemnification is expressly required
to be made by law, (ii) the proceeding was authorized by the board of directors
of the corporation or (iii) such indemnification is provided by the corporation,
in its sole discretion, pursuant to the powers vested in the corporation under
the California General Corporation Law.
19.
(b) Other Officers, Employees And Other Agents. The corporation shall have
the power to indemnify its other officers, employees and other agents as set
forth in the California General Corporation Law.
(c) Determination By The Corporation. Promptly after receipt of a request
for indemnification hereunder (and in any event within 90 days thereof) a
reasonable, good faith determina-tion as to whether indemnification of the
director or executive officer is proper under the circumstances because such
director or executive officer has met the applicable standard of care shall be
made by:
(1) a majority vote of a quorum consisting of directors who are not parties
to such proceeding;
(2) if such quorum is not obtainable, by independent legal counsel in a
written opinion; or
(3) approval or ratification by the affirmative vote of a majority of the
shares of this corporation represented and voting at a duly held meeting at
which a quorum is present (which shares voting affirmatively also
constitute at least a majority of the required quorum) or by written
consent of a majority of the outstanding shares entitled to vote; where in
each case the shares owned by the person to be indemnified shall not be
considered entitled to vote thereon.
(d) Good Faith.
(1) For purposes of any determination under this bylaw, a director or
executive officer shall be deemed to have acted in good faith and in a
manner he reasonably believed to be in the best interests of the
corporation and its shareholders, and, with respect to any criminal action
or proceeding, to have had no reasonable cause to believe that his conduct
was unlawful, if his action is based on information, opinions, reports and
statements, including financial statements and other financial data, in
each case prepared or presented by:
(i) one or more officers or employees of the corporation whom the
director or executive officer believed to be reliable and competent in
the matters presented;
(ii) counsel, independent accountants or other persons as to matters
which the director or executive officer believed to be within such
person's professional competence; and
(iii) with respect to a director, a committee of the Board upon which
such director does not serve, as to matters within such committee's
designated authority, which committee the director believes to merit
confidence; so long as, in each case, the director or executive officer
acts without knowledge that would cause such reliance to be
unwarranted.
20.
(2) The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not,
of itself, create a presumption that the person did not act in good faith
and in a manner which he reasonably believed to be in the best interests of
the corporation and its shareholders or that he had reasonable cause to
believe that his conduct was unlawful.
(3) The provisions of this paragraph (d) shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth by the
California General Corporation Law.
(e) Expenses. The corporation shall advance, prior to the final disposition
of any proceeding, promptly following request therefor, all expenses incurred by
any director or executive officer in connection with such proceeding upon
receipt of an undertaking by or on behalf of such person to repay said amounts
if it shall be determined ultimately that such person is not entitled to be
indemnified under this bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (f) of this bylaw, no advance shall be made by the corporation if a
determination is reasonably and promptly made by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to the
proceeding (or, if no such quorum exists, by independent legal counsel in a
written opinion) that the facts known to the decision making party at the time
such determination is made demonstrate clearly and convincingly that such person
acted in bad faith or in a manner that such person did not believe to be in the
best interests of the corporation and its shareholders.
(f) Enforcement. Without the necessity of entering into an express
contract, all rights to indemnification and advances to directors and executive
officers under this bylaw shall be deemed to be contractual rights and be
effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in the forum in
which the proceeding is or was pending or, if such forum is not available or a
determina-tion is made that such forum is not convenient, in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request there-for. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. The corporation shall be entitled to raise as a
defense to any such action that the claimant has not met the standards of
conduct that make it permissible under the California General Corporation Law
for the corporation to indemnify the claimant for the amount claimed. Neither
the failure of the corporation (including its board of directors, independent
legal counsel or its shareholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he has met the applicable standard of conduct set
forth in the California General Corporation Law, nor an actual deter-mination by
the corporation (including its board of directors, independent legal counsel or
its shareholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
21.
(g) Non-Exclusivity Of Rights. To the fullest extent permitted by the
corporation's Articles of Incorporation and the California General Corporation
Law, the rights conferred on any person by this bylaw shall not be exclusive of
any other right which such person may have or hereafter acquire under any
statute, provision of the Articles of Incorporation, bylaws, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding office. The
corporation is specifically authorized to enter into individual contracts with
any or all of its directors, officers, employees or agents respecting
indemnification and advances, to the fullest extent permitted by the California
General Corporation Law and the corporation's Articles of Incorporation.
(h) Survival Of Rights. The rights conferred on any person by this bylaw
shall continue as to a person who has ceased to be a director or executive
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(i) Insurance. The corporation, upon approval by the board of directors,
may purchase insurance on behalf of any person required or permitted to be
indemnified pursuant to this bylaw.
(j) Amendments. Any repeal or modification of this bylaw shall only be
prospective and shall not affect the rights under this bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.
(k) Employee Benefit Plans. The corporation shall indemnify the directors
and officers of the corporation who serve at the request of the corporation as
trustees, investment managers or other fiduciaries of employee benefit plans to
the fullest extent permitted by the California General Corporation Law.
(l) Saving Clause. If this bylaw or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the corporation shall
nevertheless indemnify each director and executive officer to the fullest extent
permitted by any applicable portion of this bylaw that shall not have been
invalidated, or by any other applicable law.
(m) Certain Definitions. For the purposes of this bylaw, the following
definitions shall apply:
(1) The term "proceeding" shall be broadly construed and shall include,
without limitation, the investiga-tion, preparation, prosecution, defense,
settlement and appeal of any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative, arbitrative or
investi-gative.
(2) The term "expenses" shall be broadly construed and shall include,
without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of
any nature or kind incurred in connection with any proceeding, including
expenses of establishing a right to indemnification under this bylaw or any
applicable law.
22.
(3) The term the "corporation" shall include, in addition to the resulting
corporation, any constituent corpora-tion (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify
its directors, officers, and employees or agents, so that any person who is
or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall
stand in the same position under the provisions of this bylaw with respect
to the resulting or surviving corporation as he would have with respect to
such constituent corporation if its separate existence had continued.
(4) References to a "director," "officer," "employee," or "agent" of the
corporation shall include, without limitation, situations where such person
is or was serving at the request of the corporation as a director, officer,
employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise.
ARTICLE XI
Loans Of Officers And Others
Section 64. Certain Corporate Loans And Guaranties. If the corporation has
outstanding shares held of record by 100 or more persons on the date of approval
by the Board of Directors, the corporation may make loans of money or property
to, or guarantee the obligations of, any officer of the corporation or its
parent or any subsidiary, whether or not a director of the corporation or its
parent or any subsidiary, or adopt an employee benefit plan or plans authorizing
such loans or guaranties, upon the approval of the Board of Directors alone, by
a vote sufficient without counting the vote of any interested director or
directors, if the Board of Directors determines that such a loan or guaranty or
plan may reasonably be expected to benefit the corporation. Notwithstanding the
foregoing, the corporation shall have the power to make loans permitted by the
California Corporations Code.
23.
Exhibit 10.19
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into on the 12th day
of November, 1998, by and between DONALD L. RICH ("Executive") and CASTELLE, a
California corporation (the "Company").
WHEREAS, the Company desires to employ Executive to provide personal
services to the Company, and wishes to provide Executive with certain
compensation and benefits in return for his services; and
WHEREAS, Executive wishes to be employed by the Company and provide
personal services to the Company in return for certain compensation and
benefits;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, it is hereby agreed by and between the parties hereto as
follows:
1. EMPLOYMENT BY THE COMPANY.
1.1 The effective date of this Agreement shall be November 10, 1998.
1.2 Subject to terms set forth herein, the Company agrees to employ Executive in
the position of Chief Executive Officer and Executive hereby accepts such
employment effective as of November 10, 1998 (the "Employment Date"). During the
term of his employment with the Company, Executive will devote his best efforts
and substantially all of his business time and attention (except for vacation
periods as set forth herein and reasonable periods of illness or other
incapacities permitted by the Company's general employment policies or as
otherwise set forth in this Agreement) to the business of the Company.
1.3 Executive shall serve in an executive capacity and shall perform such duties
as are customarily associated the position of Chief Executive Officer and such
other duties as are assigned to Executive by the Company's Board of Directors
(the "Board"). Executive will report to the Board. Executive shall be appointed
to the Board and the Company will use its best efforts to elect and re-elect
Executive to the Board.
1.4 The employment relationship between the parties shall also be governed by
the general employment policies and practices of the Company, including those
relating to protection of confidential information and assignment of inventions,
except that when the terms of this Agreement differ from or are in conflict with
the Company's general employment policies or practices, this Agreement shall
control.
2. COMPENSATION.
2.1 Salary. Executive shall receive for services to be rendered hereunder an
annualized base salary of $200,000, payable on a biweekly basis.
1.
2.2 Bonus. Executive will be eligible to earn a bonus, in an amount up to
$100,000 if performance criteria to be developed by the Compensation Committee
of the Board (the "Corporation Committee") are met. These performance criteria
will be established by the Compensation Committee prior to the end of the fourth
quarter of the previous year. In the event Executive exceeds the performance
criteria established by the Compensation Committee in a given year, Executive
will be eligible to earn a bonus in excess of $100,000.
2.3 Standard Company Benefits. Executive shall be entitled to all rights and
benefits for which he is eligible under the terms and conditions of the standard
Company benefits and compensation practices which may be in effect from time to
time and provided by the Company to its executive employees generally.
2.4 Compensatory Stock Awards. On November 12, 1998, the Board shall grant
Executive an option to acquire three hundred thousand (300,000) shares of the
common stock of the Company. Such options shall be granted under the Company's
1988 Incentive Stock Plan (the "Option Plan"). The exercise price per share of
these options will be equal to one hundred percent (100%) of the fair market
value of the Company's common stock, as determined under the Option Plan on the
date of grant. Subject to Executive's continued employment by the Company,
one-sixth (1/6) of the options shall vest on the date that is six (6) months
after the date on which Executive commences employment and an additional
one-thirty-sixth (1/36) of the options shall vest each calendar month for thirty
(30) months thereafter for each subsequent month of service Executive completes
with the Company. The vesting of such options may be accelerated upon a
termination of Executive's employment with the Company pursuant to the
provisions of the Executive Severance and Transition Benefits Agreement that
Executive will enter into with the Company.
2.5 Executive Severance And Transition Benefits Agreement. Effective as of the
Employment Date, Executive will be eligible to enter into an Executive Severance
and Transition Benefits Agreement with the Company in the form attached hereto
as Exhibit A (the "Severance Agreement"). The Severance Agreement will provide
the sole benefits that Executive will receive upon Executive's termination of
employment with the Company for any reason.
3. PROPRIETARY INFORMATION OBLIGATIONS.
3.1 Agreement. Executive agrees to execute and abide by the Proprietary
Information and Inventions Agreement attached hereto as Exhibit B.
3.2 Remedies. Executive's duties under the Proprietary Information and
Inventions Agreement shall survive termination of his employment with the
Company. Executive acknowledges that a remedy at law for any breach or
threatened breach by him of the provisions of the Proprietary Information and
Inventions Agreement would be inadequate, and he therefore agrees that the
Company shall be entitled to injunctive relief in case of any such breach or
threatened breach.
2.
4. OUTSIDE ACTIVITIES.
4.1 Except with the prior written consent of the Board, Executive will not
during the term of this Agreement undertake or engage in any other employment,
occupation or business enterprise, other than ones in which Executive is a
passive investor. Executive may engage in civic and not-for-profit activities so
long as such activities do not materially interfere with the performance of his
duties hereunder.
4.2 During the term of his employment by the Company, except on behalf of the
Company, Executive will not directly or indirectly, whether as an officer,
director, stockholder, partner, proprietor, associate, representative,
consultant, or in any capacity whatsoever engage in, become financially
interested in, be employed by or have any business connection with any other
person, corporation, firm, partnership or other entity whatsoever which were
known by him to compete directly with the Company, throughout the world, in any
line of business engaged in (or planned to be engaged in) by the Company;
provided, however, that anything above to the contrary notwithstanding, he may
own, as a passive investor, securities of any competitor corporation, so long as
his direct holdings in any one such corporation shall not in the aggregate
constitute more than 1% of the voting stock of such corporation.
5. TERMINATION OF EMPLOYMENT. Both the Company and Executive shall have the
right to terminate Executive's employment with the Company at any time, with or
without cause, and without prior notice. If Executive's employment with the
Company is terminated, Executive will be eligible to receive severance benefits
to the extent provided as set forth in the Severance Agreement.
6. NONINTERFERENCE.
While employed by the Company, and for one (1) year immediately
following the Termination Date, Executive agrees not to interfere with the
business of the Company by soliciting, attempting to solicit, inducing, or
otherwise causing any employee of the Company to terminate his or her employment
in order to become an employee, consultant or independent contractor to or for
any competitor of the Company.
7. GENERAL PROVISIONS.
7.1 Notices. Any notices provided hereunder must be in writing and shall be
deemed effective upon the earlier of personal delivery (including personal
delivery by telex) or the third day after mailing by first class mail, to the
Company at its primary office location and to Executive at his address as listed
on the Company payroll.
7.2 Severability. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
3.
7.3 Waiver. If either party should waive any breach of any provisions of this
Agreement, he or it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provision of this Agreement.
7.4 Complete Agreement. This Agreement and its Exhibit A and Exhibit B
constitute the entire agreement between Executive and the Company and are the
complete, final, and exclusive embodiment of their agreement with regard to this
subject matter. They are entered into without reliance on any promise or
representation other than those expressly contained herein or therein, and they
cannot be modified or amended except in a writing signed by an officer of the
Company.
7.5 Counterparts. This Agreement may be executed in separate counterparts, any
one of which need not contain signatures of more than one party, but all of
which taken together will constitute one and the same Agreement.
7.6 Headings. The headings of the sections hereof are inserted for convenience
only and shall not be deemed to constitute a part hereof nor to affect the
meaning thereof.
7.7 Successors and Assigns. This Agreement is intended to bind and inure to the
benefit of and be enforceable by Executive and the Company, and their respective
successors, assigns, heirs, executors and administrators, except that Executive
may not assign any of his duties hereunder and he may not assign any of his
rights hereunder without the written consent of the Company, which shall not be
withheld unreasonably.
7.8 Attorneys' Fees. If either party hereto brings any action to enforce his or
its rights hereunder, each party in any such action shall be responsible for its
own attorneys' fees and costs incurred in connection with such action.
4.
7.9 Choice of Law. All questions concerning the construction, validity and
interpretation of this Agreement will be governed by the law of the State of
California.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
CASTELLE
By:/S/ Jerome Burke
Jerome Burke
President
Date: 12th November, 1998
Accepted and agreed this
12th day of November, 1998
/s/ Donald L. Rich
DONALD L. RICH
5.
EXHIBIT A
EXECUTIVE SEVERANCE AND
TRANSITION BENEFITS AGREEMENT
THIS EXECUTIVE SEVERANCE AND TRANSITION BENEFITS AGREEMENT (the
"Agreement") is entered into effective as of the 10th day of November, 1998
between DONALD L. RICH, ("Executive") and CASTELLE, a California corporation
(the "Company"). This Agreement is intended to provide Executive with the
compensation and benefits described herein upon the occurrence of specific
events. Certain capitalized terms used in this Agreement are defined in Article
5.
The Company and Executive hereby agree as follows:
ARTICLE 1
EMPLOYMENT BY THE COMPANY
1.1 The Company and Executive wish to set forth the compensation and benefits
which Executive shall be entitled to receive (i) in the event Executive's
employment with the Company terminates, or (ii) in the event there is a Change
in Control of the Company, under the circumstances described herein.
1.2 The duties and obligations of the Company to Executive under this Agreement
shall be in consideration for Executive's past services to the Company,
Executive's continued employment with the Company, and Executive's execution of
the general waiver and release described in Section 3.2.
1.3 This Agreement shall remain in full force and effect so long as Executive is
employed by the Company; provided, however, that Executive's rights to payments
and benefits under Article 2 shall continue until the Company's obligation to
provide such payments and benefits is satisfied.
1.4 This Agreement shall supersede any other agreements relating to Executive's
termination of employment with the Company.
ARTICLE 2
SEVERANCE, CHANGE IN CONTROL AND TRANSITION BENEFITS
2.1 Severance Benefits. If Executive's employment terminates due to an
Involuntary Termination Without Cause or a Voluntary Termination for Good Reason
after the date of execution of this Agreement, and without regard to any Change
in Control of the Company, the termination of employment will be a Covered
Termination. Executive shall receive Base Pay and bonus that have accrued but
are unpaid as of the date of such Covered Termination, and, within thirty (30)
days following such Covered Termination, Executive shall also receive a lump sum
payment equal to one hundred percent (100%) of Executive's Base Pay, all of the
foregoing subject to applicable tax withholding. In addition, following a
Covered Termination, Executive and Executive's covered dependents will be
eligible to continue their health care benefit coverage as permitted by COBRA
(Internal Revenue Code Section 4980B) at the same cost to Executive as in effect
immediately prior to the Covered Termination for the one (l)-year period
following the Covered Termination.
1.
2.2 Transition Bonus.
(a) In the event there is a Change in Control of the Company and Executive
continues to render services to the Company for ninety (90) days following the
closing of the transaction resulting in such Change in Control, then, if:
(i) Executive's employment has been terminated and such termination is not a
Covered Termination, Executive shall be entitled to a lump-sum payment equal to
fifty percent (50%) of Executive's Base Pay, subject to applicable withholding;
or
(ii) Executive's employment has been terminated and such termination is a
Covered Termination, Executive shall be entitled to a lump-sum payment equal to
the Severance Benefits set forth in Section 2.1 of this Agreement, subject to
applicable withholding.
(b) If Executive does not terminate employment with the successor company on or
before the ninetieth (90th) day after the closing of the transaction resulting
in a Change in Control and continues to render services to the Company from and
after the ninetieth (90th) day following such closing, then Executive shall be
entitled to a lump-sum payment equal to fifty percent (50%) of Executive's Base
Pay, subject to applicable withholding, and without regard to any payment that
might be received by Executive with respect to a Covered Termination.
2.3 Acceleration of Vesting of Outstanding Options.
(a) If Executive's employment terminates on a date that is less than eighteen
(18) months after the date Executive commences employment with the Company and
such termination is a Covered Termination, the vesting of any options to
purchase common stock of the Company then held by Executive shall accelerate and
such options shall become immediately vested as to fifty percent (50%) of the
total number of shares of common stock subject to such options.
(b) If Executive's employment terminates on a date that is eighteen (18) months
or more after the date Executive commences employment with the Company and such
termination is a Covered Termination, the vesting of any options to purchase
common stock of the Company then held by Executive shall accelerate and such
options shall become immediately vested as to one hundred percent (100%) of the
total number of shares of common stock subject to such options.
(c) Notwithstanding (a) and (b) above, if Executive's employment terminates in
connection with a Change in Control that is a transaction that is accounted for
as a pooling of interests for financial accounting purposes, then no portion of
any option to purchase common stock of the Company granted to Executive after
November 10, 1998 shall accelerate unless the Company receives reasonable
assurances from its independent public accountants (and from the acquiring
party's independent public accountants) that in their good faith judgment such
acceleration will not affect the pooling of interests accounting treatment of
such Change in Control transaction.
2.
2.4 Mitigation. Executive shall not be required to mitigate damages or the
amount of any payment provided under this Agreement by seeking other employment
or otherwise, nor shall the amount of any payment provided for under this
Agreement be reduced by any compensation earned by Executive as a result of
employment by another employer or by any retirement benefits received by
Executive after the date of the Covered Termination, or otherwise.
2.5 Possible Outcomes. The chart attached hereto as Exhibit B is intended to
summarize the possible cash benefits payable under this Article 2 in the
circumstances indicated and is incorporated into this Agreement for the
convenience of the parties.
ARTICLE 3
LIMITATIONS AND CONDITIONS ON BENEFITS
3.1 Withholding of Taxes. The Company shall withhold appropriate federal, state,
local (and foreign, if applicable) income and employment taxes from any payments
hereunder.
3.2 Employee Agreement and Release Prior to Receipt of Benefits. Upon the
occurrence of a Covered Termination, and prior to the receipt of any benefits
under this Agreement on account of the occurrence of such Covered Termination,
Executive shall execute the Employee Agreement and Release (the "Release") in
the form attached hereto as Exhibit A. Such Release shall specifically relate to
all of Executive's rights and claims in existence at the time of such execution
and shall confirm Executive's obligations under the Company's standard form of
proprietary information agreement. It is understood that Executive has
twenty-one (21) days to consider whether to execute such Release, and Executive
may revoke such Release within seven (7) business days after execution. In the
event Executive does not execute such Release within the twenty-one (2l)-day
period, or if Executive revokes such Release within the subsequent seven (7)
business day period, no benefits shall be payable under this Agreement and this
Agreement shall be null and void.
ARTICLE 4
OTHER RIGHTS AND BENEFITS
4.1 Nonexclusivity. Except as otherwise expressly provided herein, nothing in
the Agreement shall prevent or limit Executive's continuing or future
participation in any benefit, bonus, incentive or other plans, programs,
policies or practices provided by the Company and for which Executive may
otherwise qualify, nor shall anything herein limit or otherwise affect such
rights as Executive may have under other agreements with the Company. Except as
otherwise expressly provided herein, amounts which are vested benefits or which
Executive is otherwise entitled to receive under any plan, policy, practice or
program of the Company at or subsequent to the date of a Covered Termination
shall be payable in accordance with such plan, policy, practice or program.
3.
4.2 Parachute Payments. If the severance and other benefits provided to
Executive under this Agreement (i) constitute "parachute payments" within the
meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code") and (ii) but for this Section 4.2, such severance and other benefits
would be subject to the excise tax imposed by Section 4999 of the Code, then
Executive's benefits under this Agreement shall be payable either:
(a) in full; or
(b) as to such lesser amount which would result in no portion of such severance
and other benefits being subject to excise tax under Section 499 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by Executive, on an after-tax basis, of the greatest amount of
severance benefits under this Agreement. Unless the Company and Executive
otherwise agree in writing, any determination required under this Section 4.2
shall be made in writing by independent public accountants agreed to by the
Company and Executive (the "Accountants"), whose determination shall be
conclusive and binding upon Executive and the Company for all purposes. For
purposes of making the calculations required by this Section 4.2, the
Accountants may make reasonable, good faith interpretations concerning the
application of Sections 280G and 4999 of the Code. The Company and Executive
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section 4.2. The Company shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this Section 4.2.
ARTICLE 5
DEFINITIONS
For purposes of the Agreement, the following terms are defined as
follows:
5.1 "Base Pay" means Executive's annual base pay at the rate in effect during
the last regularly scheduled payroll period immediately preceding any
termination of Executive's employment or, if higher, Executive's annual base pay
in effect as of the date of this Agreement if subsequent to that time Executive
has agreed to a reduction in base pay in connection with a general reduction in
the base pay of other similarly situated employees of the Company.
5.2 "Change in Control" means (1) a dissolution, liquidation or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise; or (4) the acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any comparable successor provisions (excluding
any employee benefit plan, or related trust, sponsored or maintained by the
Company or any Affiliate of the Company) of the beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable
successor rule) of securities of the Company representing at least fifty percent
(50%) of the combined voting power entitled to vote in the election of
directors.
4.
5.3 "Covered Termination" means an Involuntary Termination Without Cause or a
Voluntary Termination for Good Reason.
5.4 "Involuntary Termination Without Cause" means Executive's dismissal or
discharge for reasons other than fraud, misappropriation, embezzlement or
intentional misconduct on the part of Executive which resulted in material loss,
damage or injury to the Company. The termination of Executive's employment will
not be deemed to be an "Involuntary Termination Without Cause" if such
termination occurs as a result of Executive's death or disability. For purposes
of the foregoing, "disability" means a disability, as that term is defined in
the long term disability plan maintained by the Company that covers Executive,
that continues for ninety (90) days.
5.5 "Voluntary Termination For Good Reason" means that the Executive voluntarily
terminates employment within ninety (90) days after any of the following are
undertaken without Executive's express written consent:
(a) the assignment to Executive of any duties or responsibilities which result
in a material diminution or adverse change of Executive's position, status or
circumstances of employment;
(b) a reduction by the Company in Executive's Base Pay;
(c) any failure by the Company to continue in effect any benefit plan or
arrangement, including incentive plans or plans to receive securities of the
Company, in which Executive is participating (hereinafter referred to as
"Benefit Plans"), or the taking of any action by the Company which would
adversely affect Executive's participation in or reduce Executive's benefits
under any Benefit Plans or deprive Executive of any fringe benefit then enjoyed
by Executive, provided, however, that Executive may not terminate for Good
Reason if the Company offers a range of benefit plans and programs which, taken
as a whole, are comparable to the Benefit Plans as determined in good faith by
the Company;
(d) a relocation of Executive or the Company's principal business offices to a
location more than twenty (20) miles from the current location at which
Executive performs duties, except for required travel by Executive on the
Company's business to an extent substantially consistent with Executive's
business travel obligations;
(e) any breach by the Company of any provision of this Agreement or Executive's
Employment Agreement dated November 10, 1998; or
(f) any failure by the Company to obtain the assumption of this Agreement by any
successor or assign of the Company.
5.
ARTICLE 6
GENERAL PROVISIONS
6.1 Employment Status. This Agreement does not constitute a contract of
employment or impose on Executive any obligation to remain as an employee, or
impose on the Company any obligation (i) to retain Executive as an employee,
(ii) to change the status of Executive as an at-will employee, or (iii) to
change the Company's policies regarding termination of employment.
6.2 Notices. Any notices provided hereunder must be in writing and such notices
or any other written communication shall be deemed effective upon the earlier of
personal delivery (including personal delivery by facsimile) or the third day
after mailing by first class mail, to the Company at its primary office location
and to Executive at Executive's address as listed in the Company's payroll
records. Any payments made by the Company to Executive under the terms of this
Agreement shall be delivered to Executive either in person or at the address as
listed in the Company's payroll records.
6.3 Severability. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
6.4 Waiver. If either party should waive any breach of any provisions of this
Agreement, he or it shall not thereby be deemed to have waived any preceding or
succeeding breach of the same or any other provision of this Agreement.
6.5 Arbitration. Unless otherwise prohibited by law or specified below, all
disputes, claims and causes of action, in law or equity, arising from or
relating to this Agreement or its enforcement, performance, breach, or
interpretation shall be resolved solely and exclusively by final and binding
arbitration held in San Francisco, California through Judicial Arbitration &
Mediation Services/Endispute ("JAMS") under the then existing JAMS arbitration
rules. However, nothing in this section is intended to prevent either party from
obtaining injunctive relief in court to prevent irreparable harm pending the
conclusion of any such arbitration. Each party in any such arbitration shall be
responsible for its own attorneys' fees, costs and necessary disbursements;
provided, however, that in the event one party refuses to arbitrate and the
other party seeks to compel arbitration by court order, if such other party
prevails, it shall be entitled to recover reasonable attorneys' fees, costs and
necessary disbursements. Pursuant to California Civil Code Section 1717, each
party warrants that it was represented by counsel in the negotiation and
execution of this Agreement, including the attorneys' fees provision herein.
6.6 Complete Agreement. This Agreement, including Exhibit A, Exhibit B, and any
other written agreements referred to in this Agreement, constitutes the entire
agreement between Executive and the Company and it is the complete, final, and
exclusive embodiment of their agreement with regard to this subject matter. It
is entered into without reliance on any promise or representation other than
those expressly contained herein.
6.
6.7 Amendment or Termination of Agreement. This Agreement may be changed or
terminated only upon the mutual written consent of the Company and Executive.
The written consent of the Company to a change or termination of this Agreement
must be signed by an executive officer of the Company after such change or
termination has been approved by the Compensation Committee of the Company's
Board of Directors.
6.8 Counterparts. This Agreement may be executed in separate counterparts, any
one of which need not contain signatures of more than one party, but all of
which taken together will constitute one and the same Agreement.
6.9 Headings. The headings of the Articles and Sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning hereof.
6.10 Successors and Assigns. This Agreement is intended to bind and inure to the
benefit of and be enforceable by Executive and the Company, and their respective
successors, assigns, heirs, executors and administrators, except that Executive
may not assign any duties hereunder and may not assign any rights hereunder
without the written consent of the Company, which consent shall not be withheld
unreasonably.
6.11 Attorneys' Fees. Except as otherwise provided in Section 6.5, if Executive
brings any action to enforce his rights hereunder, Executive shall be
responsible for his own attorneys' fees and costs incurred in connection with
such action, regardless of the outcome of such action.
6.12 Choice Of Law. All questions concerning the construction. validity and
interpretation of this Agreement will be governed by the law of the State of
California, without regard to such state's conflict of laws rules.
6.13 Non-Publication. The parties mutually agree not to disclose publicly the
terms of this Agreement except to the extent that disclosure is mandated by
applicable law or to respective personal advisors.
6.14 Construction Of Agreement. In the event of a conflict between the text of
the Agreement and any summary, description or other information regarding the
Agreement, the text of the Agreement shall control.
7.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year written above.
CASTELLE DONALD L. RICH
By: /s/Jerome Burke /s/ DONALD L. RICH
Name: Jerome Burke
Title: Executive Vice President
Exhibit A: Employee Agreement and Release
Exhibit B: Chart of Possible Outcomes
8.
EXHIBIT A
EMPLOYEE AGREEMENT AND RELEASE
I understand and agree completely to the terms set forth in the
foregoing agreement.
I hereby confirm my obligations under the Company's proprietary
information agreement.
I acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A general release does not extend
to claims which the creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him must have materially
affected his settlement with the debtor." I hereby expressly waive and
relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to my release of any claims I may
have against the Company.
Except as otherwise set forth in this Agreement, I hereby release,
acquit and forever discharge the Company, its parents and subsidiaries, and
their officers, directors, agents, servants, employees, shareholders,
successors, assigns and affiliates, of and from any and all claims, liabilities,
demands, causes of action, costs, expenses, attorneys' fees, damages,
indemnities and obligations of every kind and nature, in law, equity, or
otherwise, known and unknown, suspected and unsuspected, disclosed and
undisclosed (other than any claim for indemnification I may have as a result of
any third party action against me based on my employment with the Company),
arising out of or in any way related to agreements, events, acts or conduct at
any time prior to and including the Effective Date of this Agreement, including
but not limited to: all such claims and demands directly or indirectly arising
out of or in any way connected with my employment with the Company or the
termination of that employment, including but not limited to, claims of
intentional and negligent infliction of emotional distress, any and all tort
claims for personal injury, claims or demands related to salary, bonuses,
commissions, stock, stock options, or any other ownership interests in the
Company, vacation pay, fringe benefits, expense reimbursements, severance pay,
or any other form of compensation; claims pursuant to any federal, state or
local law or cause of action including, but not limited to, the federal Civil
Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act
of 1967, as amended ("ADEA"); the federal Americans with Disabilities Act of
1990; the California Fair Employment and Housing Act, as amended; tort law;
contract law; wrongful discharge; discrimination; fraud; defamation; emotional
distress; and breach of the implied covenant of good faith and fair dealing;
provided, however, that nothing in this paragraph shall be construed in any way
to release the Company from its obligation to indemnify me pursuant to the
Company's indemnification obligation pursuant to agreement or applicable law or
to reduce or eliminate any coverage I may have under the Company's director and
officer liability policy, if any.
1.
I acknowledge that I am knowingly and voluntarily waiving and releasing
any rights I may have under ADEA. I also acknowledge that the consideration
given for the waiver and release in the preceding paragraph hereof is in
addition to anything of value to which I was already entitled. I further
acknowledge that I have been advised by this writing, as required by the ADEA,
that: (A) my waiver and release do not apply to any rights or claims that may
arise after the Effective Date of this Agreement; (B) I have the right to
consult with an attorney prior to executing this Agreement; (C) I have
twenty-one (21) days to consider this Agreement (although I may choose to
voluntarily execute this Agreement earlier); (D) I have seven (7) days following
the execution of this Agreement by the parties to revoke the Agreement; and (E)
this Agreement shall not be effective until the date upon which the revocation
period has expired, which shall be the eighth day after this Agreement is
executed by me, provided that the Company has also executed this Agreement by
that date (the "Effective Date").
CASTELLE DONALD L. RICH
By: ___________________________ __________________________
Name: ___________________________ Date:_____________________
Title: ___________________________
2.
EXHIBIT B
POSSIBLE CASH PAYMENTS UNDER
EXECUTIVE SEVERANCE AND TRANSITION BENEFITS AGREEMENT
- ---------------------------------------- -------------------------------------- --------------------------------------
Termination that Does Not Qualify as Termination that Qualifies as a
a Covered Termination Covered Termination
- ---------------------------------------- -------------------------------------- --------------------------------------
- ---------------------------------------- -------------------------------------- --------------------------------------
Prior to Change in Control Cash: -0- Cash: 12 months base pay
- ---------------------------------------- -------------------------------------- --------------------------------------
- ---------------------------------------- -------------------------------------- --------------------------------------
0 - 89 days after Change in Control Cash: -0- Cash: 12 months base pay
- ---------------------------------------- -------------------------------------- --------------------------------------
- ---------------------------------------- -------------------------------------- --------------------------------------
90 days after Change in Control Cash: 6 months base pay Cash: 12 months base pay
- ---------------------------------------- -------------------------------------- --------------------------------------
- ---------------------------------------- -------------------------------------- --------------------------------------
90+ days after Change in Control Cash: 6 months base pay Cash: 18 months base pay
- ---------------------------------------- -------------------------------------- --------------------------------------
EXHIBIT B
CASTELLE
EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
In consideration of my employment or continued employment by Castelle (the
"Company"), and the compensation now and hereafter paid to me, I hereby agree as
follows:
1. NONDISCLOSURE
1.1 Recognition of Company's Rights; Nondisclosure. At all times during my
employment and thereafter, I will hold in strictest confidence and will not
disclose, use, lecture upon or publish any of the Company's Proprietary
Information (defined below), except as such disclosure, use or publication may
be required in connection with my work for the Company, or unless an officer of
the Company expressly authorizes such in writing. I will obtain Company's
written approval before publishing or submitting for publication any material
(written, verbal, or otherwise) that relates to my work at Company and/or
incorporates any Proprietary Information. I hereby assign to the Company any
rights I may have or acquire in such Proprietary Information and recognize that
all Proprietary Information shall be the sole property of the Company and its
assigns.
1.2 Proprietary Information. The term "Proprietary Information" shall mean any
and all confidential and/or proprietary knowledge, data or information of the
Company. By way of illustration but not limitation, "Proprietary Information"
includes (a) trade secrets, inventions, mask works, ideas, processes, formulas,
source and object codes, data, programs, other works of authorship, know-how,
improvements, discoveries, developments, designs and techniques (hereinafter
collectively referred to as "Inventions"); and (b) information regarding plans
for research, development, new products, marketing and selling, business plans,
budgets and unpublished financial statements, licenses, prices and costs,
suppliers and customers; and (c) information regarding the skills and
compensation of other employees of the Company. Notwithstanding the foregoing,
it is understood that, at all such times, I am free to use information which is
generally known in the trade or industry, which is not gained as result of a
breach of this Agreement, and my own, skill, knowledge, know-how and experience
to whatever extent and in whichever way I wish.
1.3 Third Party Information. I understand, in addition, that the Company has
received and in the future will receive from third parties confidential or
proprietary information ("Third Party Information") subject to a duty on the
Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. During the term of my employment and
thereafter, I will hold Third Party Information in the strictest confidence and
will not disclose to anyone (other than Company personnel who need to know such
information in connection with their work for the Company) or use, except in
connection with my work for the Company, Third Party Information unless
expressly authorized by an officer of the Company in writing.
1.
1.4 No Improper Use of Information of Prior Employers and Others. During my
employment by the Company I will not improperly use or disclose any confidential
information or trade secrets, if any, of any former employer or any other person
to whom I have an obligation of confidentiality, and I will not bring onto the
premises of the Company any unpublished documents or any property belonging to
any former employer or any other person to whom I have an obligation of
confidentiality unless consented to in writing by that former employer or
person. I will use in the performance of my duties only information which is
generally known and used by persons with training and experience comparable to
my own, which is common knowledge in the industry or otherwise legally in the
public domain, or which is otherwise provided or developed by the Company.
2. ASSIGNMENT OF INVENTIONS.
2.1 Proprietary Rights. The term "Proprietary Rights" shall mean all trade
secret, patent, copyright, mask work and other intellectual property rights
throughout the world.
2.2 Prior Inventions. Inventions, if any, patented or unpatented, which I made
prior to the commencement of my employment with the Company are excluded from
the scope of this Agreement. To preclude any possible uncertainty, I have set
forth on Exhibit B (Previous Inventions) attached hereto a complete list of all
Inventions that I have, alone or jointly with others, conceived, developed or
reduced to practice or caused to be conceived, developed or reduced to practice
prior to the commencement of my employment with the Company, that I consider to
be my property or the property of third parties and that I wish to have excluded
from the scope of this Agreement (collectively referred to as "Prior
Inventions"). If disclosure of any such Prior Invention would cause me to
violate any prior confidentiality agreement, I understand that I am not to list
such Prior Inventions in Exhibit B but am only to disclose a cursory name for
each such invention, a listing of the party(ies) to whom it belongs and the fact
that full disclosure as to such inventions has not been made for that reason. A
space is provided on Exhibit B for such purpose. If no such disclosure is
attached, I represent that there are no Prior Inventions. If, in the course of
my employment with the Company, I incorporate a Prior Invention into a Company
product, process or machine, the Company is hereby granted and shall have a
nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with
rights to sublicense through multiple tiers of sublicensees) to make, have made,
modify, use and sell such Prior Invention. Notwithstanding the foregoing, I
agree that I will not incorporate, or permit to be incorporated, Prior
Inventions in any Company Inventions without the Company's prior written
consent.
2.3 Assignment of Inventions. Subject to Sections 2.4, and 2.6, I hereby assign
and agree to assign in the future (when any such Inventions or Proprietary
Rights are first reduced to practice or first fixed in a tangible medium, as
applicable) to the Company all my right, title and interest in and to any and
all Inventions (and all Proprietary Rights with respect thereto) whether or not
patentable or registrable under copyright or similar statutes, made or conceived
or reduced to practice or learned by me, either alone or jointly with others,
during the period of my employment with the Company. Inventions assigned to the
Company, or to a third party as directed by the Company pursuant to this Section
2, are hereinafter referred to as "Company Inventions."
2.4 Nonassignable Inventions. This Agreement does not apply to an Invention
which qualifies fully as a nonassignable Invention under Section 2870 of the
California Labor Code (hereinafter "Section 2870"). I have reviewed the
notification on Exhibit A (Limited Exclusion Notification) and agree that my
signature acknowledges receipt of the notification.
2.
2.5 Obligation to Keep Company Informed. During the period of my employment and
for six (6) months after termination of my employment with the Company, I will
promptly disclose to the Company fully and in writing all Inventions authored,
conceived or reduced to practice by me, either alone or jointly with others. In
addition, I will promptly disclose to the Company all patent applications filed
by me or on my behalf within a year after termination of employment. At the time
of each such disclosure, I will advise the Company in writing of any Inventions
that I believe fully qualify for protection under Section 2870; and I will at
that time provide to the Company in writing all evidence necessary to
substantiate that belief. The Company will keep in confidence and will not use
for any purpose or disclose to third parties without my consent any confidential
information disclosed in writing to the Company pursuant to this Agreement
relating to Inventions that qualify fully for protection under the provisions of
Section 2870. I will preserve the confidentiality of any Invention that does not
fully qualify for protection under Section 2870.
2.6 Government or Third Party. I also agree to assign all my right, title and
interest in and to any particular Company Invention to a third party, including
without limitation the United States, as directed by the Company.
2.7 Works for Hire. I acknowledge that all original works of authorship which
are made by me (solely or jointly with others) within the scope of my employment
and which are protectable by copyright are "works made for hire," pursuant to
United States Copyright Act (17 U.S.C., Section 101).
2.8 Enforcement of Proprietary Rights. I will assist the Company in every proper
way to obtain, and from time to time enforce, United States and foreign
Proprietary Rights relating to Company Inventions in any and all countries. To
that end I will execute, verify and deliver such documents and perform such
other acts (including appearances as a witness) as the Company may reasonably
request for use in applying for, obtaining, perfecting, evidencing, sustaining
and enforcing such Proprietary Rights and the assignment thereof. In addition, I
will execute, verify and deliver assignments of such Proprietary Rights to the
Company or its designee. My obligation to assist the Company with respect to
Proprietary Rights relating to such Company Inventions in any and all countries
shall continue beyond the termination of my employment, but the Company shall
compensate me at a reasonable rate after my termination for the time actually
spent by me at the Company's request on such assistance.
In the event the Company is unable for any reason, after reasonable effort, to
secure my signature on any document needed in connection with the actions
specified in the preceding paragraph, I hereby irrevocably designate and appoint
the Company and its duly authorized officers and agents as my agent and attorney
in fact, which appointment is coupled with an interest, to act for and in my
behalf to execute, verify and file any such documents and to do all other
lawfully permitted acts to further the purposes of the preceding paragraph with
the same legal force and effect as if executed by me. I hereby waive and
quitclaim to the Company any and all claims, of any nature whatsoever, which I
now or may hereafter have for infringement of any Proprietary Rights assigned
hereunder to the Company.
3.
3. RECORDS. I agree to keep and maintain adequate and current records (in the
form of notes, sketches, drawings and in any other form that may be required by
the Company) of all Proprietary Information developed by me and all Inventions
made by me during the period of my employment at the Company, which records
shall be available to and remain the sole property of the Company at all times.
4. ADDITIONAL ACTIVITIES. I agree that during the period of my employment by the
Company I will not, without the Company's express written consent, engage in any
employment or business activity which is competitive with, or would otherwise
conflict with, my employment by the Company. I agree further that for the period
of my employment by the Company and for one (l) year after the date of
termination of my employment by the Company I will not induce any employee of
the Company to leave the employ of the Company.
5. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms
of this Agreement and as an employee of the Company does not and will not breach
any agreement to keep in confidence information acquired by me in confidence or
in trust prior to my employment by the Company. I have not entered into, and I
agree I will not enter into, any agreement either written or oral in conflict
herewith.
6. RETURN OF COMPANY DOCUMENTS. When I leave the employ of the Company, I will
deliver to the Company any and all drawings, notes, memoranda, specifications,
devices, formulas, and documents, together with all copies thereof, and any
other material containing or disclosing any Company Inventions, Third Party
Information or Proprietary Information of the Company. I further agree that any
property situated on the Company's premises and owned by the Company, including
disks and other storage media, filing cabinets or other work areas, is subject
to inspection by Company personnel at any time with or without notice. Prior to
leaving, I will cooperate with the Company in completing and signing the
Company's termination statement.
7. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique and
because I may have access to and become acquainted with the Proprietary
Information of the Company, the Company shall have the right to enforce this
Agreement and any of its provisions by injunction, specific performance or other
equitable relief, without bond and without prejudice to any other rights and
remedies that the Company may have for a breach of this Agreement.
8. NOTICES. Any notices required or permitted hereunder shall be given to the
appropriate party at the address specified below or at such other address as the
party shall specify in writing. Such notice shall be deemed given upon personal
delivery to the appropriate address or if sent by certified or registered mail,
three (3) days after the date of mailing.
9. NOTIFICATION OF NEW EMPLOYER. In the event that I leave the employ of the
Company, I hereby consent to the notification of my new employer of my rights
and obligations under this Agreement.
4.
10. GENERAL PROVISIONS.
10.1 Governing Law; Consent to Personal Jurisdiction. This Agreement will be
governed by and construed according to the laws of the State of California, as
such laws are applied to agreements entered into and to be performed entirely
within California between California residents. I hereby expressly consent to
the personal jurisdiction of the state and federal courts located in Santa Clara
County, California for any lawsuit filed there against me by Company arising
from or related to this Agreement.
10.2 Severability. In case any one or more of the provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
the other provisions of this Agreement, and this Agreement shall be construed as
if such invalid, illegal or unenforceable provision had never been contained
herein. If moreover, any one or more of the provisions contained in this
Agreement shall for any reason be held to be excessively broad as to duration,
geographical scope, activity or subject, it shall be construed by limiting and
reducing it, so as to be enforceable to the extent compatible with the
applicable law as it shall then appear.
10.3 Successors and Assigns. This Agreement will be binding upon my heirs,
executors, administrators and other legal representatives and will be for the
benefit of the Company, its successors, and its assigns.
10.4 Survival. The provisions of this Agreement shall survive the termination of
my employment and the assignment of this Agreement by the Company to any
successor in interest or other assignee.
10.5 Employment. I agree and understand that nothing in this Agreement shall
confer any right with respect to continuation of employment by the Company, nor
shall it interfere in any way with my right or the Company's right to terminate
my employment at any time, with or without cause.
10.6 Waiver. No waiver by the Company of any breach of this Agreement shall be a
waiver of any preceding or succeeding breach. No waiver by the Company of any
right under this Agreement shall be construed as a waiver of any other right.
The Company shall not be required to give notice to enforce strict adherence to
all terms of this Agreement.
5.
10.7 Entire Agreement. The obligations pursuant to Sections 1 and 2 of this
Agreement shall apply to any time during which I was previously employed, or am
in the future employed, by the Company as a consultant if no other agreement
governs nondisclosure and assignment of inventions during such period. This
Agreement is the final, complete and exclusive agreement of the parties with
respect to the subject matter hereof and supersedes and merges all prior
discussions between us. No modification of or amendment to this Agreement, nor
any waiver of any rights under this Agreement, will be effective unless in
writing and signed by the party to be charged. Any subsequent change or changes
in my duties, salary or compensation will not affect the validity or scope of
this Agreement.
This Agreement shall be effective as of the first day of my employment with the
Company, namely: 10 November, 1998.
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE
COMPLETELY FILLED OUT EXHIBIT B TO THIS AGREEMENT.
Dated: 12 November, 1998
/s/ Donald L. Rich
(Signature)
Donald L. Rich
(Printed Name)
ACCEPTED AND AGREED TO:
CASTELLE
/s/ Jerry Bruke
By:Jerry Bruke
Title: President
3255-3 Scott Boulevard
Santa Clara, California 95054
Dated: 12 November, 1998
6.
EXHIBIT A
LIMITED EXCLUSION NOTIFICATION
THIS IS TO NOTIFY you in accordance with Section 2872 of the California
Labor Code that the foregoing Agreement between you and the Company does not
require you to assign or offer to assign to the Company any invention that you
developed entirely on your own time without using the Company's equipment,
supplies, facilities or trade secret information except for those inventions
that either:
1. Relate at the time of conception or reduction to practice of the
invention to the Company's business, or actual or demonstrably anticipated
research or development of the Company;
2. Result from any work performed by you for the Company.
To the extent a provision in the foregoing Agreement purports to
require you to assign an invention otherwise excluded from the preceding
paragraph, the provision is against the public policy of this state and is
unenforceable.
This limited exclusion does not apply to any patent or invention
covered by a contract between the Company and the United States or any of its
agencies requiring full title to such patent or invention to be in the United
States.
I ACKNOWLEDGE RECEIPT of a copy of this notification.
By: /s/ DONALD L. RICH
DONALD L. RICH
Date: 12 November, 1998
WITNESSED BY:
Jerome J. Burke
CASTELLE
EXHIBIT B
TO: Castelle
FROM: Donald Rich
DATE: 12 November, 1998
SUBJECT: Previous Inventions
1. Except as listed in Section 2 below, the following is a complete list of all
inventions or improvements relevant to the subject matter of my employment by
Castelle (the "Company") that have been made or conceived or first reduced to
practice by me alone or jointly with others prior to my engagement by the
Company:
|X| No inventions or improvements.
| | See below:
| | Additional sheets attached.
2. Due to a prior confidentiality agreement, I cannot complete the
disclosure under Section 1 above with respect to inventions or improvements
generally listed below, the proprietary rights and duty of confidentiality with
respect to which I owe to the following party(ies):
Invention or Improvement Party(ies) Relationship
1. ________________________ __________ _________________
2. ________________________ __________ _________________
3. ________________________ __________ _________________
| | Additional sheets attached.
Exhibit 23.1
Consent of PricewaterhouseCoopers LLP
Independent Accountants
We consent to the incorporation by reference in the registration statement of
Castelle and subsidiaries on Form S-8 (File No.333-75247) of our report dated
February 5, 1999, on our audits of the consolidated financial statements of
Castelle and subsidiaries as of December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998, and our report dated February
5, 1999, on our audit of the financial statement schedule, which reports are
included in this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 26, 1999