SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material under Rule 14a-12
CASTELLE
(Name of Registrant as Specified In Its Charter)
--
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
|_| Fee paid previously with preliminary materials:
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
CASTELLE
855 Jarvis Drive, Suite 100
Morgan Hill, CA 95037
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held On May 28, 2004
To The Shareholders Of Castelle:
Notice Is Hereby Given that the Annual Meeting of Shareholders of
Castelle, a California corporation, will be held on Friday, May 28, 2004, at
10:00 a.m. local time at our corporate offices located at 855 Jarvis Drive,
Suite 100, Morgan Hill, California, 95037 for the following purposes:
1. To elect directors to serve for the ensuing year and until their
successors are elected.
2. To ratify the selection of PricewaterhouseCoopers LLP as our
independent auditors for the year ending December 31, 2004.
3. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors has fixed the close of business on March 31,
2004 as the record date for the determination of shareholders entitled to notice
of and to vote at this Annual Meeting and at any adjournment or postponement
thereof.
By Order of the Board of Directors
Paul Cheng
Chief Financial Officer and Secretary
Morgan Hill, California
April 29, 2004
--------------------------------------------------------------------------------
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM THE RECORD
HOLDER A PROXY ISSUED IN YOUR NAME.
--------------------------------------------------------------------------------
CASTELLE
855 Jarvis Drive, Suite 100
Morgan Hill, CA 95037
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
May 28, 2004
INFORMATION CONCERNING SOLICITATION AND VOTING
General
The enclosed proxy is solicited on behalf of the Board of Directors of
Castelle, a California corporation, for use at the Annual Meeting of
Shareholders to be held on May 28, 2004, at 10:00 a.m. local time (the "Annual
Meeting"), or at any adjournment or postponement thereof, for the purposes set
forth herein and in the accompanying Notice of Annual Meeting. The Annual
Meeting will be held at our corporate offices, located at 855 Jarvis Drive,
Suite 100, Morgan Hill, California 95037. We intend to mail this proxy statement
and accompanying proxy card on or about May 3, 2004 to all shareholders entitled
to vote at the Annual Meeting.
Solicitation
We will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
card and any additional information furnished to shareholders. Copies of
solicitation materials will be furnished to banks, brokerage houses, fiduciaries
and custodians holding in their names shares beneficially owned by others to
forward to such beneficial owners. We may reimburse persons representing
beneficial owners of common stock for their costs of forwarding solicitation
materials to such beneficial owners. Original solicitation of proxies by mail
may be supplemented by telephone, telegram or personal solicitation by
directors, officers or other regular employees of the company. No additional
compensation will be paid to directors, officers or other regular employees for
such services.
Voting Rights and Outstanding Shares
Only holders of record of common stock at the close of business on
March 31, 2004 (the "Record Date") will be entitled to notice of and to vote at
the Annual Meeting. At the close of business on March 31, 2004 we had
outstanding and entitled to vote 3,549,642 shares of common stock.
Each holder of record on the Record Date will be entitled to one vote
for each share held on all matters to be voted upon. With respect to the
election of directors, shareholders may exercise cumulative voting rights. Under
cumulative voting, each holder of common stock will be entitled to five votes
for each share held. Each shareholder may give one candidate all the votes that
shareholder is entitled to cast or may distribute his or her votes among as many
candidates as the shareholder chooses. However, no shareholder will be entitled
to vote for a candidate unless the candidate's name has been placed in
nomination prior to the voting. No shareholder will be entitled to vote
cumulatively unless at least one shareholder has given notice at the meeting,
prior to the voting, of his or her intention to cumulate votes. Unless the
proxyholders are otherwise instructed, shareholders, by means of the
accompanying proxy, will grant the proxyholders discretionary authority to
cumulate votes.
All votes will be tabulated by the inspector of election appointed for
the meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Abstentions and broker non-votes are counted
towards a quorum, but are not counted for any purpose in determining whether a
matter is approved.
Revocability of Proxies
Any person giving a proxy pursuant to this solicitation has the power
to revoke it at any time before it is voted. It may be revoked by filing with
our Secretary at our principal executive office, 855 Jarvis Drive, Suite 100,
Morgan Hill, California 95037, a written notice of revocation or a duly executed
proxy bearing a later date, or it may be revoked by attending the meeting and
voting in person. Attendance at the meeting will not, by itself,
1
revoke a proxy. Please note, however, that if a shareholder's shares are held of
record by a broker, bank or other nominee and that shareholder wishes to vote at
the meeting, the shareholder must bring to the meeting a letter from the broker,
bank or other nominee confirming the shareholder's beneficial ownership of the
shares and that the broker, bank or other nominee is not voting the shares at
the meeting.
Shareholder Proposals
The deadline for submitting a shareholder proposal for inclusion in our
proxy statement and form of proxy for our 2005 annual meeting of shareholders
pursuant to Rule 14a-8 of the Securities and Exchange Commission 120 calendar
days before the one year anniversary of the date of the proxy statement, or
January 5, 2005. Shareholder proposals may be presented at the 2005 annual
meeting the shareholders only if we have received adequate notice of such
proposals at our principal executive offices no later than January 5, 2005.
Proposals we receive after that date will be considered untimely and will not be
presented at our 2005 annual meeting. Unless a shareholder who wishes to bring a
matter before the shareholders at our 2005 annual meeting of shareholders
notifies us of such matter prior to January 5, 2005, management will have
discretionary authority to vote all shares for which it has proxies in
opposition to such matter.
[The Remainder of this Page Intentionally Left Blank]
2
Proposal 1
Election Of Directors
There are five nominees for the five Board positions presently
authorized in our Bylaws. Each director to be elected will hold office until the
next annual meeting of shareholders and until his successor is elected and
qualified, or until such director's earlier death, resignation or removal. Each
nominee listed below is currently a director of Castelle, having been elected by
the shareholders, or in the case of Mr. Smith, appointed by the Board.
Shares represented by executed proxies will be voted, if authority to
do so is not withheld, for the election of the five nominees named below, with
discretionary power with respect to any further nominees and to cumulate votes.
In the event that any nominee should be unavailable for election as a result of
an unexpected occurrence, such shares will be voted for the election of such
substitute nominee as management may propose. Each person nominated for election
has agreed to serve if elected and management has no reason to believe that any
nominee will be unable to serve.
The five candidates receiving the highest number of affirmative votes
cast at the meeting will be elected as our directors. The minimum authorized
number of directors is five, and there are no vacancies on the Board.
The Board Of Directors Recommends
A Vote In Favor Of Each Named Nominee.
NOMINEES
The names of the nominees and certain information about them are set
forth below:
Name Age Position
Donald L. Rich 62 Chairman of the Board
Scott C. McDonald 50 President, Chief Executive Officer and Director
Peter R. Tierney 59 Director, President and Chief Executive Officer
of Finaplex, Inc.
Robert H. Hambrecht 37 Managing Director of Corporate Finance,
W.R. Hambrecht + Company
Robert O. Smith 59 Former President and CEO of Digital Power
Corporation
Set forth below is biographical information for each nominee.
Donald L. Rich
Mr. Rich joined Castelle in November 1998 and served as Chief Executive
Officer and President from November 1998 to April 2002. Mr. Rich became Chairman
of the Board in May 1999, and has continued in that role since retiring as our
CEO in April 2002. Mr. Rich served as Chief Financial Officer from April 1999 to
March 2001 and Secretary from February 2000 to March 2001. From 1997 until
November 1998, Mr. Rich was self-employed as a consultant. From 1993 through
1997, Mr. Rich was Chief Executive Officer and President of Talarian
Corporation, a provider of real-time infrastructure software for the enterprise
and the Internet. Prior to that, he held various sales and marketing management
positions at Integrated Systems, Inc. and International Business Machines
Corporation. Mr. Rich holds a BS degree in Mechanical Engineering from Purdue
University and an MBA from the Stanford Graduate School of Business.
Scott C. McDonald
Mr. McDonald has served as a director of Castelle since April 1999.
Since April 2002, Mr. McDonald has been our President and Chief Executive
Officer. From May 2001 to the first quarter of 2002, Mr. McDonald
3
served on the board of directors for Octant Technologies and Digital Power
Corporation and provided consulting services. From December 1999 to April 2001,
Mr. McDonald served as the Chief Financial and Administrative Officer at Conxion
Corporation, a network and internet services company. From 1997 to 1999, Mr.
McDonald served on the board of directors for CIDCO Incorporated, Octant
Technologies Inc. and Digital Power Corporation, in addition to providing
consulting services to CIDCO Incorporated. From 1993 to 1997, Mr. McDonald was
the senior operating and financial executive at CIDCO Incorporated, an innovator
in advanced telephony products, serving as Executive Vice President, Chief
Operating Officer, Chief Financial Officer and Secretary. From 1989 to 1993, Mr.
McDonald was Chief Financial Officer and Vice President, Finance &
Administration at Integrated Systems, Inc., a provider of embedded operating
software and design automation tools. Prior to 1989, Mr. McDonald held financial
management and investor relations positions with Computer Products, Inc.,
Compower Corporation, Monterey Federal Credit Union and the J.M. Smucker
Company. Mr. McDonald currently serves on the board of directors of
privately-held Octant Technologies, Inc. Mr. McDonald holds a BS in Accounting
from the University of Akron and an MBA from Golden Gate University.
Peter R. Tierney
Mr. Tierney has served as a director of Castelle since April 1999. He
currently serves as President and Chief Executive Officer of Finaplex, Inc., a
software company delivering the next generation of wealth management and
brokerage processing platforms. Mr. Tierney was previously President & CEO of
Sawyer Media Systems, a privately held business focused on delivering next
generation media. Previously, Mr. Tierney spent four years as President and
Chief Executive Officer of MarketFirst Software Corporation, a company that
specializes in streamlining and maximizing the effectiveness of marketing
programs. From 1991 to 1997, Mr. Tierney served as Chairman, President and CEO
of Inference Corporation, a leading provider of self-service and knowledge
management tools for the customer service and help desk industries. Prior to
Inference, as Senior Vice President of Oracle Corporation, Tierney was
responsible for worldwide marketing and served as a member of the Oracle
Management Committee. Earlier in his career, Mr. Tierney served as Vice
President of Marketing and Sales for Relational Technology (Ingres) Corporation
and was Director of Marketing for the IBM Northwestern Region. Mr. Tierney also
currently serves on the board of advisors of the privately-held company, The
SoftAd Group. Mr. Tierney holds a bachelor's degree in management and economics
from Northeastern University.
Robert H. Hambrecht
Mr. Hambrecht has served as a director of Castelle since March 1998.
Mr. Hambrecht was a founding partner of W.R. Hambrecht + Co., an investment
banking firm, founded in January 1998, and is presently Managing Director of
Corporate Finance. From 1996 through January 1998, Mr. Hambrecht was Vice
President of H&Q Venture Partners, a venture capital firm. From 1994 to 1996,
Mr. Hambrecht was employed by Unterberg Harris, an investment banking firm. Mr.
Hambrecht also serves on the board of directors of five privately-held
companies. Mr. Hambrecht earned a master's degree in public administration from
Columbia University in 1993.
Robert O. Smith
Mr. Smith has served as a director of Castelle since March 2004.
From 1990 to 2004 he has served primarily as Chairman, President and CEO of
Digital Power Corporation (Amex: DPW), makers of switching power supplies. Mr.
Smith currently serves as a consultant to Digital Power Corporation. Prior to
that, he held various senior-level management positions at Computer Products
Inc., Harris Computer Systems, the J.M. Smucker Company and Ametek/Lamb
Electric. Mr. Smith holds a bachelor's degree in business administration from
Ohio University.
4
The Board has made the following determination of the independence
status of each of the Directors according to the applicable Marketplace Rules of
The NASDAQ Stock Market as of the mailing date of the Proxy:
-------------------------------------- -----------------------------------------
| Independent | | Not Independent |
-------------------------------------- -----------------------------------------
| | | Donald L. Rich 1 |
-------------------------------------- -----------------------------------------
| | | Scott C. McDonald |
-------------------------------------- -----------------------------------------
| Peter R. Tierney | | |
-------------------------------------- -----------------------------------------
| Robert H. Hambrecht | | |
-------------------------------------- -----------------------------------------
| | | Robert O. Smith 2 |
-------------------------------------- -----------------------------------------
1 The Board has determined that Mr. Rich will become an independent
director in April 2005, at which time three years will have passed
following his retirement from employment with the company.
2 Although the Board of Directors has determined that Mr. Smith will
not be considered independent at the time of his initial appointment,
the Board believes that Mr. Smith will become independent under the
applicable Marketplace Rules of The NASDAQ Stock Market and Rule 10A-3
under the Securities Exchange Act of 1934, in November 2004. In
November 2004, three years will have passed since Mr. Smith left the
employment of Digital Power Corporation, on whose compensation
committee Mr. McDonald sat while Mr. Smith was an executive officer.
[The Remainder of this Page Intentionally Left Blank]
5
PROPOSAL 2
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Audit Committee and the Board of Directors has selected
PricewaterhouseCoopers LLP as our independent auditors for the year ending
December 31, 2003, and has further directed that management submit the selection
of independent auditors for ratification by the shareholders at the Annual
Meeting. PricewaterhouseCoopers LLP has audited our financial statements since
Castelle's inception in 1987. Representatives of PricewaterhouseCoopers LLP are
expected to be present at the Annual Meeting, will have an opportunity to make a
statement if they so desire and will be available to respond to appropriate
questions.
Shareholder ratification of the selection of PricewaterhouseCoopers LLP
as our independent auditors is not required by our Bylaws or otherwise. However,
the Board is submitting the selection of PricewaterhouseCoopers LLP to the
shareholders for ratification as a matter of good corporate practice. If the
shareholders fail to ratify the selection, the Audit Committee and the Board
will reconsider whether or not to retain that firm. Even if the selection is
ratified, the Audit Committee and the Board in their discretion may direct the
appointment of different independent auditors at any time during the year if
they determine that such a change would be in the best interests of Castelle and
its shareholders.
The affirmative vote of the holders of a majority of the shares present
in person or represented by proxy and voting at the Annual Meeting (which shares
voting affirmatively also constitute at least a majority of the required quorum)
will be required to ratify the selection of PricewaterhouseCoopers LLP.
The following is a summary of the fees billed to our company by
PricewaterhouseCoopers for professional services rendered during the years ended
December 31, 2003 and 2002.
2003 2002
---------------- ----------------
Audit Fees $140,000.00 $133,500.00
Audit-Related Fees $5,000.00 -
Tax Fees - -
All Other Fees - $27,204.00
Audit Fees. Consists of fees billed for professional services rendered
for the audit of our annual consolidated financial statements and review of the
quarterly consolidated financial statements and services that are normally
provided by PricewaterhouseCoopers in connection with statutory and regulatory
filings or engagements.
Audit-Related Fees. Consists of fees billed for assurance and related
services that are reasonably related to the performance of the audit or review
of our consolidated financial statements and are not reported under "Audit
Fees." These services include accounting consultations in connection with public
offerings, internal control reviews, and consultations concerning financial
accounting and reporting standards.
Tax Fees. Consists of fees billed for professional services for tax
compliance and tax advice. These services consist of assistance regarding
federal, state and international tax compliance, assistance with the preparation
of various tax returns, research and design tax study and international
compliance.
All Other Fees. Consists of fees for products and services other than
the services reported above.
The Board Of Directors Recommends
A Vote In Favor Of Proposal 2.
6
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the ownership of
Castelle's common stock as of March 31, 2004 by: (i) each director and nominee
for director; (ii) each executive officer named in the Summary Compensation
Table; (iii) all executive officers and directors of Castelle as a group; and
(iv) all persons known by us to be beneficial owners of more than five percent
of our common stock.
Beneficial Ownership (1)
Number of Percent of
Beneficial Owner Shares Total
Entities affiliated with:
J.P. Morgan Chase & Co., Inc. (2) 387,219 10.9%
560 Mission Street, 10th Floor
San Francisco, CA 94105
Donald L. Rich (3) 435,000 10.9%
Scott McDonald (3) 306,543 8.4%
Eric Chen (3) 91,562 2.5%
Michael Petrovich (3) 79,000 2.2%
Paul Cheng (3) 69,270 1.9%
Robert Hambrecht (3) 48,010 1.3%
Peter Tierney (3) 40,000 1.1%
Richard Fernandez (3) 21,562 *
Robert O. Smith (3) 1,683 *
Edward Heinze(3) 4,062 *
All officers and directors as a group (10 persons) 1,095,009 24.9%
__________________________________
* Less than one percent.
(1) This table is based upon information supplied by officers, directors
and principal shareholders and Schedules 13D and 13G filed with the
Securities and Exchange Commission (the "SEC"). Unless otherwise
indicated in the footnotes to this table and subject to community
property laws where applicable, we believe that each shareholder named
in this table has sole voting and investment power with respect to the
shares indicated as beneficially owned. Applicable percentages are
based on 3,549,642 shares outstanding on March 31, 2004, the record
date for this proxy, plus options exercisable within 60 days of March
31, 2004, for the person being measured.
(2) The named entity and the entities' respective general partners,
directors, executive officers, members and/or managers, as applicable,
disclaim beneficial ownership of any securities other than those
directly held by such person.
(3) Includes shares subject to options exercisable within 60 days of March
31, 2004 as follows: 111,293 for Mr. McDonald, 40,000 for Mr.
Hambrecht, 56,562 for Mr. Chen, 64,270 for Mr. Cheng, 75,000 for Mr.
Petrovich, and 1,562 for Mr. Heinze. Represents shares subject to
options exercisable within 60 days of March 31, 2004 as follows:
435,000 for Mr. Rich, 40,000 for Mr. Tierney, 1,683 for Mr. Smith and
21,562 for Mr. Fernandez.
7
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Cash Compensation
In 2003, each non-employee director receives a quarterly retainer of
$2,500 and a per meeting fee of $1,000 for each quarterly board meeting
attended. Non-employee directors are also reimbursed for their expenses incurred
in connection with attending Board meetings.
Equity Compensation
In 2003, each non-employee director received stock option grants under
the 2002 Equity Incentive Plan (the "2002 Option Plan"), which superceded the
1995 Non-Employee Directors' Stock Option Plan, as amended through February
2000, and the 1988 Equity Incentive Plan, as amended through 1998 (collectively
as the "Prior Option Plan"). Directors receive non-qualifying stock options
under the 2002 Option Plan and Code.
The 2002 Option Plan provides that each non-employee member of the
Board of Directors, upon initial election to the Board, is automatically granted
an option to purchase 10,000 shares of common stock at an exercise price equal
to the then-current fair market value per share of our common stock. This
initial option grant vests monthly in 12 equal installments, beginning one month
after the date of grant provided that the optionee has continuously served as a
director. On April 1 of each year (or the next business day should such date be
a legal holiday), each member of the Board who is eligible for participation in
the 2002 Option Plan is automatically granted an option to purchase 5,000 shares
of common stock at an exercise price equal to the then-current fair market value
per share of our common stock, without further action by us, the Board or our
shareholders. This annual grant to non-employee members of the Board under the
2002 Option Plan vests monthly in 12 equal installments, beginning one month
after the date of grant provided that the optionee has, during the entire period
prior to such vesting date, continuously served as a director. The exercise
price of options granted under the 2002 Option Plan is 100% of the fair market
value of the common stock on the date of the option grant. The term of options
granted under the 2002 Option Plan may not be longer than ten years.
During 2003, we granted to each of Messrs. Hambrecht, Tierney and Rich
options to purchase 5,000 shares at exercise prices of $2.96 per share under the
2002 Option Plan. In March 2004, we granted to Mr. Smith options to purchase
10,000 shares at an exercise price of $4.50 upon his initial election to the
Board. The exercise prices were equal to the respective fair market values of
such common stock on the date of grant (based upon the closing sale price
reported on the NASDAQ SmallCap Market for the date of grant).
Options which remain outstanding under the Prior Option Plan will
accelerate under certain circumstances. In the event of a merger of Castelle
with or into another corporation or a consolidation, acquisition of assets or
other change-in-control transaction, vesting of option grants under the Prior
Option Plan is accelerated and the option will terminate if not exercised prior
to the consummation of the transaction.
Compensation of Executive Officers
Summary of Compensation
The following table shows for the years ended December 31, 2003, 2002
and 2001, compensation awarded or paid to, or earned by, our Chief Executive
Officer and the four other most highly compensated executive officers at
December 31, 2003 whose total annual salary and bonus exceeded $100,000 (the
"Named Executive Officers"):
8
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
Name and Principal Securities
Underlying
Position Year Salary Bonus ($)(1) Other($)(3) Options (#)
-------- ---- ------ --------- ----------- -----------
Scott C. McDonald (2) 2003 $200,000 $137,253 -- 150,000
President, Chief Executive
Officer & Director
2002 138,718 75,000 -- 300,000
2001 -- -- -- --
Eric Chen 2003 170,703 72,500 -- 20,000
Sr. Vice President, Engineering &
Business Development
2002 158,306 69,143 $24,784 --
2001 151,960 41,587 -- 15,000
Paul Cheng 2003 138,200 57,500 -- 15,000
Vice President, Chief Financial
Officer and Secretary
2002 132,239 57,643 -- --
2001 126,950 30,002 -- 25,000
Richard Fernandez (4) 2003 125,833 50,000 -- 5,000
Vice President, Operations
2002 70,000 31,625 -- 45,000
2001 -- -- -- --
Michael Petrovich 2003 110,650 -- 76,125 5,000
Vice President,
Sales, International
2002 115,304 -- 110,842 --
2001 134,523 -- 57,805 --
(1) Represents bonus amounts for services earned in the respective years
but certain amounts were paid in the subsequent year.
(2) Mr. McDonald became our CEO in April 2002.
(3) 2002 Other includes $24,784 for Mr. Chen and $30,408 for Mr. Petrovich
for cash paid out in lieu of personal time off. For Mr. Petrovich,
"Other" includes $76,125 in sales commissions earned in 2003, $80,434
in sales commissions earned in 2002 and $57,805 in sales commissions
earned in 2001. Portions of the earned commissions were paid in the
subsequent year.
(4) Mr. Fernandez joined our company in June 2002.
As of March 31, 2004, As of March 31, 2004, 125,001 shares had been
exercised by Mr. McDonald, 70,000 by Mr. Rich, 7,500 had been exercised by Mr.
Petrovich, and 61,770 by Mr. Heinze under the Prior Option Plan.
Stock Option Grants and Exercises
In 2003, we granted options to our executive officers under the 2002
Option Plan. As of December 31, 2003, options to purchase a total of 1,590,206
shares were outstanding under the Prior Option Plan and the 2002 Option Plan.
There are no shares available for additional grants under the Prior Option Plan.
We did not grant any stock appreciation rights, restricted stock awards or stock
purchase rights during 2003.
9
The following tables show for the year ended December 31, 2003,
information regarding options granted to, exercised by, and held at year-end by
the named executive officers:
OPTION GRANTS IN YEAR 2003
Individual Grants
-------------------
Potential Realizable Value at
Number of Assumed Annual Rates of Stock
Underlying Total Options Exercise or Base Price Appreciation
Securities Percentage of for Option Term (3)
Name and Principal Options Granted to Price Per Share Expiration -------------------
Position Granted (#) Employees (1) ($) (2) Date 5% ($) 10% ($)
-------- ------------ ------------ ------- ---- ------ -------
Scott C. McDonald 150,000(4) 49.3% $2.75 6/23/2010 $167,929 $391,346
Eric Chen 20,000(5) 6.6% $3.40 8/18/2010 27,683 64,513
Paul Cheng 15,000(5) 4.9% $3.40 8/18/2010 20,762 48,385
Richard Fernandez 5,000(5) 1.6% $3.40 8/18/2010 6,921 16,129
Michael Petrovich 5,000(5) 1.6% $3.40 8/18/2010 6,921 16,129
(1) Based on options to purchase an aggregate of 304,500 shares of common
stock to employees in 2003.
(2) The exercise price is equal to 100% of the fair market value of common
stock at the date of the grant.
(3) The potential realizable value is calculated based on the assumption
that the stock price on the date of grant appreciates from the date of
grant at the indicated annual rate compounded annually for the entire
term of the option and that the option is exercised and sold on the
last day of its term for the appreciated stock price. The 5% and 10%
assumed rates of appreciation are derived from the rules of the U.S.
Securities and Exchange Commission and do not represent our estimate or
projection of future common stock prices.
(4) Mr. McDonald's option grant of 150,000 shares began vesting on
4/22/2003 and 1/36th vests each calendar month for 36 months from the
aforementioned date.
(5) 25% vests on 8/18/2004 and the remaining portion vests in equal monthly
installments over a 36-month period.
10
AGGREGATE OPTION EXERCISES IN LAST YEAR AND YEAR-END OPTION VALUES
The following table sets forth the number of shares of common stock
subject to exercisable and unexercisable stock options held as of December 31,
2003 by each of the named executive officers.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End (#) at FY-End ($)(1)
Shares Acquired Value --------------------- ----------------
on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
--------------- --------------- ----------- ------------- ----------- -------------
Scott C. McDonald...... 100,000 $68,000 73,778 249,973 $95,621 $371,489
Eric Chen.............. - - 81,873 28,127 159,351 18,113
Paul Cheng............. - - 57,915 27,085 122,828 27,943
Michael Petrovich...... 17,500 $27,300 75,000 5,000 138,425 -
Richard Fernandez..... - - 16,875 33,125 40,331 67,219
------------------------------------------------------------------------------------------------------------------------------------
(1) Based on the fair market value of the common stock at December 31,2003 of $3.14 (closing sales price) minus the exercise
price of the option.
EMPLOYMENT SEVERANCE AND CHANGE OF CONTROL AGREEMENTS
In November 1998, Castelle entered into employment and severance
agreements with Donald L. Rich, both of which terminated in April 2002 following
Mr. Rich's decision to retire as our Chief Executive Officer. Because Mr. Rich's
retirement was entirely voluntary, he was not entitled to receive further
payments under either his employment agreement or his severance agreement.
In April 2002, Castelle entered into an employment agreement with Scott
C. McDonald, pursuant to which Mr. McDonald agreed to serve as our Chief
Executive Officer. The employment agreement is not for a specified term and is
terminable at will or without cause at any time upon written notice, subject to
the conveyance of certain severance benefits to Mr. McDonald upon termination,
as described below. The employment agreement provided for an annual base salary
of $200,000, plus an annual bonus of up to a sum of $100,000, if performance
criteria are met, or above $100,000 in the discretion of the Compensation
Committee if performance criteria are exceeded. Mr. McDonald's annual base
salary was adjusted by the Compensation Committee to $225,000 as of his one year
anniversary date in April 2003, and his bonus arrangement was also revised (see
"Report of the Compensation Committee of the Board of Directors on Executive
Compensation" below). Mr. McDonald was originally granted options to purchase
300,000 shares of the common stock under our Prior Option Plan. The first option
became one quarter vested after six months, with the remainder vesting over the
next eighteen months. The second option becomes fully vested after three years.
In 2003, Mr. McDonald received a grant to purchase additional shares of the
company (see "Report of the Compensation Committee of the Board of Directors on
Executive Compensation" below).
We have also entered into a severance and transition benefit agreement
with Mr. McDonald, pursuant to which we agreed that if we terminate Mr. McDonald
without cause or if Mr. McDonald terminates his employment voluntarily for good
cause, we are required to pay him 100% of his annualized salary and maintain the
medical benefits conveyed to him for one year. In addition, 50% of Mr.
McDonald's unvested options will become immediately vested. The agreement allows
Mr. McDonald to terminate his employment for good cause if his responsibilities
are materially diminished, base pay is reduced or potential bonus payments are
materially reduced, the company fails to continue any benefit plan in which Mr.
McDonald is participating without comparable replacement, our corporate
headquarters is relocated more than 20 miles from its current location or we
breach this agreement or Mr. McDonald's employment agreement. No payment will be
due if Mr. McDonald is dismissed for cause. In the event of a change of control
of Castelle, Mr. McDonald is eligible for a lump sum payment equal to six months
of his base salary, in addition to any benefits that may be conveyed to Mr.
McDonald upon termination, if he remains with us at least ninety days after a
change in control and his employment is subsequently terminated for any reason.
11
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Robert H. Hambrecht and
Peter R. Tierney, neither of whom are officers or employees. None of our
executive officers currently serves or has served as a member of the Board of
Directors or the Compensation Committee of any entity, or any executive officer
of which serves on our Board of Directors or Compensation Committee, except as
provided below. Mr. Scott C. McDonald served on the Compensation Committee of
the Board of Digital Power Corporation ("Digital Power") at a time when Mr.
Robert O. Smith served as Digital Power's Chief Executive Officer. Mr. Smith
left the employment of Digital Power in November, 2001. Mr. Smith does not serve
on our Compensation Committee.
[The Remainder of this Page Intentionally Left Blank]
12
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
(The information contained in this Report of the Compensation Committee
shall not be deemed to be "soliciting material" or "filed" or incorporated by
reference in future filings with the Securities and Exchange Commission, or
subject to the liabilities of Section 18 of the Securities Exchange Act of 1934,
whether made before or after the date hereof and irrespective of any general
incorporation language in any filing, except to the extent that Castelle
specifically incorporates it by reference into a document filed under the
Securities Act of 1933 or the Securities Exchange Act of 1934.)
Our executive compensation program is administered by the Compensation
Committee of the Board of Directors. The Committee currently consists of Robert
H. Hambrecht and Peter R. Tierney. Each is a non-employee director within the
meaning of Section 16 of the Securities Exchange Act of 1934 and an "outside
director" within the meaning of Section 162(m) of the Internal Revenue Code.
None of the members of the Compensation Committee has any interlocking
relationships as defined by the Securities and Exchange Commission.
General Compensation Philosophy
The Committee is responsible for determining compensation policies for
our executive officers, including any stock-based awards to such individuals
under the Prior Option Plan and the 2002 Option Plan. In determining executive
officer compensation, the Compensation Committee considers corporate performance
against our objectives.
The Compensation Committee structures executive compensation packages
with two objectives:
o to ensure that the compensation and incentives provided to the
executive officers are closely aligned with our financial performance
and shareholder value; and
o to attract and retain, through a competitive compensation structure,
those key executives critical to the long-term success of the company
For 2003, our executive compensation program included the following
components: (i) base salary, (ii) options to purchase shares of common stock,
and (iii) quarterly incentives in the form of cash bonuses.
Executive Compensation
Stock Options. In addressing the first objective, the Compensation
Committee utilizes stock option grants to executive officers to tie a portion of
executive officer compensation directly to our stock price performance. The
Compensation Committee believes that the grant of an equity interest in the
company serves to link management interests with shareholder interests and to
motivate executive officers to make decisions that are in the best interests of
Castelle and the shareholders. The Board considers stock option grants to
executive officers based on various factors, including (i) each officer's
responsibilities, (ii) any changes in such responsibilities, (iii) past option
grants and each officer's current equity interest in the company and (iv)
individual or corporation performance. In 2003, our executive officers received
options to purchase common stock at levels ranging from 5,000 to 150,000 shares.
Base Salary and Cash Bonuses. The second objective of the overall
executive compensation policy is addressed by a salary and bonus policy which is
based on:
o consideration of the salaries and total compensation of executive
officers in similar positions with comparable companies in the
industry;
o the qualifications and experience of each executive officer;
o the company's financial performance during the past year; and
o each officer's performance against objectives related to their areas
of responsibility.
13
The Compensation Committee periodically reviews individual base salaries of
executive officers, and adjusts salaries based on individual job performance and
changes in the officer's duties and responsibilities. In making salary
decisions, the Board exercises its discretion and judgment based on these
factors. No specific formula is applied to determine the weight of each factor,
although the mix among the compensation elements of salary, cash incentive and
stock options are biased toward stock options to emphasize the link between
executive incentives and the creation of shareholder value as measured by the
equity markets. Consequently, salaries and cash incentives may be in the
low-range as compared to the comparable companies in the industry while stock
options may be in the mid to high-range compared to comparable companies. The
Chief Executive Officer provides the Board with recommendations for individual
executive officers based upon an evaluation of their performance against
objectives and responsibilities. The base salaries paid to three of our
executive officers were increased in 2003 ranging from $10,000 to $25,000 per
annum.
The Compensation Committee believes that another key element of
executive compensation should be the variable portion provided by cash incentive
plans. The Board of Directors sets annual performance objectives for executives
of the company, which are administered quarterly by the Chief Executive Officer.
Our executive officer compensation plan is designed such that if we meet our
stated objectives, executive officers receive the cash incentive part of their
compensation. If we perform below our stated objectives, the cash incentive
portion of the executive's compensation is significantly reduced, and may be
eliminated altogether if performance is below defined thresholds. A
substantially smaller portion of some executives' incentive compensation is
based on performance against individual objectives. The actual cash bonus earned
in 2003 by executive officers depended upon the extent to which our objectives
were achieved. Because we obtained a certain percentage of such quarterly
performance objectives, cash bonuses ranging from $50,000 to $137,253 were paid
to executive officers for services performed during 2003.
Chief Executive Officer
The Compensation Committee uses similar factors to those described
above for the executive officers in setting the annual salary, stock option
grant and cash incentives awarded to our Chief Executive Officer, Scott C.
McDonald. Mr. McDonald is eligible to receive quarterly performance bonuses, in
a total amount of up $150,000 per year. Payment of $75,000 or fifty percent
(50%) of such bonus is contingent upon the company remaining profitable on an
Earnings per Share basis. The remaining $75,000 or fifty percent (50%) of such
bonus shall be granted in proportion to the company meeting the profit
performance criteria set forth within the financial plans approved by the
Compensation Committee and Board of Directors. In the event Mr. McDonald exceeds
the performance criteria established by the Committee and Board in a given year
(as determined by the Compensation Committee), Mr. McDonald will be eligible to
earn bonuses that exceed a total of $150,000 for the year. Mr. McDonald was
awarded cash bonuses totaling $137,253 in 2003. The Board awarded Mr. McDonald
stock option grants totaling 150,000 shares during 2003.
Internal Revenue Code Section 162(m) Limitation
Section 162(m) of the Internal Revenue Code, limits the tax deduction
to $1 million for compensation paid to certain executive officers. Compensation
in excess of $1 million may be deducted if it is performance-based compensation
within the meaning of the Code. The Committee has determined that stock options
granted under our Prior Option Plan with an exercise price at least equal to the
fair market value of the common stock on the date of grant should, where
practicable, be treated as "performance-based compensation," and the Prior
Option Plan contains provisions designed to allow compensation recognized by an
executive officer as a result of the grant of a stock option to be deductible by
the company.
2003 Compensation Committee
ROBERT H. HAMBRECHT
PETER R. TIERNEY
14
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
(The information contained in this Report of the Compensation Committee
shall not be deemed to be "soliciting material" or "filed" or incorporated by
reference in future filings with the Securities and Exchange Commission, or
subject to the liabilities of Section 18 of the Securities Exchange Act of 1934,
whether made before or after the date hereof and irrespective of any general
incorporation language in any filing, except to the extent that Castelle
specifically incorporates it by reference into a document filed under the
Securities Act of 1933 or the Securities Exchange Act of 1934.)
The Audit Committee has the responsibility, under delegated authority
from the Board of Directors, for providing independent, objective oversight of
our corporate accounting and reporting practices as well as the quality and
integrity of our financial statements and reports. The Audit Committee acts
under a written charter adopted and approved by the Board of Directors. The
Audit Committee was comprised of three non-employee directors (see section
"Board Committees and Meetings" above).
Management is responsible for our internal controls and the financial
reporting process. The independent auditors are responsible for performing an
independent audit of our financial statements in accordance with generally
accepted auditing standards and to issue a report thereon. The Audit Committee's
responsibility is to monitor and oversee these processes.
In this context, the Audit Committee has met and held discussions with
management and the independent auditors. Management represented to the Audit
Committee that our consolidated financial statements were prepared in accordance
with generally accepted accounting principles, and the Audit Committee has
reviewed and discussed our consolidated financial statements for the year ended
December 31, 2003 with management and the independent auditors. In addition, the
Audit Committee has discussed with the independent auditors the matters required
to be discussed by the Statement on Auditing Standards No. 61, Communication
with Audit Committees, as amended, has received and reviewed the written
disclosures and the letter from the independent public auditors required by
Independence Standard No. 1, Independence Discussions with Audit Committees, as
amended, has reviewed and negotiated applicable audit fees, has discussed with
the independent auditors their independence, and has undertaken the additional
communications, review and other requirements and activities mandated by those
provisions of the Sarbanes-Oxley Act of 2002 which have been adopted.
Based on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the financial statements
referred to above be included in our Annual Report on Forms 10-K for the year
ended December 31, 2003, filed with the Securities and Exchange Commission.
Audit Committee of the Board of Directors
ROBERT H. HAMBRECHT
DONALD L. RICH
PETER R. TIERNEY
15
PERFORMANCE MEASUREMENT COMPARISON1
The following graph shows the total shareholder return of an investment
of $100 in cash on December 31, 1998 for (i) our common stock, (ii) the NASDAQ
Stock Market Index (U.S. Companies) and (iii) the NASDAQ Computer Manufacturer
Stock Index. All values assume reinvestment of the full amount of all dividends
and are calculated as of December 31 of each year:
Comparison of 5 year Cumulative Total Return*
Among Castelle, The NASDAQ Stock Market (U.S.) Index
and the NASDAQ Computer Manufacturers Index
Cumulative Total Return
---------------------------------------------------
12/98 12/99 12/00 12/01 12/02 12/03
----- ------ ------ ------ ------ ------
CASTELLE 100.00 187.50 106.30 75.00 109.00 314.00
NASDAQ STOCK MARKET (U.S.) 100.00 186.20 126.78 96.96 68.65 108.18
NASDAQ COMPUTER MANUFACTURERS 100.00 212.51 133.24 76.84 54.33 87.83
*$100 invested on 12/31/98 in stock of index-including reinvestment of
dividends. Fiscal year ending December 31.
Copyright (c) Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
All rights reserved.
www.researchdatagroup.com/S&P.htm
The information contained above shall not be deemed to be "soliciting
material" or "filed" or incorporated by reference in future filings with the
Securities and Exchange Commission, or subject to the liabilities of Section 18
of the Securities Exchange Act of 1934, whether made before or after the date
hereof and irrespective of any general incorporation language in any filing,
except to the extent that we specifically incorporate it by reference into a
document filed under the Securities Act of 1933 or the Securities Exchange Act
of 1934.
16
CORPORATE GOVERNANCE
BOARD COMMITTEES AND MEETINGS
During 2003, the Board of Directors held four meetings and acted three
times by unanimous written consent. The Board has an Audit Committee, a
Compensation Committee, an Executive Committee and a Nominating Committee.
During 2003, each Board member attended 75% or more of the aggregate
number of meetings of the Board and committees on which he served.
The Audit Committee meets at least annually with our management and
independent auditors to review the results of the annual audit and discuss the
financial statements, recommends to the Board the independent auditors to be
retained, reviews, negotiates and approves audit fees, oversees the independence
of the independent auditors, evaluates the independent auditors' performance and
receives and considers the independent auditors' comments as to controls,
adequacy of staff and management performance and procedures in connection with
audit and financial controls. The Audit Committee pre-approves all audit
services to be performed by any accounting firm, including our independent
auditors, and all non-audit services to be provided by our independent auditors,
and provides the Board of Directors such additional information and materials as
it may deem necessary to make the Board aware of significant financial,
accounting, and internal control matters that require the attention of the
Board. During 2003, the Audit Committee was composed of three non-employee
directors, Messrs. Hambrecht, Rich and Tierney. Mr. Hambrecht serves as Chairman
of the Audit Committee.
The Board of Directors has determined that Messrs. Hambrecht and
Tierney are independent for Audit Committee purposes pursuant to the applicable
Marketplace Rules of The NASDAQ Stock Market and Rule 10A-3 under the Securities
Exchange Act of 1934. While Mr. Rich is not independent for Audit Committee
purposes, he has been a member of the Audit Committee pursuant to an exception
to the applicable Marketplace Rules of The NASDAQ Stock Market that will expire
at the time of the impending Annual Meeting of Shareholders, and accordingly his
last day of service on the Audit Committee will be May 28, 2004. At that time,
the Board intends to appoint Mr. Robert O. Smith to the Audit Committee.
Although the Board of Directors has determined that Mr. Smith will not be
considered independent for audit committee purposes at the time of his initial
appointment, the Board believes that Mr. Smith will become independent under the
applicable Marketplace Rules of The NASDAQ Stock Market and Rule 10A-3 under the
Securities Exchange Act of 1934, in November 2004. Until such time, Mr. Smith
will serve on the Audit Committee under an exception to the applicable rules of
The NASDAQ Stock Market. The Board has determined that Mr. Smith's membership on
the Audit Committee is required by and in the best interests of the company and
its shareholders due to Mr. Smith's expertise, knowledge and experience in the
industry and his knowledge of financial and accounting matters.
The Board of Directors has determined that each member is qualified as
an audit committee financial expert pursuant to Item 401(h) of Regulation S-K
and as a financially sophisticated audit committee member under Rule
4350(d)(2)(A) of the Marketplace Rules of The NASDAQ Stock Market. The Audit
Committee acts pursuant to a written charter adopted by the Board, which is
attached to this Proxy Statement as Appendix A. The Audit Committee met four
times during 2003 and acted once by unanimous written consent.
The Compensation Committee makes recommendations concerning salaries
and incentive compensation, authorizes stock option awards to employees and
consultants under our stock option plans and otherwise determines compensation
levels and performs such other functions regarding compensation as the Board may
delegate. The Compensation Committee is composed of two outside directors:
Messrs. Hambrecht and Tierney. Mr. Tierney serves as the Chairman of the
Compensation Committee, and the Board of Directors has determined that each of
the members of the Compensation Committee is independent as defined in the
applicable Marketplace Rules of The NASDAQ Stock Market. The Compensation
Committee held one meeting and acted two times by unanimous written consent
during 2003
The Executive Committee makes recommendations to the Board of Directors
on projects assigned by the Board of Directors. The Executive Committee is
composed of three directors, Messrs Rich, Hambrecht and
17
McDonald. The Executive Committee held no meetings during 2003 and took no
action by unanimous written consent.
The Nominating Committee identifies, evaluates and nominates candidates
for consideration for appointment or election as members of the Board, makes
recommendations regarding the structure and composition of the Board and
committees of the Board, and oversees the evaluation of the Board and committees
of the Board. The Board of Directors has adopted a written charter for the
Nominating Committee, a current copy of which is available on our website at
http://www.castelle.com/corporate/governance.htm, under the "Investor Relations"
page. Please note that information on the company web site is not incorporated
by reference into this Proxy Statement. The Nominating Committee is composed of
two directors, Messrs. Hambrecht and Tierney. Mr. Tierney serves as the Chairman
of the Nominating Committee, and the Board of Directors has determined that each
of the members of the Nominating Committee is independent as defined in the
applicable Marketplace Rules of The NASDAQ Stock Market. The Nominating
Committee was formed in 2004, held no meetings during 2003 and took no action by
unanimous written consent.
DIRECTOR NOMINATION
In evaluating potential director candidates, the Nominating Committee
considers the appropriate balance of experience, skills and characteristics
required of the Board of Directors and seeks to ensure that at least a majority
of the directors are independent under the applicable Marketplace Rules of The
NASDAQ Stock Market, Inc. The Nominating Committee selects director nominees
based on their personal and professional integrity, depth and breadth of
experience, ability to make independent analytical inquiries, understanding of
our business, willingness to devote adequate attention and time to duties of the
Board of Directors and such other criteria as is deemed relevant by the
Nominating Committee. Castelle believes that the backgrounds and qualifications
of the directors, considered as a group, should provide a diverse mix of
experience, knowledge and skills.
In identifying potential director candidates, the Nominating Committee
relies on recommendations made by current directors and officers. In addition,
the Nominating Committee may engage a third party search firm to identify and
recommend potential candidates.
Finally, the Nominating Committee will consider candidates recommended
by shareholders.
Any shareholder wishing to recommend a director candidate for
consideration by the Nominating Committee must provide written notice to the
Corporate Secretary at our principal executive offices located at 855 Jarvis
Drive, Suite 100, Morgan Hill, CA 95037 by the time of the deadline set forth
below. Any such notice should clearly indicate that it is a recommendation of a
director candidate by a shareholder and must set forth (i) the name, age,
business address and residence address of the recommended candidate, (ii) the
principal occupation or employment of such recommended candidate, (iii) the
class and number of shares of the corporation which are beneficially owned by
such recommended candidate, (iv) a description of all understandings or
arrangements between the shareholder and the recommended candidate and any other
person or persons pursuant to which the recommendations are to be made by the
shareholder and (v) any other information relating to such recommended candidate
that is required to be disclosed in solicitations of proxies for the election of
directors. In addition, such notice must contain (i) a representation that the
shareholder is a holder of record of Castelle stock entitled to vote at such
meeting, (ii) the name and address, as they appear on our books, of the
shareholder proposing such nomination, (iii) the class and number of shares of
our common stock that are beneficially owned by such shareholder, (iv) any
material interest of the shareholder in such recommendation and (v) any other
information that is required to be provided by the shareholder pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended, in such
shareholder's capacity as proponent of a shareholder proposal. We require that
any such recommendations for inclusion in our proxy materials for our 2005
Annual Meeting of Shareholders be made not later than January 5, 2005 to ensure
adequate time for meaningful consideration by the committee. See "Shareholder
Proposals" for additional information regarding deadlines for submitting
proposals. Properly submitted recommendations will be forwarded to our
Nominating Committee for review and consideration. Assuming that a shareholder
recommendation complies with the above process and contains the information
required above, the Nominating Committee will evaluate a candidate recommended
by a shareholder according to its processes and criteria established in its sole
discretion.
18
ATTENDANCE AT ANNUAL MEETINGS
Castelle invites all of its directors to attend our annual meetings of
shareholders. Two directors attended the annual meeting of shareholders held on
May 29, 2003.
STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
The Board of Directors maintains a process for shareholders to
communicate with the Board of Directors or with individual directors.
Shareholders who wish to communicate with the Board of Directors or with
individual directors should direct written correspondence to our Corporate
Secretary at our principal executive offices located at 855 Jarvis Drive, Suite
100, Morgan Hill, CA 95037. Any such communication must contain (i) a
representation that the shareholder is a holder of record of stock of the
corporation, (ii) the name and address, as they appear on the corporation's
books, of the shareholder sending such communication and (iii) the class and
number of shares of the corporation that are beneficially owned by such
shareholder. The Board has charged the Corporate Secretary to determine in his
discretion whether the communication is appropriate for director, committee or
board consideration. The Corporate Secretary is required to direct certain
communications, including all communications regarding personal grievances,
administrative matters, the conduct of the company's normal business operations,
billing issues, product or service related inquiries, order requests and similar
issues to the appropriate individual within the company. The Corporate Secretary
will forward all other communications to the Board of Directors, or the Board
member addressee, or to the director or committee of the Board appointed to
handle such communications, except for communications deemed unduly hostile,
threatening, illegal or inappropriate, in which case the Corporate Secretary has
the authority to discard the communication or to take appropriate legal action
regarding such communication.
CODE OF CONDUCT AND ETHICS
Castelle has adopted a Code of Conduct and Ethics that applies to all
officers, directors, and employees. Our Code of Conduct and Ethics is posted on
our website under the "Investor Relations" page at
http://www.castelle.com/corporate/governance.htm. Please note that information
on the company web site is not incorporated by reference into this Proxy
Statement.
[The Remainder of this Page Intentionally Left Blank]
19
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than the relationships described below, and in the sections
entitled "Executive Compensation" and "Employment Severance and Change of
Control Agreements," since January 1, 2003, there has not been, nor is there
currently proposed, any transaction or series of similar transactions to which
we were or will be a party in which the amount involved exceeded or will exceed
$60,000 and in which any director, executive officer, holder of more than 5% of
our common stock or any member of his or her immediate family had or will have a
direct or indirect material interest.
In January 2001, we engaged W.R. Hambrecht + Co. ("WRH + Co."), an
investment bank in which Mr. Hambrecht, one of our directors, is a partner, to
provide certain financial advisory services. WRH + Co. rendered an insignificant
level of services to the company under this arrangement, and the agreement was
terminated in 2001. Also, WRH + Co. has been selected to perform certain stock
repurchase services for us, as part of our common stock repurchase program
announced on October 16, 2002. During 2003, WRH + Co. had rendered an
insignificant level of services to the company through these services.
Our Bylaws provide that we will indemnify directors and executive
officers to the fullest extent permitted by California law. Under our Bylaws,
indemnified parties are entitled to indemnification for negligence, gross
negligence and otherwise to the fullest extent permitted by law. The Bylaws also
require us to advance litigation expenses in the case of legal proceedings,
against an undertaking by the indemnified party to repay such advances if it is
ultimately determined that the indemnified party is not entitled to
indemnification.
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20
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information, as of December 31,
2003, concerning securities authorized for issuance under all equity
compensation plans of Castelle:
----------------------------------------- --------------------------- -------------------------- ---------------------
Number of securities to Weighted average
be issued upon exercise exercise price of Number of
of outstanding options, outstanding options, securities remaining
warrants and rights warrants and rights for future
issuance
----------------------------------------- --------------------------- -------------------------- ---------------------
Equity incentive plans approved by 1,590,206 $1.38 546,500*
security holders
----------------------------------------- --------------------------- -------------------------- ---------------------
Equity compensation plans not approved -0- n/a -0-
by security holders
----------------------------------------- --------------------------- -------------------------- ---------------------
Total 1,590,206 $1.38 546,500
----------------------------------------- --------------------------- -------------------------- ---------------------
* Represents 546,500 shares available for issuance under our 2002 Equity Incentive Plan
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers, and persons who own more than ten percent of
the common stock, to file with the SEC initial reports of ownership and to file
reports of changes in ownership of common stock. Officers, directors and greater
than ten percent shareholders are required to furnish us with copies of all
Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no other reports were
required, during the year ended December 31, 2003 all Section 16(a) filing
requirements applicable to our officers, directors and greater than ten percent
beneficial owners were complied with, except that Michael Petrovich filed a Form
4 related to the exercise of 17,500 shares late by two business days and Edward
Heinze filed a Form 4 related to the exercise and sale of 26,352 shares late by
four business days.
OTHER MATTERS
The Board of Directors knows of no other matters that will be presented
for consideration at the Annual Meeting. If any other matters are properly
brought before the meeting, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment.
By Order of the Board of Directors
/s/Paul Cheng
Chief Financial Officer and Secretary
April 29, 2004
A copy of Castelle's Annual Report to the Securities and Exchange Commission on
Form 10-K for the year ended December 31, 2003 is available without charge upon
written request to: Corporate Secretary, Castelle, 855 Jarvis Drive, Suite 100,
Morgan Hill, CA 95037.
21
CHARTER OF THE
AUDIT COMMITTEE
OF THE
BOARD OF DIRECTORS OF
CASTELLE
I. Purpose and Authority
The Audit Committee (the "Committee") of the Board of Directors (the
"Board") of Castelle (the "Company") is appointed by the Board to oversee the
accounting and financial reporting processes of the Company and audits of the
financial statements of the Company. The Committee's principal functions are to:
o monitor the periodic reviews and audits of the adequacy of the
accounting and financial reporting processes and systems of
internal control that are conducted by the Company's
independent auditors and the Company's financial and senior
management;
o appoint and review, and evaluate the independence and
performance of, the Company's independent auditors; and
o facilitate communication among the Company's independent
auditors and the Company's financial and senior management.
The Committee will fulfill these functions primarily by carrying out
the activities enumerated in Part IV of this charter. In order to serve these
functions, the Committee shall have unrestricted access to Company personnel and
documents, shall have authority to direct and supervise an investigation into
any matters within the scope of its duties, and shall have authority to engage
and determine funding for such independent counsel, experts and other advisers
as it determines to be necessary or appropriate to carry out its
responsibilities and duties. The Company will provide for appropriate funding,
as determined by the Committee, in its capacity as a committee of the Board, for
payment of (a) compensation to the public accounting firm engaged for the
purpose of rendering or issuing an audit report or performing other audit,
review or attest services for the Company; (b) compensation to any advisers
employed by the Committee referenced above; and (c) ordinary administrative
expenses of the Committee that are necessary or appropriate in carrying out its
duties.
While the Committee has the responsibilities and powers set forth in
this charter, it is not the duty of the Committee to plan or conduct audits or
to determine that the Company's financial statements are complete and accurate
and are in accordance with generally accepted accounting principles. This is the
responsibility of management and the Company's independent auditors.
II. Membership
All members of the Committee will be appointed by, and shall serve at
the discretion of, the Board. Unless a chair is elected by the full Board, the
members of the Committee may designate a chair by majority vote of the Committee
membership.
The Committee shall consist of three or more members of the Board, with
the exact number being determined by the Board. Each member of the Committee
shall be "independent" as defined by applicable law, the rules of the Securities
and Exchange Commission and the rules of The Nasdaq Stock Market, as they may be
amended from time to time (collectively, the "Rules"), except as otherwise
permitted thereby. Each member of the Committee shall have the ability to read
and understand fundamental financial statements and at least one member shall be
a financial expert or have financial sophistication to the extent as may be
required by the Rules.
22
III. Meetings
Meetings of the Committee shall be held from time to time as determined
by the Board and/or the members of the Committee. The Committee should
periodically meet with he independent auditors out of the presence of management
about internal controls, the fullness and accuracy of the Company's financial
statements and any other matters that the Committee or these groups believe
should be discussed privately with the Committee. The Committee members, or the
Chairman of the Committee on behalf of all of the Committee members, should
communicate with management and the independent auditors on a quarterly basis
in connection with their review of the Company's financial statements.
IV. Responsibilities and Duties
The following shall be the principal recurring processes of the
Committee in carrying out its oversight responsibilities. These processes are
set forth as a guide with the understanding that the Committee may supplement
them as appropriate and may establish policies and procedures from time to time
that it deems necessary or advisable in fulfilling its responsibilities.
1. Review the Company's quarterly and annual financial statements, including any
report or opinion by the independent auditors, prior to distribution to the
public or filing with the Securities and Exchange Commission.
2. In connection with the Committee's review of the annual financial statements:
o Discuss with the independent auditors, management of the financial
statements and the results of the independent auditors' audit of the
financial statements.
o Discuss any items required to be communicated by the independent
auditors in accordance with Statement of Accounting Standards No.
61, as amended - or such other relevant standards or requirements
then in effect. These discussions should include the independent
auditors' judgments about the quality and appropriateness of the
Company's accounting principles, the reasonableness of significant
judgments, the clarity of the disclosures in the Company's financial
statements and any significant difficulties encountered during the
course of the audit, including any restrictions on the scope of work
or access to required information.
3. In connection with the Committee's review of the quarterly financial
statements:
o Discuss with the independent auditors and management the results of
the independent auditors' review of the quarterly financial
statements in accordance with SAS No. 100 - or such other relevant
standards or requirements then in effect.
o Discuss significant issues, events and transactions and any
significant changes regarding accounting principles, practices,
judgments or estimates with management and the independent auditors,
including any significant disagreements among management and the
independent auditors.
4. Receive from the independent auditors and review a report of: (a) all
critical accounting policies and practices to be used; (b) all alternative
treatments within generally accepted accounting principles for policies and
practices related to material items that have been discussed with management of
the Company, including ramifications of the use of such alternative disclosures
and treatments and the treatment preferred by the independent auditors; and (c)
other material written communications between the independent auditors and the
management of the Company, such as any management letter or schedule of
unadjusted differences.
5. Discuss any comments or recommendations of the independent auditors outlined
in their annual management letter. Approve a schedule for implementing any
recommended changes and monitor compliance with the schedule.
23
6. Discuss with the independent auditors and management their periodic reviews
of the adequacy of the Company's accounting and financial reporting processes
and systems of internal control, including the adequacy of the systems of
reporting to the Committee by each group.
7. Appoint, determine the compensation and funding for, retain, and oversee the
work of any public accounting firm engaged by the Company (including resolution
of disagreements between management and the accounting firm regarding financial
reporting) for the purpose of preparing or issuing an audit report or related
work or performing other audit, review or attest services for the Company.
Review the independence, performance, experience and qualifications of the
independent auditors.
8. Preapprove all auditing services and permissible non-audit services (subject
to any de minimus or other exceptions allowed by applicable law and rules)
provided to the Company by the independent auditors. Before the independent
auditors are engaged by the Company to render auditing or non-audit services,
the engagement must either (a) be approved by the Committee or (b) if the
services do not respect the provision of audit, review or attest services,
satisfy any de minimus or other exceptions allowed by applicable law and rules
or (c) be entered into pursuant to preapproval policies and procedures
established by the Committee, provided that the policies and procedures are
detailed as to the particular service and the Committee is informed of each
service and such policies and procedures do not include delegation of the
Committee's responsibilities under the Securities Exchange Act of 1934 to the
Company's management. For example, the Committee may delegate the authority to
grant preapproval of auditing and non-audit services to one or more designated
independent members of the Committee; provided, that the decisions of any member
to whom authority is delegated to preapprove an activity must be presented to
the full Committee at each of its scheduled meetings.
9. Resolve disagreements between management and the independent auditors
regarding financial reporting.
10. Periodically consult with the independent auditors out of the presence of
management about internal controls, the fullness and accuracy of the Company's
financial statements and any other matters that the Committee or these groups
believe should be discussed privately with the Committee.
11. Communicate with the Company's independent auditors about the Company's
expectations regarding its relationship with the auditors, including the
following: (i) the independent auditors' ultimate accountability to the
Committee; and (ii) the sole authority and responsibility of the Committee to
select, evaluate and, where appropriate, replace the independent auditors.
12. Review and approve processes and procedures to ensure the continuing
independence of the Company's independent auditors. These processes shall
include obtaining and reviewing, on an annual basis, a letter from the
independent auditors describing all relationships between the independent
auditors and the Company required to be disclosed by Independence Standards
Board Standard No. 1, reviewing the nature and scope of such relationships and
discontinuing any relationships that the Committee believes could compromise the
independence of the auditors.
13. Review the independent auditors' audit plan.
14. Review and approve all transactions between the Company and any
related-party, as such term is defined in applicable law.
15. Receive from each of the Company's principal executive officer or officers
and each of the Company's principal financial officer or officers, or persons
performing similar functions, and review, a report of: (a) all significant
deficiencies in the design or operation of internal controls which could
adversely affect the Company's ability to record, process, summarize and report
financial data; and (b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the Company's
internal controls.
16. Periodically review the status of any legal matters that could have a
significant impact on the Company's financial statements.
24
17. Annually prepare a report to the Company's stockholders for inclusion in the
Company's annual proxy statement as required by the rules and regulations of the
Securities and Exchange Commission, as they may be amended from time to time.
18. Establish procedures for (a) the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal accounting
controls or auditing matters and (b) the confidential and anonymous submission
by employees of the Company of concerns regarding questionable accounting or
auditing matters.
19. Review and reassess the adequacy of the Committee's charter periodically.
Submit the charter to the Company's Board of Directors for review and include a
copy of the charter as an appendix to the Company's proxy statement as required
by the rules and regulations of the Securities and Exchange Commission, as they
may be amended from time to time (currently, once every three years).
20. Perform any other activities required by applicable law, rules or
regulations, including the rules of the Securities and Exchange Commission and
any stock exchange or market on which the Company's Common Stock is listed, and
perform other activities that are consistent with this charter, the Company's
Bylaws and governing laws, as the Committee or the Board deems necessary or
appropriate.
V. Minutes:
The Committee will maintain written minutes of meetings and
periodically report to the Board of Directors on significant matters related to
the Committee's responsibilities.
[The Remainder of this Page Intentionally Left Blank]
25
CASTELLE
Annual Meeting of Shareholders
to be held on May 28, 2004
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Scott C. McDonald and Paul Cheng, and
each of them, as the Proxyholders, each with full powers of substitution and
resubstitution, and hereby authorizes them to represent and to vote, as
designated below, all shares of common stock of Castelle (the "Corporation")
that the undersigned is entitled to vote at the Annual Meeting of Shareholders
of the Corporation (the "Meeting") to be held on May 28, 2004, at 10:00 a.m.
local time, at the Corporation's corporate offices located at 855 Jarvis Drive,
Suite 100, Morgan Hill, California 95037, and at any and all postponements,
continuations and adjournments thereof.
This Proxy, when properly executed and returned in a timely manner,
will be voted at the Meeting and any adjournment or postponement thereof in the
manner described herein. If no contrary indication is made, the proxy will be
voted FOR the Board of Director nominees, and FOR Proposal 2 and in accordance
with the judgment and in the discretion of the persons named as Proxyholders
herein on any other business that may properly come before the Meeting or any
adjournment or postponement thereof, to the extent authorized by Rule 14a-4(c)
promulgated under the Securities Exchange Act of 1934. In exercising this proxy
to elect members of the Board of Directors, the proxy holders may vote shares
cumulatively in such fashion as they determine in their discretion.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
----------------------- ---------------------
CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE
SEE SEE
REVERSE REVERSE
SIDE SIDE
----------------------- ---------------------
DETACH HERE
|X| Please mark
votes as in this
example.
The Board of Directors unanimously recommends that you vote FOR the Board of
Director nominees and FOR Proposal 2.
|_| MARK HERE FOR ADDRESS
CHANGE AND NOTE BELOW
1. Election of Directors.
Nominees: Donald L. Rich, Scott C. McDonald, Peter R. Tierney,
Robert H. Hambrecht and Robert O.Smith
|_| FOR all nominees |_| WITHHOLD from all nominees
To withhold authority to vote for any individual nominee, strike a
line through that nominee's name.
2. Proposal to ratify the appointment of PricewaterhouseCoopers LLP as
independent auditors for 2004.
FOR AGAINST ABSTAIN
|_| |_| |_|
In addition, this proxy card grants discretionary authority on such other
matters that may be presented at the annual meeting for a vote of the
shareholders.
Please sign exactly as your name appears on this Proxy. If more than one name
appears, all persons so designated should sign. Attorneys, executors,
administrators, trustees and guardians should indicate their capacities. If the
signer is a corporation, please print full corporate name and indicate capacity
of duly authorized officer executing on behalf of the corporation. If the signer
is a partnership, please print full partnership name and indicate capacity of
duly authorized person executing on behalf of the partnership. Please date this
Proxy.
Signature: Date:
----------------------------------- ------------------------
Printed Name:
-----------------------------------
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN
THIS PROXY CARD AND RETURN IT PRIOR TO THE MEETING IN THE ENCLOSED ENVELOPE.
(Reverse Side)