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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, 1999
| | 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 or in
definitive proxy or information statements incorporated by reference in Part III
of the Form 10-K. ___
The approximate aggregate market value of the Common Stock held
by-non-affiliates of the Registrant, based upon the last sale price of the
Common Stock reported on the Nasdaq SmallCap Market on March 1, 2000 was
$6,139,000. Shares of Common Stock held by persons who hold more than 10% of the
outstanding shares and shares held by officers and directors of the Registrant
have been excluded because such persons may be deemed to be affiliates. This
determination is not necessarily conclusive.
The number of shares of Common Stock outstanding as March 1, 2000 was 4,651,996.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Castelle's proxy statement relating to the annual meeting of
shareholders to be held on May 10, 2000 (the "Proxy Statement") are incorporated
by reference into Part III of this Form 10-K.
CASTELLE
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I ....................................................................................................1
ITEM 1. BUSINESS........................................................................................1
ITEM 2. PROPERTIES.....................................................................................20
ITEM 3. LEGAL PROCEEDINGS..............................................................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS..........................................20
PART II ...................................................................................................21
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...........................21
ITEM 6. SELECTED FINANCIAL DATA........................................................................22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION..........22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........27
PART III ...................................................................................................28
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................28
ITEM 11. EXECUTIVE COMPENSATION.........................................................................28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................28
PART IV ...................................................................................................29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................29
SIGNATURES ...................................................................................................31
PART I
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that are based on our current expectations
about our company and our industry. We use words such as
"plan,""expect,""intend,""believe,""anticipate,""estimate" and other similar
expressions to identify some forward-looking statements, but not all
forward-looking statements include these words. All of our forward-looking
statements involve risks and uncertainties. The Company's actual results could
differ significantly from our expectations and from the results expressed in or
implied by these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed elsewhere in this
Annual Report on Form 10-K. We urge you to consider these cautionary statements
carefully in evaluating our forward-looking statements. Except as required by
law, we undertake no obligation to publicly update any forward-looking
statements to reflect subsequent events and circumstances.
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.
INTRODUCTION
Castelle (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, and
InfoPressTM are trademarks of the Company. This Annual Report on Form 10-K
includes trademarks and trade names of other companies.
The Company designs, develops, markets and supports server appliances
providing office messaging solutions and other shared services. The Company's
current products are focused on two areas: fax messaging products and print
servers. The Company's products consist of FaxPress, an integrated
hardware/software network faxing solution; InfoPress, an enterprise-level
fax-on-demand software product, and LANpress print servers.
The Company's products have historically centered on fax and print
servers and related technologies. Starting in 1997, the Company's revenues have
declined as competition increased, primarily with the print server products in
the Asia Pacific Region, while at the same time the Internet and other
networking technologies advanced. As a result, the Company experienced annual
operating losses during 1997 through 1999. During the past two years, management
has redirected the Company's efforts to focus on server appliances and on
development efforts to integrate existing and future products with the Internet
and emerging networking technologies. Through restructuring and implementing
numerous cost reductions, the company was able to report an operating profit in
the fourth quarter of 1999 and a positive cash flow for the year.
Castelle's objective is to be a leading worldwide supplier of server
appliances providing office messaging solutions and other shared services. The
Company's products answer the need for specialized networking equipment that
allow network administrators to deploy complex networking applications without
the cost and time required to install server-based software solutions. Castelle
pioneered server appliances, establishing a benchmark for "plug and play" and
ease of use with its fax and print server product families. Castelle products
are installed in most Fortune 1000 companies, and in small and medium sized
businesses worldwide. Castelle is now applying its proven technology to expand
its line of server appliances to provide Internet and Intranet messaging and
communication solutions for small and medium enterprises, and departments of
large corporations.
1
The Company has adapted its products for use with the Internet and will
continue to focus on the effect of the Internet on network productivity. The
Company's FaxPress fax servers provide an essential component of a corporate
unified messaging solution. The Company has developed Internet fax capability
with its FaxPress and InfoPress servers and Internet print capability with its
LANpress print servers.
Castelle sells its products through multiple channels, 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's distributors sell
Castelle's products to value-added resellers ("VARs"), e-commerce vendors and
other resellers. The Company's three major domestic distributors include Ingram
Micro, Inc. ("Ingram"), Tech Data Corporation ("Tech Data") and Merisel, Inc.
("Merisel"). and its largest international distributors are Macnica Corporation
("Macnica") in Japan and Ingram UK in the United Kingdom. The Company's
e-commerce strategy includes developing close relationships with such mass
market vendors as CDW, Insight, MicroWarehouse, and BUY.COM. The Company also
distributes its products through its on-line store on the Company's Web site.
The Company also has relationships with certain original equipment manufacturers
and sells software and upgrades directly to end-users.
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. Additional
risks and uncertainties not presently known to the Company or that the Company
currently deems immaterial also may impair the Company's business 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 sales will often reflect orders shipped
in the same quarter in which they are received. The Company's backlog at any
given time is not necessarily indicative of actual sales for any succeeding
period. 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.
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."
2
History of Losses; Accumulated Deficit
The Company has experienced significant operating losses and, as of
December 31, 1999, had an accumulated deficit of $25 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, the Company has sustained annual losses in 1997 through
1999, 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."
Nasdaq SmallCap Listing; Risk associated with Limited Market
The Company's Common Stock has been listed on the Nasdaq SmallCap
Market since April 1999. In order to maintain its listing on the Nasdaq SmallCap
Market, the Company must maintain total assets, capital and public float at
specified levels, and generally must maintain a minimum bid price of $1.00 per
share. If the Company fails to maintain the standard necessary to be quoted on
the Nasdaq SmallCap Market, the Company's Common Stock could become subject to
delisting. If the Common Stock is delisted, trading in the Common Stock could be
conducted on the OTC Bulletin Board or in the over-the-counter market in what is
commonly referred to as the "pink sheets." If this occurs, a shareholder will
find it more difficult to dispose of the Common Stock or to obtain accurate
quotations as to the price of the Common Stock. Lack of any 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 and could adversely effect the Company's ability to raise
additional equity or debt financing on acceptable 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.
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 and the emergence of the
Internet and other communication technologies. 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 cost estimates 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 print servers. 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/email 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.
3
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."
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 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.
4
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
software, hardware and service 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. In the fax server
market the Company competes with 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 in the print server market 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 31% and 38% of the Company's net sales in 1999 and
1998, respectively. The Company sells its products in approximately 40 foreign
countries through approximately 70 international distributors. Macnica, the
Company's principal Japanese distributor, accounted for approximately 60% and
67% of the Company's international sales in 1999 and 1998, respectively. 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."
Lack of Product Revenue Diversification
The Company derives substantially all of its sales from its fax and
print server products. The Company is leveraging its expertise in these areas to
develop new messaging features and products to support greater integration into
corporate network environments and with Internet communications. See "Business
- -Research and Product Development". The Company expects that its current
products will continue to account for a majority of the Company's sales in the
near future. A decline in demand for these products as a result of competition,
technological change or other factors, or a delay in the development and market
acceptance of new features and products, would have a material adverse effect on
the Company's business, operating results and financial condition.
5
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. The Company's distributors sell
Castelle's products to VARs, e-commerce vendors and other resellers. The
distribution of personal computers and networking products 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 distributors typically represent other
products that are complementary to, or compete with, those of the Company. In
particular, certain of its competitors, including Hewlett-Packard and Intel,
sell a substantially higher dollar volume of products through several of the
Company's large U.S. 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 single sources. Other product components 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 supplier of certain print
server products is SerComm. There can be no assurance that these products will
produce gross margins comparable to those of the Company's internally generated
products or that the parties with which the Company contracts will continue to
provide the quantities and quality of products needed by the Company or that
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. There can be no assurance
that third parties will not assert infringement claims against the Company 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 claims. 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."
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.
8
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 March 1, 2000 the Company's officers and directors and their
affiliates beneficially owned approximately 24% 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.
BUSINESS
General
Castelle designs, develops, markets and supports server appliances
providing office messaging solutions and other shared services. The Company's
current products are focused on two areas: fax messaging products, including a
range of software enhancements, and print servers. The Company's products
consist of FaxPress, an integrated hardware/software network faxing solution;
InfoPress an enterprise-level fax-on-demand software product and LANpress print
servers. See "Business -- Research and Product Development."
The Company's products have historically centered on fax and print
servers and related technologies. Starting in 1997, the Company's revenues have
declined as competition increased, primarily with the print server products in
the Asia Pacific Region, while at the same time the Internet and other
networking technologies advanced. As a result, the Company experienced annual
operating losses during 1997 through 1999. During the past two years, management
has redirected the Company's efforts to focus on server appliances and on
development efforts to integrate existing and future products with the Internet
and emerging networking technologies. Through restructuring and implementing
numerous cost reductions, the company was able to report an operating profit of
$114,000 in the fourth quarter of 1999. Additionally, increased cash management
during 1999 provided a positive cash flow for the year.
9
Industry Background
In the mid-1980s, organizations began to interconnect personal
computers into local area networks (LANs) in order to allow work groups to share
files and peripherals such as printers. As LANs have proliferated throughout
organizations and client/server architectures have gained acceptance, they have
become increasingly complex, the size and multimedia intensity of files being
transmitted has increased and the applications operating on the computer
networks have become more critical to the success of the business enterprise.
The proliferation of the Internet and Intranets and popularity of electronic
communications expanded the role of LAN's as a means to provide common access to
the Internet, email and other messaging applications. Installation, maintenance
and administration of LAN equipment has always required a staff of highly
skilled professionals. The costs associated with LANs and related equipment are
significant and affordable only for larger organizations. Many small and medium
sized businesses were not able to invest in necessary equipment and support
staff. This created the need for specialized networking equipment that would
allow network administrators to deploy complex networking applications without
the cost and time required to install server-based software solutions. These
devices are known in the industry as "Server Appliances" or "Thin Servers". A
server appliance is an integrated software/hardware solution designed to reduce
the complexity and cost for a specific server based application. Internet
routers, email servers, remote access servers, communication servers, and print
servers are examples of the server appliances used by businesses today.
Castelle pioneered server appliances, establishing a benchmark for
"plug and play" and ease of use with its fax and print server product families.
Fax Messaging Products: The increasing popularity of email
and the Internet provided the boost to all types of electronic
communications as many users and organizations became more comfortable
and accustomed to their use. To further simplify and improve inter- and
intra-organizational communications, corporate MIS departments are
looking for ways to integrate different types of messaging into a
unified messaging environment. Fax remains one of the key business
communication tools and is one of the essential components of the
corporate messaging environment. In corporate communication
infrastructures, fax is being integrated into email. To facilitate this
capability companies install email-integrated fax server systems.
Users can send and receive faxes as easily as emails, using the same
email application for both types of messages. 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 reduced
cost of fax transmissions, fax servers utilize Fax-Over-IP technology
to transmit faxes over the Internet.
These fax servers can be provided using complex software that require
Windows NT or UNIX systems and specialized and expensive fax modems.
The other approach is a dedicated fax server appliance, such as
Castelle FaxPress.
10
Fax servers can also be used as an independent network shared messaging
system in environments that require high-volume incoming and outgoing
faxes. Users are able to send and receive 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.
The Company also has Information Delivery Systems, which include
email-on-demand and fax-on-demand products. Fax-on-Demand is the
ability to use a touch-tone phone and a fax machine to request and
receive 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
information-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.
Server appliances, such as communications/messaging servers and print servers,
have emerged to gain significant market acceptance due to their ability to
significantly reduce complexity and cost associated with the installation and
maintenance of networking systems. These appliances also make the complex
functionality of Internet and Intranet communications available and affordable
to many smaller businesses. As MIS professionals in larger organizations and
business owners of smaller enterprises continue to recognize the benefits of
server appliances to provide such critical functionality as Internet and
Intranet communications, remote access, scanning, electronic mail and related
functions, the Company believes that the demand for such network systems will
increase.
Castelle Strategy
Castelle's objective is to be a leading worldwide supplier of server
appliances providing office messaging solutions and other shared services.
Castelle pioneered server appliances, establishing a benchmark for "plug and
play" and ease of use with its fax and print server product families. Castelle
products are installed in most Fortune 1000 companies, and in small and medium
sized businesses worldwide. Castelle is now applying its proven technology to
the office, integrating desktop messaging, Internet connectivity, print and
other shared services.
11
Focus on Server Appliances: The Company focuses exclusively on
providing innovative, reliable, easy-to-use network 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.
Focus on Messaging and Communications: The Company focuses on
developing application solutions for Inter and Intra-company
communications. The Company believes that its focus on application
servers rather than on infrastructure systems enables the Company to
offer products that bring higher value services to customers and
provide a higher margin to the Company.
Expand Product Line: The Company is leveraging its expertise in server
appliances to offer new easy-to-use, cost-effective solutions. The
Company continues to expand both its fax and print server products and
apply its proven technology to other areas.
Focus on E-commerce and Other High Volume Distribution Channels: The
Company has established a two-tier domestic and international
distribution network of leading national and regional network product
distributors and resellers including Ingram Micro, TechData, and
Merisel. Castelle's products are well suited for sale by e-commerce
vendors and the Company has been successful working with leading
suppliers such as CDW, BUY.COM, Insight, MicroWarehouse domestically
and Software Catalog and W-Store in Europe. The Company also sells
through OEM vendors such as Fujitsu Ltd. in Japan (" Fujitsu"). and
Veritek ("Veritek") in Korea. 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
offerings 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 range of server appliance products
that enhance network productivity, performance and functionality. The Company's
current products are grouped into two areas: fax messaging products, including a
range of software enhancements, and print servers.
Fax Messaging Products: The Company offers the FaxPress family of
email-integrated fax server appliances. The Company positions the
FaxPress as the easiest way to add faxing to your network and integrate
fax with email. FaxPress allows network users to send, receive, route,
print, store, edit and retrieve fax transmissions from their own
personal computers on a local area network. FaxPress can be integrated
into an email system creating a unified fax/email messaging
environment. FaxPress enables users to transmit documents directly to a
fax device as easily as if they were printing to a laser printer or
sending an email message. The product also provides 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 1999 and 1998, fax
products represented 78% and 68%, respectively, of total net sales.
12
Key features of the FaxPress products (configured with its current
software versions) include:
o Easy Installation and maintenance: FaxPress is a fax server
appliance and comes with all necessary hardware and
software. The hardware system is a small box with integrated
10/100 Base-T Ethernet or Token Ring interfaces, and one to
eight intelligent fax modems. All the required system and
client software is provided with the product.
o Support for popular network operating environments: FaxPress
operates in any local area network based on Microsoft
Windows 2000, Windows NT, NT Terminal Server, Novell NetWare
or Linux servers.
o Ability to create unified fax/email messaging environment:
FaxPress has the ability to integrate fax into a corporate
email system, allowing users to send and receive faxes in
the same manner as emails. FaxPress supports Microsoft
Exchange/Outlook, Lotus Notes, Novell GroupWise, Netscape
and other SMTP compatible systems. Castelle's unique
Exchange Direct interface offloads fax processing from MS
Exchange Server while maintaining tight integration with the
Outlook client.
o Ability to send faxes from many applications: Easy faxing
from within any Windows, Windows 95/98 and Windows NT/2000
application such as Microsoft Office and Lotus Smart Suite.
o Electronic delivery of faxes to desktops: FaxPress supports
several methods [DID (Direct Inward Dialing), DTMF (Dual
Tone Multifrequency), T.30 sub-addressing, OCR (Optical
Character Recognition) routing, line routing] to deliver
incoming faxes direct to the email or fax inbox of the
intended recipient.
o Internet faxing capabilities reduce transmission costs:
FaxPress enables users to connect several units via the
Internet or the Intranet to form a private Fax-over-IP
network that can significantly reduce the cost of fax
transmissions. FaxPress can also operate within a Fax2Net
Internet Faxing network, a worldwide ISP.
o Integration into custom applications: The Company provides a
Software Development Kit which allows programmers to
integrate faxing functions into their current applications
or to create new customized applications that use the
FaxPress server.
o Software Options: The Company offers a range of value-added
software options which increase the functionality of
Castelle's FaxPress systems and enables 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 Company offers a family of FaxPress fax server systems
ranging from entry-level products targeted to small businesses with
under 50 users to high-end fax solutions capable of supporting
enterprise-wide installations. The suggested U.S. list prices for
FaxPress fax server products range from $1,495 to $7,995. The server
pricing is based on hardware model, with no per-user costs. The
FaxPress 2500, 3500 and 5000 come with the FaxPress 6.0 PRO version
that adds integration with popular email packages, and many advanced
fax management and integration features. FaxPress 6.0 PRO is optional
on FaxPress SBE. The following table summarizes the Company's FaxPress
system products:
13
-----------------------------
Network Environment
---------------------------------------------------------------------------------------------
NetWare Windows
Number of Email Network 3.x, 4.x, 5.x NT/2000
Product Model Modems Integration Topology (IPX) (IPX,IP)
---------------------------------------------------------------------------------------------
FaxPress SBE 1 Optional Ethernet |X| |X|
FaxPress 1500-N 2 |X| Ethernet |X| |X|
FaxPress 3500 4 |X| Token Ring |X| |X|
FaxPress 5000 4 or 8 |X| Ethernet |X| |X|
---------------------------------------------------------------------------------------------
Information-on-demand systems: InfoPress software enables the access of
information via any touch-tone 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 email-on-demand
methods.
Castelle's InfoPress is a software product designed to operate on the
Microsoft Windows NT/2000 platform. The system utilizes voice and fax
processing hardware, as well as telephone system interface (analog or
T1) hardware with as few as two and as many as 288 ports that are
actually deployed at a customer site.
o Fax-on-Demand:Fax-on-Demand allows a user to request and
receive information on demand by dialing a telephone number.
The user interacts 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 Email-on-Demand:Email-on-Demand allows a user to request and
receive information on demand by using email. Auto-reply
email exists today, but is limited to receiving one
document, usually in text format. The main benefit of
email-on-demand is the ability to share the document library
with fax-on-demand.
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: Printer sharing continues to be one of the important
benefits of computer networking. Print servers are the most efficient
and economical way of sharing printers on networks. While demand for
print servers in various sizes of businesses continues to grow, the
market is very competitive. Castelle has been involved in the print
server business for more than 10 years. After continuous improvements
on the cost and feature set, Castelle's LANpress has become a
well-received print server product line. Our latest print server models
incorporate a RISC microprocessor, Fast Ethernet, Windows 2000,
Internet Printing and many other attractive new features. Castelle
LANpress JR is the world's smallest print server commercially available
today. It's similar in size to that of a standard printer cable
connector. The suggested U.S. list price for LANpress print servers
ranges from $149 to $499.
14
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 95 / 98 / Apple Upgrade Internet
Interface 4.x, 5.x NT / 2000 Ethertalk Capability Printing
- -----------------------------------------------------------------------------------------------------------------------
LANpress 1P/100 MP (1) 10/1000 |X| |X| |X| |X| |X| |X|
LANpress 3P/100 10/1000 |X| |X| |X| |X| |X| |X|
LANpress Jr. MP (2) 10 |X| |X| |X| |X| |X| |X|
LANpress 2+1 MP (3) 10 |X| |X| |X| |X| |X| |X|
LANpress 3+1 MP (3) 10 |X| |X| |X| |X| |X| |X|
- ----------------------------------------------------------------------------------------------------------------------
--------------------
(1)1 Centronics parallel port
(2)Connects directly to port on Printer
(3)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.
Research and Product Development
The Company has invested substantially in research and product
development. The Company believes its future performance will depend in large
part on its ability to enhance its current products, to expand its product
offerings, to maintain technological competitiveness and meet an expanding range
of customer requirements.
Castelle continues to invest in enhancing its server appliance product
lines 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 changing corporate communications/messaging environment and
increasing demand for easy-to-use networking systems define these needs. The
development efforts are focused on enhancing functionality of existing products
and developing other systems to expand our product offerings. The Company is
leveraging its unique technology and engineering expertise in server appliances,
networking, and client and server software to develop a new line of office
messaging server appliances. The Company's development efforts are focusing on
high value applications, while relying on its partners to provide basic
functionality for some of its product lines.
The current FaxPress fax server product line is being enhanced to offer
greater integration into corporate networking environments with such features
as:
o Windows NT Terminal Server support
o Windows 2000 Professional, Server and Advanced Server support
o Linux file server support
o Improved integration with Microsoft Exchange via Exchange Connector
Castelle will continue to further its strategy of supporting
Fax-Over-IP (Internet Faxing) through its own FaxPress-to-FaxPress communication
and interfaces to third-party Internet Fax providers.
The Company developed new versions of its FaxPress servers to offer
higher performance at a lower cost. Furthermore, the Company is applying this
technology to the development of new generations of server appliances that will
provide integrated email/fax messaging and other shared services.
15
The InfoPress Information Delivery product line is being improved to
support the current versions of Adobe Acrobat Reader and Netscape. It will
support Windows 2000 with a new printer driver. New and improved Web integration
is also being developed for the next version release.
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."
Sales, Marketing and Distribution
Castelle sells its products through multiple channels, 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 in Japan and Veritek in Korea. 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
distributors and VARs in qualifying sales opportunities for the fax and print
server products. The Company also sells some products through the on-line store
on its Web site. The Company's European headquarters located in the UK provides
sales and support services for Europe.
Demand for Castelle's products is created through a variety of
marketing programs. These programs are targeted toward end-users to stimulate
demand for the products and toward distributors, resellers, VARs and e-commerce
vendors to promote the product in the sales channel. 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 Internet marketing via targeted e-advertising,
publishing and sponsoring email newsletters, enhancing its Web presence, print
advertising, conducting direct mail campaigns, offering seminars, trade shows
and conferences and other forms of public relations efforts. To further expand
its Internet marketing efforts, the Company has deployed an e-marketing system
by MarketFirst Software to better respond to customers who contact the Company
via the Internet. The Company's Web site has been updated and designed to assist
customers in obtaining information about Castelle products and contacting
Castelle sales personnel, and offers selected products and services through the
Company's on-line store.
The Company's products are well suited for sale by e-commerce vendors,
and the Company has experienced success working with leading suppliers such as
CDW, BUY.COM, Insight, MicroWarehouse domestically and Software Catalog and
W-Store in Europe.
16
The Company's five largest distributors accounted for approximately 42%
of the Company's net sales in 1999 and 57% of its net sales in 1998. Macnica,
the Company's principal Japanese distributor, and Ingram, the Company's largest
domestic distributor, accounted for approximately 18% and 12%, respectively, of
the Company's net sales in 1999 and 26% and 17%, respectively, of its net sales
in 1998. Sales to customers located in the Pacific Rim and Europe comprised
approximately 31% and 38% of the Company's net sales in 1999 and 1998,
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 Castelle's products through a
variety of marketing and support programs, our distributors may give higher
priority to products of other suppliers, thereby reducing the efforts they
devote to selling our products. In particular, certain of our competitors,
including Hewlett-Packard and Intel, sell a substantially higher total dollar
volume of products through several of the Company's large U.S. 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. The
Company has a stock rotation policy with certain of its distributors that allows
them to return marketable inventory against offsetting orders. In the event that
the Company reduces 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. See "Business -Risk
Factors - Dependence on Suppliers and Subcontractors."
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 email during normal Company business days from 6:00 a.m.
to 5:00 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, including a Web site as well as an internal
help desk system. The Company has an automated call management distribution
system that provides 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 manufacture 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 Conexant, and microprocessors from Motorola, are currently available from
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. 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. See "Business -- Risk Factors -
Dependence on Suppliers and Subcontractors."
17
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."
18
Employees
As of February 22, 2000, the Company employed a total of 72 full-time
equivalent personnel, 15 in manufacturing, and 16 in sales and marketing, 17 in
engineering, 12 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.
EXECUTIVE OFFICERS OF THE COMPANY
Identification of Executive Officers
The names of the executive officers of the Company and their ages as of
February 22, 2000 are set forth below:
Name Age Position
Donald L. Rich 58 Chairman of the Board, President, Chief Executive
Officer, Chief Financial Officer and Secretary
Ronnie E. Mansoor 43 Chief Technology Officer, Vice President of
Engineering
Edward J. Heinze 54 Vice President Sales, North America
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. Mr. Rich
has served as Chief Financial Officer since April 1999. He became Chairman
of the Board in May 1999 and has served as Secretary since February 2000.
From January 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 communications middleware
software. 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.
Ronnie E. Mansoor
Mr. Mansoor joined the Company in 1997, after working as a consultant
for Castelle since 1995. He has served as the Director of Engineering and
was appointed Chief Technology Officer and Vice President of Engineering in
August 1999. Prior to joining Castelle, Mr. Mansoor served as the President
of Implicit Inc., a consulting company which provided software development
services to companies such as: Canon, Minolta, Adaptec, ASP, and Cylink, in
the fields of networking, imaging, security, and Internet technologies. In
addition, he held project management positions at Document Technologies, a
document imaging company, and ADAC Laboratories, a medical imaging company.
Mr. Mansoor holds a BS degree in Electrical Engineering and a PE degree in
Physics from Tel Aviv University.
19
Edward J. Heinze
Mr. Heinze has been with Castelle Inc. since 1994. He was appointed
Vice President Sales, North America in January 2000. Prior to his
appointment to Vice President, Mr. Heinze served Castelle as Product
Manager, Fax Product Line, and Regional Sales Manager. Before joining
Castelle, he served in several capacities at Visual/White Pine Software,
including Vice President of Sales. Prior to his tenure at White Pine, he was
Chief Operations Officer for XMARK, and Vice President of Sales and
Marketing at EIT, Millicom, Olympia, and Ontel. He holds a BS degree from
Waynesburg College.
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, expiring 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
20
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 and was transferred to the Nasdaq
SmallCap Market as of April 1999. The following table shows the intraday high
and low sale prices per share of Castelle's Common Stock as reported on the
Nasdaq National Market for the periods indicated prior to April 1999 and as
reported on the Nasdaq SmallCap Market for the periods indicated after April
1999. Such quotations do not include retail markups, markdowns or commissions.
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
Fiscal 1999 High Low
First Quarter $1 1/2 $ 1/2
Second Quarter $1 5/32 $ 3/8
Third Quarter $1 1/4 $ 5/8
Fourth Quarter $2 3/8 $ 7/8
As of December 31, 1999, there were 114 holders of record of the
Company's Common Stock. On March 1, 2000 the last sale price reported on the
Nasdaq SmallCap Market for the Company's Common Stock was $1.9375 per share.
Dividend Policy
The Company has not paid cash dividends on its Common Stock. The Board
of Directors currently intends 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.
21
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,
---------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(in thousands, except per share amounts)
INCOME STATEMENT DATA:
Net Sales $16,116 $21,746 $25,343 $29,461 $25,082
Gross Profit $ 8,404 $11,598 $13,507 $14,468 $11,511
Gross Profit as a % of Net Sales 52% 53% 53% 49% 46%
Net income/(loss) ($3,555) ($7,534) ($6,895) $5,724 $2,024
Net income/(loss) as a % of Net Sales (22%) (35%) (27%) 19% 8%
Net income/(loss) per share - diluted ($0.78) ($1.67) ($1.54) $1.45 $0.78
BALANCE SHEET DATA:
Cash and Cash Equivalents $4,714 $3,924 $6,204 $8,161 $7,268
Working Capital $3,555 $6,763 $10,816 $13,163 $8,912
Total Assets $8,502 $12,494 $18,926 $27,303 $14,728
Long-term Liabilities -- $98 $52 -- $75
Stockholders Equity $4,020 $7,501 $14,855 $21,616 $9,289
Net loss for 1999, 1998, and 1997 included net charges for
restructuring and other non-recurring items of $.4 million, $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.
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".
22
The Company's products have historically centered on fax and print
servers and related technologies. Starting in 1997, the Company's revenues have
declined as competition increased, primarily with the print server products in
the Asia Pacific Region, while at the same time the Internet and other
networking technologies advanced. As a result, the Company experienced annual
operating losses beginning from 1997 through 1999. During the past two years,
management has redirected the Company's efforts to focus on server appliances
and on development efforts to integrate existing and future products with the
Internet and emerging networking technologies. Through restructuring and
implementing numerous cost reductions, the company was able to report an
operating profit of $114,000 in the fourth quarter of 1999. Additionally,
increased cash management during 1999 provided a positive cash flow for the
year. Accounts receivable collections were improved, resulting in the average
Days Sales Outstanding of 35 at the end of 1999 versus 87 at the end of the
prior year. Inventory levels also decreased resulting in a doubling of inventory
turns in 1999.
Results of Operations
Net Sales
Net sales decreased 26% to $16.1 million in 1999 from $21.7 million in
1998. The decline of $5.6 million in net sales resulted primarily from lower
sales of the Company's main product lines, including a $3.7 million decrease
in print server products in Asia, and the Company's efforts to manage down
the inventory in the distribution channel. Revenue in 1998 had been reduced
by increases in the sales return allowance of approximately $1.0 million.
In 1998, net sales decreased 14% to $21.7 million from $25.3 million in
1997. The $3.6 million decline in net sales resulted primarily from lower
sales of the Company's print server products in Japan, increases in sales
returns and allowance of approximately $1.0 million, and increases in local
competition in Europe. The increase in Sales Returns Allowances allowed the
Company to better manage the level of inventory in the distribution channel.
International sales were $4.9 million, $8.3 million, and $11.9 million
in 1999, 1998 and 1997, respectively, representing 31%, 38% and 47%,
respectively, of net sales. Lower international sales were the result of a
reduction in general demand for the Company's print server 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, obsolescence and
manufacturing costs and warranty expenses. Cost of sales were $7.7 million,
$10.1 million and $11.8 million in 1999, 1998 and 1997, respectively, and
represented 48%, 47% and 47% of net sales for those years. Cost of sales as
a percentage of net sales has remained constant during these years as a
result of a higher proportion of net sales being derived from higher margin
fax products, offset by a lower gross margin percentage on sales of print
servers and unfavorable manufacturing overhead absorption rates due to lower
volumes. During 1999 the Company reduced manufacturing overhead by $.4
million through reduction of personnel and other costs savings. However in
1999 the Company recognized $1.1million of expense related to the disposal
of obsolete inventory.
Research and Development
Research and product development expenses were $2.7 million, $2.9
million and $3.1 million in 1999, 1998 and 1997, respectively, and
represented 17%, 13% and 12% of net sales for those periods. Spending has
supported existing products and the development of unified messaging server
appliances. The absolute dollar amount of research and product development
expense decreased slightly in 1999 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 decrease in research and development expenses in 1998 compared to
1997 was mainly due to improved expense controls.
Sales & Marketing
Sales and marketing expenses were $6.7 million, $8.8 million and $9.2
million for 1999, 1998 and 1997, respectively, and represented 42%, 40% and
36% of net sales for those periods. The expense decline in 1999 compared to
1998 was due to a reduction in personnel, lower marketing promotion, trade
show, occupancy and other cost savings.
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 increase in sales efforts for a new
fax product line.
General & Administrative
General and administrative expenses were $2.1 million, $2.4 million and
$2.3 million for 1999, 1998 and 1997, respectively, or 13%, 11% and 9% of
net sales for those periods. The decrease in expenses in 1999 was due to a
lower allowance for doubtful accounts and overall cost savings, offset by
increases in the amounts paid for administrative salaries and bonuses.
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.
Restructuring and Other Charges & Amortization of Intangible Assets
In 1999, the Company recognized a restructuring charge of $402,000 for
expenses associated with the Company's exit from the Object-Fax NT product
line including the disposition of excess inventory, reductions in personnel
and the write-off of excess office space. This disposition is expected to
reduce the Company's operating costs in future years.
In April 1998, the Company acquired the Object-Fax NT product 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 were amortized over 12
months, resulting in a $120,000 charge in 1998. In determining the amount of
in-process research and development, the Company 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.
24
In 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.
In addition, 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.
Interest Income, net
Net interest income was $126,000, $170,000 and $288,000 in 1999, 1998
and 1997, respectively. The changes in interest income versus the prior
years are due to changing cash balances.
Provision for (Benefit from) Income Taxes
In 1999 the Company's provision for income taxes was $4,000,
representing state taxes only. Because of the Company's net loss in 1999,
there were no federal nor substantial state income taxes recognized.
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.
In 1997 the Company recorded a net benefit from income taxes of
$732,000. At the time, this amount 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.
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, 1999, the Company had $4.7 million of cash and cash equivalents,
increased from $3.9 million for the same period in 1998. Working capital
decreased to $3.6 million at December 31, 1999 from $6.8 million at December 31,
1998. Cash and cash equivalents increased in 1999, even after funding the
operating loss for 1999, primarily because of significantly improved collections
of accounts receivable and reduction in inventory requirements. Working capital
decreased primarily because of the operating loss in 1999.
The Company has a $3.0 million secured revolving line of credit with a bank,
which expires in March 2000, pursuant to which the Company may borrow 100%
against pledges of cash at the bank's prime rate (8.50% at December 31, 1999).
Borrowings under this line of credit agreement are collateralized by all of the
assets of the Company. Under the terms of the loan agreement, the Company is
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, 1999 had no borrowings under the line of credit. The Company
expects to negotiate an extension of this line of credit.
25
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, 1999, the Company had drawn $288,000 against
this amount of which $98,000 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, 1999, net accounts receivable were $1.5 million, down
from $3.5 million for the same period in 1998. At the end of 1999 the average
Days Sales Outstanding was 35 versus 87 at the end of 1998. This is the result
of a focus on increased cash collections by the Company in 1999.
Net inventories as of December 31, 1999 were $1.4 million, down from $3.7
million in 1998. Inventory turnover for the year-ended 1999 was 4.4, up from 1.9
in 1998. This is the result of efforts by the Company to reduce inventory,
especially for older product lines.
Castelle acquired additional capital equipment of $184,000, $223,000 and
$732,000 in 1999, 1998 and 1997, 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.
In 1998 the Company acquired the Object-Fax NT product line for a total
purchase price of $1.4 million, including $300,000 in cash and 440,000 shares of
Castelle Common Stock.
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.
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,
1999. 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.
26
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, 1999 and 1998.................. F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997......................................... F-3
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997......................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997......................................... F-5
Notes to Consolidated Financial Statements.................................... F-6
(b) The following financial statement schedules of Castelle for
the years ended December 31, 1999, 1998 and 1997 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.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors
The information required by this Item concerning the Company's directors is
incorporated by reference from the sections captioned "Proposal 1: Election of
Directors" contained in the Company's definitive Proxy Statement related to the
Annual Meeting of Shareholders to be held May 10, 2000, to be filed by the
Company with the Securities and Exchange Commission (the "Proxy Statement").
Identification of Executive Officers
The information required by this Item concerning the Company's executive
officers is set forth in Part I of this Report.
Compliance with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by reference from the
section captioned "Compliance with Section 16(a) of the Securities and Exchange
Act of 1934" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
section captioned "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
sections captioned "Certain Transactions" and "Executive Compensation" contained
in the Proxy Statement.
28
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) Reports on Form 8-K - None
(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.
3.2(3) Amended and Restated Bylaws of the Company.
4.1 Reference is made to Exhibits 3.1 and 3.2.
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.
10.1(3)* 1995 Non-Employee Directors' Stock Option Plan, and form
of Director Stock Option Agreement.
10.2(4) Warrant for Common Stock issued to Unterberg Harris.
10.3(2)* Form of Indemnity Agreement between the Registrant and
each of its directors and executive officers.
10.4(2) OEM Purchase Agreement dated May 23, 1995, by and
between the Registrant and SerComm Corporation.
10.5(2) Distribution Agreement dated February 26, 1990, by and
between the Registrant and Ingram Micro D Inc.
10.6(2) Distributor Contract dated June 25, 1991, as amended
June 25, 1991, by and between the Registrant and Tech
Data Corporation.
10.7(2) Distribution Agreement dated March 26, 1992, as amended
March 26, 1992, by and between the Registrant and
Merisel, Inc.
10.8(2) Distributor Agreement dated October 1, 1990, by and
between the Registrant and Vitek.
10.9(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.
29
10.10(5)*1988 Equity Incentive Plan, as amended.
10.11(4) Warrant for Common Stock issued to RvR Securities Corp.
10.12(6)*Form of Executive Severance and Transition Benefits
Agreement between the Company and Messier. P. Raje.
10.13(6)*Form of Executive Severance and Transition Benefits
Agreement between the Company and Messier. J. Burke.
10.14(3)*The Executive Severance and Transition Benefits
Agreement dated November 10, 1998 between the Company
and Messier. Don Rich.
10.15(7)*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-20 of the Notes to Consolidated Financial