<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
FAROUDJA, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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<PAGE>
FAROUDJA, INC.
750 PALOMAR AVENUE
SUNNYVALE, CALIFORNIA
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
---------------------
The 1998 Annual Meeting of Stockholders of FAROUDJA, INC. will be held at
the Sheraton Four Points Hotel, located at 1100 N. Mathilda Avenue, Sunnyvale,
California, on Wednesday, June 10, 1998, beginning at 9:00 A.M. local time, for
the following purposes:
1. To elect three nominees to serve as directors of the Company for a three
year term and until their respective successors shall be elected and
qualified;
2. To approve amendments to the Company's 1997 Performance Stock Option
Plan; and
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The Board of Directors has fixed the close of business on April 17, 1998 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Annual Meeting or any adjournment thereof.
You are cordially invited to attend the meeting.
By Order of the Board of Directors.
Yves C. Faroudja
CHIEF TECHNICAL OFFICER AND SECRETARY
Sunnyvale, California
May 6, 1998
YOUR VOTE IS IMPORTANT
YOU ARE URGED TO SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING FORM OF
PROXY, SO THAT IF YOU ARE UNABLE TO ATTEND THE MEETING YOUR SHARES MAY
NEVERTHELESS BE VOTED. IF YOU DO ATTEND AND WISH TO VOTE IN PERSON, THE PROXY
IS REVOCABLE.
<PAGE>
FAROUDJA, INC.
----------------
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 10, 1998
------------------------
This Proxy Statement is furnished to the stockholders of FAROUDJA, INC. (the
"Company") in connection with the solicitation of proxies for use at the Annual
Meeting of Stockholders to be held at the Sheraton Four Points Hotel, located at
1100 N. Mathilda Avenue, Sunnyvale, California, on June 10, 1998, beginning at
9:00 A.M. local time, and at any adjournment thereof.
Proxies delivered pursuant to this solicitation are revocable at the option
of the persons executing the same, prior to their exercise, by attendance and
voting at the Annual Meeting or by written notice delivered to the Secretary of
the Company prior to the meeting, and are solicited by and on behalf of the
Board of Directors of the Company. Unless previously revoked, all proxies
representing shares entitled to vote which are delivered pursuant to this
solicitation will be voted at the meeting by the named attorneys-in-fact and
agents, to the extent authorized, in accordance with the directions contained
therein. If no such directions are given, the shares represented by such proxies
will be voted in favor of the election of three directors and the proposed
amendments to the Company's 1997 Performance Stock Option Plan. The named
proxies may vote in their discretion upon such other matters as may properly
come before the meeting. Assuming a quorum is present in person or by proxy at
the meeting, with respect to the election of directors, the nominees receiving
the greatest number of votes cast will be elected to the Board. The affirmative
vote of the holders of a majority of the shares of common stock $.001 par value
per share (the "Common Stock") represented at the Annual Meeting is necessary
for approving the proposed amendments to the Company's 1997 Performance Stock
Option Plan.
For purposes of determining whether a matter has received a majority vote,
abstentions will be included in the vote totals, with the result that an
abstention has the same effect as a negative vote. In instances where brokers
are prohibited from exercising discretionary authority for beneficial owners who
have not returned a proxy, those shares will not be included in the vote totals
and therefore will have no effect on the vote.
The cost of this solicitation will be borne by the Company. Proxies may be
solicited by personal interview, telephone and telegraph, as well as by use of
the mails. Banks, brokerage houses and other custodians, nominees or fiduciaries
will be requested to forward soliciting material to their principals and to
obtain authorization for the execution of proxies, and will be reimbursed for
their reasonable out-of-pocket expenses incurred in that regard. Employees of
the Company participating in the solicitation of proxies will not receive any
additional remuneration.
On April 17, 1998, the Company had 12,084,557 shares of Common Stock
outstanding, and there were no outstanding shares of any other class of stock.
Each holder of the Common Stock is entitled to one vote for each share of such
stock held. Only stockholders of record at the close of business on April 17,
1998 will be entitled to vote at the Annual Meeting. A majority of the
outstanding shares, whether present in person or by proxy, is required to
constitute a quorum to transact business at the meeting.
The Company intends to cause this Proxy Statement to be mailed to
stockholders on or about May 6, 1998.
1
<PAGE>
BENEFICIAL OWNERSHIP
OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of March 31,
1998 for (i) each person known by the Company to own beneficially more than 5%
of the outstanding shares of Common Stock, (ii) each of the Company's directors,
(iii) the Chief Executive Officer and those persons who were, at December 31,
1997, the Company's four most highly compensated executive officers other than
the Chief Executive Officer (collectively, the "Named Executive Officers") and
(iv) all executive officers and directors as a group. As of March 31, 1998, a
total of 12,084,557 shares of the Company's Common Stock were issued and
outstanding. Except as indicated in the footnotes to the table, the persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to community
property laws where applicable. Except as otherwise indicated, the address of
each of the persons in this table is as follows: c/o Faroudja, Inc., 750 Palomar
Avenue, Sunnyvale, California, 94086.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------
<S> <C> <C>
BENEFICIAL OWNER SHARES PERCENT
- --------------------------------------------------------------------- ---------- -----------
Yves C. Faroudja(2) ................................................. 2,094,444 17.3%
Roger K. Baumberger(3) .............................................. 1,488,753 12.3
Faroudja Images Investors, LLC(3) ................................... 1,488,353 12.3
c/o Spencer Trask Securities, Inc.
535 Madison Avenue
New York, New York 10022
Merv L. Adelson(4)(5) ............................................... 1,487,124 12.3
Adelson Investors, LLC(4) ........................................... 1,431,579 11.9
10900 Wilshire Boulevard
Los Angeles, California 90024
Kevin B. Kimberlin(6) ............................................... 919,311 7.6
S3 Incorporated ..................................................... 833,334 6.9
2801 Mission College Boulevard
Santa Clara, California 95052
Oshkim Limited Partners, L.P.(6) .................................... 737,593 6.1
Michael J. Moone(7) ................................................. 243,307 2.0
William J. Turner(8) ................................................ 162,297 1.3
William N. Sick, Jr.(9) ............................................. 136,727 1.1
Donald S. Butler(10) ................................................ 94,843 *
Matthew D. Miller(11) ............................................... 79,005 *
Michael C. Hoberg(12) ............................................... 27,224 *
Stuart D. Buchalter(4)(13) .......................................... 13,274 *
Thomas A. Harvey(14) ................................................ 490 *
All directors and executive officers as a group
(12 persons)(15) .................................................. 5,259,780 41.9%
</TABLE>
- ------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by that
person that are currently exercisable or exercisable within 60 days of
March 31, 1998 are deemed outstanding.
2
<PAGE>
(2) Mr. Faroudja holds the 2,094,444 shares jointly with Isabell Faroudja, his
wife. Includes 44,444 shares issuable upon exercise of warrants.
(3) Roger K. Baumberger is the Managing Member of Faroudja Images Investors,
LLC. Mr. Baumberger exercises voting and investment power over the shares
held by this entity, but disclaims beneficial ownership.
(4) Mr. Adelson is the Managing Member of Adelson Investors, LLC and exercises
sole voting and investment power over the shares held by that entity. Mr.
Buchalter is an officer of Adelson Investors, LLC and has an interest in
the profits of such firm, but does not exercise voting or investment power
over the shares held by the entity.
(5) Includes 3,077 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998 and 21,718 shares issuable upon exercise
of a warrant granted to Mr. Adelson under a consulting agreement (the
"Adelson Warrant"). Does not include 3,438 shares subject to options
granted to Mr. Adelson or 43,434 shares subject to the Adelson Warrant that
are not currently exercisable.
(6) Mr. Kimberlin is the general partner of Oshkim Limited Partners, L.P. and
exercises voting and investment power over the shares held by this entity.
He also has a beneficial interest in Faroudja Images Investors, LLC.
Includes 15,122 shares owned by Kimberlin Family Partners, L.P, of which
Mr. Kimberlin is the general partner and 165,846 shares owned by Spencer
Trask Holdings, Inc. in which Mr. Kimberlin is the Chairman.
(7) Includes 242,082 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998. Does not include 286,850 shares subject
to options granted to Mr. Moone that are not currently exercisable.
(8) Mr. Turner has a beneficial interest in Faroudja Images Investors, LLC.
Includes 11,109 shares held jointly with Mr. Turner's spouse.
(9) Includes 11,763 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998. Does not include 14,297 shares subject to
options granted to Mr. Sick that are not currently exercisable. Includes
11,342 shares held by Business Resources International where Mr. Sick is
the Chairman and Chief Executive Officer.
(10) Includes 94,628 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998. Does not include 101,336 shares subject
to options granted to Mr. Butler that are not currently exercisable.
(11) Includes 13,494 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998. Does not include 3,438 shares subject to
options granted to Mr. Miller that are not currently exercisable.
(12) Includes 26,563 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998. Does not include 48,437 shares subject
to options granted to Mr. Hoberg that are not currently exercisable.
(13) Includes 3,077 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1998 granted to Mr. Buchalter. Does not
include 3,438 shares subject to an option granted to Mr. Buchalter that
are not currently exercisable.
(14) Does not include 100,000 shares subject to options granted to Mr. Harvey
that are not currently exercisable.
(15) All directors and executive officers as a group hold options and warrants
to purchase 460,845 shares of the Company, which options and warrants will
vest within 60 days of March 31, 1998 and options and warrants to purchase
740,224 shares of the Company, which options and warrants will not have
vested within 60 days of March 31, 1998.
3
<PAGE>
ELECTION OF DIRECTORS
The Company's Certificate of Incorporation provides for a classified Board
of Directors consisting of three classes of directors with each director serving
a three-year term. Yves Faroudja, Michael Moone and Stuart Buchalter have been
designated Class 1 directors and were reelected at the 1997 Annual Meeting of
Stockholders for terms expiring at the 2000 Annual Meeting of Stockholders. Merv
Adelson, Kevin Kimberlin and William Turner have been designated Class 2
directors with terms expiring at the 1998 Annual Meeting of Stockholders.
William Sick and Matthew Miller have been designated as Class 3 directors with
terms expiring at the 1999 Annual Meeting of Stockholders. At each annual
meeting of stockholders, directors are elected for a full term of three years to
succeed those whose terms are expiring. Officers are elected annually by the
Board of Directors and serve at the discretion of the Board of Directors.
The Board of Directors has nominated Merv Adelson, Kevin Kimberlin and
William Turner for reelection to the Board of Directors for respective
three-year terms which will expire at the 2001 Annual Meeting of Stockholders.
All three nominees have indicated their willingness to serve and Proxies will be
voted for the election of all three individuals unless instructions are given on
the Proxy to withhold authority to vote for any of them.
Nominations for the election of directors, other than by the Board of
Directors, at the 1998 Annual Meeting must have been made by a stockholder
entitled to vote for the election of directors by giving timely written notice
to the Secretary of the Company at the Company's principal offices. Such notice
must have been received no later than the close of business on March 26, 1998,
ten days after the Company's public disclosure of the date of the 1998 Annual
Meeting, as required by the Company's Bylaws. For subsequent annual meetings, a
stockholder must give notice to the Secretary of the Company not less than 60
days nor more than 90 days prior to the annual meeting. Such stockholder's
notice must be in writing and must set forth as to each proposed nominee all
information relating to such person that is required to be disclosed in
solicitations of proxies pursuant to Regulation 14A under the Securities
Exchange Act of 1934 ("Exchange Act") including, but not limited to, such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected. Such stockholder notice must also set forth
the name and address, as they appear on the Company's books, of the nominating
stockholder and the class and number of shares of common stock beneficially
owned by such stockholder.
4
<PAGE>
The following table sets forth certain information with respect to the
nominees for director and the other directors of the Company.
THE BOARD OF DIRECTORS
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION
- ------------------------------ ---------------------------------------------------------------------------------
<S> <C>
Michael J. Moone.............. Michael J. Moone (age 51) has served as President, Chief Executive Officer and a
director of the Company since joining the Company in July 1996. From February
1995 to June 1996, Mr. Moone was President, Chief Executive Officer and a
director of Healthrider, Inc., a home fitness equipment supplier. In June 1993,
he co-founded Kid One, Inc., a developer of electronic toys and games, and served
as its Chief Executive Officer and a director through February 1995. In 1985, Mr.
Moone founded Merchantec International, a credit card processing company, and
served as its President, Chief Executive Officer and a director through May 1993.
In 1983 he founded Electronic Publishing Systems, Inc., a software development
and marketing company and served as its President through May 1985. From November
1979 to April 1983 he was President of Atari, Inc., a developer and manufacturer
of home video games and a subsidiary of Warner Communications, Inc. From July
1978 to November 1979, he was Vice President and General Manager of Milton
Bradley Co. ("MBC"), a developer and manufacturer of toys and games. Previously,
he held a number of marketing and general management positions with MBC.
Yves C. Faroudja.............. Yves C. Faroudja (age 64) is co-founder of the Company and has served as a
director of the Company since its inception in 1971. Mr. Faroudja served as the
Company's President from 1971 to July 1996, has been the Company's Chief
Technical Officer ("CTO") since July 1996 and is currently Chairman of its
Executive Committee of the Board of Directors. Mr. Faroudja has entered into an
agreement with the Company pursuant to which he will serve as the Company's CTO
until a new CTO is identified and hired.
William J. Turner............. William J. Turner (age 54) has served as Chairman of the Board of Directors of
the Company since December 1995. From November 1989 to the present, Mr. Turner
has been chairman of Turner & Partners, a management and financial consulting
company. In February 1997, Mr. Turner also became a co-founder and co-manager of
Signature Capital, LLC, a venture capital company ("Signature Capital"). From
1983 to 1989, Mr. Turner was the President, Chief Operating Officer and a
director of Automatic Data Processing, a computer and information services firm.
Mr. Turner is currently a director of Federal Home Loan Mortgage Corporation.
Kevin B. Kimberlin............ Kevin B. Kimberlin (age 45) has served as a director of the Company since
December 1995. Since 1991, Mr. Kimberlin has been Chairman of Spencer Trask
Holdings, Inc., an investment banking firm. Mr. Kimberlin is a co-founder of
Ciena Corporation, Myriad Genetics and The Immune Response Corporation. He has
been a director of The Immune Response Corporation since 1986.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION
- ------------------------------ ---------------------------------------------------------------------------------
<S> <C>
Matthew D. Miller............. Matthew D. Miller (age 51) has served as a director of the Company since December
1995. Since December 1997, Dr. Miller has served as President and Chief Executive
Officer of Sarnoff Digital Communications. Since July 1994, Dr. Miller has served
as President of M-Squared Media and Technology L.L.C., a venture capital
investment and consulting firm focusing on high technology companies. From August
1988 to July 1994, he served as Vice President of Technology at General
Instrument Corporation, and from March 1984 to August 1988, he was Vice President
of Technology at Viacom Inc., a media and communications company. He is a
director of Lymisys Inc. and several private technology companies.
William N. Sick............... William N. Sick (age 63) has served as a director of the Company since December
1995. Mr. Sick is Chairman and Chief Executive Officer of Business Resources
International, an investment services company he founded in 1989. In February
1997, Mr. Sick became a co-founder and co-manager of Signature Capital. In 1988
and 1989, he served as Chief Executive Officer and a director of American
National Can Company ("ANC"), a packaging company. During this period, he was
also Vice Chairman of Triangle Industries, Inc., the owner of ANC. From 1958 to
1987, Mr. Sick was employed by Texas Instruments Incorporated ("TI") where he
served in several management capacities, including five years as President of TI
Semiconductor Group and Executive Vice President and a director of the Company.
Prior to that time, he was President of TI Asia in Tokyo and President of the TI
Europe Division. Mr. Sick is currently Chairman of the Board of Trustees of the
Shedd Aquarium in Chicago and a member of the Board of Governors of Rice
University.
Merv L. Adelson............... Merv L. Adelson (age 68) has served as a director of the Company since September
1996. Mr. Adelson has been Chairman of East-West Capital Associates, Inc., a
private investment banking company, since 1989. Mr. Adelson has been a director
of Time Warner, Inc., a media and communication corporation, since 1989. Mr.
Adelson served as Vice Chairman of Warner Communications, Inc. from January 1989
through August 1991. Previously, he was Chairman and Chief Executive Officer of
Lorimar Telepictures Corporation, an entertainment firm. Mr. Adelson is a
director of 7th Level, Inc., a developer of interactive and animation tools. Mr.
Adelson has served as a Managing Member of Adelson Investors, LLC, a private
venture capital fund, since February 1996.
Stuart D. Buchalter........... Stuart D. Buchalter (age 60) has served as a director of the Company since April
1996. Mr. Buchalter has been Of Counsel with the California law firm of
Buchalter, Nemer, Fields & Younger, a Professional Corporation, since August
1980. He has been an officer of East-West Capital Associates, Inc. since February
1996. From August 1980 to June 1993, he served as Chairman of the Board of
Directors and Chief Executive Officer of Standard Brands Paint Company, a paint
retailer and manufacturer. Mr. Buchalter is a director of Authentic Fitness
Corp., an athletic apparel manufacturer, Earl Scheib, Inc., an automotive
painting company, and City National Corp., the holding company for City National
Bank. He is also Vice-Chairman of the Board of Trustees of Otis College of Art
and Design.
</TABLE>
6
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has three standing committees; the Executive
Committee, the Audit Committee and the Compensation Committee.
EXECUTIVE COMMITTEE. The Executive Committee of the Board of Directors
reviews and monitors the Company's annual operating and capital expense budgets,
and acts as the Board of Directors' nominating committee with respect to the
selection of independent directors. Merv Adelson, Matthew Miller and Yves
Faroudja are the members of the Executive Committee and Yves Faroudja is its
chairman. During the Company's fiscal year ended December 31, 1997 ("Fiscal
1997"), the Executive Committee held one meeting.
AUDIT COMMITTEE. The Audit Committee of the Board of Directors (i) reviews
the results and scope of the annual audit and other services provided by the
Company's independent auditors; (ii) reviews and evaluates the Company's
internal audit and control functions; and (iii) monitors transactions between
the Company and its employees, officers and directors. Kevin B. Kimberlin and
Stuart D. Buchalter are the members of the Audit Committee. During Fiscal 1997,
the Audit Committee held two meetings.
COMPENSATION COMMITTEE. The Compensation Committee of the Board of
Directors administers the Company's stock option and stock purchase plans and
designates compensation levels for the Company's executive officers and
directors. William J. Turner and William N. Sick are the members of the
Compensation Committee. During Fiscal 1997, the Compensation Committee held two
meetings.
MEETINGS, ATTENDANCE AND FEES
During Fiscal 1997, the Board of Directors held seven meetings. Only Merv
Adelson attended fewer than 75% of the aggregate number of meetings of the Board
and the Committees on which he served.
Prior to August 1997, directors received no fees for serving on the Board of
Directors but were reimbursed for reasonable expenses incurred by them in
attending Board of Directors and Committee meetings. Commencing in August 1997,
each non-employee director receives an annual retainer of $7,500, payable in
Common Stock on the day after the Annual Meeting of Stockholders. In addition,
each non-employee director receives $650 for each Board of Directors meeting
attended and $375 for each committee meeting attended. Non-employee directors
are also eligible to participate in the 1997 Non-Employee Directors Stock Option
Plan. On August 13, 1997 the Company issued 750 shares of its Common Stock to
each of Stuart D. Buchalter, Merv Adelson, William N. Sick, William J. Turner
and Kevin B. Kimberlin as their annual retainer for serving as directors of the
Company. Under a consulting agreement between the Company and Matthew D. Miller,
the Company paid Mr. Miller a consulting fee of $7,000 per month from July 1997
to August 1997 and $5,000 per month for the remainder of Fiscal 1997. On
December 17, 1997, the Board of Directors made a warrant issued to Merv Adelson
under his consulting agreement with the Company currently exercisable with
respect to 21,718 shares of Common Stock.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation limits the personal liability of a director of the
Company for monetary damages for breach of fiduciary duty of care as a director.
Liability is not eliminated for (i) any breach of the director's duty of loyalty
to the Company or its stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
unlawful payment of dividends or stock purchases or redemptions pursuant to
Section 174 of the Delaware General Corporation Law; or (iv) any transaction
from which the director derived an improper personal benefit.
7
<PAGE>
The Company's By-Laws provide that the Company shall indemnify its officers
and directors and may indemnify its employees and other agents to the fullest
extent permitted under Delaware Law, including in those circumstances where
indemnification would otherwise be discretionary. The Company believes that
indemnification under its By-Laws covers at least negligence and gross
negligence on the part of indemnified parties. The By-Laws authorize the use of
indemnification agreements, and the Company has entered into indemnification
agreements with each of its officers and directors that are in some respects
broader than the specific indemnification provisions contained in Delaware Law.
The indemnification agreements may require the Company, among other things, to
indemnify such directors against certain liabilities that may arise by reason of
their status or service as directors (other than liabilities arising from
willful misconduct of a culpable nature) and to advance expenses reasonably
expected to be incurred in defending any proceeding against them for which they
would receive indemnification. The Company has obtained directors and officers
liability insurance with respect to certain matters, including matters arising
under the Securities Act.
COMPLIANCE WITH REPORTING REQUIREMENTS OF SECTION 16 OF THE EXCHANGE ACT
Under Section 16(a) of the Exchange Act, the Company's directors, executive
officers and any persons holding ten percent or more of the Company's Common
Stock are required to report their ownership of Common Stock and any changes in
that ownership to the Securities and Exchange Commission (the "SEC") and to
furnish the Company with copies of such reports. Specific due dates for these
reports have been established and the Company is required to report in this
Proxy Statement any failure to file on a timely basis by such persons. Based
solely upon a review of copies of reports filed with the SEC during Fiscal 1997,
all persons subject to the reporting requirements of Section 16(a) filed all
required reports on a timely basis.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No directors, other than those identified above, served as members of the
Compensation Committee during Fiscal 1997. No member of that Committee was an
officer or employee of the Company or any of its subsidiaries during the year.
None of the executive officers of the Company has served on the board of
directors or on the compensation committee of any other entity, any of whose
officers served either on the Board of Directors or on the Compensation
Committee of the Company.
8
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company during
Fiscal 1997 to the Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
----------------------------------------- -------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS COMPENSATION OPTIONS (#) COMPENSATION(2)
- ----------------------------------- ---- ---------- -------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Moone .................. 1997 $ 247,913 $200,000 -- -- $4,740
President, Chief Executive 1996 73,904 150,000 -- 528,932(4) 4,750
Officer and Director(3)
Yves C. Faroudja .................. 1997 196,787 -- -- -- 4,620
Chief Technical Officer, 1996 198,500 -- -- -- 2,464
Secretary and Director(5)
Michael C. Hoberg ................. 1997 129,164 45,000 -- -- 4,750
Vice President--Finance and Chief 1996 -- -- -- 75,000(4) --
Financial Officer(6)
Donald S. Butler .................. 1997 211,684 55,000 -- -- 2,750
Vice President-- Engineering(7) 1996 125,564 30,512 -- 195,964(4) --
Thomas A. Harvey .................. 1997 77,177 68,000 -- 100,000(9) --
Vice President--Sales and
Marketing(8)
</TABLE>
- ------------------------
(1) Excludes perquisites and other personal benefits which for each Named
Executive Officer did not exceed the lesser of (i) $50,000 or (ii) 10% of
the total annual salary and bonus for such officer. The bonus for each
executive varies annually based on a variety of factors.
(2) Represents matching contributions by the Company under the 401(k) plan.
(3) Mr. Moone joined the Company in June 1996, and the amount reported
represents his salary in 1996 on a pro-rated basis. See "--Employment
Agreements."
(4) These shares are issuable upon exercise of stock options granted under the
1995 Employee Stock Option Plan (the "1995 Option Plan").
(5) Mr. Faroudja served as the Company's President prior to June 1996, and
currently serves as the Company's Chief Technical Officer, Chairman of the
Executive Committee of the Board of Directors, Secretary and Director. See
"--Employment Agreements."
(6) Mr. Hoberg joined the Company in December 1996 and did not receive a salary
payment in 1996. For Fiscal 1997, Mr. Hoberg's salary on an annualized basis
was $135,000. Includes a grant of options in 1996 to purchase 75,000 shares
under the 1995 Option Plan at an exercise price of $3.91. The options vest
over four years.
(7) Mr. Butler joined the Company in May 1996 and the amount reported represents
his salary on a pro-rated basis based on an annual salary of $200,000.
Commencing in May 1997, Mr. Butler's base salary was increased to $220,000.
Includes a grant of options in 1996 to purchase 172,964 shares under the
1995 Option Plan at an exercise price of $3.83 and a grant of options to
purchase 23,000 shares under the 1995 Option Plan at an exercise price of
$3.91. The options vest over four years.
(8) Mr. Harvey joined the Company in June 1997, and the amount reported
represents his salary in 1997 on a pro-rated basis based on an annual salary
of $200,000. Includes a grant of options in 1997 to purchase 100,000 shares
under the 1997 Performance Stock Option Plan at an exercise price of $7.50.
The options vest over four years.
(9) These shares are issuable upon exercise of stock options granted under the
1997 Performance Stock Option Plan.
9
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to options granted
to each Named Executive Officer during Fiscal 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
--------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
PERCENT OF
NUMBER OF TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE PRICE
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION
NAME GRANTED (#)(2) FISCAL 1997(2) ($/SHARE)(3) DATE 5% ($) 10% ($)
- ---------------------------- -------------- ----------------- --------------- ----------- ---------- ------------
Michael J. Moone............ -- -- -- -- -- --
Michael C. Hoberg........... -- -- -- -- -- --
Yves C. Faroudja............ -- -- -- -- -- --
Donald S. Butler............ -- -- -- -- -- --
Thomas A. Harvey............ 100,000 24.2% $ 7.50 06/10/07 $ 471,671 $ 1,195,307
</TABLE>
- ------------------------
(1) As suggested by the rules of the Securities and Exchange Commission, the
Company used assumed rates of the Company's stock price appreciation in
calculating the potential realizable value of executive stock options
(calculated based upon a 10-year option term, with compounded appreciation
at 5% and 10% rates). The actual value, if any, an executive may realize
will depend on the excess of the stock price on the date the option is
exercised over the option's exercise price so that there is no assurance the
value realized by an executive will be at or near the values estimated
above. The Company does not advocate or necessarily agree that the stated
assumed annual rates of appreciation properly determine the value of the
options. Actual gains, if any, on stock option exercises are dependent on
the future financial performance of the Company, overall market conditions
and the option holder's continued employment through the vesting period.
(2) These options were granted pursuant to the Company's 1997 Performance Stock
Option Plan. The options vest 1/4 after the first anniversary of the date of
the grant and 1/48th each month thereafter.
(3) These options were granted at an exercise price equal to the fair market
value of the Company's Common Stock as determined by the Board of Directors
of the Company on the date of grant.
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<PAGE>
AGGREGATE OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
There were no stock options exercised by the Named Executive Officers during
Fiscal 1997. The following table sets forth certain information regarding stock
options held as of December 31, 1997 by the Named Executive Officers.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
-------------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS
FISCAL YEAR END (#) AT FISCAL YEAR END ($)(1)
-------------------------- ---------------------------
<CAPTION>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Michael J. Moone(2).................. 186,985 341,947 $ 1,223,302 $ 2,235,403
Yves C. Faroudja..................... -- -- -- --
Michael C. Hoberg(2)................. 18,750 56,250 121,313 363,938
Donald S. Butler(2).................. 74,215 121,749 485,642 796,083
Thomas A. Harvey(3).................. -- 100,000 -- 288,000
</TABLE>
- ------------------------
(1) Represents the difference between $10.38, the closing price of Company's
Common Stock as reported on the Nasdaq Stock Market on December 31, 1997,
and the exercise price of the options.
(2) Each of these options were granted pursuant to the 1995 Option Plan. These
options were granted at an exercise price equal to the fair market value of
the Company's Common Stock as determined by the Board of Directors on the
date of grant, and vest over a four year period, at the rate of 1/4 on the
first anniversary of the date of grant and 1/48th of the shares each month
thereafter.
(3) These options were granted pursuant to the 1997 Performance Stock Option
Plan. These options were granted at an exercise price equal to the fair
market value of the Company's Common Stock as determined by the Board of
Directors of the date of grant, and vest over a four year period, at the
rate of 1/4 on the first anniversary of the date of grant and 1/48th of the
shares each month thereafter.
EMPLOYMENT AGREEMENTS
In March 1996, the Company entered into an employment agreement with Yves C.
Faroudja for a term of two years, pursuant to which Mr. Faroudja was to serve as
Chief Technical Officer ("CTO") of the Company at an annual base salary of
$100,000 for the first year and $66,600 for the second year (the "Faroudja
Employment Agreement"). Mr. Faroudja was required to devote at least one-half of
his time to the Company during the first year of the Faroudja Employment
Agreement and at least one-third of his time to the Company during the second
year of the Faroudja Employment Agreement. Mr. Faroudja could not engage in any
other business activities that interfered with the performance of his duties
under the Faroudja Employment Agreement with the Company, and the Faroudja
Employment Agreement contained a covenant not to compete. Mr. Faroudja's annual
base salary was to increase proportionately if Mr. Faroudja contributed more
than one-half of his time to the Company during the first year and/or more than
one-third of his time to the Company during the second year of his employment
with the Company, with a maximum annual base salary during the first and second
years of $200,000 for each year. Mr. Faroudja was entitled under the Faroudja
Employment Agreement to participate in all insurance and benefit plans generally
available to the employees of the Company.
The Faroudja Employment Agreement was superceded on March 8, 1998 by an
agreement entered into between the Company and Mr. Faroudja for a term of three
years pursuant to which Mr. Faroudja will serve as the Company's CTO until a new
CTO is identified and hired (the "Advisory Agreement"). Thereafter, Mr. Faroudja
will serve as a Senior Fellow to the Company, advising the Company in a variety
of areas, with time to be devoted at Mr. Faroudja's discretion. Under the
Advisory Agreement, Mr. Faroudja will be paid a fee of $150,000 per year and was
granted a five year option to purchase an aggregate of 22,500 shares of Common
Stock. Mr. Faroudja is entitled to the use of a Company automobile
11
<PAGE>
and medical insurance to be paid for by the Company in an amount not to exceed
$13,680 per year. The Advisory Agreement may only be terminated by the Company
for cause (as defined in the Advisory Agreement). If the Advisory Agreement is
terminated due to Mr. Faroudja's disability, he will be entitled to his annual
base salary for an additional six months. Mr. Faroudja may terminate the
Advisory Agreement upon six months notice to the Company.
On July 8, 1996, the Company entered into an employment agreement with
Michael J. Moone for a term of four years, pursuant to which Mr. Moone is to
serve as President, Chief Executive Officer and a director of the Company at an
annual base salary of $175,000. Effective January 1, 1997, Mr. Moone's annual
base salary was increased to $250,000. Mr. Moone is entitled to receive an
annual bonus of up to 100% of his annual base salary at the discretion of the
Board of Directors. Mr. Moone is entitled to participate in all insurance and
benefit plans generally available to the employees of the Company. Mr. Moone was
granted options under the 1995 Option Plan to purchase 456,432 shares at an
exercise price of $3.83 per share and 72,500 shares at an exercise price of
$3.91 per share. If Mr. Moone's employment is terminated for any reason, he is
entitled to his accrued and unpaid annual base salary and bonus. However, if Mr.
Moone dies and the Company has not obtained life insurance for the benefit of
Mr. Moone's estate, the Company is required to pay his estate three month's
annual base salary and bonus.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The report of the Compensation Committee shall not be deemed incorporated by
reference to any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
OVERVIEW AND PHILOSOPHY
The Compensation Committee of the Board of Directors (the "Committee") is
composed entirely of outside directors and is responsible for developing and
making recommendations to the Board with respect to the Company's executive
compensation policies. In addition, the Committee, pursuant to authority
delegated by the Board, determines the compensation to be paid to the Company's
executive officers and directors. The Committee is responsible for setting and
administering the policies which govern annual compensation, the Company's 1997
Non-Employee Directors Stock Plan, the 1997 Performance Stock Option Plan, the
1997 Employee Stock Purchase Plan, and the 1995 Stock Option Plan.
There are three elements in the Company's executive compensation program,
all determined by individual and corporate performance:
- Annual base salary compensation.
- Annual incentive compensation.
- Long-term incentive compensation.
In designing its compensation programs, the Company believes that
compensation should reflect the value created for stockholders and support the
Company's strategic goals. Specifically, the objectives of the program are as
follows:
- Attract and retain key executives critical to the long-term success of the
Company.
- Reflect and promote the Company's values, and reward executives for
outstanding contributions to the Company's success.
- Reward executives for long-term strategic management and the enhancement
of stockholder value by providing opportunities for ownership in the
Company.
12
<PAGE>
- Provide incentives for performance, not only with respect to the
achievement of the Company's goals, but also the Company's performance
relative to that of its peers in the technology industry.
- Align the interests of the Company's executive officers with those of the
Company's stockholders through participation in stock-based incentive
plans.
EXECUTIVE OFFICER COMPENSATION PROGRAM
ANNUAL BASE SALARY
In reviewing the annual base compensation of executive officers, the
Compensation Committee considers the individual executive's performance for the
year, the Company's overall performance for the year, the compensation for
executives at competing companies in the technology industry, current market
conditions, and the recommendations of the Company's Chief Executive Officer.
The Company's general approach to annual base salary compensation is to pay
annual salaries which are competitive with salaries paid to executives of
similarly situated companies in the technology industry, after considering the
individual executive's experience and prior and potential contributions to the
Company. The annual base salary for the Company's Chief Executive Officer for
1997 was initially based on his rights under an employment agreement which were
entered into on July 8, 1996 and as amended on January 1, 1997 to provide for an
annual base salary of $250,000. The Committee has determined to continue the
Chief Executive Officer's salary at that level in view of the prior and expected
future contributions of the Chief Executive Officer to the Company's growth. The
Committee believes the annual base salary for the Company's Chief Technical
Officer and the four Vice Presidents are commensurate with the current
incumbents' level of experience and prior and potential future contributions to
the Company.
ANNUAL INCENTIVE COMPENSATION
The Committee generally believes that, at higher executive levels, a greater
percentage of an individual's total annual cash compensation opportunity should
consist of variable compensation tied to the Company's performance. The
Committee's practice with regard to awarding annual bonuses to executive
officers is to establish measures of performance which the Committee determines
to be appropriate under the circumstances and to assign such relative weight to
any such factors. The Committee focuses particularly on such factors as growth
in earnings and increased market share in the Company's products, as well as
discretionary factors in determining whether or not bonuses are paid. In making
such determinations, the Committee takes into consideration and gives
significant weight to the recommendations of the Chief Executive Officer with
respect to the bonuses of executive officers other than himself.
STOCK EQUITY BASED COMPENSATION
The Company believes that stock ownership is a significant incentive for the
improvement of the long-term performance of the Company by aligning the
interests of the executive officers and stockholders which, in turn, will help
build stockholder wealth. The Company also recognizes that a stock incentive
program is a necessary element of a competitive compensation package for its
employees. In January 1997, the Company adopted the 1997 Performance Stock
Option Plan to succeed the earlier 1995 Stock Option Plan (the "1997 Option
Plan"). The 1997 Option Plan is applicable to the employees of the Company
(including inside directors and officers) and authorizes the Compensation
Committee to determine the terms of the options granted, including the exercise
price, the number of shares subject to the option and exercisability therefor.
In making its determination to grant options under the 1997 Option Plan, the
Committee analyzes, among other things, the executive's level of responsibility
and the role in positively influencing future results.
13
<PAGE>
COMPENSATION OF MICHAEL J. MOONE, THE CHIEF EXECUTIVE OFFICER
On July 8, 1996, the Company entered into an employment agreement with Mr.
Moone which provided for an annual base salary of $175,000. On January 1, 1997,
this agreement was amended to increase Mr. Moone's annual base salary to
$250,000. The Committee reviewed the annual base salary and considered it to be
appropriate for another year based on the same executive compensation policy
exercised above with respect to executive officers of the Company. Further, the
Compensation Committee approved an incentive cash bonus to Mr. Moone of
$200,000. In determining the amount of cash bonuses paid to Mr. Moone, the
Committee considered the overall performance of the Company for 1997 as compared
to similar technology companies and determined this bonus to be reasonable.
Compensation Committee
William J. Turner
William N. Sick, Jr.
14
<PAGE>
PRICE PERFORMANCE GRAPH
Set forth below is a line graph comparing the Company's total stockholder
return on Common Stock with the Nasdaq Stock Market Index ("NASDAQ") and the
Hambrecht & Quist Technology Index, as of the Company's initial public offering
on October 30, 1997 through the end of Fiscal 1997. The measurement points
utilized in the graph consist of the last day in each calendar month.
COMPARISON OF 2 MONTH CUMULATIVE TOTAL RETURN*
AMONG FAROUDJA, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE HAMBRECHT & QUIST TECHNOLOGY INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FAROUDJA, INC. NASDAQ STOCK MARKET (U.S.) HAMBRECHT & QUIST TECHNOLOGY
<S> <C> <C> <C>
10/30/97 $100.00 $100.00 $100.00
10/97 150.00 103.00 102.00
11/97 117.00 102.00 102.00
12/97 173.00 100.00 97.00
</TABLE>
* $100 INVESTED ON 10/30/97 IN STOCK OR INDEX --
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31, 1997.
15
<PAGE>
CERTAIN TRANSACTIONS
YVES FAROUDJA LICENSE AGREEMENT
On January 20, 1997 (the "Effective Date"), the Company entered into a
license agreement (the "License Agreement") with Yves Faroudja with respect to
all intellectual property, including all rights in inventions, works of
authorship and designs owned by Mr. Faroudja prior to the Effective Date
(collectively, the "Faroudja Technology"), pursuant to which (1) Mr. Faroudja
granted to the Company a worldwide, perpetual, royalty-free, sublicensable
license to exploit the Faroudja Technology and (2) Mr. Faroudja assigned to the
Company his rights to all intellectual property, including all rights in
inventions, works of authorship and designs, first owned by him during the
period commencing on the Effective Date and ending on the date (the "Termination
Date") Yves Faroudja ceases to be an employee of the Company. The Company's
license to the Faroudja Technology in the field of data processing for
electronically displaying images to the human eye (the "Company Field") is
exclusive subject to licenses previously granted by Mr. Faroudja. Mr. Faroudja
has retained the non-exclusive, nontransferable rights to exploit the Faroudja
Technology outside of the Company Field. The License Agreement remains in effect
during the term of the Advisory Agreement between Mr. Faroudja and the Company.
See "Executive Compensation--Employment Agreement." The Company's right to use
the Faroudja Technology and rights to enforce rights granted thereunder survive
the termination of the License Agreement.
As consideration for the License Agreement, Yves Faroudja was granted a
warrant to purchase 100,000 shares of Common Stock at an exercise price of $7.50
per share. The warrant vests as to 1/36th of the total shares for each full
month after January 20, 1997 provided that Yves Faroudja is then either (i)
employed by the Company (as a full or part-time employee), or (ii) acting as a
member of the Board of Directors of the Company. Certain registration rights and
anti-dilution provisions are provided to Yves Faroudja as contained therein.
CONSULTING AGREEMENTS
In July 1997, the Company entered into a consulting services agreement with
Matthew D. Miller. Pursuant to this agreement, Mr. Miller, a director of the
Company, agreed to advise the Company on strategic, technology and
communications matters and to provide such assistance and advice related to such
matters as the Company may request. This agreement was for a term of one year,
was renewable upon the mutual consent of Mr. Miller and the Company's Board of
Directors and could be cancelled on four weeks notice if the Company's Board of
Directors is not satisfied with Mr. Miller's performance. Under the agreement,
the Company paid Mr. Miller a consulting fee of $7,000 per month from July 1997
through August 1997, and paid Mr. Miller $5,000 for the remaining months of
Fiscal 1997. Mr. Miller was also entitled to receive a performance-based
year-end bonus which was to be determined by the Company's Board of Directors in
its sole discretion. The Company issued to Mr. Miller an option to purchase
50,000 shares of Common Stock at an exercise price of $9.50 per share (the
"Miller Option") under the agreement. The Miller Option had a term of three
years and vested as to 1/24th of the option shares each month during the first
year after the date of grant and as to an additional 1/2 of the option shares
one year after the date of grant. On December 17, 1997, the Company and Mr.
Miller agreed to cancel the Consulting Agreement effective as of December 22,
1997. Accordingly, the Miller Option was cancelled as to any options that had
not vested by December 22, 1997.
In December 1996, the Company entered into a three year consulting agreement
("Adelson Consulting Agreement") with Merv Adelson, a director of the Company,
pursuant to which Mr. Adelson agreed to provide certain consulting services in
the analysis and implementation of potential strategic alliances ("Proposed
Strategic Alliances") in the specific field of TV signal enhancement for TV,
cable TV, satellite TV and DVDs, including, but not limited to (i) providing the
Company with a list of possible corporate investors, partners, customers,
buyers, lenders and joint ventures ("Proposed Strategic Alliance Partners"),
(ii) coordinating and making approaches to Proposed Strategic Alliance Partners,
and (iii) assisting in the
16
<PAGE>
negotiation of the principal forms of Proposed Strategic Alliances and
preparation of all contracts, documents, approvals and related matters necessary
to consummate a Proposed Strategic Alliance with a Proposed Strategic Alliance
Partner. On December 17, 1997, the Adelson Consulting Agreement, which had
provided that the Company shall compensate Mr. Adelson for any strategic
alliance or combination of strategic alliances during the term of the agreement
in which the Company receives consideration (as defined in the amendment to the
agreement) of at least $5 million, through the issuance of a three year warrant
to Mr. Adelson for the purchase of 65,152 shares of Common Stock with an
exercise price of $0.15 per share ("Adelson Warrant"), was amended. The Adelson
Consulting Agreement was amended to compensate Mr. Adelson for services valued
at less than $5 million by providing that the number of shares for which the
Warrant may be exercised currently will be determined by the Company's Board of
Directors, from time to time, based upon the level of consideration received by
the Company as a result of Mr. Adelson's services. On December 17, 1997, the
Board of Directors made the Adelson Warrant currently exercisable with respect
to 21,718 shares of Common Stock as of that date. During the term of the
Consulting Agreement, the Company also agreed to use its best efforts to cause
the election to the Board of Directors of Mr. Adelson (or a designee of Mr.
Adelson reasonably acceptable to the Board of Directors) and an additional
designee of Mr. Adelson reasonably acceptable to the Board of Directors. Mr.
Buchalter serves on the Board of Directors as Mr. Adelson's designee.
LICENSE AGREEMENT WITH S3
In March 1997, the Company entered into a license agreement with S3
Incorporated ("S3") to develop integrated circuits incorporating the Company's
video processing technologies for use in PCs. Portions of the license were
exclusive for certain markets for a period of five years provided that
performance criteria, including minimum license fees were satisfied. S3 has
advised the Company that it will no longer make the minimum license payments
necessary to maintain its exclusive rights with respect to any periods after
March 31, 1998. No director, officer or affiliate of S3 is an affiliate of the
Company.
On June 30, 1997, the Company issued 526,316 shares of Common Stock to S3
for an aggregate purchase price of $5.0 million. Under the terms of the Stock
Purchase Agreement and an Investor's Rights Agreement, S3 is entitled to certain
anti-dilution and registration rights as described therein. The anti-dilution
provisions Stock Purchase Agreement provided that S3 was entitled to receive
additional shares if the Company's initial public offering was less than $9.50
per share. Based on the Company's initial public offering price of $6.00, the
Company issued 307,018 additional shares of Common Stock to S3. Under the
purchase agreement, S3 has the right to have an observer attend meetings of the
Company's Board of Directors and committees thereof, except that the Company may
exclude the observer from a meeting of the Board of Directors or portion thereof
if (i) such meeting concerns the relationship between the Company and S3 or (ii)
if such attendance would result in disclosure of trade secrets to S3 or would
adversely affect the attorney-client privilege between the Company and its
counsel.
Mr. Buchalter is Of Counsel to the California law firm of Buchalter, Nemer,
Fields and Younger, which from time to time provides legal services to the
Company.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors, and will
continue to be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
17
<PAGE>
PROPOSAL TO AMEND THE
FAROUDJA 1997 PERFORMANCE STOCK OPTION PLAN
The stockholders will be asked to consider and act upon a proposal to amend
the Faroudja 1997 Performance Stock Option Plan (the "1997 Option Plan"). The
1997 Option Plan was adopted and approved by the Company's stockholders on
January 2, 1997.
PROPOSED AMENDMENTS TO THE 1997 OPTION PLAN
The Board has proposed amendments to the 1997 Option Plan to (i) increase
the number of shares available for issuance upon the exercise of stock options
under the 1997 Option Plan to 1,125,000 and (ii) to limit the number of options
that may be granted to an individual in any one fiscal year to 500,000 options.
REASONS FOR THE AMENDMENTS
The Plan currently authorizes the issuance of options to acquire an
aggregate of 725,000 shares. As of March 31, 1998 only 369,458 shares were
available for the issuance of additional options under the 1997 Option Plan. The
Board of Directors considered, among other things, the Company's reliance
primarily on stock options in place of long-term cash based bonuses to provide
long term incentive compensation to its employees. The Board of Directors
believes it is in the best interests of the Company to make available such
options for the Company's key employees and in order to permit the Company to
continue this policy additional shares must be made available under the 1997
Option Plan.
In connection with recommending an increase in the number of shares
available under the Plan, the Board of Directors has also recommended that the
1997 Option Plan limit the amount of options that may be granted to an
individual in any one fiscal year to 500,000 options. This limitation is
recommended because the federal income tax laws limit to $1,000,000 the annual
amount publicly held corporations may deduct for reasonable compensation to
certain executive officers (including compensation attributable to stock
options) if such reasonable compensation does not qualify as "performance based
compensation" or compensation paid on a "commission basis." Qualified
performance-based compensation must satisfy the performance goal requirement.
Compensation attributable to a stock option is deemed to satisfy such a
requirement if, among other things, the Plan states the maximum number of shares
with respect to which options may be granted during a specified period to any
employee.
SUMMARY OF THE 1997 OPTION PLAN
The 1997 Option Plan was adopted by the Board of Directors and Stockholders
of the Company on January 2, 1997 and was amended on June 13, 1997. The 1997
Option Plan is not qualified under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code") and is not subject to any provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
PURPOSE
The purpose of the 1997 Option Plan is to further the growth and success of
the Company and its subsidiaries by enabling employees of, or consultants to,
the Company or any of its subsidiaries to acquire shares of Common Stock thereby
increasing their personal interest in such growth and success and to provide a
means of rewarding outstanding performance by such person to the Company or its
subsidiaries.
Options granted under the 1997 Option Plan may be either incentive stock
options ("Incentive Stock Options") as that term is used in Section 422 of the
Code, or any successor thereto, or options which do not qualify as incentive
stock options ("Non-Qualified Stock Options"). Options granted to consultants
shall be Non-Qualified Stock Options.
18
<PAGE>
SHARES RESERVED
There are currently 725,000 shares of Common Stock reserved for issuance
upon exercise of options granted under the 1997 Option Plan. If the Stockholders
approve the agreement, there will be 1,125,000 shares reserved for issuance.
Shares of Common Stock will be made available from the authorized but unissued
shares of the Common Stock or from outstanding shares of Common Stock which have
been reacquired by the Company. If any option granted under the 1997 Option Plan
shall for any reason expire or become unexercisable for any reason without
having been exercised in full, the unpurchased shares of Common Stock subject to
such option shall again become available for granting of options under the 1997
Option Plan.
ADMINISTRATION
The Board has delegated administration of the 1997 Option Plan to its
Compensation Committee ("Committee"). The Committee shall have full power and
authority in its discretion to take any and all action required or permitted to
be taken under the 1997 Option Plan, including the selection of optionees, the
determination of the number of shares which may be covered by stock options, the
date at which the options may be exercised or granted, whether or not the option
is an Incentive Stock Option or a Non-Qualified Stock Option and other terms and
conditions thereof.
ELIGIBILITY
Options may be granted to any person who is an employee of, or consultant
to, the Company or any of its subsidiaries on the date of grant, except that (i)
no options may be granted to any optionee possessing more than 10% of the voting
power of all classes of stock of the Company or its subsidiaries unless the
exercise price is fixed at not less than 110% of the fair market value on the
date of grant and the option is not exercisable after five years from the date
of grant, (ii) no options may be granted to any person serving on the Committee,
and (iii) no options may be granted to any optionee if such options are in
excess of 25% of the options issued or issuable under the 1997 Option Plan for
any particular year.
The Company may issue Incentive Stock Options provided that the aggregate
fair market value (determined at the time the Incentive Stock Option is granted)
of the Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by the optionee during any calendar year (under
all Incentive Stock Option plans of the Company) shall not exceed $100,000.
Should it be determined that any Incentive Stock Option granted pursuant to the
1997 Option Plan exceeds such maximum, such Incentive Stock Option shall be
considered to be a Non-Qualified Stock Option and not to qualify for treatment
as an Incentive Stock Option under Section 422 of the Code to the extent, but
only to the extent, of such excess.
OPTION PRICE
The exercise price of each Incentive Stock Option shall be determined by the
Committee and shall not be less than 100% of the fair market value of the Common
Stock subject to the option on the date the option is granted; provided,
however, that the exercise price of the Common Stock subject to the Incentive
Stock Option may not be less than 110% of such fair market value (without regard
to any restriction other than a restriction which, by its terms, will never
lapse) where the optionee owns (or is deemed to own pursuant to Section 424(d)
of the Code) Common Stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or any of its subsidiaries. The
exercise price of each Non-Qualified Stock Option shall be determined by the
Committee and shall not be less than 85% of the fair market value of the shares
of Common Stock on the date of grant.
An option shall be exercised by written notice to the Company upon terms and
conditions as provided in the optionee's stock option agreement. The purchase
price of Common Stock acquired pursuant to an option shall be paid by a
certified or cashier's check payable to the order of the Company, or by transfer
to
19
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the Company of shares of Common Stock owned by the optionee having a fair market
value on the exercise date equal to the option price for the shares being
purchased or a combination of both. If other than the optionee, the person or
persons exercising the option shall be required to furnish the Company
appropriate documentation satisfactory to Company counsel that such person or
persons have the full legal right and power to exercise the option on behalf of
and for the optionee.
ADJUSTMENTS UPON CHANGES IN COMMON STOCK; REORGANIZATION, MERGER, CONSOLIDATION
If the outstanding shares of the Common Stock of the Company are increased,
decreased, or changed into, or exchanged for a different number or kind of
shares or securities of the Company, without receipt of consideration by the
Company, through reorganization, merger, recapitalization, reclassification,
stock split, stock dividend, stock consolidation, or otherwise, an appropriate
and proportionate adjustment shall be made in the number and kind of shares as
to which options may be granted. A corresponding adjustment changing the number
or kind of shares and the exercise price per share allocated to unexercised
options, or portions thereof, which shall have been granted prior to any such
change shall likewise be made. Adjustments shall be made by the Committee whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final and conclusive. No fractional shares of stock shall be issued on
account of any such adjustment. Upon the dissolution or liquidation of the
Company, or upon any reorganization, merger or consolidation of the Company
where the Company is the surviving corporation and the stockholders immediately
prior to such transaction do not own at least 80% of the Company's Common Stock
immediately after such transaction, or upon any reorganization, merger or
consolidation of the Company where the Company is not the surviving corporation,
or upon a sale of substantially all of the assets or 80% of the outstanding
Common Stock, the 1997 Option Plan will terminate and any options granted prior
thereto shall become immediately exercisable in full and shall remain
exercisable until the effective date of such transaction.
VESTING
The Committee shall determine vesting periods for options granted under the
1997 Option Plan that will be set forth in the option agreement. Notwithstanding
the foregoing, all options will vest at a rate of at least 20% per year over 5
years from the date of grant.
EXPIRATION, TERMINATION AND TRANSFER OF OPTIONS
Subject to earlier termination as provided in the 1997 Option Plan, each
option granted and all rights or obligations thereunder by its terms shall
expire on such date as the Committee may determine as set forth in such stock
option agreement, but not later than (i) 5 years from the date of grant in the
case of any Incentive Stock Option granted to an optionee who owns (or is deemed
to own pursuant to Section 424(d) of the Code) Common Stock possessing more than
10% of the total combined voting power of all classes of stock of the Company or
any of its subsidiaries, and (ii) 10 years from the date of grant in the case of
all other options. Except in the event of termination of employment due to
death, disability or "termination for cause" (as determined by the Committee
which shall be binding on the optionee), options will terminate 90 days after an
optionee ceases to be employed by the Company or its subsidiaries unless the
options by their terms were scheduled to terminate earlier but only as to such
number of shares as to which the option was exercisable on the date of
termination. If termination occurs by reason of disability (as defined in
Section 22(e)(3) of the Code) or due to the optionee's death, such period shall
be extended to one year. If employment is terminated for cause, the optionee's
period to exercise will be reduced to thirty days. In addition, the option
agreement may provide that subsequent to the grant of any option, the Committee
may, in its sole discretion, terminate in whole or in part, any portion of such
option which has not yet become exercisable if it determines that the optionee
is not satisfactorily performing the duties to
20
<PAGE>
which such optionee was assigned on the date such option was granted.
Simultaneously with the consummation of the sale of the Company, options will
terminate if such optionee was given an opportunity to exercise such options.
An option by its terms may only be transferred by will or by laws of descent
and options shall be exercisable during the lifetime of the person to whom the
option is granted only by such person. Notwithstanding the foregoing, a third
party may exercise an option if such person provides to the Company proof,
satisfactory to the Company's counsel, of his or her right to exercise the
option.
TERMINATION AND AMENDMENT OF THE 1997 OPTION PLAN
The 1997 Option Plan will terminate in 2007, or upon such earlier date
determined by the Board. The 1997 Option Plan will also terminate upon
liquidation, reorganization, merger or consolidation of the Company as discussed
above. No options may be granted under the 1997 Option Plan after it is
terminated. No amendment of the 1997 Option Plan may, without the consent of the
person to whom an option shall theretofore have been granted, impair or
adversely alter the rights of such person with respect to such option. No
modification, extension, renewal or other change in any option granted under the
1997 Option Plan shall be made after the grant of such option, unless the same
is consistent with the provisions of the 1997 Option Plan.
The 1997 Option Plan may be amended by the Board of Directors at any time,
and from time to time. However, except as otherwise provided in the 1997 Option
Plan, no amendment shall be effective unless approved by a vote of a majority of
the outstanding shares of the common stock of the Company, represented in person
or by proxy and entitled to vote, at a meeting of the stockholders of the
Company and any adjournment or postponement thereof if the amendment will: (a)
materially modify the requirements as to eligibility for participation in the
1997 Option Plan, (b) increase the number of shares reserved for options under
the 1997 Option Plan, (c) change the exercise price for Incentive Stock Options,
(d) lengthen the term during which Incentive Stock Options may be granted, or
(e) materially increase the benefits accruing to participants under the 1997
Option Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is only a summary of the principal federal income
tax consequences of the options and rights to be granted under the 1997 Option
Plan, and is based on existing federal law (including administration,
regulations and rulings) which is subject to change, in some cases
retroactively. This discussion is also qualified by the particular circumstances
of individual optionees, which may substantially alter or modify the federal
income tax consequences herein discussed. Each employee should consult his or
her tax advisor with respect to the specific tax consequences of his or her
participation in the 1997 Option Plan.
Generally, when an option qualifies as an Incentive Stock Option under
Section 422 of the Code: (i) an optionee will not realize taxable income either
upon the grant or the exercise of the option, (ii) any gain or loss upon a
qualifying disposition of the shares acquired by the exercise of the option will
be treated as capital gain or loss, and (iii) no deduction will be allowed to
the Company for federal income tax purposes in connection with the grant or
exercise of an Incentive Stock Option or a qualifying disposition of the shares.
A disposition by an optionee of Common Stock acquired upon exercise of an
Incentive Stock Option will constitute a qualifying disposition if it occurs
more than two years after the grant of the option, and one year after the
transfer of the shares to the optionee. If such Common Stock is disposed of by
the optionee before the expiration of those time limits, the transfer would be a
"disqualifying disposition" and the optionee, in general, will recognize
ordinary income in the year of the disqualifying disposition equal to the lesser
of (i) the aggregate fair market value of the shares, as of the date of
exercise, less the option price, or (ii) the amount realized on the
disqualifying disposition less the option price. Ordinary income
21
<PAGE>
from a disqualifying disposition will constitute ordinary compensation income.
Any gain in addition to the amount reportable as ordinary income on a
"disqualifying disposition" generally will be capital gain.
Capital gain recognized by an optionee on shares held more than one year but
less than 18 months prior to disposition will be taxable at a maximum rate of
28%; capital gain recognized on shares held for more than 18 months will be
taxable at a maximum rate of 20%.
While the exercise of an Incentive Stock Option does not result in current
taxable income, there are implications with regard to the alternative minimum
tax. Upon the exercise of an Incentive Stock Option, the difference between the
fair market value of Common Stock on the date of exercise and the option price
generally is treated as an adjustment to taxable income in that taxable year for
alternative minimum tax purposes, as are a number of other items specified by
the Code. Such adjustments (along with tax preference items) form the basis for
the alternative minimum tax (presently at the rate of 26% on the first $175,000
of alternative minimum taxable income and 28% on amounts in excess of $175,000
for individuals), which may apply depending on the amount of the computed
"regular tax" of the employee for that year. Under certain circumstances the
amount of alternative minimum tax is allowed as a carry forward credit against
regular tax liability in subsequent years.
In the case of stock options which do not qualify as an Incentive Stock
Option (Non-Qualified Stock Options), no income generally is recognized by the
optionee at the time of the grant of the option. Under present law the optionee
generally will recognize ordinary income at the time the Non-Qualified Stock
Option is exercised equal to the aggregate fair market value of the shares
acquired less the option price. Ordinary income from a Non-Qualified Stock
Option will constitute compensation for which withholding may be required under
federal and state law.
Subject to special rules applicable when an optionee uses Common Stock of
the Company to exercise an option, shares acquired upon exercise of a
Non-Qualified Stock Option will have a tax basis equal to their fair market
value on the date on which ordinary income is recognized and the holding period
for the shares generally will begin on such date. Upon subsequent disposition of
the shares, the optionee normally will recognize capital gain or loss.
The Company will generally be entitled to a deduction equal to the ordinary
income (i.e., compensation) recognized by the optionee in the case of a
"disqualifying disposition" of shares of Common Stock received upon exercise of
an Incentive Stock Option or in connection with the exercise of a Non-Qualified
Stock Option.
Federal income tax laws limit to $1,000,000 the annual amount publicly held
corporations may deduct for reasonable compensation paid to certain executive
officers (including compensation attributable to stock options) if such
reasonable compensation does not qualify as "performance based compensation" or
compensation paid on a "commission basis." The $1,000,000 limitation is
determined for each executive officer to which the deduction applies.
If, as a result of certain changes in control of the Company, certain
employee options become immediately exercisable, the additional economic value
attributable to the acceleration may be deemed an "excess parachute payment" to
the extent the additional value (when combined with the value of other change of
control payments) equals or exceeds 300% of the employee's average annual
taxable compensation over the five calendar years preceding the change of
control. Any such excess over the employee's average annual taxable compensation
will be subject to a 20% excise tax. To the extent that an excess parachute
payment is not deductible and is paid to an executive officer whose compensation
is subject to the $1,000,000 deduction limitation rules, the $1,000,000
deduction limitation is reduced by such amount, but not below zero.
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<PAGE>
GRANT OF OPTIONS
The following table sets forth certain information with respect to options
granted under the 1997 Option Plan as of December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
GRANTED UNDER
NAME AND POSITION 1997 OPTION PLAN
- -------------------------------------------------------------------------- ------------------
<S> <C>
Michael J. Moone ......................................................... --
President, Chief Executive Officer and Director
Yves C. Faroudja ......................................................... --
Chief Technical Officer, Secretary and Director
Michael C. Hoberg ........................................................ --
Vice President--Finance and Chief Financial Officer
Donald S. Butler ......................................................... --
Vice President--Engineering
Thomas A. Harvey ......................................................... 100,000
Vice President--Sales and Marketing
Current Executive Officers as a Group..................................... 180,000
All current Directors who are not executives as group..................... 50,000
Non-executive employees as a group........................................ 183,025
</TABLE>
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" APPROVAL
OF THE PROPOSAL TO AMEND THAT FAROUDJA 1997 PERFORMANCE STOCK OPTION PLAN.
INDEPENDENT AUDITORS
The firm of Ernst & Young LLP served as the Company's independent auditors
for Fiscal 1997. This firm has advised the Company that it has no direct or
indirect financial interest in the Company. Representatives of this firm are
expected to be present at the Annual Meeting of Stockholders, with the
opportunity to make a statement should they desire to do so, and will be
available to respond to appropriate questions from stockholders.
OTHER MATTERS
The Board of Directors knows of no business other than that described herein
that will be presented for consideration at the annual meeting. If, however,
other business shall properly come before the meeting, the persons named in the
enclosed form of Proxy intend to vote the shares represented by said Proxies on
such matters in accordance with their judgment in the best interests of the
Company.
STOCKHOLDERS' PROPOSALS FOR THE 1999 ANNUAL MEETING
Any proposal of a stockholder intended to be presented at the Company's 1999
Annual Meeting of Stockholders must be received by the Company for inclusion in
the Proxy Statement and form of Proxy for that meeting no later than January 6,
1999.
AVAILABILITY OF FORM 10-K
THE COMPANY WILL PROVIDE TO ANY STOCKHOLDER WITHOUT CHARGE, UPON THE WRITTEN
REQUEST OF THAT STOCKHOLDER, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. SUCH REQUESTS SHOULD BE ADDRESSED TO: MICHAEL C. HOBERG,
CHIEF FINANCIAL OFFICER, FAROUDJA, INC., 750 PALOMAR AVENUE, SUNNYVALE,
CALIFORNIA 94086.
23
<PAGE>
SECOND AMENDMENT TO THE
FAROUDJA, INC.
1997 PERFORMANCE STOCK OPTION PLAN
The 1997 Performance Stock Option Plan of Faroudja, Inc. as adopted on
January 2, 1997 and amended on June 13, 1997 is amended as provided herein and
except as so amended, the 1997 Performance Stock Option Plan remains in full
force and effect.
1. Article III Paragraph 3.1 is amended and restated in its entirety to
read as follows:
3.1 Number of Shares Available. The total number of shares of Common
Stock which are available for granting Options hereunder shall be One
Million One Hundred Twenty-Five Thousand (1,125,000) (subject to
adjustment as provided below in Section 3.3 and in Article VIII
hereof)."
2. Article V, Paragraph 5.2.4 shall be added in its entirety to read as
follows:
"5.2.4 no Options may be granted to any Person in any one taxable
year of the Company in excess of 500,000 shares of Common Stock."
<PAGE>
PROXY
FAROUDJA
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF FAROUDJA, INC. (THE
"COMPANY") FOR USE AT THE 1998 ANNUAL MEETING OF STOCKHOLDERS (THE "MEETING") TO
BE HELD ON JUNE 10, 1998, AT 9:00 A.M., AT THE SHERATON FOUR POINTS HOTEL,
LOCATED AT 1100 N. MATHILDA AVENUE, SUNNYVALE, CALIFORNIA.
The undersigned hereby appoints Michael J. Moone and Michael C. Hoberg, or
either one of them, as Proxies, with full power of substitution, to vote all
shares of Common Stock of the Company held of record by the undersigned on April
17, 1998 at the Meeting or at any adjournments thereof, on the proposals set
forth below and in their discretion upon such other matters as may properly come
before the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES LISTED IN PROPOSAL
1 AND A VOTE TO APPROVE THE AMENDMENTS TO THE COMPANY'S 1997 PERFORMANCE STOCK
OPTION PLAN.
1. ELECTION OF DIRECTORS
/ / FOR all nominees listed below for the terms set forth in the Proxy
Statement (except as marked to the contrary below).
/ / WITHHOLD AUTHORITY to vote for all nominees listed below.
MERV ADELSON KEVIN KIMBERLIN WILLIAM TURNER
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE WRITE
THAT NOMINEE'S NAME ON THE LINE PROVIDED BELOW.)
----------------------------------------------------------------------------
2. AMENDMENTS TO THE COMPANY'S 1997 PERFORMANCE STOCK OPTION PLAN
/ / FOR approval of the amendments on the terms set forth in the Proxy
Statement.
/ / AGAINST the approval of the amendments.
/ / ABSTAIN from voting for the approval of the amendments.
3. In their discretion, the Proxies are authorized to vote upon such business
as may properly come before the Meeting.
<PAGE>
This proxy, when properly executed, will be voted in the manner directed by
the undersigned stockholder. If no direction is given, THIS PROXY WILL BE VOTED
for PROPOSAL 1 and PROPOSAL 2. All proxies heretofore given by the undersigned
are hereby revoked. Receipt of the Proxy Statement dated May 6, 1998 is
acknowledged.
Please mark, sign, date and return this Proxy in the accompanying prepaid
envelope.
Dated _______________________, 1998
___________________________________
(Signature)
___________________________________
(Signature)
Please sign your name exactly as it
appears hereon. When signing as
attorney, executor, administrator,
trustee, guardian or corporate
officer please include full title.
