<PAGE> 1
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:
<TABLE>
<S> <C>
/X/ Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
FAFCO, 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/ $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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:
N/A
(2) Form, Schedule or Registration Statement No.:
N/A
(3) Filing Party:
N/A
(4) Date Filed:
N/A
<PAGE> 2
PRELIMINARY COPY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
May 2, 1996
TO THE SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of FAFCO,
Inc., a California corporation (the "Company"), will be held on Thursday, May 2,
1996 at 3:00 p.m., local time, at the Company's executive offices, 2690
Middlefield Road, Redwood City, California 94063 (telephone (415) 363-2690) for
the following purposes:
1. To elect three (3) directors to serve for the ensuing year and until
their successors are elected.
2. To approve the amendment and restatement of the Articles of
Incorporation of the Company (the "Articles") in order to (1) reduce the
vote of stockholders required in the case of certain major transactions
involving the company under certain circumstances and (2) add provisions
limiting liability of directors and permitting indemnification of
directors and officers under certain circumstances.
3. To ratify the appointment of Price Waterhouse LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1996.
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only shareholders of record at the close of business on March 6, 1996 are
entitled to notice of, and to vote at, the meeting and any adjournment thereof.
All shareholders are cordially invited to attend the meeting in person.
However, to assure your representation at the meeting, you are urged to mark,
sign, date and return the enclosed proxy card as promptly as possible in the
postage prepaid envelope enclosed for that purpose. Any shareholder attending
the meeting may vote in person even if such shareholder returned a proxy.
Sincerely,
ALEX N. WATT, Secretary
Redwood City, California
March 29, 1996
<PAGE> 3
PRELIMINARY COPY
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of FAFCO, Inc. (the "Company")
for use at the Annual Meeting of Shareholders (the "Annual Meeting") to be held
on Thursday, May 2, 1996 at 3:00 p.m. local time, or at any adjournment thereof,
for the purposes set forth herein and in the accompanying Notice of Annual
Meeting of Shareholders. The Annual Meeting will be held at the Company's
principal executive offices, 2690 Middlefield Road, Redwood City, California.
Its telephone number at that address is (415) 363-2690.
These proxy solicitation materials were mailed on or about March 29, 1996
to all shareholders entitled to vote at the meeting.
RECORD DATE AND OUTSTANDING SHARES
Shareholders of record at the close of business on March 6, 1996 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting.
At the Record Date, 3,112,687 shares of the Company's Common Stock, $0.125
par value, were issued and outstanding. The only person known by the Company to
be the beneficial owner of more than 5% of the Company's Common Stock as of the
Record Date was Freeman A. Ford. See "ELECTION OF DIRECTORS -- Security
Ownership."
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before its use by delivering to the Company a written
notice of revocation or a duly executed proxy bearing a later date or by
attending the meeting and voting in person.
VOTING AND SOLICITATION
Every shareholder voting in the election of directors may cumulate such
shareholder's votes and give one candidate a number of votes equal to the number
of directors to be elected (three) multiplied by the number of shares held by
such shareholder, or distribute such number of votes on the same principle among
as many candidates as the shareholder thinks fit, provided that votes cannot be
cast for more than the number of directors to be elected. However, no
shareholder shall be entitled to cumulate votes for a candidate unless such
candidate's name has been placed in nomination prior to the voting and the
shareholder, or any other shareholder, has given notice at the meeting prior to
the voting of the intention to cumulate votes. On all other matters, each share
has one vote.
The cost of this solicitation will be borne by the Company. The Company
will reimburse brokerage firms and other persons representing beneficial owners
of shares for their expenses in forwarding solicitation material to such
beneficial owners in accordance with applicable regulations. Proxies may also be
solicited by certain of the Company's directors, officers and regular employees,
without additional compensation, personally or by telephone or telegram.
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of business at the Annual Meeting
is a majority of the shares of Common Stock issued and outstanding on the Record
Date. Shares that are voted "FOR", "AGAINST" or "WITHHELD FROM" a matter are
treated as being present at the meeting for purposes of establishing a
<PAGE> 4
quorum and are also treated as shares "represented and voting" at the Annual
Meeting (the "Votes Cast") with respect to such matter.
While there is no definitive statutory or case law authority in California
as to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against a proposal.
Broker non-votes will be counted for purposes of determining the presence
or absence of a quorum for the transaction of business, but will not be counted
for purposes of determining the number of Votes Cast with respect to the
proposal (other than the proposal to approve the amendment and restatement of
Articles of Incorporation of the Company (the "Articles Amendment Proposal"), on
which the broker has expressly not voted. Thus, a broker non-vote will not
affect the outcome of the voting on a proposal (other than the Articles
Amendment Proposal).
SHAREHOLDER PROPOSALS
Proposals of shareholders of the Company that are intended to be presented
by such shareholders at the Company's next Annual Meeting of Shareholders must
be received by the Company no later than December 30, 1996 in order to be
considered for possible inclusion in the Company's proxy statement and form of
proxy relating to that meeting.
PROPOSAL 1
ELECTION OF DIRECTORS
NOMINEES
A Board of three directors is proposed to be elected at the meeting. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
for the Company's three nominees named below, all of whom are currently
directors of the Company. In the event that any nominee of the Company is unable
or declines to serve as a director at the time of the Annual Meeting of
Shareholders, the proxies will be voted for any nominee who shall be designated
by the current Board of Directors to fill the vacancy. In the event that
additional persons are nominated for election as directors, the proxy holders
intend to vote all proxies received by them in such a manner in accordance with
cumulative voting (if it is invoked) as will assure the election of as many of
the nominees listed below as possible, and, in such event, the specific nominees
to be voted for will be determined by the proxy holders. It is not expected that
any nominee will be unable or will decline to serve as a director. The term of
office of each person elected as a director will continue until the next Annual
Meeting of Shareholders or until his successor has been elected and qualified.
The names of the nominees, and certain information about them, are set
forth below.
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
- --------------------------------------- --- --------------------------------------- --------
<S> <C> <C> <C>
Freeman A. Ford........................ 55 Chairman of the Board, President and 1972
Chief Executive Officer of the Company.
William A. Berry....................... 57 Senior Vice President and Chief 1974
Financial Officer of Compression Labs,
Inc., a supplier of video-conferencing
equipment.
Robert W. Selig, Jr. .................. 56 President of Davis Instruments 1974
Corporation, a manufacturer and
distributor of marine equipment.
</TABLE>
2
<PAGE> 5
Except as set forth below, each of the nominees has been engaged in his
principal occupation set forth above during the past five years. There is no
family relationship between any directors or executive officers of the Company.
Mr. Ford is also a director of H.B. Fuller Company.
Mr. Berry was Vice President and Chief Administrative Officer of Raychem
Corporation, a manufacturer of products based on radiation chemistry, from June
1985 until December 1988. In December 1988, Mr. Berry resigned from Raychem and
became self-employed as a management consultant. From August 1990 until January
1992, Mr. Berry served as President of Optical Shields Ltd., a manufacturer of
products based on liquid crystals. In January 1992, Mr. Berry resigned from
Optical Shields Ltd. and became self-employed as a management consultant. Since
April 1992, Mr. Berry has served as Senior Vice President and Chief Financial
Officer of Compression Labs, Inc., a supplier of video-conferencing equipment.
Mr. Selig has served as President of Davis Instruments Corp., a
manufacturer of marine and weather equipment, for more than the past five years.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR EACH OF THE
COMPANY'S NOMINEES FOR DIRECTOR.
VOTE REQUIRED
The three nominees receiving the highest number of affirmative votes of the
shares entitled to be voted for them shall be elected as directors. Votes
withheld from any director are counted for purposes of determining the presence
or absence of a quorum, but have no other legal effect under California law.
SECURITY OWNERSHIP
The following table sets forth the beneficial ownership of Common Stock of
the Company as of the Record Date of (1) each person known by the Company to
beneficially own more than 5% of the Company's Common Stock, (2) each director,
(3) the executive officers of the Company named in the Summary Compensation
Table below (the "Named Executive Officers"), and (4) all directors and
executive officers as a group:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
------------------------
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES(1) TOTAL
--------------------------------------------------------------- --------- ----------
<S> <C> <C>
Freeman A. Ford................................................ 1,934,846(2) 56.8%
c/o FAFCO, Inc.
2690 Middlefield Road
Redwood City, California 94063
Alex N. Watt................................................... 78,950(3) 2.5%
David K. Harris................................................ 57,199(4) 1.8%
Robert W. Selig, Jr. .......................................... 46,528(5) 1.5%
William A. Berry............................................... 23,250(6) *
Joseph Feingold................................................ 20,000(7) *
Michael Anderson............................................... 12,000(8) *
All current directors and executive officers as a group (6
persons)..................................................... 2,152,773(9) 60.7%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise indicated in the footnotes to this table or as otherwise
provided by community property laws, the beneficial owner has sole voting
and investment power with respect to all shares.
3
<PAGE> 6
(2) Includes (i) 298,000 shares held of record by trusts for the benefit of Mr.
Ford's children for which he and his spouse serve as trustees and as to
which shares he disclaims beneficial ownership, (ii) 209,344 shares jointly
owned by Mr. Ford and his spouse, (iii) 52,250 shares issuable upon exercise
of options exercisable within 60 days of the Record Date, (iv) 117,500
shares issuable upon conversion of 10% Convertible Subordinated Notes held
by Mr. Ford, and (v) 123,750 shares issuable upon exercise of outstanding
warrants exercisable within 60 days of the Record Date.
(3) Includes 58,764 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date held by Mr. Watt and 1000
shares held by Mr. Watt and Sandra S. Watt as joint tenants.
(4) Includes 42,950 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date held by Mr. Harris.
(5) Includes (i) 13,000 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date held by Mr. Selig, and (ii)
5,700 shares held by trusts for the benefit of Mr. Selig's children, as to
which shares he disclaims beneficial ownership.
(6) Includes 13,000 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date held by Mr. Berry.
(7) Includes 20,000 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date held by Mr. Feingold, a former
executive officer.
(8) Includes 12,000 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date held by Mr. Anderson.
(9) Includes (i) 169,099 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date held by four executive
officers (one of whom is also a director), (ii) 26,000 shares issuable upon
exercise of outstanding options and warrants exercisable within 60 days of
the Record Date held by two outside directors, (iii) 117,500 shares issuable
upon conversion of 10% Convertible Subordinated Notes held by an executive
officer who is also a director, and (iv) 123,750 shares issuable upon
exercise of warrants held by a director who is also an executive officer.
By virtue of his position as Chairman of the Board, President and Chief
Executive Officer of the Company and his beneficial ownership of approximately
54.3% of the Company's Common Stock as of the Record Date, Freeman A. Ford may
be deemed to be a "parent" and/or "control person" of the Company within the
meaning of the rules and regulations promulgated under the Securities Act of
1933, as amended. Mr. Ford can elect a majority of the Board of Directors and
controls any shareholder vote that does not require a supermajority with respect
to which his shares are eligible to be voted.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely on its review of the copies of Forms 3, 4 and 5 received by
the Company, or written representations from certain reporting persons that no
Forms 5 were required for such persons, the Company believes that, during the
fiscal year ended December 31, 1994, all filing requirements under Section 16(a)
of the Securities Exchange Act applicable to its officers, directors and 10%
shareholders were complied with.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of three meetings during
the year ended December 31, 1995 (the "Last Fiscal Year").
The Audit Committee of the Board of Directors, which currently consists of
outside directors Berry and Selig, held two meetings during the Last Fiscal
Year. This Committee recommends engagement of the Company's independent
accountants and is primarily responsible for approving the services performed by
the Company's independent accountants and for reviewing and evaluating the
Company's accounting principles and its system of internal accounting controls.
4
<PAGE> 7
There is no compensation committee or nominating committee or any committee
performing those functions. During the Last Fiscal Year, no director attended
fewer than 75% of the aggregate of the meetings of the Board of Directors and
the committees on which such director served.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company for services rendered during the Last Fiscal Year to the
Company by the Chief Executive Officer and the other Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------- ------------
OTHER ANNUAL SECURITIES
NAME AND COMPENSATION UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS ($) OPTIONS(#) COMPENSATION
- --------------------------------- ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Freeman A. Ford.................. 1995 $115,211 $ 0 $1,931(2) $ 0 $2,582(1)
Chairman of the Board, 1994 115,126 0 0 0 2,492(1)
President and Chief Executive 1993 110,294 14,221 0 0 2,367(1)
Officer
Alex N. Watt..................... 1995 106,047 0 4,357 0 2,218(1)
Vice President, 1994 104,007 0 4,794(2) 15,814 2,218(1)
Finance and Administration, 1993 99,830 12,731 4,794(2) 0 1,360(1)
and Chief Financial Officer
Joseph Feingold.................. 1995 106,501 0 0 20,000 636(1)
Vice President
David K. Harris.................. 1995 107,207 0 1,454(2) 0 293(1)
Vice President 1994 103,670 0 1,128(2) 3,135 270(1)
Pool Products 1993 99,752 12,731 1,128(2) 0 226(1)
Michael Anderson................. 1995 104,609 0 2,555(2) 0 485(1)
Vice President 1994 103,902 0 2,070(2) 0 485(1)
Commercial Products(3) 1993 65,375 0 2,070(2) 0 485(1)
</TABLE>
- ---------------
(1) Represents life insurance premiums paid by the Company on behalf of Messrs.
Ford, Watt, Harris and Anderson.
(2) Represents value of use of Company vehicles by Messrs. Watt, Harris and
Anderson.
(3) Mr. Anderson became an executive officer in May 1993.
(4) Mr. Feingold became an executive officer in November 1994, and left the
Company in November 1995. Mr. Feingold continues to serve as a consultant to
the Company.
5
<PAGE> 8
The following table sets forth certain information regarding stock options
granted to the Named Executive Officers during the Last Fiscal Year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS FAIR MARKET
OPTIONS GRANTED TO EXERCISE VALUE ON
GRANTED EMPLOYEES IN PRICE DATE OF GRANT EXPIRATION
NAME (#) FISCAL YEAR ($/SH) ($/SH) DATE
- ---------------------------- ---------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Freeman A. Ford............. 0 N/A N/A N/A N/A
Alex N. Watt................ 0 N/A N/A N/A N/A
David K. Harris............. 0 N/A N/A N/A N/A
Joseph Feingold............. 20,000(1) 83% $ 0.56 $0.75(2) 11/21/02
Michael Anderson............ 0 N/A N/A N/A N/A
</TABLE>
- ---------------
(1) Non-statutory option granted outside of any option plan. Option has a
seven-year term and was fully exercisable as of the date of grant, November
21, 1995.
(2) Based on the last available bid price in the over-the-counter market on
November 21, 1995, which price the Board of Directors has determined to be
the fair market value of the Company's Common Stock on said date.
The following table sets forth information regarding the value of all
unexercised stock options and warrants held by the Named Executive Officers as
of the end of the Last Fiscal Year. No options were exercised by any Named
Executive Officer during the last Fiscal Year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION AND WARRANT VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/ OPTIONS/
WARRANTS AT WARRANTS AT
FISCAL YEAR- FISCAL YEAR-
END(#) END($)(2)
-------------- ----------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------------- --------------- ------------ -------------- ----------------------
<S> <C> <C> <C> <C>
Freeman A. Ford................... 0 N/A 176,000/10,000 $7,734/0
Alex N. Watt...................... 0 N/A 58,764/10,000 0/0
David K. Harris................... 0 N/A 41,085/15,000 0/0
Joseph Feingold................... 0 N/A 20,000/ 0 0/0
Michael Anderson.................. 0 N/A 12,000/ 8,000 0/0
</TABLE>
- ---------------
(1) Based on the average of the bid and asked prices for the Company's Common
Stock for the last trading day prior to 1995 fiscal year-end ($0.25), minus
the exercise price of the option or warrant.
DIRECTOR COMPENSATION
Directors who are not employees of the Company are entitled to receive
directors' fees in the amount of $750 for each board meeting attended and $750
for each committee meeting attended, provided that such committee meeting is
held on a different day than that of the board meeting. Directors who are not
employees of the Company are also entitled to an annual retainer of $1,250.
Messrs. Berry and Selig were each granted a six-year warrant to purchase
7,500 shares of the Company's Common Stock in February 1988 (the "Warrants").
The Warrants became exercisable as to 20% of the
6
<PAGE> 9
shares subject to the Warrants on each anniversary of their grant and had an
exercise price of $0.50 per share. Both Warrants were exercised in full in
January 1994, in each case for a value realized of $7,500.
The Board of Directors has adopted and the shareholders of the Company have
approved the 1991 Directors' Stock Option Plan (the "Directors' Plan") pursuant
to which each non-employee director of the Company is automatically granted a
nonstatutory stock option to purchase 10,000 shares (a "Director's Option") on
the later to occur of the date of adoption of the Plan (April 15, 1991) or the
date of his or her appointment or election to the Board. Each Director's Option
has a term of ten years and becomes exercisable as to 20% of the shares subject
thereto on each anniversary date of its grant. Messrs. Berry and Selig were each
granted a Director's Option on April 15, 1991. Such options have an exercise
price per share of $0.50.
In addition, in April 1993, Messrs. Berry and Selig were each granted
options to purchase 5,000 shares of Common Stock at an exercise price of $0.50
per share. Such warrants become exercisable as to 20% of the shares on the
first, second, third, fourth and fifth anniversaries of date of grant.
CERTAIN TRANSACTIONS
During 1987 and 1988, Freeman A. Ford extended a line of credit in the
amount of $275,000 to The Gregory Company ("Gregory"), a wholly-owned subsidiary
of the Company. The obligations of Gregory under the line of credit are
guaranteed by the Company and were initially secured by the assets and 100% of
the outstanding stock of Gregory. As of November 1987, Gregory's obligations
became secured by all of the assets of the Company. As of December 1989, Gregory
had drawn down the entire $275,000 line of credit and had issued promissory
notes for such amount, which became due on October 31, 1989 (the "Gregory
Notes"). The Gregory Notes were amended in March 1989 to extend the maturity
dates thereof to May 31, 1993 and in March 1993 to extend the maturity dates
until May 30, 1996. The Gregory Notes bear interest at the floating prime rate
of Silicon Valley Bank plus 4%. As consideration for Mr. Ford's agreement to
extend this line of credit to Gregory, the Company issued warrants to purchase
90,000 and 33,750 shares of Common Stock of the Company in February 1987 and
December 1988, respectively (the "Original Warrants"). The Original Warrants had
an exercise price of $0.1875 per share and expired unexercised in February 1991.
In February 1991, the Company issued warrants to purchase 90,000 and 33,750
shares of Common Stock of the Company to replace the Original Warrants (the
"1991 Warrants"). The 1991 Warrants expired unexercised in February 1993. In
March 1993, the Company issued warrants to purchase 90,000 and 33,750 shares of
Common Stock of the Company to replace the 1991 Warrants (the "1993 Warrants").
The 1993 Warrants have the same terms as the Original Warrants (including an
exercise price of $0.1875 per share) but they do not expire until May 1996. As
of the Record Date, the 1993 Warrants had not been exercised.
In November 1987, in connection with a loan from the Financial Center Bank
(the "Bank") to the Company, Mr. Ford agreed to subordinate his interest in the
assets of Gregory and the outstanding stock of Gregory to the Bank and also
agreed that he would not be repaid any indebtedness (excluding interest) until
all obligations owed to the Bank by the Company have been fully paid. In
addition, in consideration of Mr. Ford's subordination, the Company granted Mr.
Ford a security interest in all of its assets. Such loan from the Bank was
repaid by the Company in October 1992.
In January 1994, Mr. Ford purchased a $50,000 principal amount convertible
subordinated note (the "Convertible Note") from the estate of Janet Ford, Mr.
Ford's mother. Accordingly, Mr. Ford is currently the holder of $250,000 in
principal amount of Convertible Notes, which entitle him to acquire an aggregate
of up to 117,500 shares of Common Stock at a conversion price of $0.50 per share
upon conversion.
In February 1996, Mr. Ford lent the Company an additional $100,000, and
Diana Ford (Mr. Ford's spouse) lent the Company $25,000. The Company expects
that such indebtedness will be canceled in consideration for the issuance to Mr.
and Mrs. Ford of promissory notes in connection with a refinancing to be
completed in March 1996.
7
<PAGE> 10
PROPOSAL 2
AMENDMENT AND RESTATEMENT OF ARTICLES OF INCORPORATION
At the Annual Meeting, shareholders are being asked to approve the
amendment and restatement of the Articles of Incorporation of the Company (the
"Articles") in order to (1) reduce the vote of shareholders required in the case
of certain major transactions involving the Company under certain circumstances
and (2) add provisions limiting liability of directors and permitting
indemnification of directors and officers under certain circumstances. The Board
of Directors approved such amendment and restatement in November 1994. Attached
hereto as Appendix A is the form of Amended and Restated Articles of
Incorporation proposed to be filed with the California Secretary of State, if
approved by the requisite shareholder vote (the "Restated Articles").
DESCRIPTION OF AND PRINCIPAL REASONS FOR THE PROPOSED AMENDMENTS
Reduction of Required Shareholder Vote
Article Sixth of the Articles currently provides that certain matters (the
"Specified Transactions"), including (a) any agreement for the merger of the
Company; (b) the sale of all or substantially all of the assets of the Company;
(c) the reclassification of the Company's stock; and (d) the amendment or repeal
of Article Sixth, if such Specified Transactions are not approved by 80% of the
Company's directors, require the affirmative vote of the holders of at least 75%
of the outstanding shares of Common Stock. The Company in June 1995 applied for
a permit from the California Department of Corporations with respect to options
to be granted in the future under the Company's 1991 Stock Option Plan (the
"Option Plan"). Such permit is necessary in order for the Company to continue to
grant stock options under the Option Plan to employees and consultants in
compliance with California securities laws. However, it is the policy of the
California Department of Corporations not to issue a permit with respect to any
issuer's stock option plan if such issuer's articles of incorporation contain a
supermajority shareholder vote requirement in excess of 66 2/3%. At the request
of the Department of Corporation, a proposal to amend the Articles reducing the
supermajority provision of Article Sixth from 75% to 66 2/3% was presented to
the shareholders at the 1995 Annual Meeting of Shareholders, but the proposal
did not receive the required margin of approval. The Department of Corporations
required that the Company exert its best efforts to obtain shareholder approval
to such an amendment to the Articles at the 1996 Annual Meeting.
Provisions Limiting Director Liability and Permitting Broader Indemnification
The Company is also soliciting approval by the shareholders of an amendment
to the Articles contained in the Restated Articles to add (1) a provision
eliminating the liability of directors for monetary damages for a breach of the
fiduciary duty of care to the fullest extent permitted by California law and (2)
a provision permitting the Company to expand indemnification of directors and
officers to the fullest extent permitted by California law.
Section 309 of the California Corporations Code (the "Corporations Code")
limits the liability of a director for an alleged failure to perform his or her
duties as long as he or she acts in good faith, in a manner believed to be in
the best interests of the Company and its shareholders and with such care,
including reasonable inquiry, as an ordinarily prudent person in like position
would use under similar circumstances. Such statute also allows a California
corporation to include a provision in its articles of incorporation reducing or
eliminating the liability of a director to the corporation or its shareholders
for monetary damages for breach of the fiduciary duty of due care, provided that
such liability does not arise from certain proscribed conduct (including
intentional misconduct and breach of the duty of loyalty). The provisions of the
Corporations Code in this regard relate only to actions brought by shareholders
on behalf of the corporation (i.e. "derivative actions") and do not apply to
claims brought by third parties.
Furthermore, Sections 204(a)(11) and 317 of the Corporations Code provide
that the Company may include a provision in its articles of incorporation
enabling the indemnification of directors and officers under a broader range of
circumstances than would be permitted absent such a provision in the articles of
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incorporation. A corporation that has such enabling language in its articles of
incorporation may include provisions in its Bylaws, and in agreements between
the corporation and its directors and officers, expanding the scope of
indemnification beyond that specifically provided by California law.
The Company is seeking shareholder approval of the amendment to limit
liability of directors and permit additional indemnification in order to provide
the maximum protection to directors and officers permitted by California law.
The Board of Directors has determined that it is in the best interests of the
Company and its shareholders to amend the Company's Articles consistent with the
foregoing statutes. The Company believes that most California corporations
include these provisions in their articles of incorporation and believes that
adding such provisions is necessary in order to continue to attract and retain
experienced persons willing to serve as directors and officers of the Company.
In order to provide further protection, the Company has amended its Bylaws
to implement the applicable statutory framework as described above and to
provide for indemnification of directors, officers and other agents of the
Company to the fullest extent permitted by California law.
The amendment will have no effect on the liability of a director for acts
or omissions that occur prior to the date when the Restated Articles become
effective.
POSSIBLE DISADVANTAGES
If the Restated Articles are approved by the shareholders at the Annual
Meeting and filed with the California Secretary of State, a director will not be
liable to the Company or its shareholders for monetary damages for breach of
such director's fiduciary duty of due care, including a breach that constitutes
negligence or even gross negligence, provided such breach does not involve
certain proscribed conduct (including reckless disregard for duties, intentional
misconduct or breach of the duty of loyalty). See "Effects of Adoption of
Restated Articles" below.
Given the broadening of the Company's indemnification of its directors and
officers permitted by the Restated Articles and the amendment to the Company's
Bylaws, it is more likely that a suit against directors will result in full or
partial indemnification by the Company than it would be without such
indemnification provisions. In addition, as a result of approval of the Restated
Articles, the shareholders of the Company will be surrendering certain
significant rights to claim damages from the directors. Accordingly, approval of
the Restated Articles may reduce the likelihood of shareholders or management
bringing a lawsuit against the directors of the Company on behalf of the Company
for breach of fiduciary duty even though such an action, if successful, might
otherwise have benefitted the Company and its shareholders. Finally, inasmuch as
its directors may benefit from the limitation of liability for monetary damages,
there is an inherent conflict of interest in approval of the Restated Articles
by the Board of Directors. The shareholders should recognize that the directors
have a direct personal interest in the approval of the Restated Articles, which
should be considered potentially at variance with the interests of the
shareholders.
EFFECTS OF ADOPTION OF RESTATED ARTICLES
The following discussion summarizes certain material differences between
the Company's Restated Articles and the Company's Articles of Incorporation as
currently in effect.
Reduction of Required Shareholder Vote
Currently, Freeman A. Ford, a director and the President and Chief
Executive Officer of the Company, beneficially owns approximately 56.8% of the
Company's Common Stock. By virtue of such ownership, Mr. Ford is in a position
under California law to elect a majority of the Board of Directors and to
approve major corporate transactions, such as the merger or sale of assets of
the Company, without generally requiring the vote of the other shareholders of
the Company. Article Sixth of the Articles, which currently requires the
affirmative vote of 75% of the outstanding shares to approve a Specified
Transaction if less than 80% of the directors approve such transaction, would
therefore only require the affirmative vote of approximately 18.2% of the
Company's Common Stock, in addition to all shares held by Mr. Ford, in order to
approve a Specified
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Transaction in such circumstances. The effect of the proposed amendment is to
lower this percentage vote of shareholders other than Mr. Ford to approximately
9.9%. Such change could make it easier to approve a Specified Transaction since
a smaller number of additional shareholders would be needed to reach the 66 2/3%
approval threshold than the current 75% threshold.
Limitation of Liability
The Restated Articles would eliminate director liability to the Company or
its shareholders for monetary damages arising out of a director's breach of his
or her duty of due care, to the fullest extent permissible under California law.
The breach of the fiduciary duty of due care by a director could, absent
adoption and filing of the Restated Articles, give rise to liability for
monetary damages caused to the Company or its shareholders. Liability for a
breach of the duty of care arises when directors have failed to exercise
sufficient care in reaching decisions or otherwise attending to their
responsibilities as directors. The Restated Articles do not eliminate the duty
of care; they only eliminate monetary damage awards occasioned by a breach of
that duty. Accordingly, if the Restated Articles are approved by the
shareholders and filed with the California Secretary of State, a breach of the
duty of care would remain a valid basis for a suit seeking to stop a proposed
transaction from occurring. It should be noted, however, that equitable remedies
such as rescission may not as a practical matter be available, for example,
after a transaction has already been consummated.
Notwithstanding the foregoing, California law does not permit the Company
to limit or eliminate directors' liability for monetary damages based on claims
arising out of any of the following:
(1) Acts or omissions that involve intentional misconduct or a knowing
and culpable violation of the law;
(2) Acts or omissions that a director believes to be contrary to the
best interests of the Company and its shareholders or that involve the
absence of good faith on the part of the director;
(3) Transactions from which the director derived an improper personal
benefit;
(4) Acts or omissions that show a reckless disregard for the
director's duty to the corporation or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary
course of performing his duties, of a risk of serious injury to the Company
or its shareholders;
(5) Acts or omissions that constitute an unexcused pattern of
inattention amounting to an abdication of the director's duty to the
corporation or its shareholders;
(6) Transactions between the Company and its directors or corporations
that have interrelated directors, under Section 310 of the Corporations
Code;
(7) Improper distributions, loans or guarantees, under Section 316 of
the Corporations Code.
The limitation of liability provisions proposed to be included in the
Restated Articles apply only to directors and do not purport to eliminate or
limit the liability of officers of the Company, including officers who are also
directors, for any act or omission in his or her capacity as an officer,
notwithstanding that the officer's actions, if negligent or improper, have been
ratified by the Board of Directors.
Indemnification
The Corporations Code also permits a corporation to indemnify its
directors, officers and other corporate agents under a broad range of
circumstances, including actual or threatened legal proceedings against such
individual by reason of his or her service on behalf of the corporation. Such
law also provides that a corporation may indemnify its directors, officers and
other corporate agents against expenses actually and reasonably incurred in any
such proceeding in which such individual is successful "on the merits" in his or
her defense, provided that such person acted in good faith and in a manner
reasonably believed to be in the best interest of the corporation and its
shareholders.
The Restated Articles, together with the Bylaws of the Company, will
provide that: (i) the Company is required to indemnify its directors and
officers to the fullest extent permissible under California law, including
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<PAGE> 13
circumstances where such indemnification would otherwise be discretionary; (ii)
the Company is required to advance expenses to its officers and directors as
incurred, including expenses relating to obtaining a determination that such
officers and directors are entitled to indemnification, provided that they
undertake to repay the amount advanced if it is ultimately determined that they
are not entitled to indemnification; (iii) the Company is authorized to enter
into indemnification agreements with its officers and directors; and (iv) the
Company may not retroactively amend the Restated Articles or Bylaw provision in
a way that is adverse to its officers or directors or former officers or
directors.
The Company is subject to the Corporations Code, which provides a detailed
statutory framework covering indemnification of officers, directors and other
agents of the Company made or threatened to be made a party to any legal
proceeding by reason of his or her service to the Company. While the Company
currently may indemnify directors and officers for certain damages resulting
from their actions as directors and officers without the provisions contained in
the proposed Restated Articles, the Restated Articles may expand the types of
circumstances that would require the Company to pay damages on behalf of
officers or directors who have been sued, and to reimburse the expenses incurred
by such officers and directors in defending themselves against claims arising by
reason of their service on behalf of the corporation. The Restated Articles
would further prohibit the shareholders of the Company from retroactively
amending or modifying the indemnification provision contained in the Restated
Articles in a way which is adverse to its officers or directors or former
officers and directors.
Effective Date
If the Restated Articles are approved by the shareholders at the Annual
Meeting, the Restated Articles will be submitted for filing with the California
Secretary of State. The limitation of liability and indemnification provisions
of the Restated Articles will not apply retroactively, but will become effective
when the Restated Articles are accepted for filing by the California Secretary
of State. The boundaries of permissible protection against liability under
California law are subject to judicial interpretation and therefore the validity
and scope of such protection may be uncertain.
VOTE REQUIRED
Approval of the Restated Articles, which include the amendments described
above, requires the affirmative vote of the holders of not less than
seventy-five percent (75%) of the outstanding shares of the Company's Common
Stock on the Record Date. Accordingly, abstentions and broker non-votes will
have the same effect as a vote against the Restated Articles.
If the Restated Articles are approved by the required vote of the
shareholders, the Company intends to file such Restated Articles with the
California Secretary of State as soon as practicable following the Annual
Meeting, at which time the provisions thereof will become effective. However,
because the Company has more than 100 shareholders of record and has only one
class of stock outstanding, Corporations Code Section 710 provides that the
supermajority vote provision contained in the Restated Articles shall cease to
be effective (and the vote requirement for the Specified Transactions shall
revert to a simple majority) two years after the filing of the Restated Articles
with the Secretary of State unless the shareholder approval of the supermajority
vote requirement is renewed by another shareholder vote.
If the Restated Articles are not approved at the Annual Meeting by the
required vote, the Restated Articles shall not be filed with the Secretary of
State and none of the amendments described above shall be effective. In such
event, the existing 75% supermajority vote provision will remain in effect and
will not require a shareholder vote for renewal due to the fact that it was
included in the Articles of Incorporation filed prior to January 1, 1989.
RECOMMENDATION
THE BOARD OF DIRECTORS HAS APPROVED THE RESTATED ARTICLES AND UNANIMOUSLY
RECOMMENDS VOTING "FOR" THE RESTATED ARTICLES, INCLUDING THE AMENDMENTS
DESCRIBED ABOVE.
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PROPOSAL 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Price Waterhouse LLP, independent
auditors, to audit the financial statements of the Company for the fiscal year
ending December 31, 1996. If the shareholders do not ratify the appointment of
Price Waterhouse, the selection of independent auditors will be reconsidered by
the Board of Directors. Representatives of Price Waterhouse are expected to be
present at the meeting, will have the opportunity to make a statement if they
desire to do so, and are expected to be available to respond to appropriate
questions.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE APPOINTMENT OF PRICE
WATERHOUSE LLP AS THE COMPANY'S AUDITORS FOR FISCAL 1996 AND RECOMMENDS THAT THE
SHAREHOLDERS VOTE "FOR" THIS PROPOSAL.
OTHER MATTERS
The Company knows of no other matters to be submitted to the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the enclosed proxy card to vote the shares they represent as
the Board of Directors may recommend.
THE BOARD OF DIRECTORS
Dated: March 29, 1996
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APPENDIX A
PROPOSED FORM OF
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF FAFCO, INC.
Freeman A. Ford and Alex N. Watt certify that:
1. They are the President and Secretary, respectively, of FAFCO, INC.,
a California corporation.
2. The Articles of Incorporation of this corporation are amended and
restated in their entirety to read as follows:
"I.
NAME
The name of the corporation is FAFCO, Inc.
II.
PURPOSE
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
AUTHORIZED STOCK
(a) This corporation is authorized to issue two classes of shares, to be
designated, respectively, Common Stock and Preferred Stock. The total number of
shares of Common Stock authorized is 10,000,000, and the par value of each such
share is $0.125. The total number of shares of Preferred Stock authorized is
1,000,000, and the par value of each such share is $1.00. The aggregate par
value of all of said shares is $2,250,000.
(b) Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized to determine or alter any or all of
the rights, preferences, privileges and restrictions granted to or imposed upon
any wholly unissued series of Preferred Stock and, within the limitations or
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of any such series then
outstanding) the number of shares comprising any such series subsequent to the
issue of shares of that series, to set the designation of any series, and to
provide for rights and terms of redemption, conversion, dividends, voting rights
and liquidation preferences of the shares of any such series.
IV.
SUPERMAJORITY VOTE
If approval by the Board of Directors is by less than the affirmative vote
or consent of 80% of the directors then in office, then in addition to the
voting requirements specified by the California General Corporation
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<PAGE> 16
Law, the affirmative vote of the holders of not less than 66 2/3% of the issued
and outstanding shares of Common Stock of the corporation shall be required to
authorize, adopt or approve any of the following:
(a) The adoption of any agreement or plan for the merger or
consolidation of the corporation with or into any person, firm, corporation
or other entity;
(b) The sale, lease, conveyance, exchange, transfer, distribution,
liquidation or other disposition of all or substantially all of the
property and assets of the corporation to any person, firm, corporation or
other entity;
(c) The reclassification of shares of stock of the corporation
entitled to vote in elections of directors; and
(d) The amendment or repeal of this Article IV.
V.
LIMITATION OF LIABILITY; INDEMNIFICATION
(a) The liability of the directors of this corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
(b) This corporation is authorized to indemnify the directors and officers
of the corporation to the fullest extent permissible under California law.
(c) Any repeal or modification of the foregoing provisions of this Article
V by the shareholders of the corporation shall not adversely affect any right or
protection of a director or officer of the corporation existing at the time of
such repeal or modification."
3. The foregoing amendment and restatement of the Articles of Incorporation
has been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of the Articles of Incorporation
has been duly approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code and the provisions of the Articles of
Incorporation, as currently in effect. The total number of outstanding shares of
Common Stock of the corporation on the record date for the shareholder meeting
at which this amendment and restatement was approved was 3,112,687 and the
corporation has no other class of capital stock outstanding. The number of
shares voting in favor of the amendment and restatement equaled or exceeded the
vote required. The percentage vote required was at least seventy-five percent
(75%) of the outstanding Common Stock.
The undersigned declare under penalty of perjury under the laws of the
State of California that the matters set forth in the foregoing certificate are
true of their own knowledge.
IN WITNESS WHEREOF, the undersigned have executed this certificate in
Redwood City, California, this day of May, 1996.
--------------------------------------
Freeman A. Ford, President
--------------------------------------
Alex N. Watt, Secretary
A-2
<PAGE> 17
PRELIMINARY COPY
THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
------------------------
FAFCO, INC.
PROXY FOR 1996 ANNUAL MEETING OF SHAREHOLDERS
MAY 2, 1996
The undersigned stockholder of FAFCO, Inc. (the "Company") hereby
acknowledges receipt of the Notice of Annual Meeting of Shareholders and Proxy
Statement for the 1995 Annual Meeting of Shareholders of the Company to be held
on May 2, 1996 at : .m., local time, at the Company's principal place of
business, 2690 Middlefield Road, Redwood City, California 94063 (telephone (415)
363-2690), and hereby revokes all previous proxies and appoints Freeman A. Ford
and Alex N. Watt, or either of them, with full power of substitution, Proxies
and Attorneys-in-Fact, on behalf and in the name of the undersigned, to vote and
otherwise represent all of the shares registered in the name of the undersigned
at said Annual Meeting, or any adjournment thereof, with the same effect as if
the undersigned were present and voting such shares, on the following matters
and in the following manner:
1. Election of Directors
/ / FOR all the nominees listed below (except as indicated). / / WITHHOLD
authority to vote for all nominees listed below.
IF YOU WISH TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH THAT NOMINEE'S NAME IN THE LIST BELOW:
FREEMAN A. FORD, WILLIAM A. BERRY, ROBERT W. SELIG, JR.
2. Proposal to approve the amendment and restatement of the Articles of
Incorporation of the Company (the "Articles") in order to (1) reduce the vote
of shareholders required in the case of certain major transactions involving
the Company under certain circumstances and (2) add provisions limiting
liability of directors and permitting indemnification of directors and
officers under certain circumstances.
/ / FOR / / AGAINST / / ABSTAIN
3. Proposal to ratify the appointment of Price Waterhouse LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1996.
/ / FOR / / AGAINST / / ABSTAIN
In their discretion, the Proxies are entitled to vote upon such other matters as
may properly come before the meeting or any adjournments thereof.
(Continued and to be signed on reverse side)
<PAGE> 18
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF NO SPECIFICATION IS MADE, THE SHARES REPRESENTED BY THIS
PROXY WILL BE VOTED FOR EACH OF THE ABOVE PERSONS AND PROPOSALS, AND FOR SUCH
OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING AS THE PROXYHOLDERS DEEM
ADVISABLE.
Dated , 1996
Signature:
---------------------------------------
Signature:
---------------------------------------
I Plan to attend the meeting: / /
(This proxy should be marked, dated and signed by each shareholder exactly as
such shareholder's name appears hereon, and returned promptly in the enclosed
envelope. Persons signing in a fiduciary capacity should so indicate. A
corporation is requested to sign its name by its President or other authorized
officer, with the office held designated. If shares are held by joint tenants or
as community property, both holders should sign.)
TO ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, PLEASE MARK, SIGN AND
DATE THIS PROXY AND RETURN IT AS PROMPTLY AS POSSIBLE.
