SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
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] 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:
N/A
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
N/A
- --------------------------------------------------------------------------------
(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):
N/A
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
N/A
- --------------------------------------------------------------------------------
(5) Total fee paid:
N/A
- --------------------------------------------------------------------------------
[ ] 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
- --------------------------------------------------------------------------------
FAFCO, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
JUNE 7, 2002
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 Friday, June 7,
2002 at 3:00 p.m., local time, at the Company's executive offices, 435 Otterson
Drive, Chico, California, 95928-8207 (telephone (530) 332-2100) for the
following purposes:
1. To elect five (5) directors to serve for the ensuing year and
until their successors are elected.
2. To adopt the 2002 Stock Plan and approve the reservation of
500,000 shares of our common stock for issuance thereunder plus
an annual increase equal to the lesser of (i) 200,000 shares,
(ii) 3% of the number of outstanding shares of our common stock,
and (iii) any lesser amount determined by our Board of Directors.
3. To ratify the appointment of Burr, Pilger & Mayer as the
independent auditors of the Company for the fiscal year ending
December 31, 2002.
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 April 18, 2002
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
Chico, California
April 29, 2002
FAFCO, INC.
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 of the Company (the "Annual
Meeting") to be held on Friday, June 7, 2002 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, 435 Otterson Drive, Chico, California,
95928-8207. Its telephone number at that address is (530) 332-2100.
These proxy solicitation materials and our Annual Report to Shareholders
for the fiscal year ended December 31, 2001 were mailed on or about May 3,
2002 to all shareholders entitled to vote at the meeting.
RECORD DATE AND OUTSTANDING SHARES
Shareholders of record at the close of business on April 18, 2002 (the
"Record Date") are entitled to notice of and to vote at the Annual Meeting. As
of the Record Date, the Company had 660 shareholders of record.
At the Record Date, 3,855,591 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 (five) 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 properly 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, telegram, telecopy or
electronic mail.
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 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 the presence or
absence of a quorum for the transaction of business, but should not be counted
as Votes Cast with respect to a proposal since the shareholder has expressly
declined to vote on such proposal. Similarly, 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 a proposal on which the broker has
expressly not voted. Accordingly, abstentions and broker non-votes will not
affect the outcome of the voting on a proposal that requires a majority of the
Votes Cast.
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 and that such shareholders desire to have included in the Company's
proxy statement relating to such meeting must be received by the Company no
later than January 2, 2003 (120 calendar days prior to the anniversary of the
mailing date of this proxy statement) in order to be considered for possible
inclusion in the Company's proxy statement and form of proxy relating to that
meeting.
If a shareholder wishes to present a proposal at the Company's annual
meeting in the year 2002 and the proposal is not intended to be included in the
Company's proxy statement relating to that meeting, the shareholder must give
advance notice to the Company prior to March 18, 2003 (45 calendar days prior
to the anniversary of the mailing date of this proxy statement) in order to be
timely. If a shareholder gives notice of such a proposal after that deadline,
the Company's proxy holders will be allowed to use their discretionary voting
authority to vote against the shareholder proposal when and if the proposal is
raised at the Company's year 2003 annual meeting.
The Company has not been notified by any shareholder of his or her
intent to present a shareholder proposal from the floor at this year's Annual
Meeting. The enclosed proxy card grants the proxy holders discretionary
authority to vote on any matter properly brought before the Annual Meeting.
-2-
PROPOSAL 1
ELECTION OF DIRECTORS
NOMINEES
A Board of five 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 five 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.
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
--------------- --- -------------------- ---------
Freeman A. Ford................... 61 Chairman of the Board, President 1972
and Chief Executive Officer of the
Company
William A. Berry(*)............... 63 Senior Vice President and Chief 1974
Financial Officer of the Electric
Power Research Institute, an energy
industry research consortium
Robert W. Selig, Jr.(*)........... 62 President of Davis Instruments 1974
Corporation, a manufacturer and
distributor of marine and weather
equipment
William F. Chisholm............... 33 Partner at Symphony Technology 1999
Group, a venture capital firm
David F. Ford..................... 34 President of Danger! Books, a book 1999
publisher and distributor
- ----------
(*) Member of Audit Committee
Except as set forth below, each of the nominees has been engaged in his
principal occupation set forth above during the past five years. Except as set
forth below, there is no family relationship between any directors, director
nominees or executive officers of the Company.
Mr. Freeman Ford, a co-founder of the Company, has served as Chairman of
the Board since 1972, as Chief Executive Officer of the Company since May 1979,
and as President since September 1984. Mr. Ford is also a director of H.B.
Fuller Company.
-3-
From April 1992 to May 1996, Mr. Berry served as Senior Vice President
and Chief Financial Officer of Compression Labs, Inc., a supplier of
video-conferencing equipment. In May 1996, Mr. Berry joined the Electric Power
Research Institute, an energy industry research consortium, as Senior Vice
President and Chief Financial Officer.
Mr. Selig serves as President of Davis Instruments Corporation, a
manufacturer and distributor of marine and weather equipment.
From January 1994 to August 1996, Mr. Chisholm attended Wharton Business
School where he received a Master of Business Administration degree. From August
1996 to January 2000, Mr. Chisholm served as a management consultant at Bain &
Company, an international strategy consulting firm. In February 2000, Mr.
Chisholm joined Symphony Technology Group, a venture capital firm, as a Partner.
Mr. Chisholm is the son-in-law of Mr. Freeman A. Ford, Chairman of the Board,
President and Chief Executive Officer of the Company.
From February 1993 to January 1995, Mr. David Ford served as Managing
Editor of Beach Magazine, an outdoor recreation-focused publication. In February
1995, Mr. David Ford joined the H.B. Fuller Company as a Communications
Specialist and served in that capacity until May 1997, after which Mr. David
Ford assumed the position of Marketing Analyst, and remained in that capacity
until May 1998. Since February 1996, Mr. David Ford has managed and served as
President of Danger! Books, a book publisher and distributor. Mr. David Ford is
the son of Mr. Freeman A. Ford, Chairman of the Board, President and Chief
Executive Officer of the Company.
VOTE REQUIRED
The five 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.
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR EACH OF THE
COMPANY'S NOMINEES FOR DIRECTOR.
-4-
SECURITY OWNERSHIP
The following table sets forth the beneficial ownership of Common Stock
of the Company as of the Record Date by (1) each person known by the Company to
beneficially own more than 5% of the Company's Common Stock, (2) each director
and nominee for director, (3) the current executive officers of the Company
named in the Summary Compensation Table below (the "Named Executive Officers"),
and (4) all current directors and executive officers as a group:
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
- ------------------------ --------------------------------
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES(1) TOTAL(2)
- ------------------------ --------- ----------
Freeman A. Ford.................................... 2,111,096(3) 50.8%
c/o FAFCO, Inc.
435 Otterson Drive
Chico, California 95928
Alex N. Watt....................................... 95,136(4) 2.3%
David K. Harris.................................... 87,199(5) 2.1%
David F. Ford...................................... 50,300(6) 1.2%
Robert W. Selig, Jr................................ 48,528(7) 1.2%
William F. Chisholm................................ 22,750(8) *
William A. Berry................................... 12,500(9) *
All current directors and executive officers as a
group (8 persons)............................... 2,465,416(10) 59.3%
- ----------
* 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.
(2) Based on 3,855,591 shares of Common Stock outstanding as of the Record
Date.
(3) Includes (i) 298,000 shares held of record by trusts for the benefit of
Freeman Ford's children, for which he and his spouse serve as trustees and
as to which shares he disclaims beneficial ownership, (ii) 499,344 shares
jointly owned by Freeman Ford and his spouse, and (iii) 112,250 shares
issuable upon exercise of options and warrants held by Freeman Ford
exercisable within 60 days of the Record Date.
(4) Includes (i) 72,950 shares issuable upon exercise of outstanding options
held by Mr. Watt exercisable within 60 days of the Record Date and (ii)
3,000 shares held by Mr. Watt and Sandra S. Watt as joint tenants.
(5) Includes 72,950 shares issuable upon exercise of outstanding options held
by Mr. Harris exercisable within 60 days of the Record Date.
(6) Includes 34,938 shares issuable upon exercise of outstanding options held
by David Ford exercisable within 60 days of the Record Date.
(7) Includes (i) 15,000 shares issuable upon exercise of outstanding options
held by Mr. Selig exercisable within 60 days of the Record Date, and (ii)
5,700 shares held of record by trusts for the benefit of Mr. Selig's
children, as to which shares he disclaims beneficial ownership.
(8) Includes (i) 4,000 shares issuable upon exercise of outstanding options
held by Mr. Chisholm exercisable within 60 days of the Record Date and (ii)
18,750 shares jointly owned by Mr. Chisholm and his wife.
(9) Includes 5,000 shares issuable upon exercise of outstanding options held by
Mr. Berry exercisable within 60 days of the Record Date.
(10) Includes (i) 281,950 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), and (ii) 58,938 shares issuable
upon exercise of outstanding options exercisable within 60 days of the
Record Date held by four outside directors.
-5-
By virtue of his position as Chairman of the Board, President and Chief
Executive Officer of the Company and his beneficial ownership of approximately
50.8% 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. Freeman Ford can elect a majority of the Board of Directors
and controls any shareholder vote that does not require a super-majority with
respect to which his shares are eligible to be voted. In addition, Freeman A.
Ford, his son (David F. Ford) and his son-in-law (William Chisholm) comprise
three out of five directors of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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, 2001, 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 two (2) meetings
during the year ended December 31, 2001 (the "Last Fiscal Year").
The Audit Committee consists of outside directors Berry and Selig, each
of whom is independent as defined under the rules of the Nasdaq Stock Market
(although such rules currently do not apply to the Company). The Audit Committee
held one meeting during the Last Fiscal Year. The Audit Committee makes
recommendations to the Board regarding the selection of independent auditors,
reviews the results and scope of audit and other services provided by the
independent auditors, reviews the accounting principles and auditing practices
and procedures to be used in preparing our financial statements and receives
and considers comments from the independent auditors on our internal controls.
The Audit Committee meets with our independent auditors to review the
results of their quarterly reviews and annual audit. The Audit Committee also
meets with our independent auditors to approve the annual scope of the audit
services to be performed.
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 OFFICERS
Freeman A. Ford, age 61, serves as Chairman of the Board, President, and
Chief Executive Officer. Mr. Ford, a co-founder of the Company, has served as
Chairman of the Board since 1972, as Chief Executive Officer of the Company
since May 1979, and as President since September 1984. Mr. Ford is also a
Director of H.B. Fuller Company.
Alex N. Watt, age 60, serves as Executive Vice President and Secretary.
Mr. Watt joined the Company as its Vice President-Finance and Chief Financial
Officer in July 1984, has served as Secretary since March 1985, and as Executive
Vice President since June 1988.
David Harris, age 46, serves as Vice President, Sales. Mr. Harris joined
the Company in August 1981 as a sales representative and has held the positions
of Pool Builder Manager, National Sales Manager-Pool Products,
-6-
Pacific Northwestern Region Sales Manager, National Sales Manager-Solar
Division, National Sales Manager, Vice President-Sales and Marketing (from June
1988 until April 1993), President-Pool Products Division (from May 1993 until
May 1995) and Vice President, Sales (since June 1995).
Nancy I. Garvin, age 56, has served as Vice President, Finance since
January 1999. Ms. Garvin joined the Company in May 1974 as an accounting clerk
and has since held the positions of Accounting Manager from January 1981 until
September 1985 and Controller from September 1985 to December 1998 with the
Company.
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 executive
officers of the Company who received salary and bonus compensation of $100,000
or more in the Last Fiscal Year (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------ ------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(1) OPTIONS (#) ($)(2)
- ------------------------- ---- -------- -------- ------------ ------------ ------------
Freeman A. Ford 2001 $156,000 $ 3,615 -- -- $ 2,488
Chairman of the Board, 2000 156,000 0 -- -- 1,662
Chief Executive Officer 1999 155,793 4,569 -- 25,000 1,662
Alex N. Watt 2001 137,238 3,180 15,454(3) -- 2,218
Executive Vice 2000 137,035 0 -- -- 2,218
President 1999 131,779 3,865 -- 25,000 2,218
David K. Harris 2001 137,238 3,180 -- -- 578
Vice President, Sales 2000 143,633 0 -- -- 542
1999 131,779 3,865 -- 25,000 494
(1) Excludes certain perquisites and other benefits that did not exceed the
lesser of $50,000 or 10% of any officer's total salary and bonus.
(2) Consists of premiums paid by the Company for term life insurance.
(3) Consists of 401K contribution (company match), health insurance and
personal benefits.
The Company did not make any grant of stock options to the Named
Executive Officers during the Last Fiscal Year.
-7-
The following table sets forth information regarding the value of all
unexercised stock options and warrants held by the Named Executive Officers as
of the end of the Last Fiscal Year.
AGGREGATED OPTION EXERCISES IN FISCAL 2001
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END AT FISCAL YEAR-END
(#) ($)(1)
-------------------- --------------------
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- -------------- -------------------- --------------------
Freeman A. Ford -- -- 82,250/0 57,250/0
Alex N. Watt -- -- 72,950/0 47,950/0
David K. Harris -- -- 72,950/0 47,950/0
(1) Based on the last reported sale price for the Company's Common Stock for the
last trading day prior to 2001 fiscal year-end of $0.45 per share.
DIRECTOR COMPENSATION
Directors who are not employees of the Company are entitled to receive
directors' fees in the amount of $1,500 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 $4,000.
In 1991 the Board of Directors has adopted and the shareholders of the
Company approved the 1991 Directors' Stock Option Plan (the "Directors' Plan")
pursuant to which each non-employee director of the Company was 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 granted has a term of ten years and becomes exercisable as to
20% of the shares subject thereto on each anniversary date of its grant. In May
1999, Messrs. William Chisholm and David Ford each received an automatic grant
of a Director's Option to purchase 10,000 shares of Common Stock at $0.50, the
fair market value on the date of grant. No further grants will be made under the
Directors' Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2000, Freeman A. Ford, David F. Ford (Freeman A. Ford's son) and
Kimberley Ford Chisholm (Freeman A. Ford's daughter and William Chisholm's
spouse) exercised warrants to purchase, at a purchase price of $0.125 per share,
240,000, 18,750 and 18,750 shares of Common Stock of the Company, respectively.
During January 2002, the Company raised $500,000 in debt financing
through the issuance of subordinated promissory notes (the "Notes"). The Notes
have a term of three years and accrue interest at an annual rate of 10%, payable
quarterly. The notes may be prepaid at any time. To the extent any Note is not
prepaid by the first anniversary of the issuance date, the applicable interest
rate will increase to 12% per annum.
-8-
In connection with the issuance of the Notes, we issued warrants to
purchase an aggregate of 100,000 shares of our common stock to the investors
(the "Warrants"). The Warrants have an exercise price of $.125 per share and a
term of three years from the date of issuance. To the extent that any Note has
not been prepaid by the first anniversary of the issuance date, we are required
to issue additional Warrants to purchase 1,000 shares of our common stock for
each $10,000 of principal that remains outstanding.
Freeman A. Ford, our Chairman and Chief Executive Officer, and Diana V.
Ford (Mr. Ford's wife) invested $150,000 of the principal amount raised, and
received Warrants to purchase 30,000 shares of common stock.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee oversees the Company's financial reporting process
on behalf of the Board of Directors. Management has the primary responsibility
for the Company's financial statements and the overall reporting process,
including the Company's system of financial controls. In fulfilling its
oversight responsibilities during fiscal year 2001, the Committee:
- reviewed and discussed the Company's unaudited and audited financial
statements with management and separately reviewed and discussed the
Company's audited annual financial statements with the Company's
independent public accountants, Burr, Pilger & Mayer,
- discussed the accounting principles, significant assumptions,
estimates and matters of judgment used in preparing the financial
statements with management and Burr, Pilger & Mayer,
- reviewed the Company's financial controls and financial reporting
process, and
- reviewed significant financial reporting issues and practices,
including changes in accounting principles and disclosure practices.
The Board has adopted a written Audit Committee Charter.
The Committee also reviewed with Burr, Pilger & Mayer, who are
responsible for expressing an opinion on the conformity of the audited financial
statements with generally accepted accounting principles, their judgment as to
the quality, and not just the acceptability, of the Company's accounting
principles and such other matters as are required to be discussed with the
Committee under generally accepted accounting principles. The Committee met with
Burr, Pilger & Mayer, with and without management present, to discuss the
results of their examinations, their evaluations of the Company's internal
controls and the overall quality of the Company's financial reporting.
In addition, the Committee has discussed with Burr, Pilger & Mayer their
independence from management and the Company including the matters in the
written disclosures and the letter from independent auditors required by the
Independence Standards Board, Standard No. 1. The Committee further discussed
with Burr, Pilger & Mayer all matters required to be discussed by Statement on
Auditing Standards No. 61 (Communications with Audit Committees). The Committee
also considered the compatibility of Burr, Pilger & Mayer's non-audit services
(principally tax advisory services) with the standards for auditor independence.
The Committee discussed with Burr, Pilger & Mayer the overall scope and plans
for their audit.
-9-
The directors who serve on the Committee are all "independent" pursuant
to the rules of the Nasdaq Stock Market (although such rules currently do not
apply to the Company), and further all meet the financial literacy and expertise
tests recommended by the Blue Ribbon Committee on Improving the Effectiveness of
Corporate Audit Committees. During fiscal 2001, the committee met once, with all
members in attendance at the meeting.
In reliance on the reviews and discussions referred to above and
representations by management that the financial statements were prepared in
accordance with generally accepted accounting principles, the Committee
recommended to the Board of Directors that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001. The Committee also recommended to the Board of Directors, and
the Board of Directors approved, the selection of Burr, Pilger & Mayer as the
Company's independent auditors for the fiscal year ending December 31, 2002.
THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS
FOR FISCAL 2001
William A. Berry
Robert W. Selig, Jr.
-10-
PROPOSAL 2
APPROVAL OF THE 2002 STOCK OPTION PLAN
Our Board of Directors determined that it is in our best interests and
the best interests of our shareholders to adopt the 2002 Stock Plan (described
below). Our 1991 Stock Option Plan expired as to new grants in April 2001. The
Board of Directors believes that adoption of a new plan is necessary in order to
retain the ability to grant equity-based performance and retention incentives to
new and existing employees, officers and directors of the Company.
In April 2002, our board of directors adopted the 2002 Stock Plan and
reserved 500,000 shares of our common stock for issuance thereunder subject to
shareholder approval, plus (a) any shares of our common stock that have been
reserved but not issued under our 1991 Stock Option Plan as of the date of
shareholder approval of the 2002 Stock Plan, (b) any shares of our common stock
returned to the 2001 Stock Option Plan as a result of termination of options or
repurchase of shares of our common stock issued under the 2001 Stock Option Plan
and (c) an annual increase on April 1 of each year equal to the lesser of (i)
200,000 shares, (ii) 3% of the outstanding shares on such date or (iii) a lesser
amount determined by our board of directors. As of the date of this proxy, no
options had been granted pursuant to the 2002 Stock Plan.
DESCRIPTION OF THE 2002 STOCK PLAN
General. The purpose of the 2002 Stock Plan is to help us attract and
retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to our employees, directors and consultants and
the employees, directors and consultants of our parent and subsidiary companies
and to promote the success of our business. Options granted under the 2002 Stock
Plan may be either "incentive stock options" or nonstatutory stock options.
Stock purchase rights may also be granted under the 2002 Stock Plan.
Administration. The 2002 Stock Plan may generally be administered by our
board of directors or a committee appointed by the board, referred to as the
administrator. The administrator may make any determinations deemed necessary or
advisable for the 2002 Stock Plan.
Eligibility. Nonstatutory stock options and stock purchase rights may be
granted to our employees, directors and consultants and to employees, directors
and consultants of any of our parent or subsidiary companies. Incentive stock
options may be granted only to our employees and to employees of any of our
parent or subsidiary companies. The administrator, in its discretion, selects
which of our employees, directors and consultants to whom options and stock
purchase rights may be granted, the time or times at which such options and
stock purchase rights shall be granted, and the exercise price and number of
shares subject to each such grant. As of the Record Date, there were
approximately 60 employees, 4 outside directors and 3 consultants eligible to be
granted options.
Limitations. Section 162(m) of the Code places limits on the
deductibility for federal income tax purposes of compensation paid to certain of
our executive officers. In order to preserve our ability to deduct the
compensation income associated with options granted to such persons, the 2002
Stock Plan provides that no employee may be granted, in any fiscal year of ours,
options and stock purchase rights to purchase more than 200,000 shares of our
common stock. Notwithstanding this limit, however, in connection with such
individual's initial employment with us, he or she may be granted options and
stock purchase rights to purchase up to an additional 100,000 shares of our
common stock.
-11-
Terms and Conditions of Options. Each option is evidenced by a stock
option agreement between us and the optionee, and is subject to the following
terms and conditions:
(a) Exercise Price. The administrator determines the exercise price of
options at the time the options are granted. The exercise price of an incentive
stock option and a nonstatutory stock option intended to qualify as "performance
based compensation" under Section 162(m) of the Code may not be less than 100%
of the fair market value of our common stock on the date such option is granted;
provided, however, that the exercise price of an incentive stock option granted
to a 10% shareholder may not be less than 110% of the fair market value on the
date such option is granted. The fair market value of our common stock is
generally determined with reference to the closing sale price for our common
stock (or the closing bid if no sales were reported) on the date the option is
granted. On the Record Date, the average of the bid and asked prices of the
Company's Common Stock, as reported by Pink Sheets OTC Market Report, was $0.50
per share.
(b) Exercise of Option; Form of Consideration. The administrator
determines when options become exercisable, and may, in its discretion,
accelerate the vesting of any outstanding option. The means of payment for
shares issued upon exercise of an option is specified in each option agreement.
The 2002 Stock Plan permits payment to be made by cash, check, promissory note,
other shares of our common stock (with some restrictions), cashless exercises,
any other form of consideration permitted by applicable law, or any combination
thereof.
(c) Term of Option. The term of an incentive stock option may be no more
than ten (10) years from the date of grant; provided, however, that in the case
of an incentive stock option granted to a 10% shareholder, the term of the
option may be no more than five (5) years from the date of grant. No option may
be exercised after the expiration of its term.
(d) Termination of Service. If an optionee's service relationship with
us terminates for any reason (excluding death or disability), then the optionee
generally may exercise the option within three (3) months of such termination to
the extent that the option is vested on the date of termination, (but in no
event later than the expiration of the term of such option as set forth in the
option agreement). If an optionee's service relationship with us terminates due
to the optionee's death or disability, the optionee or the optionee's personal
representative, estate, or the person who acquires the right to exercise the
option by bequest or inheritance, as the case may be, generally may exercise the
option, to the extent the option was vested on the date of termination, within
six (6) months from the date of such termination.
(e) Nontransferability of Options. Unless otherwise determined by the
administrator, options granted under the 2002 Stock Plan are not transferable
other than by will or the laws of descent and distribution, and may be exercised
during the optionee's lifetime only by the optionee.
(f) Other Provisions. The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the 2002 Stock Plan as
may be determined by the administrator.
Stock Purchase Rights. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant us a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with us for any reason (including
death or disability). The purchase price for shares repurchased pursuant to the
restricted stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to us. The repurchase option shall lapse at a rate determined by the
administrator.
Adjustments Upon Changes in Capitalization. In the event that the our
common stock changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in our capital
structure effected without the receipt of consideration, appropriate adjustments
shall be made in the
-12-
number and class of shares of stock subject to the 2002 Stock Plan, the number
of shares that may be added to the 2002 Stock Plan on an annual basis, the
number of shares that may be granted to an optionee in any year and in
connection with an optionee's initial employment with us, the number and class
of shares of stock subject to any option or stock purchase right outstanding
under the 2002 Stock Plan, and the exercise price of any such outstanding option
or stock purchase right.
In the event of a liquidation or dissolution, any unexercised options or
stock purchase rights will terminate. The administrator may, in its sole
discretion, provide that each optionee shall have the right to exercise all or
any part of the option or stock purchase right, including shares as to which the
option or stock purchase right would not otherwise be exercisable.
In connection with our merger with or into another corporation or our
"change of control," as defined in the 2002 Stock Plan, each outstanding option
and stock purchase right shall be assumed or an equivalent option or right
substituted by the successor corporation. If the successor corporation refuses
to assume the options and stock purchase rights or to substitute substantially
equivalent options or rights, the optionee shall have the right to exercise the
option or stock purchase right as to all the optioned stock, including shares
not otherwise vested or exercisable. In such event, the administrator shall
notify the optionee that the option or stock purchase right is fully exercisable
for fifteen (15) days from the date of such notice and that the option or stock
purchase right terminates upon expiration of such period.
Amendment and Termination of the Plan. Our board of directors may amend,
alter, suspend or terminate the 2002 Stock Plan, or any part thereof, at any
time and for any reason. However, we will obtain shareholder approval for any
amendment to the 2002 Stock Plan to the extent necessary and desirable to comply
with applicable law. No such action by the board of directors or shareholders
may alter or impair any option or stock purchase right previously granted under
the 2002 Stock Plan without the written consent of the optionee. Unless
terminated earlier, the 2002 Stock Plan shall terminate ten (10) years from the
date the 2002 Stock Plan was adopted by our board of directors.
FEDERAL INCOME TAX CONSEQUENCES
Incentive Stock Options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise is an adjustment item for alternative
minimum tax purposes and may subject the optionee to the alternative minimum
tax. Upon a disposition of the shares more than two (2) years after grant of the
option and one (1) year after exercise of the option, any gain or loss is
treated as long-term capital gain or loss. Net capital gains on shares held more
than twelve (12) months may be taxed at a maximum federal rate of 20%. Capital
losses are allowed in full against capital gains and up to $3,000 against other
income. If these holding periods are not satisfied, the optionee recognizes
ordinary income at the time of disposition equal to the difference between the
exercise price and the lower of (i) the fair market value of the shares at the
date of the option exercise, or (ii) the sale price of the shares. Any gain or
loss recognized on such a premature disposition of the shares in excess of the
amount treated as ordinary income is treated as long-term or short-term capital
gain or loss, depending on the holding period. A different rule for measuring
ordinary income upon such a premature disposition may apply if the optionee is
also an officer, director, or 10% shareholder of ours. Unless limited by Section
162(m) of the Code, we are entitled to a deduction in the same amount as the
ordinary income recognized by the optionee.
Nonstatutory Stock Options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price. Any
taxable income recognized in connection with an option exercise by our employee
is subject to tax withholding by us. Unless limited by
-13-
Section 162(m) of the Code, we are entitled to a deduction in the same amount as
the ordinary income recognized by the optionee. Upon a disposition of such
shares by the optionee, any difference between the sale price and the optionee's
exercise price, to the extent not recognized as taxable income as provided
above, is treated as long-term or short-term capital gain or loss, depending on
the holding period. Net capital gains on shares held more than 12 months may be
taxed at a maximum federal rate of 20%. Capital losses are allowed in full
against capital gains and up to $3,000 against other income.
Stock Purchase Rights. Stock purchase rights will generally be taxed in
the same manner as nonstatutory stock options. However, restricted stock is
subject to a "substantial risk of forfeiture" within the meaning of Section 83
of the Code, because we may repurchase the stock when the purchaser ceases to
provide services to us. As a result of this substantial risk of forfeiture, the
purchaser will not recognize ordinary income at the time of purchase. Instead,
the purchaser will recognize ordinary income on the dates when the stock is no
longer subject to a substantial risk of forfeiture (i.e., when our right of
repurchase lapses). The purchaser's ordinary income is measured as the
difference between the purchase price and the fair market value of the stock on
the date the stock is no longer subject to right of repurchase.
The purchaser may accelerate to the date of purchase his or her
recognition of ordinary income, if any, and begin his or her capital gains
holding period by timely filing (i.e., within thirty (30) days of purchase), an
election pursuant to Section 83(b) of the Code. In such event, the ordinary
income recognized, if any, is measured as the difference between the purchase
price and the fair market value of the stock on the date of purchase, and the
capital gain holding period commences on such date. The ordinary income
recognized by a purchaser who is our employee will be subject to tax withholding
by us. Different rules may apply if the purchaser is also an officer, director,
or 10% shareholder of ours.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON US AND OPTIONEES WITH RESPECT TO THE GRANT AND EXERCISE OF OPTIONS UNDER
THE 2002 STOCK PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS
THE TAX CONSEQUENCES OF THE EMPLOYEE'S, DIRECTOR'S OR CONSULTANT'S DEATH OR THE
PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY
IN WHICH THE EMPLOYEE, DIRECTOR OR CONSULTANT MAY RESIDE.
VOTE REQUIRED
The approval of the 2002 Stock Plan requires the affirmative vote of a
majority of the Votes Cast on the proposal at the Annual Meeting.
RECOMMENDATION
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING "FOR" THE ADOPTION
OF THE 2002 STOCK PLAN AND THE RESERVATION OF SHARES THEREUNDER.
-14-
PROPOSAL 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Burr, Pilger & Mayer, independent
auditors, to audit the financial statements of the Company for the fiscal year
ending December 31, 2002. Burr, Pilger & Mayer audited the Company's financial
statements for the Last Fiscal Year. Representatives of Burr, Pilger & Mayer 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.
FEES BILLED TO THE COMPANY BY BURR, PILGER & MAYER
Audit Fees:
Audit fees billed to the Company by Burr, Pilger & Mayer during the Last
Fiscal Year for review of the Company's annual financial statements and those
financial statements included in the Company's quarterly reports on Form 10-QSB,
totaled $44,407.
Financial Information Systems Design and Implementation Fees:
The Company did not engage Burr, Pilger & Mayer to provide advice to the
Company regarding financial information systems design and implementation during
the Last Fiscal Year ended December 31, 2001.
All Other Fees:
Fees billed to the Company by Burr, Pilger & Mayer during the Last
Fiscal Year for all other non-audit services rendered to the Company, including
tax related services totaled $13,621.
Shareholder ratification of the selection of Burr, Pilger & Mayer as the
Company's independent public accountants is not required by the Company's
by-laws or any other applicable legal requirement. However, the Board is
submitting the selection of Burr, Pilger & Mayer to the shareholders for
ratification as a matter of good corporate practice. If the shareholders fail to
ratify the selection, the Audit Committee and the Board will reconsider its
selection. Even if the selection is ratified, the Board at its discretion may
direct the appointment of a different independent accounting firm at any time
during the year if it determines that such a change would be in the best
interests of the Company and its shareholders.
The Audit Committee considered and determined that the provision of the
services other than the services described under "Audit Fees" is compatible with
maintaining the independence of the independent auditors.
VOTE REQUIRED
Ratification of the selection of Burr, Pilger & Mayer as the Company's
independent auditors for Fiscal 2002 requires the affirmative vote of a majority
of the Votes Cast on the proposal at the Annual Meeting.
RECOMMENDATION
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE APPOINTMENT OF BURR,
PILGER & MAYER AS THE COMPANY'S AUDITORS FOR FISCAL 2002 AND RECOMMENDS THAT THE
SHAREHOLDERS VOTE "FOR" THIS PROPOSAL.
-15-
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: April 29, 2002
-16-
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FAFCO, INC.
PROXY FOR 2002 ANNUAL MEETING OF SHAREHOLDERS -- JUNE 7, 2002
The undersigned shareholder of FAFCO, Inc. (the "Company") hereby
acknowledges receipt of the Notice of Annual Meeting of Shareholders and Proxy
Statement for the 2002 Annual Meeting of Shareholders of the Company to be held
on June 7, 2002 at 3:00 p.m., local time, at the Company's principal place of
business, 435 Otterson Drive, Chico, California, 95928-8207 (telephone (530)
332-2100), and hereby revokes all previous proxies and appoints Freeman A. Ford
and Alex N. Watt, or either of them, with full power of substitution, as 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 matters and in the
manner specified below:
<Table>
1. Election of Directors
Nominees:
Freeman A. Ford, William A. Berry, Robert W. Selig, Jr., David F. Ford, William F. Chisholm
[ ] FOR all nominees [ ] WITHHELD from all nominees
[ ] FOR all nominees except any whose name is crossed out above.
2. Proposal to adopt the 2002 Stock Plan and approve the reservation of 500,000 shares of our
common stock for issuance thereunder plus an annual increase.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to ratify the appointment of Burr, Pilger & Mayer as the independent auditors of the
Company for the fiscal year ending December 31, 2002.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</Table>
In their discretion, the Proxies are entitled to vote as they deem advisable
upon such other matters as may properly come before the meeting or any
adjournments thereof.
(Continued and to be signed on reverse side)
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 NOMINEES AND THE PROPOSAL LISTED ON THE
REVERSE SIDE AND WILL BE VOTED ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING AS THE PROXIES DEEM ADVISABLE.
Dated -----------------, 2002
-----------------------------
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 or
other entity is requested to
have this proxy signed in 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.