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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________________ to _______________.
Commission file number 0-10120
FAFCO, INC.
(Exact name of registrant as specified in its charter)
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<CAPTION>
CALIFORNIA 94-2159547
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
2690 MIDDLEFIELD ROAD, REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: 415/363-2690
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.125 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
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Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of
____________________was____________________, based upon the average of the bid
and ask prices reported for such date by the National Quotation Bureau. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
executive officers and directors of the registrant have been excluded in that
such persons may be deemed to be "affiliates" as that term is defined under the
rules and regulations promulgated under the Securities Act of 1933. This
determination is not necessarily conclusive for other purposes.
The number of shares of the registrant's Common Stock outstanding as of
_________________, was _____________.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT DESCRIPTION FORM 10-K PART
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Portions of Exhibit 13.1 (the Company's 1995 Annual Report to Shareholders
(the "Annual Report").......................................................... I, II, IV
The Company's Definitive Proxy Statement (the "Proxy Statement") for the
1996 Annual Meeting to be held on April 27, 1996 (the Proxy Statement is
expected to be filed pursuant to Regulation 14A on or before April 1,
1996) ...................................................................... III
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_____________________________
With the exception of the information specifically incorporated by reference in
Parts I, II, III and IV of this Form 10-K, neither the Company's Annual Report
nor the Company's Proxy Statement is to be deemed filed as part of this report.
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PART I
ITEM 1. Business
INTRODUCTION
FAFCO, Inc. ("FAFCO," the "Company" or "Registrant") designs, develops,
manufactures, and markets solar heating systems for swimming pools and thermal
energy storage systems for commercial and industrial cooling. Pool product
sales amounted to 62% of net sales in 1995 compared to 57% of net sales in 1994
and 63% of net sales in 1993. Thermal energy storage sales amounted to 38% of
net sales in 1995 compared to 42% of net sales in 1994 and 34% in 1993; (444
domestic hot water heater sales were discontinued in early 1994 and had
amounted to 2% of net sales in 1993).
The Company manufactures products for the solar heating of water for low and
medium temperature applications. From the inception of the Company's
predecessor as a sole proprietorship in 1969 until 1976, efforts were largely
devoted to the refinement of the Company's initial product, a solar heating
system for swimming pools - a low temperature solar application. Since that
time, the Company has focused on increasing its share of the pool heating
market by extending its network of independent distributors, decreasing its
manufacturing costs, and improving its initial product. In 1983, a passive
domestic hot water heating system, the 444, was introduced (this product was
discontinued in early 1994). In 1987, the Company introduced a thermal energy
storage system based on the same heat exchanger technology as is used in its
swimming pool heating systems. In 1993, the Company introduced a
state-of-the-art control system for swimming pool solar heating systems.
FAFCO, Inc. was incorporated under the laws of the State of California in 1972.
Its principal executive offices are located at 2690 Middlefield Road, Redwood
City, California. Its telephone number at that address is (415) 363-2690.
MARKETS
Swimming Pool Heating
Low temperature solar applications developed because of the cost effectiveness
of solar systems in heating a high volume of water to produce a small
temperature change. The market for swimming pool heating developed for several
reasons. First, pool owners normally use their pools when solar energy is
abundant (during daylight hours and the summer swimming season). Second, pools
already have two elements needed for low temperature water heating: storage
(the pool water) and circulation (the existing pool pump and associated
plumbing). Third, pool owners are an easily identifiable market.
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Thermal Energy Storage
FAFCO also designs, develops, manufactures, and markets a static, glycol ice
builder for the thermal storage market. Since the product's introduction,
FAFCO has sold "ice banks" primarily to the commercial air conditioning market
for use in off-peak air conditioning systems.
Domestic Water Heating
Until early 1994, FAFCO also marketed solar systems for medium temperature
applications, principally domestic water heating. This product line was
discontinued due to lack of demand for such products at current energy price
levels.
PRODUCTS
Swimming Pool Heating
The FAFCO solar pool heating system is composed of six to twelve solar
collectors, a sun sensor, an automatic control, and associated accessories.
The collectors and sensor are typically mounted on the roof of a pool owner's
home and connected to the pool pump and automatic control.
The customer sets the automatic control for the desired water temperature and,
when the sensor detects that there is sufficient solar energy for the system to
function efficiently, the automatic control directs the flow of water from the
pool to the collectors. The water absorbs heat as it passes through the
collectors and then flows back to the pool. When the desired water temperature
is achieved or when there is insufficient solar energy, the automatic control
redirects the flow of pool back to the water and water is drained from the
collectors. When the water temperature drops or there is sufficient solar
energy, the system is reactivated automatically.
In February 1996, the Company introduced a version of its solar pool heating
system specifically designed for above ground swimming pools. This system is
composed of one or two solar collectors optimized for use in heating above
ground swimming pools and designed to lie flat on the ground or to be mounted
on a rack on the ground.
The Company's solar collectors are composed entirely of a polyolefin material
(a high molecular weight polymer compound) and made up of small round tubes
formed side by side in a rectangular shape either one-by-two meter,
four-by-eight feet, four-by-ten feet, or four-by-twelve feet in size, with
submanifolds and header pipes thermoformed on each end. This design provides
for a maximum heating surface and even water flow in order to transfer 75 to 90
percent of the available solar energy to the pool water.
The polyolefin material, which has been specially formulated by the Company, is
black in color (to optimize solar energy absorption) and has the inherent
advantages over other possible materials of lower cost, lighter weight, and
higher resistance to the corrosive effects of pool chemicals and degradation
resulting from ultraviolet radiation, heat, and other environmental effects.
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In May 1993, the Company introduced a proprietary microprocessor-based control
(AutoPool) for its solar pool heating systems. Prior to May 1993, the Company
had a private label arrangement with an automatic control manufacturer.
AutoPool has built-in "intelligence" that allows it to optimize the heating and
filtration time for the swimming pool and can also control non-conventional
solar swimming pool heaters.
Domestic Water Heating
In 1981, the Company began the design and development of an advanced passive
solar domestic water heating system, the 444. In the second quarter of 1983,
the Company began manufacturing and selling the 444 and has sold approximately
13,000 systems to date.
Because of lack of demand for the Company's solar domestic water heating
system, this product has been discontinued, effective the first quarter of
1994. The Company has ongoing obligations to service, and provide spare parts
for, domestic water heaters sold prior to that time.
Thermal Energy Storage
The Company's thermal energy storage ("IceStor") systems utilize nighttime
electrical capacity to create stored cooling energy. This is normally done by
storing inexpensive "off-peak" energy in the form of either chilled water or
ice. The next day, this stored cooling capacity is used in conjunction with
the building's air conditioning equipment to significantly reduce electrical
requirements for cooling during times of high electrical demand and high
electrical cost.
Cool storage systems offer electrical utilities a solution to their
fundamental, long-term problem: increasing peak demand for power during
periods of limited available capacity (i.e. during business hours). IceStor
technology shifts consumption to off-peak periods when there is available
capacity and lower demand.
MARKETING AND SALES
Solar Systems
FAFCO markets its solar systems and controls in the United States through
independent distributors who sell directly to end users. Distributors
generally have sales, installation, and service personnel who are supported by
extensive FAFCO marketing and technical materials, as well as in-depth factory
and field training programs.
The majority of sales personnel employed by the typical distributor are
assigned to retrofit sales, which are sales to existing pool owners. Retrofit
sales are generated through direct mail, customer referrals, canvassing, and,
to a lesser extent, selected media advertising. The balance of the
distributor's sales personnel are generally assigned to contractor accounts
seeking referrals for new construction sales.
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FAFCO usually provides direct mail literature and other advertising materials
to distributors and mails or places these materials with local advertisers on
the distributors' behalf and partially at the distributors' expense. In
certain instances, distributors will also engage in direct mailing and
advertising.
In the past, the Company has canceled several distributor agreements for
reasons of inadequate performance by the distributor, primarily failure to
provide adequate sales, installation and service support for the Company's
products. In such instances, the Company has generally been able to find
qualified replacements.
All work relating to the installation of FAFCO solar systems is covered by a
full one-year warranty provided by the distributor. The Company's solar
collectors used to be covered by a ten-year limited warranty, which was changed
to a ten-year full warranty beginning in 1991. Its automatic controls, pumps,
and drain-down valves are covered by a three-year limited warranty. FAFCO
warranties cover defects in materials and workmanship provided that the related
products are used for their intended purpose.
FAFCO solar systems are designed to require only minimal maintenance, which can
be performed either by the consumer using an owner's manual or by the
distributor's service personnel.
Thermal Energy Storage Systems
The Company markets its IceStorproducts through independent contractors who
design and build heating and cooling systems for commercial and industrial
applications. The Company has also licensed its IceStor products for sale
overseas, including to design-and-build, heating, ventilating, and
air-conditioning companies in Taiwan, Korea, and Japan. These licensing
agreements provide for licensee's assembly and sale of IceStor products in
those countries.
SALES BY GEOGRAPHIC AREA
The Company's net sales during 1995, 1994, and 1993 were geographically
distributed approximately as follows:
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1995 1994 1993
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California 21% 24% 25%
Florida 37% 38% 44%
Oklahoma 7% 10% 3%
Other States 20% 13% 16%
Foreign Countries 15% 15% 12%
100% 100% 100%
---- ---- ----
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One of the Company's customers, Kailay International, accounted for 10% of the
Company's fiscal 1995 net sales. During 1995, Kailay International was the
licensee for the Company's IceStor(TM) products in Taiwan and as such purchased
IceStor(TM) products and components for
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assembly into products for resale to end users in Taiwan. No other customer
accounted for 10% or more of the Company's sales in fiscal 1993, 1994 or 1995.
Foreign sales of the Company's products are made through independent foreign
distributors and licensees. Sales to foreign distributors and licensees are
shipped directly from the Company's facilities in California and invoiced in
U.S. dollars. Export sales are subject to certain controls and restrictions,
including tariffs and import duties, and are subject to certain risks,
including changing regulatory requirements of foreign jurisdictions and
transportation delays and interruptions; however, the Company has not
experienced any material difficulties relating to such limitations.
BACKLOG
Sales to solar distributors are made against individual purchase orders rather
than through volume purchase arrangements. The Company typically ships its
products within one to five days of receipt of an order; therefore, the
Company's backlog at any date is usually insignificant and is not a meaningful
indicator of future sales. FAFCO distributors tend to order frequently in
small quantities in order to minimize their inventory levels and match
inventory levels with current installation schedules.
Sales of IceStor products are made against individual purchase orders to
general contractors or Heating, Ventilating, and Air Conditioning (HVAC)
contractors for specific new construction projects or for retrofit in existing
buildings. The Company typically ships these products within six weeks or less
of receipt of an order; therefore, the Company's backlog with respect to
IceStor products at any date is also usually insignificant and not a meaningful
indicator of future sales.
GOVERNMENT TAX INCENTIVES
Although the Company's operations are not directly subject to extensive
governmental regulations, the existence or lack of federal, state, and local
tax incentives for the sale and installation of solar systems has a substantial
impact on the Company's business. There is currently no federal tax credit for
solar heating systems, and state solar tax credits are available only in a few
states. The Company does not anticipate that solar tax credits will become
available for solar heating systems in any additional states, nor does in
anticipate a significant increase in sales due to existing or future tax
credits.
MANUFACTURING
FAFCO's manufacturing activities consist primarily of the production of
polyolefin solar collectors and IceStor heat exchangers, copper solar
collectors, housings for solar collectors, housings for solar collectors,
automatic controls, components for its solar systems, and IceStor containers.
A total system approach is emphasized in order to ensure the effectiveness and
reliability of the Company's products after they have been installed,
eliminating the need for distributors to rely upon materials from other
suppliers.
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The Company's solar pool heating system utilizes collectors produced from
polyolefin resins using a patented extrusion and thermoforming process. The
Company's IceStor system utilizes heat exchangers, which are also made from
polyolefin resins using a patented extrusion and thermoforming process.
Substantially all equipment used in these processes has been designed and built
by the Company's research and development engineers.
The Company's resins are a petroleum by-product. The market price of these
resins has fluctuated over the years with an increase in 1990 and early 1991
due to tensions in the Middle East, followed by a stabilization after the
completion of Desert Storm. It is expected that the price of the Company's
resins will continue to fluctuate as a result of domestic and international
political and economic conditions.
FAFCO has qualified multiple sources of supply for all of its resins,
materials, and subassemblies. However, certain materials and subassemblies are
obtained from single sources. The Company believes these items could be
supplied by the Company's other qualified sources if sufficient lead time were
provided. The Company attempts to maintain additional inventory of such
materials to mitigate the risk of supply shortages; however, any prolonged
inability to obtain such items would have a material adverse effect on the
Company's results of operations. To date, the Company has not experienced any
significant manufacturing problems or delays due to shortages of materials.
Quality assurance is performed by FAFCO at its manufacturing facility. Test
and inspection procedures are a part of substantially all production and
assembly operations. In addition, the Company uses it own diagnostic equipment
and laboratory to continually test and inspect raw materials, work in process,
and finished goods.
COMPETITION
The Company's solar heating products currently compete directly with solar
heating products offered by less than ten other manufacturers of solar heating
systems, and indirectly with conventional heating systems. The Company's
AutoPool product currently competes directly with automatic controls
manufactured by a number of companies in the United States.
The Company believes that the principal competitive factors in the markets for
FAFCO solar products and controls are (i) product performance and reliability;
(ii) marketing and technical support from the manufacturer for distribution
channels; (iii) selling, installation, and service capabilities of distribution
channels; and (iv) price. The Company believes that it competes favorably with
respect to all of these factors. However, certain of its competitors may have
greater financial, marketing, and technological resources than those of the
Company.
A number of companies in the United States manufacture thermal energy storage
systems of various types similar to the Company's IceStor product. The
industry is in the early stages of development and additional competitors are
expected to enter the market over time.
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At the present time, the Company believes that the main competitive factors in
the thermal energy storage market are performance, reliability, and price. The
Company believes that it competes favorably with respect to these factors.
However, several of its competitors have greater financial, marketing, and
technological resources than those of the Company.
RESEARCH AND DEVELOPMENT
For the years ended December 31, 1995, 1994, and 1993, the Company's research
and development expenses were $460,100, $484,300, and $479,400, respectively.
The majority of the research and development costs incurred in 1995 related to
research and development of solar heating products for above ground swimming
pools, which the Company introduced in February 1996, and an improved solar
heating product for in-ground pools, which is currently scheduled to be
introduced in April 1996.
The Company currently uses consulting engineers, in addition to staff
engineers, who are responsible for existing product improvement, applications
engineering, and new product research and development. The Company is
exploring other potential revenue-producing uses for its polyolefin extrusions.
PATENTS, TRADEMARKS AND LICENSES
FAFCO currently holds four United States patents and one foreign patent
relating to certain aspects of its products and manufacturing technology.
These patents expire at various times between March 1997 and July 2003.
However, the Company believes that patent protection is secondary to such
factors as ongoing product development and refinement, the knowledge and
experience of its personnel, and their ability to design, manufacture, and
successfully market the Company's products.
From time to time, the Company has registered as trademarks certain product
names and marks in order to preserve its right to those product names and
marks.
The Company has granted licenses to assemble and sell IceStor in Taiwan, Korea,
and Japan to a Taiwanese company, a Korean company, and a Japanese company,
respectively. See "Marketing and Sales" above.
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EMPLOYEES
At December 31, 1995, the Company had a total of forty-eight 48 full-time
employees, including eight (8) in marketing, two (2) in research and
development, thirty (30) in manufacturing, and eight (8) in general management
and administration. The Company also uses temporary employees from agencies to
fill seasonal needs. The Company has never had a work stoppage. No employees
are represented by a labor organization. During 1995, the Company laid off 32%
of its employees in order to bring expenses more in line with reduced sales
levels.
SEASONALITY
Information regarding the seasonality of the Company's business is set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Seasonality" on page 20 of the Annual Report, which information is
incorporated herein by reference.
SEGMENT INFORMATION
Following the sale of the business of the Company's subsidiary, The Gregory
Company, in 1988, the Company has only had continuing operations in the energy
products segment.
ENVIRONMENTAL REGULATIONS
The Company is subject to a number of environmental regulations concerning
potential air and water pollution. However, such regulations have not in the
past had, and are not expected to have, any material adverse effect on the
Company's business. There can be no assurance that compliance with existing or
future regulations will not require the expenditure of funds or the
modification of the Company's manufacturing process, which could have a
material adverse effect on the Company's business or financial condition.
ITEM 2. Properties
The Company's principal executive offices and manufacturing facilities for its
products are located in a single 42,500 square foot facility in Redwood City,
California. This facility is covered by a lease expiring in the year 2000.
See Note 11 of Notes to Consolidated Financial Statements on page 14 of the
Annual Report, which information is incorporated herein by reference.
The Company believe that its current facilities are adequate to meet its
requirements for space in the near future. Manufacturing space is being fully
utilized at the present time. However, additional demand can be accommodated
by adding second and third employee shifts.
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ITEM 3. Legal Proceedings
There are presently no material pending legal proceedings to which the Company
is a party or to which any of its property is subject, except for ordinary
routine legal proceedings incidental to the Company's business.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of security holders during the
fourth quarter of its fiscal year ended December 31, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are set forth below. All officers serve
at the pleasure of the Board of Directors. There are no family relationships
between any executive officers or directors.
Freeman A. Ford, age 55, 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 54, serves as Vice President of Finance and Administration,
Chief Financial Officer, and Secretary. Mr. Watt joined the Company as its
Vice President-Finance and Chief Financial Officer in July 1984, and has served
as Secretary since March 1985.
David Harris, age 40, serves as Vice President, Pool Products. 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,
Pacific Northwestern Region Sales Manager, National Sales Manager-Solar
Division, National Sales Manager, Vice President-Sales and Marketing (from June
1988 until April 1993) and President-Pool Products Division (from May 1993
until May 1995).
Michael Anderson, age 50, has served as Vice President, Commercial Products
since May 1995. Mr. Anderson joined the Company in September 1984 as Vice
President, Sales and Marketing and held that position until February 1987. Mr.
Anderson served as President of Marcus Company, a manufacturer's representative
for HVAC and refrigeration products from March 1987 until May 1993, when he
rejoined the Company as President, Commercial Products Division.
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PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information regarding the market for and market prices of the Company's Common
Stock, the number of shareholders of record, and information regarding
dividends is set forth under the heading "Common Stock Data" on page 19 of the
Annual Report, which information is incorporated herein by reference.
ITEM 6. Selected Financial Data
Selected financial data for the Company is set forth in the table entitled
"Five-Year Summary of Operations" on page 18 and in the last sentence of the
text under the table entitled "Common Stock Data" on page 19 of the Annual
Report, which information is incorporated herein by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations is set forth under the heading
"Management's Discussion and Analysis", on pages 20 through 22 of the Annual
Report, which information is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company are set forth on pages 4
through 15 of the Annual Report, which information is incorporated herein by
reference. The supplementary financial information of selected quarterly
financial data is not required under Regulation S-K Item 302, because the
Company does not meet the tests set forth therein.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding directors is to be set forth under the heading "Election
of Directors - Nominees" in the Company's Proxy Statement, which information is
incorporated herein by reference.
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Information regarding executive officers is set forth under the caption
"Executive Officers of the Registrant" in Part I of this Form 10-K, which
information is incorporated into this Item 10 by reference.
Information regarding the filing of reports by insiders under Section 16(a) of
the Exchange Act is to be set forth under the heading "Election of Directors -
Compliance with Section 16(a) of the Exchange Act" in the Company's Proxy
Statement, which information is incorporated herein by reference.
ITEM 11. Executive Compensation
Information regarding the Company's remuneration of its executive officers and
directors is to be set forth under the headings "Election of Directors -
Executive Compensation" and "Election of Directors - Director Compensation" in
the Company's Proxy Statement, which information is incorporated herein by
reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding the security ownership of certain beneficial owners and
management is to be set forth under the headings "Election of Directors -
Security Ownership" and "Information Concerning Solicitation and Voting -
Record Date and Outstanding Shares" in the Company's Proxy Statement, which
information is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is to be
set forth under the headings "Election of Directors - Nominees" and "Election
of Directors - Certain Transactions" in the Company's Proxy Statement, which
information is incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Financial Statements
The consolidated balance sheets for the years ended December 31, 1995 and
1994, the consolidated statements of income, of shareholders' equity, and of
cash flows for each of the three years in the period ended December 31,
1995, and the notes thereto appear on pages 4 through 15 of Exhibit 13.1 to
this Annual Report on Form 10-K.
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2. Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedule (see page
17 of this Annual Report on Form 10-K).
The following schedule for the years ended December 31, 1995, 1994, and 1993
is included in this report. Such schedule should be read in conjunction
with the consolidated financial statements in the Annual Report.
Schedule VIII - Valuation and Qualifying Accounts and Reserves
Schedules not included in these financial statement schedules have been
omitted because they are not applicable or the required information is shown
in the financial statements or notes thereto.
3. The following exhibits are filed as part of or incorporated by
reference, to the extent indicated herein, in this Annual Report on
Form 10-K.
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EXHIBIT NO. DESCRIPTION (FOOTNOTES APPEAR AT THE END OF THE EXHIBIT LIST)
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3.1(1) Articles of Incorporation, as amended.
3.1(a)(11) Form of Amended and Restated Articles of Incorporation, to be filed following shareholder approval.
3.2(3) Bylaws, as amended.
4.1(1) Stock Purchase Agreement dated April 14, 1977, between Registrant and certain investors.
4.2(3) 10% Convertible Subordinated Notes Purchase Agreement dated March 27,1984, between Registrant and certain investors.
4.2(a)(2) Amendment to Subordinated Note Purchase Agreement dated March 27, 1990.
4.2(b)(9) Amendment to 10% Subordinated Note Agreement dated March 25, 1991.
4.3(4)* Security and Guaranty Agreement and Common Stock Purchase Warrant between the Registrant and Freeman A. Ford dated
February 16, 1987.
4.3(a)(5)* Amendment to the Security and Guaranty Agreement between the Registrant and Freeman A. Ford dated December 8, 1987.
4.3(b)(6)* Amendment to the Security and Guaranty Agreement between the Registrant and Freeman A. Ford dated February 1, 1988.
4.3(c)(7)* Second Amendment to the Promissory Notes between the Registrant and Freeman A. Ford dated March 26, 1991.
4.3(d)(9)* Form of Common Stock Purchase Warrant issued March 25, 1993 by the Registrant to Freeman A. Ford.
4.3(e)(9) Amendment to the Promissory Notes between the Registrant and Freeman A. Ford dated March 25, 1993.
4.4(10) Common Stock Warrant issued January 19, 1994 to B. Severns.
4.5 Reference Exhibits 3.1 and 3.2.
10.1 Reference Exhibit 4.1.
10.2 Reference Exhibit 4.2, 4.2(a), and 4.2(b).
10.3(7)* 1981 Incentive Stock Option Plan.
10.4(7)* Form of 1981 Incentive Stock Option Agreement.
10.8(1) Standard Form of Distributor Agreement.
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<TABLE>
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EXHIBIT NO. DESCRIPTION
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10.9(7) Lease Agreement and Addenda for 2690 Middlefield Road, Redwood City, California, between Registrant, as Lessee,
and Beals Martin and Associates, as Lessor, dated January 18, 1990.
10.10(3) FAFCO Solar Partners II Certificate of Limited Partnership and Limited Partnership Agreement.
10.11 Reference Exhibits 4.3, 4.3(a), 4.3(b), 4.3(c), 4.3(d), and 4.3(e).
10.12(6) Licensing Agreement between the Registrant, as Licensor, and Enercon Engineering, as Licensee, dated May 20, 1988.
10.13(6)* Form of Director's Warrant issued February 1988 to directors Berry and Selig.
10.14(11)* 1991 Stock Option Plan, as amended.
10.14(a)(8)* Form of Stock Option Agreement used under the 1991 Stock Option Plan.
10.15(8)* 1991 Directors' Stock Option Plan.
10.15(a)(8)* Form of Nonstatutory Stock Option Agreement used under 1991 Director's Stock Option Plan.
10.16(8)* Employee Stock Purchase Plan.
10.16(a)(8)* Form of Subscription Agreement used under Employee Stock Purchase Plan.
10.17(9) Licensing Agreement and Addendum between the Registrant, as Licensor, and Jang-Han Systems Engineering, as
Licensee, ated January 1, 1993.
10.18(10) Export - Import and Technical License Agreement between the Registrant, as Licensor, and Ebara Corporation, as
Licensee, dated October 22, 1993.
10.19(10) Business Loan Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated June 10, 1992.
10.19(a)(10) Loan Modification Agreement between Registrant as Borrower and Silicon Valley Bank, as Lender, dated March 8, 1994.
10.19(b) Loan Modification Agreement between Registrant as Borrower and Silicon Valley Bank as Lender dated June 5, 1995.
10.19(c) Loan Modification Agreement between Registrant as Borrower and Silicon Valley Bank as Lender dated August 7, 1995.
10.19(d) Loan Modification Agreement between Registrant as Borrower and Silicon Valley Bank as Lender dated August 7, 1995.
10.19(e) Loan Modification Agreement between Registrant as Borrower and SiliconValley Bank as Lender dated September
22, 1995.
10.19(f) Loan Modification Agreement between Registrant as Borrower and Silicon Valley Bank as Lender dated February 8, 1996.
10.20(11) Agency/Distributorship Agreement between Registrant as Manufacturer and Jabria Establishment, as Agent/
Distributorship, dated December 10, 1994.
11.1 Computation of Earnings Per Share (see Note 12 of Notes to Consolidated Financial Statements on pages 14 and 15
of the Annual Report).
13.1 Registrant's 1995 Annual Report to Shareholders.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants (see page 20)
24.1 Power of Attorney (see page 19).
27.1 Financial Data Schedule.
</TABLE>
* Denotes a Management Contract or Compensatory plan or arrangement.
15
<PAGE> 16
(1) Incorporated by reference to exhibit filed with Registrant's Registration
Statement on Form S-1 (File No. 2-72297) filed May 14, 1981.
(2) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
(3) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1983.
(4) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1986.
(5) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987.
(6) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988.
(7) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990.
(8) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991.
(9) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
(10) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(11) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(b) Reports on Form 8-K: No Current Reports on Form 8-K were filed by the
Company during the fourth quarter of 1995.
(c) Exhibits: See subsection (a) (3) above.
(d) Financial Statement Schedules: See subsection (a) (2) above.
16
<PAGE> 17
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors of FAFCO, Inc.
Our audits of the consolidated financial statements referred to in our report
dated March 27, 1996 appearing on page 17 of the 1995 Annual Report to
Shareholders of FAFCO, Inc. (which report and consolidated financial statements
are incorporated by reference in this Annual Report on Form 10-K) also included
an audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Price Waterhouse LLP
San Francisco, California
March 27, 1996
17
<PAGE> 18
FAFCO, INC.
SCHEDULE
VIII
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
Balance at Additions Charged
Beginning of to Costs and Balance at End of
Description Period Expenses Deductions Period
- ----------- ------------ ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
1995:
Allowance for doubtful accounts $5,700(1)
current accounts receivable $469,100 $39,600 39,100(4) $463,900
short-term receivable 39,100 39,100
Warranty reserve 247,000 10,500 41,500(2) 216,000
Deferred tax asset valuation
allowance 600,900 782,900 1,383,800
- -------------------------------
1994:
Allowance for doubtful accounts
current accounts receivable $417,400 $52,600 $ 900(1) $469,100
long-term receivable
Warranty reserve 280,300 71,800 105,100(2) 247,000
Deferred tax asset valuation
allowance 893,900 293,000 600,900
1993:
Allowance for doubtful accounts
current accounts receivable $320,200 $98,500 $1,300(1) $417,400
long-term receivable 203,700 23,200 226,900(1)
Warranty reserve 310,900 99,700 130,300(2) 280,300
Deferred tax asset valuation
allowance 717,400(3) 176,500 893,900
- -------------------------------
</TABLE>
(1) Write-offs of uncollectible accounts, including allowance on related
party receivable from FAFCO Solar Partners II deemed uncollectible in
1993.
(2) Cost of warranty claims processed.
(3) Beginning balance at adoption of SFAS 190 (Accounting for Income Taxes).
(4) Reclassified to allowance for short-term notes receivable.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1996 FAFCO, Inc.
/s/Freeman A. Ford
--------------------------------
Freeman A. Ford,
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Freeman A.
Ford and Alex N. Watt, or either of them, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, President and March 27, 1996
/s/Freeman A. Ford Chief Executive Officer (Principal
- -----------------------
Freeman A. Ford Executive Officer) and Director
Vice President, Finance & Administration March 27, 1996
/s/Alex N. Watt and Chief Financial Officer (Principal
- -----------------------
Alex N. Watt Financial and Accounting Officer)
/s/William A. Berry Director March 27, 1996
- -----------------------
William A. Berry
/s/Robert W. Selig, Jr. Director March 27, 1996
- -----------------------
</TABLE>
Robert W. Selig, Jr.
19
<PAGE> 20
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-75201, 2-86299, 2-95390 and 33-76220) of FAFCO,
Inc. of our report dated March 27, 1996, appearing on page 17 of the 1995
Annual Report to Shareholders, which is incorporated by reference in this
Annual Report on Form 10-K. We also consent to the incorporation by reference
of our report on the Financial Statement Schedule, which appears on page 18 of
this Form 10-K.
Price Waterhouse LLP
San Francisco, California
March 27, 1996
20
<PAGE> 21
ITEMS
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT NO. DESCRIPTION
3.1(1) Articles of Incorporation, as amended.
3.1(8) Form of Amended and Restated Articles of Incorporation, to be filed following shareholder
approval.
3.2(3) Bylaws, as amended.
4.1(1) Stock Purchase Agreement dated as of April 14, 1977, between Registrant and certain investors.
4.2(3) 10% Convertible Subordinated Notes Purchase Agreement dated as of March 27, 1984, between
Registrant and certain investors.
4.2(a)(2) Amendment to Subordinated Note Purchase Agreement dated March 27, 1990.
4.2(b)(9) Amendment to 10% Subordinated Note Agreement dated March 25, 1993.
4.3(4) Security and Guaranty Agreement and Common Stock Purchase Warrant between the Registrant and
Freeman A. Ford dated February 16, 1987.
4.3(a)(5) Amendment to the Security and Guaranty Agreement between the Registrant and Freeman A. Ford dated
December 8, 1987.
4.3(b)(6) Amendment to the Security and Guaranty Agreement between the Registrant and Freemen A. Ford dated
February 1, 1988.
4.3(c)(7) Second Amendment to the Promissory Notes between the Registrant and Freeman A. Ford
dated March 26, 1991.
4.3(d)(9) Form of Common Stock Purchase Warrant issued March 25, 1993 by the Registrant to Freeman A. Ford.
4.3(e)(9) Amendment to the Promissory Notes between the Registrant and Freeman A. Ford dated March 25, 1993.
4.4 Common Stock Warrant issued January 19, 1994 to B. Severns.
4.5 Reference Exhibits 3.1 and 3.2.
10.1 Reference Exhibit 4.1.
10.2 Reference Exhibit 4.2, 4.2(a) and 4.2(b).
10.3(7) 1981 Incentive Stock Option Plan.
10.4(7) Form of 1981 Incentive Stock Option Agreement.
10.8(1) Standard form of Distributor Agreement.
10.9(7) Lease Agreement and Addenda for 2690 Middlefield Road, Redwood City, California, between Registrant,
as Lessee, and Beals Martin and Associates, as Lessor, dated January 18, 1990.
10.10(3) FAFCO Solar Partners II Certificate of Limited Partnership and Limited Partnership Agreement.
10.11 Reference Exhibit 4.3, 4.3(a), 4.3(b), 4.3(c), 4.3(d) and 4.3(e).
10.12(6) Licensing Agreement between the Registrant, as Licensor, and Enercon Engineering, as Licensee, dated
May 20, 1988.
10.13(6) For of Director's Warrant issued February 1988 to directors Berry and Selig.
10.14(11) 1991 Stock Option Plan, as amended.
10.14(a)(8) Form of Stock Option Agreement used under the 1991 Stock Option Plan.
10.15(8) 1991 Directors' Stock Option Plan.
10.15(a)(8) Form of Nonstatutory Stock Option Agreement used under 1991 Directors' Stock Option Plan.
10.16(8) Employee Stock Purchase Plan.
10.16(a)(8) Form of Subscription Agreement used under Employee Stock Purchase Plan.
10.17(9) Licensing Agreement and Addendum between the Registrant as Licensor, and Jang-Han Systems Engineering,
as Licensee, dated January 1, 1993.
10.18(10) Export - Import and Technical License Agreement between the Registrant as Licensor and Ebara Corporation
as Licensee, dated October 22, 1993.
10.19(10) Business Loan Agreement between Registrant as Borrower and Silicon Valley Bank as Lender, dated
June 10, 1992.
10.19(a)(10) Loan Modification Agreement between Registrant as Borrower and Silicon Valley Bank, as Lender, dated
March 8, 1994.
10.19(b) Loan Modification Agreement between Registrant as Borrower and Silicon Valley Bank as Lender dated
June 5, 1995.
10.19(c) Loan Modification Agreement between Registrant as Borrower and Silicon Valley Bank as Lender dated
August 7, 1995.
10.19(d) Loan Modification Agreement between Registrant as Borrower and Silicon Valley Bank as Lender dated
September 22, 1995.
10.19(e) Loan Modification Agreement between Registrant as Borrower and Silicon Valley Bank as Lender dated
February 8, 1996.
10.20 Agency/Distributorship Agreement between Registrant, as Borrower and Silicon Valley Bank, as Lender,
dated 12/10/94.
11.1 Computation of Earnings Per Share (see Note 12 of Notes to Consolidated Financial Statements on pages
14 and 15 of the Annual Report).
13.1 Registrant's 1995 Annual Report to Shareholders.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accounts (see page 20).
24.1 Power of Attorney (see page 19).
</TABLE>
21
<PAGE> 1
EXHIBIT 10.19(b)
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of June 5, 1995, by and
between FAFCO, INC. ("Borrower") whose address is 2690 Middlefield Road,
Redwood City, CA 94063, and Silicon Valley Bank ("Lender") whose address is
3000 Lakeside Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Lender, Borrower is indebted to Lender pursuant to, among
other documents, a Promissory Note, dated June 10, 1992, in the original
principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00) (the
"Note"). The Note has been modified pursuant to Change in Terms Agreements,
dated February 15, 1993 and April 29, 1993, and a Loan Modification Agreement,
dated March 8, 1994, pursuant to which, among other things, the principal
amount of the Note was increased to One Million and 00/100 Dollars
($1,000,000.00). The Note, together with other promissory notes from Borrower
to Lender, is governed by the terms of a Business Loan Agreement, dated June
10, 1992, between Borrower and Lender, as may be amended from time to time (the
"Loan Agreement").
Hereinafter, all indebtedness owing by Borrower to Lender shall be referenced
to as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL: Repayment of the Indebtedness is secured by a
Commercial Security Agreement, dated June 3, 1994 (the "Security Agreement").
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Note (and other notes executed by Borrower in
favor of Lender) shall be referred to as the "Security Documents."
Hereinafter, the Security Documents, together with all other documents
evidencing or securing the Indebtedness shall be referred to as the "Existing
Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS:
A. Modification(s) to Note.
1. Payable in one payment of all outstanding principal plus all accrued
unpaid interest on June 5, 1996. In addition, Borrower will pay
regular monthly payments of all accrued unpaid interest due as of
each payment date, beginning July 5, 1995, and all subsequent
interest payments will be due on the same day of each month there-
after.
2. The principal amount of the Note is hereby increased to One Million
Five Hundred Thousand and 00/100 Dollars ($1,500,000.00).
B. Modification(s) to Loan Agreement.
1. The Tangible Net Worth and Profitability covenant as provided in the
paragraph entitled "Financial Covenants" are hereby amended as
follows:
Borrower shall maintain, on a monthly basis, a minimum Tangible Net
Worth plus Subordinated Debt of $2,000,000.00. Further, maintain
profitability as follows:
Allow loss for quarter ended March 31, 1995;
Loss for quarter ended June 30, 1995, not to exceed $150,000.00;
Loss for quarter ended September 30, 1995, not to exceed
$150,000.00;
<PAGE> 2
EXHIBIT 10.19(b) page two
Profits of at least $300,000.00 for quarter ended December 31, 1995.
2. Accounts receivable audits will now be performed on an annual basis
(rather than when borrowings under the Note exceed $100,000.00).
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. LOAN FEE. Borrower shall pay to Lender a fee in the amount of Seven
Thousand Five Hundred and 00/100 Dollars ($7,500.00) (the "Loan Fee") plus all
out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has no
defenses against the obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower understands and agrees that in modifying
the existing Indebtedness, Lender is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents. Except
as expressly modified pursuant to this Loan Modification Agreement, the terms
of the Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released
by Lender in writing. No maker, endorser, or guarantor will be released by
virtue of this Loan Modification Agreement. The terms of this Paragraph apply
not only to this Loan Modification Agreement, but also to all subsequent loan
modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee and Lender's receipt of the Amendment
and Reaffirmation of Subordination Agreements executed by each Creditor.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: LENDER:
FAFCO, INC. SILICON VALLEY BANK
By: \s\ Alex N. Watt By: \s\ Julie Schneider
Name: Alex N. Watt Name: Julie Schneider
Title: V.P. Finance & Administration Title: CBD
<PAGE> 1
EXHIBIT 10.19(c)
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of August 7, 1995,
by and between FAFCO, INC. ("Borrower") whose address is 2690 Middlefield Road,
Redwood City, CA 94063, and Silicon Valley Bank ("Lender") whose address is
3000 Lakeside Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, dated June 10, 1992, in the original
principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00)
(the "Note"). The Note has been modified pursuant to Change in Terms
Agreements, dated February 15, 1993 and April 29, 1993, and a Loan Modification
Agreements, dated March 8, 1994, and June 5, 1995, pursuant to which, among
other things, the principal amount of the Note was increased to One Million
Five Hundred Thousand and 00/100 Dollars ($1,500,000.00). The Note, together
with other promissory notes from Borrower to Lender, is governed by the terms
of a Business Loan Agreement, dated June 10, 1992, between Borrower and Lender,
as may be amended from time to time (the "Loan Agreement").
Hereinafter, all indebtedness owing by Borrower to Lender shall be referenced
to as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL: Repayment of the Indebtedness is secured by a
Commercial Security Agreement, dated June 3, 1994.
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Note (and other notes executed by Borrower in
favor of Lender) shall be referred to as the "Security Documents."
Hereinafter, the Security Documents, together with all other documents
evidencing or securing the Indebtedness shall be referred to as the "Existing
Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS:
A. Agreement to Forbear.
1. Lender agrees to forebear from exercising it remedies under the
Existing Loan Documents until September 30, 1995, notwithstanding
Borrower's existing default under the Loan Agreement as result of
Borrower's failure to comply with the profitability covenant as of
the quarter ended June 30, 1995.
By signing below, Borrower acknowledges that the Indebtedness
currently is in default and as a result of such default, Lender is
entitled to exercise its remedies as provided in the Existing Loan
Documents and as provided under applicable law. Nothing in this
Agreement in any way shall constitute Lender ''waiver of Borrower''
existing default under the Loan Agreement.
Upon termination of the forbearance period described above, without
any notice to Borrower, Lender may exercise any remedies available to
Lender under the Existing Loan Documents and under applicable law.
<PAGE> 2
EXHIBIT 10.19(c) page two
B. Modification(s) to Loan Agreement.
1. The profitability covenant as provided in the paragraph entitled
"Financial Covenants" is hereby amended to read, in its entirety:
Borrower shall achieve profitability on a quarterly basis, with
allowance for one loss not to exceed $350,000.00 for the quarter
ending September 30, 1995.
2. Notwithstanding anything to the contrary as provided in the Loan
Agreement and the Existing Loan Documents, Borrower may not repay the
Subordinate Debt owing to its creditors; provided, however, upon
Borrower's achievement of two consecutive quarters of profitability,
Borrower may repay such Subordinated Debt, subject to, however,
Lender's prior consent.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has no
defenses against the obligations to pay any amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the
existing Indebtedness, Lender is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents.
Except as expressly modified pursuant to this Loan Modification Agreement, the
terms of the Existing Loan Documents remain unchanged and in full force and
effect. Lender's agreement to modifications to the existing Indebtedness
pursuant to this Loan Modification Agreement in no way shall obligate Lender
to make any future modifications to the Indebtedness. Nothing in this Loan
Modification Agreement shall constitute a satisfaction of the Indebtedness.
It is the intention of Lender and Borrower to retain as liable parties all
makers and endorsers of Existing Loan Documents, unless the party is expressly
released by Lender in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
Paragraph apply not only to this Loan Modification Agreement, but also to
all subsequent loan modification agreements.
7. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee of Five Hundred Dollars ($500).
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: LENDER:
FAFCO, INC. SILICON VALLEY BANK
By: \s\ Alex N. Watt By: \s\ Julie Schneider
Name: Alex N. Watt Name: Julie Schneider
Title: V.P. Finance & Administration Title: CBD
<PAGE> 1
EXHIBIT 10.19(d)
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of September 22,
1995, by and between FAFCO, INC. ("Borrower") whose address is 2690 Middlefield
Road, Redwood City, CA 94063, and Silicon Valley Bank ("Lender") whose address
is 3000 Lakeside Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness
which may be owing by Borrower to Lender, Borrower is indebted to Lender
pursuant to, among other documents, a Promissory Note, dated June 10, 1992, in
the original principal amount of Five Hundred Thousand and 00/100 Dollars
($500,000.00) (the "Note"). The Note has been modified pursuant to Change in
Terms Agreements, dated February 15, 1993 and April 29, 1993, and a Loan
Modification Agreement, dated March 8, 1994, and June 5, 1995, pursuant to
which, among other things, the principal amount of the Note was increased to
One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00). The
Note, together with other promissory notes from Borrower to Lender, is governed
by the terms of a Business Loan Agreement, dated June 10, 1992, between
Borrower and Lender, as may be amended from time to time (the "Loan
Agreement").
Hereinafter, all indebtedness owing by Borrower to Lender shall be referenced
to as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL: Repayment of the Indebtedness is secured
by a Commercial Security Agreement, dated June 3, 1994 (the "Security
Agreement").
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Note (and other notes executed by Borrower in
favor of Lender) shall be referred to as the "Security Documents."
Hereinafter, the Security Documents, together with all other documents
evidencing or securing the Indebtedness shall be referred to as the "Existing
Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS:
A. Modification(s) to Note.
1. The interest rate to be applied to the unpaid principal balance of
the note is hereby increased, effective as of the date hereof, to a
rate equal to one and one-half percent (1.50%) above the Lender's
Index (as defined therein).
B. Modification(s) to Loan Agreement.
1. The paragraph entitled "Financial Covenants" is hereby amended to
read, in its entirety:
Borrower shall maintain, on a monthly basis, beginning with the
period ending September 30, 1995, on a monthly basis, a minimum
quick ratio of 0.75 to 1.00; a maximum debt to tangible net worth
ratio of 1.50 to 1.00; and a minimum tangible net worth plus
subordinated debt of $1,500,000.00. Furthermore, Borrower shall
achieve profitability, on a quarterl basis, beginning with the
quarter ending December 31, 1995, and quarterly thereafter.
2. The first sentence of the paragraph entitled "Borrowing Base Formula"
is hereby amended to read, in its entirety:
Borrowing Base Formula. Funds shall be advanced under the Line
according to
<PAGE> 2
EXHIBIT 10.19(d) page two
a borrowing base formula as determined by Lender on a monthly basis,
defined as follows: the lesser of (a) $1,500,000.00 or (b) Eighty
percent (80%) of eligible accounts receivable plus $150,000.00
through December 31, 1995, decreasing to the lesser of (C) $150,000.00
or (d) Seventy five percent (75%) of eligible accounts receivable as
of January 1, 1996.
C. Forbearance.
1. Lender agrees to forebear from exercising its remedies under the
Existing Loan Documents until December 31, 1995, not withstanding
Borrower's existing default under the Loan Agreement as a result
of Borrower's failure to comply with the tangible net worth covenant
as of August 31, 1995 and the profitability covenant as of the
quarter ending September 30, 1995. By signing below, Borrower
acknowledges that the Indebtedness currently is in default and as a
result of such default, Lender is entitled to exercise its remedies
as provided in the Existing Loan Documents and as provided under
applicable law. Nothing in this Agreement in any way shall
constitute Lender's waiver of Borrower's existing default under the
Loan Agreement.
Upon termination of the forbearance period described above, without
any notice to Borrower, Lender may exercise any remedies available to
Lender under the Existing Loan Documents and under applicable law.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has no
defenses against the obligations to pay any amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the
existing Indebtedness, Lender is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents.
Except as expressly modified pursuant to this Loan Modification Agreement, the
terms of the Existing Loan Documents remain unchanged and in full force and
effect. Lender's agreement to modifications to the existing Indebtedness
pursuant to this Loan Modification Agreement in no way shall obligate Lender to
make any future modifications to the Indebtedness. Nothing in this Loan
Modification Agreement shall constitute a satisfaction of the Indebtedness. It
is the intention of Lender and Borrower to retain as liable parties all makers
and endorsers of Existing Loan Documents, unless the party is expressly
released by Lender in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
Paragraph apply not only to this Loan Modification Agreement, but also to
all subsequent loan modification agreements.
7. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee and Lender's receipt of the Amendment
and Reaffirmation of Subordination Agreements executed by each Creditor.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: LENDER:
FAFCO, INC. SILICON VALLEY BANK
By: \s\ Alex N. Watt By: \s\ Julie Schneider
Name: Alex N. Watt Name: Julie Schneider
Title: V.P. Finance & Administration Title: CBD
<PAGE> 1
EXHIBIT 10.19(e)
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of February 8,
1996, by and between FAFCO, INC. ("Borrower") whose address is 2690 Middlefield
Road, Redwood City, CA 94063, and Silicon Valley Bank ("Lender") whose address
is 3000 Lakeside Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which
may be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, dated June 10, 1992, in the original
principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00) (the
"Note"). The Note has been modified pursuant to Change in Terms Agreements,
dated February 15, 1993 and April 29, 1993, and a Loan Modification Agreements,
dated March 8, 1994, and June 5, 1995, pursuant to which, among other things,
the principal amount of the Note was increased to One Million Five Hundred
Thousand and 00/100 Dollars ($1,500,000.00). The Note, together with other
promissory notes from Borrower to Lender, is governed by the terms of a
Business Loan Agreement, dated June 10, 1992, between Borrower and Lender, as
may be amended from time to time (the "Loan Agreement").
Hereinafter, all indebtedness owing by Borrower to Lender shall be referenced
to as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL: Repayment of the Indebtedness is secured
by a Commercial Security Agreement, dated June 3, 1994 (the "Security
Agreement").
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Note (and other notes executed by Borrower in
favor of Lender) shall be referred to as the "Security Documents."
Hereinafter, the Security Documents, together with all other documents
evidencing or securing the Indebtedness shall be referred to as the "Existing
Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS:
A. Modification(s) to Note.
1. The interest rate to be applied to the unpaid balance of the Note is
hereby increased, effective as of the date hereof, to a rate equal to
two and one-half percent (2.50%) above the Lender's Index (as defined
therein). The principal amount of the Note is hereby reduced to One
Million Dollars ($1,000,000.00).
B. Modification(s) to Loan Agreement.
1. The paragraph entitled "Financial Covenants" is hereby amended to
read, in its entirety::
Borrower shall maintain, on a monthly basis, beginning with the
period ending January 31, 1996, a minimum quick ratio of 0.50 to
1.00, a maximum debt to tangible net worth ratio of 2.75 to 1.00, and
a minimum tangible net worth plus subordinated debt of $1,050,000
plus the net proceeds received by Borrower from the sale of
convertible securities after the date of this Amendment.
Furthermore, Borrower shall achieve profitability, on a quarterly
year-to-date basis, beginning with the quarter ending March 31,
1996, and quarterly thereafter.
<PAGE> 2
EXHIBIT 10.19(e) page two
2. The first sentence of the paragraph entitled "Borrowing Base Formula"
is hereby amended to read, in its entirety:
C. Forbearance.
1. Lender agrees to forebear from exercising its remedies under the
Existing Loan Documents until June 5, 1996, not withstanding
Borrower's existing default under the Loan Agreement as a result of
Borrower's failure to comply with certain covenants as of as of
December 31, 1995. Borrower acknowledges that the Indebtedness
currently is in default and as a result of such default, Lender is
entitled to exercise its remedies as provided in the Existing Loan
Documents and as provided under applicable law. Nothing in this
Agreement in any way shall constitute Lender's waiver of Borrower's
existing default under the Loan Agreement.
Upon termination of the forbearance period described above, without
any notice to Borrower, Lender may exercise any remedies available to
Lender under the Existing Loan Documents and under applicable law.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it has no
defenses against the obligations to pay any amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the
existing Indebtedness, Lender is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents.
Except as expressly modified pursuant to this Loan Modification Agreement, the
terms of the Existing Loan Documents remain unchanged and in full force and
effect. Lender's agreement to modifications to the existing Indebtedness
pursuant to this Loan Modification Agreement in no way shall obligate Lender
to make any future modifications to the Indebtedness. Nothing in this Loan
Modification Agreement shall constitute a satisfaction of the Indebtedness.
It is the intention of Lender and Borrower to retain as liable parties all
makers and endorsers of Existing Loan Documents, unless the party is expressly
released by Lender in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
Paragraph apply not only to this Loan Modification Agreement, but also to
all subsequent loan modification agreements.
7. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee of Five Hundred Dollars ($500).
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: LENDER:
FAFCO, INC. SILICON VALLEY BANK
By: \s\ Alex N. Watt By: \s\ Julie Schneider
Name: Alex N. Watt Name: Julie Schneider
Title: V.P. Finance & Administration Title: CBD
<PAGE> 1
FAFCO, Inc.
1995 Annual Report
a manufacturer of polymer heat exchangers
FAFCO, Inc. designs, manufactures, and markets heat exchangers made primarily
of polymers for use in solar swimming pool heating and for thermal energy
storage. FAFCO markets its swimming pool products in the United States and
overseas through independent distributors who sell directly to end users. The
Company markets its IceStor? products in the United States through independent
manufacturers' representatives. The Company has also licensed its IceStor?
products overseas. In addition, the Company sells certain electronic products
to automate swimming pool functions which reduce the time and costs associated
with the swimming pool operation.
FAFCO has manufactured over one million polymer heat exchangers since its
incorporation in 1972. The heat exchangers are made using proprietary and
patented processing technology. The Company is the largest manufacturer of
solar pool heating systems in the United States.
In 1987, FAFCO introduced IceStor?, a static glycol ice builder for the thermal
storage market. The FAFCO IceStor? utilizes a variation of the Company's
polymer heat exchanger placed in a galvanized steel container. The IceStor?
products, a demand-side management tool for electric utilities, use chilled
glycol flowing through the heat exchanger to convert a static volume of water
in the container to ice. The ice is made at night using less expensive
(C)off-peaka power. The cooling energy stored in the ice is then reclaimed the
next day during (C)peak periodsa to provide space or process cooling. The
result is lowered cooling costs.
FAFCO's products are manufactured and marketed with a common founding strategy
outlined below:
The choice of markets where high market share or growth are likely.
A high value-added manufacturing process that minimizes direct labor in favor
of proprietary processes.
An effort to maximize gross margin based on sophisticated manufacturing in high
volume to enable economies of scale.
Experienced management whose capabilities exceed the immediate demands of the
business.
A resolution to combine the foregoing to build a large and successful
enterprise.
<PAGE> 2
Letter to Shareholders
Dear Shareholder:
Nineteen ninety-five has proven to be one of the most challenging years in
FAFCO, Inc.'s twenty-six year history. FAFCO, Inc. recorded a net loss of
$1,918,300 on net sales of $7,876,100. This compared with a profit of $454,500
and net sales of $10,526,000 in 1994.
There were principally two reasons for FAFCO's loss. Ice storage sales that had
grown aggressively for several years declined 31.8% in 1995. The decline was
caused in large part by deregulation of certain electric utilities, which can
cause the reduction or the elimination of ice storage incentive programs. In
addition, solar sales declined 20.4%. Total sales in 1995 were off $2,649,900
(25.2%) compared with 1994.
The following measures have been taken to improve operating results:
We have reduced our number of employees from a high of 74 in July 1995 to 48 as
of January 31, 1996.
Monthly fixed expenses have been reduced by 32% from their peak in July 1995
and are at roughly the same level as in 1994.
We hope to increase solar sales by introducing our first new solar panel since
1976. In addition, we are introducing a new solar heating system for
above-ground pools and initiating more sales outside of California and Florida.
We are seeking to increase thermal energy storage sales of our IceStor? product
through efforts of a regional salesman hired in 1995 and emphasis on regionally
attractive markets and by focusing on international business that has strong
potential.
Although I am delighted to put 1995 behind us, there were a number of
accomplishments. New products were designed, prototyped, and readied for
market. New production machines were designed and built. Productivity as
measured by sales per employee increased substantially to reach $165,000 per
employee.
The foregoing, combined with the support of our bank and the raising of
$325,000 additional subordinated debt, make me optimistic that FAFCO can
recover from the financial setbacks of 1995 and show improved results in 1996.
Early indications in 1996 are positive. FAFCO's resilience under considerable
pressure is entirely due to the remarkable resourcefulness, dedication, and
spirit of each and every one of our employees, for which I am grateful.
Sincerely,
Freeman A. Ford
President
<PAGE> 3
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, 1995 1994
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 126,200 $ 338,000
Accounts receivable, less allowance for doubtful
accounts of $463,900 in 1995 and $469,100 in 1994 1,149,600 2,551,200
Current portion of long-term notes receivable 64,000 14,500
Inventories 717,200 843,200
Prepaid expenses and other current assets 145,500 116,900
Other accounts receivable 15,000
Deferred tax asset, net of allowance 125,200 140,600
Total current assets 2,327,700 4,019,400
Plant and equipment, at cost 2,345,100 2,286,500
Less accumulated depreciation and amortization (2,085,900) (1,907,200)
259,200 379,300
Notes receivable and other assets (net) 327,700 33,900
Deferred tax asset, net of allowance 485,800 470,400
Total assets $ 3,400,400 $ 4,903,000
Liabilities and shareholders' equity
Current liabilities:
Note payable to bank $ 751,300 $
Accounts payable and other accrued expenses 949,100 1,193,100
Accrued compensation and benefits 188,900 161,900
Accrued warranty expense 216,000 247,000
Income taxes payable 45,800
Total current liabilities 2,105,300 1,647,800
Convertible subordinated notes ($425,000 was owed
to related parties in 1995 and 1994) 600,000 600,000
Other non-current liabilities 80,400 125,100
Total liabilities 2,785,700 2,372,900
Shareholders' equity:
Preferred Stock-authorized 1,000,000 shares of $1.00
par value, none of which has been issued
Common Stock-authorized 10,000,000 shares of $0.125 par value;
3,112,687 issued and outstanding in 1995 and
3,100,887 issued and outstanding in 1994 389,000 387,600
Capital in excess of par value 5,035,600 5,034,100
Notes receivable secured by Common Stock (75,100) (75,100)
Deficit (4,734,800) (2,816,500)
Total shareholders' equity 614,700 2,530,100
Commitments and contingent liabilities
Total liabilities and shareholders' equity $ 3,400,400 $ 4,903,000
</TABLE>
<PAGE> 4
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Net sales 7,876,100 10,526,000 9,352,200
Other income (expense) 39,700 108,800 (69,900)
Total revenues 7,915,800 10,634,800 9,282,300
Cost of goods sold 5,637,900 6,542,900 5,563,800
Marketing and selling expense 2,137,200 1,767,500 1,546,900
General and administrative expense 1,502,000 1,257,100 1,361,100
Research and development expense 460,100 484,300 479,400
Net interest expense 95,300 79,400 76,900
Total costs and expenses 9,832,500 10,131,200 9,028,100
Income (loss) before income taxes and
extraordinary item (1,916,700) 503,600 254,200
Provision for income taxes 1,600 49,100 116,700
Income (loss) before cumulative effect of change in
method of accounting for income taxes (1,918,300) 454,500 137,500
Cumulative effect of change in method
of accounting for income taxes 717,400
Net income (loss) (1,918,300) 454,500 854,900
Primary net income (loss) per share before cumulative
effect of change in accounting principle $ (0.62) $ 0.13 $ 0.04
Primary net income per share from change in method of
accounting for income taxes 0.22
Primary net income (loss) per share $ (0.62) $ 0.13 $ 0.26
Fully diluted net income (loss) per share before cumulative
effect of change in accounting principle $ (0.62) $ 0.13 $ 0.05
Fully diluted net income per share from change in method of
accounting for income taxes 0.19
Fully diluted net income (loss) per share $ (0.62) $ 0.13 $ 0.24
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 5
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Notes Receivable
Number Capital in Secured by Retained
of Common Excess of Common Earnings
Shares Stock Par Value Stock (Deficit)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 3,051,755 $381,500 $5,026,600 $(105,700) $(4,125,900)
Net income for the year 854,900
Payment of notes receivable
secured by Common Stock 6,600
Balance at December 31, 1993 3,051,755 381,500 5,026,600 (99,100) (3,271,000)
Net income for the year 454,500
Cancellation of shares and
related notes receivable (32,000) (4,000) (20,000) 24,000
Cancellation of shares in satisfaction
of other notes receivable (11,218) (1,400) (7,000)
Issuance of shares pursuant to
exercise of Directors' Warrants 15,000 1,900 5,600
Issuance of shares under the 1981
Employee Incentive Stock Option Plan 77,850 9,700 29,200
Cancellation of shares pursuant to a
rescission offer (500) (100) (300)
Balance at December 31, 1994 3,100,887 $387,600 $5,034,100 (75,100) (2,816,500)
Net loss for the year (1,918,300)
Cancellation of shares in satisfaction
of other notes receivable (3,000) (400) (4,100)
Issuance of shares under the 1981
Employee Incentive Stock Option Plan 8,800 1,100 3,300
Issuance of shares under the 1991
Employee Incentive Stock Option Plan 6,000 700 2,300
Balance at December 31, 1995 3,112,687 $389,000 $5,035,600 $(75,100) $(4,734,800)
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 6
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
<S> <C> <C> <C>
Cash flow from operating activities:
Net (loss) income (1,918,300) 454,500 854,900
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 178,700 169,400 156,400
Allowance for doubtful accounts 33,900 51,700 97,200
Provision for inventory reserve 105,800 (800) (30,800)
Loss on disposition of fixed assets 22,700
Cumulative effect of change in method
of accounting for income taxes (717,400)
Change in assets and liabilities:
Change in receivables 1,367,800 (372,400) (394,100)
Change in inventories 20,200 (86,200) (93,000)
Change in prepaid expenses (28,600) 55,900 (80,000)
Change in deferred tax assets 700 105,700
Change in other assets (333,000) 9,900 40,800
Change in payables and accrued expenses (288,900) 63,800 111,800
Change in other non-current liabilities (27,800) (6,300) 73,600
Net cash (used in) provided by operations (867,500) 340,200 125,100
Cash flow from investing activities:
Purchase of fixed assets (81,300) (104,900) (209,400)
Net cash used in investing activities (81,300) (104,900) (209,400)
Cash flow from financing activities:
Repayment of notes receivables secured
by common stock 6,600
Proceeds from sale of common stock 7,400 46,000
Proceeds from borrowings 751,300
Repayment of borrowings ($250,000 was repaid
to a related party in 1993) (21,700) (19,300) (251,400)
Net cash provided by (used in) financing activities 737,000 26,700 (244,800)
Net (decrease) increase in cash and cash
equivalents (211,800) 262,000 (329,100)
Cash and cash equivalents, beginning of year 338,000 76,000 405,100
Cash and cash equivalents, end of year 126,200 338,000 $76,000
Supplemental disclosures of cash flow information:
Cash paid during the year for interest 89,800 $83,400 $85,400
Net cash paid during the year for income taxes 49,000 117,400
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 7
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
The Company designs, develops, manufactures, and markets solar heating systems
for swimming pools and thermal energy storage systems for commercial and
industrial cooling. The solar heating systems are sold to wholesalers and
distributors primarily in California and Florida and in other locations in the
United States and overseas. Thermal energy storage systems are marketed through
manufacturers' representatives throughout the United States and
internationally. One of the Company's customers accounted for 10% of the
Company's fiscal 1995 net sales. No customer accounted for 10% or more of the
Company's sales in fiscal 1994 or 1993. During 1995 and 1994, the Company had
sales to unaffiliated customers in foreign countries amounting to 15% of total
net sales. During 1993, such sales amounted to 12% of total net sales. A
summary of significant accounting policies follows:
Principles of Consolidation
The consolidated financial statements include the accounts of FAFCO, Inc. and
its wholly-owned subsidiary. All significant inter- company balances and
transactions have been eliminated in consolidation.
Revenue Recognition
Revenues on sales of products are recognized at the time of shipment of goods
or performance of service.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost or market determined using the
last-in, first-out (LIFO) method. At December 31, 1995 and 1994, inventories
would have been approximately $874,600 and $940,800, respectively, if the
first-in, first-out method had been used.
Plant and Equipment
Plant and equipment are stated based on historical cost adjusted for
accumulated depreciation. Depreciation and amortization of plant and equipment,
excluding vehicles and leasehold improvements, are determined using accelerated
methods. For vehicles and leasehold improvements, the straight-line method is
used. The estimated useful lives of the assets range between three and ten
years. Minor replacements, improvements, maintenance, and repairs are expensed
as incurred. Major replacements and improvements are capitalized and
depreciated over the remaining useful life of the related asset. Gains and
losses on sales and retirement of plant and equipment are credited or charged
to income.
<PAGE> 8
Notes to Consolidated Financial Statements (cont'd.)
Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of
The FASB issued a new standard, FAS No. 121, (C)Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed of,a which
provides guidance on when to recognize and how to measure impairment losses of
long-lived assets and certain identifiable intangibles and how to value
long-lived assets to be disposed of. The Company anticipates that the impact of
FAS No. 121, when adopted, will not be material. The Company is required to
adopt this new standard in 1996.
Income Taxes
As required by generally accepted accounting principles (GAAP) effective
January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, (C)Accounting for Income Taxesa (FAS No. 109), on a
prospective basis. The new standard requires an asset and liability approach
for financial accounting and reporting for income taxes. Under this approach,
deferred tax assets and liabilities are recognized for the tax consequences of
temporary differences between the financial reporting and tax basis of assets
and liabilities. (See Note 8.)
Concentration of Credit Risk
Most of the Company's business activity is with customers located in California
and Florida. As of December 31, 1995, unsecured trade accounts receivable from
customers in California and Florida were $811,100 and $796,300, respectively.
Warranties
In the normal course of business, the Company makes certain warranties as to
workmanship and materials. Product warranty periods range from two to ten years
for full coverage and up to an additional seven years of limited coverage. The
estimated future expense of these warranties is accrued at the time of sale.
The estimates inherent in accounting for such warranties are reviewed and
revisions to previous estimates are made as required to reflect the most
current information available.
Net Income Per Share
Net income per share is based on the sum of the weighted average number of
shares issued and outstanding during the years. (See Note 12.)
Accounting for Stock-Based Compensation
The FASB issued a new standard, FAS No. 123, (C)Accounting for Stock-Based
Compensation,a which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then
recognized over the service period. Alternatively, the standard permits
entities to continue accounting for employee stock options and similar equity
instruments under APB Opinion 25, (C)Accounting for Stock Issued to Employees.a
Entities that continue to account
<PAGE> 9
Notes to Consolidated Financial Statements (cont'd.)
for stock options using APB Opinion 25 are required to make pro forma
disclosures of net income and earnings per share, as if the fair value-based
method of accounting defined in FAS No. 123 had been adopted. The Company has
not determined which method it will follow in the future. The Company will be
required to adopt the new standard in its fiscal year 1996.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include highly
liquid investments with a maturity of three months or less.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Current Assets and Current Liabilities: The carrying value of cash equivalents,
accounts receivable, short-term borrowings, accounts payable, and accrued
expenses approximates fair value because of their short maturity.
Long-Term Debt: The fair value of the Company's long-term debt is estimated
based on the borrowing rates currently available to the Company for loans with
similar terms. At December 31, 1995, the carrying amount approximates estimated
fair value of long-term debt.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 1994
<S> <C> <C>
Raw materials $ 395,200 $ 464,000
Work in progress 118,500 211,300
Finished goods 203,500 167,900
</TABLE>
3. Plant and Equipment
Plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, 1995 1994
<S> <C> <C>
Machinery and equipment $ 1,754,500 $1,752,700
Office and computer equipment 370,500 322,800
Leasehold improvements 88,600 79,500
Vehicles 131,500 131,500
$ 2,345,100 $2,286,500
Less accumulated depreciation
and amortization (2,085,900) (1,907,200)
$ 259,200 $ 379,300
</TABLE>
<PAGE> 10
Notes to Consolidated Financial Statements (cont'd.)
4. Notes Receivable
During 1995, the Company converted $429,700 of accounts receivable from two
customers into notes receivable, one of which is secured by an interest in real
property. Both notes are being repaid in monthly installments through 1997.
5. Convertible Subordinated Notes
The notes outstanding at December 31, 1995 were due on March 27, 1996, bore
interest at 10% per annum payable quarterly, and were partially convertible
into Common Stock of the Company at any time at the option of the holder. The
notes were subordinated to any bank debt or other senior indebtedness (as
defined) of the Company. The Company could, at its option, call the notes for
redemption at any time. The conversion price is $0.50 per share and the maximum
aggregate number of shares issuable upon conversion of all of the notes is
270,000 shares.
In February 1996, the Company borrowed an additional $325,000 from certain of
the note holders, interest at 12%, in the form of bridge financing, through
March 27, 1996, $125,000 of which was from related parties (see Note 9). On
March 27, 1996, the Company exchanged the $600,000 of convertible subordinated
notes and the $325,000 of bridge notes for new notes, due March 27, 2000,
bearing interest at 11% per annum, payable quarterly, and warrants to purchase
Common Stock. The exercise price of the warrants is $0.125 per share, the
maximum aggregate number of shares issuable is 555,000, and the unexercised
warrants expire March 27, 2000.
6. Bank Line of Credit
The Company's bank line of credit, which is secured by substantially all assets
of the Company, was modified on June 5, 1995 to allow the Company to borrow the
lesser of $1,500,000 or an amount determined by a formula applied to net
accounts receivable, inventories, and net plant and equipment. Amounts borrowed
bear interest at the bank's prime rate plus 1/2%. The line of credit contains
certain covenants relating to working capital, current ratio, and tangible net
worth and expires on June 5, 1996. The line of credit was modified as to
certain covenants on August 7, 1995, September 22, 1995, and February 8, 1996,
and the interest rate was increased from the bank's prime rate plus 1/2% to the
bank's prime rate plus 1-1/2% on September 22, 1995 and to the bank's prime
rate plus 2-1/2% on February 8, 1996. The maximum borrowing under the line was
reduced to $1,000,000 on February 8, 1996. At December 31, 1995, the Company
has complied with or obtained waivers for compliance with the loan covenants.
<PAGE> 11
Notes to Consolidated Financial Statements (cont'd.)
As of December 31, 1995, the Company had utilized $751,300 of this facility. At
December 31, 1994, the Company had no borrowing under this line of credit.
7. Shareholders' Equity
The Board of Directors, without shareholder approval, may determine the rights,
preferences, privileges, and restrictions of the Company's unissued Preferred
Stock. Such shares may be issued in one or more series.
In 1980, the Company issued 202,300 shares of Common Stock at a price of $2.43
per share in exchange for non-interest bearing promissory notes, which have a
balance due of $75,100 at December 31, 1995 and 1994. The notes are due and
<PAGE> 12
Notes to Consolidated Financial Statements (cont'd.)
payable and the Company intends to pursue collection of these notes. In the
event that any of the notes are uncollectible, the Company will demand
surrender of the related shares issued and will cancel and write off the
related notes receivable balance.
In 1990, the Company issued 74,000 shares of common stock at $0.75 per share.
Payment for these shares was partially funded by full- recourse notes, which
had a balance due of $24,000 and $30,600 at December 31, 1993 and 1992,
respectively. During 1994, the Company canceled the balance of the shares that
remained unpaid and the related balance of the notes outstanding.
Under the Company's Employee Stock Purchase Plan, 150,000 shares of Common
Stock have been reserved for issuance at 85% of fair market value as of
specified dates. The Plan was suspended in 1991 and no shares were issued
thereunder since 1991.
The Company has a 1981 Incentive Stock Option Plan under which 310,000 shares
of Common Stock are reserved for issuance. During 1995, options to purchase
8,800 shares were exercised. During 1994, options to purchase 77,850 shares
were exercised. No options were exercised under the 1981 plan during 1993. The
plan expired by its terms in 1991.
In 1988, the Company's Board of Directors granted, and during 1988 the
shareholders approved, the grant of six-year warrants to purchase a total of
15,000 shares of Common Stock at $0.50 per share, the fair market value on the
date of grant, to outside directors. These warrants were exercised in January
1994.
The Company has a 1991 Incentive Stock Option Plan under which 250,000 shares
of Common Stock are reserved for issuance to employees and consultants.
During November 1994, the Board of Directors approved an increase in the number
of shares of Common Stock reserved for issuance to a total of 500,000 shares
subject to shareholder approval, which was obtained in April 1995. During 1993,
options were granted to purchase 214,000 shares exercisable at $0.50 per share,
the fair market value on the date of grant. No options were granted or
exercised under the 1991 plan during 1994. During 1995, options were granted to
purchase 124,000 shares exercisable at $0.56 per share, the fair market value
on the date of grant. During 1995, options to purchase 6,000 shares were
exercised.
The Company has a 1991 Director's Stock Option Plan under which 50,000 shares
of Common Stock are reserved for issuance. During 1991, options were granted to
purchase a total of 20,000 shares at $0.50 per share, the fair market value at
date of grant, to two outside directors. During 1993, options were granted to
purchase a total of 10,000 shares at $0.50 per share, the fair market value at
date of grant, to two outside directors. None of these options have been
exercised. No options were granted or exercised during 1994 or 1995.
Options granted under these plans vest at 20% per year for five years from date
of grant and expire six years from date of grant.
During 1994, the Company granted nonqualified options to purchase a total of
43,218 shares at $0.75 per share to a consultant and four employees and during
1995, the Company granted nonqualified options to purchase 20,000 shares at
$0.56 per share to a consultant. These options were fully vested at the date of
grant and expire six years from date of grant. None of these options have been
exercised. During 1995, options to purchase 234 shares were canceled.
<PAGE> 13
Notes to Consolidated Financial Statements (cont'd.)
<TABLE>
<S> <C> <C> <C>
Net income tax provision $ 1,600 $ 49,100 $ 116,700
</TABLE>
Effective January 1, 1993, as required by GAAP, the Company changed its method
of accounting for income taxes by adopting SFAS 109. The cumulative effect of
this change on years prior to 1993 increased net income by $717,400. The
cumulative effect, resulting primarily from the recognition of the tax effects
of state and federal net operating loss carryforwards and net deductible
temporary differences, totaled $1,434,800, which was offset by a valuation
allowance of $717,400. A reconciliation of the statutory federal income tax
rate with the effective tax rate reported in the financial statements follows:
<TABLE>
<CAPTION>
Years ended December 31 1995 1994 1993
<S> <C> <C> <C>
Statutory federal income
tax (benefit) rate (34.0%) 34.0% 34.0%
Effect on tax rate resulting
from: State and foreign
income taxes, net of federal
tax benefit (1.4%) 6.0% 8.9%
Tax effect of change in
valuation allowance 40.9% (49.4%)
Expiration of tax credits 0.7% 18.2%
Other (6.2%) (0.4%) 3.0%
Effective tax rate 0% 8.4% 45.9%
</TABLE>
The Company records its deferred taxes on a tax jurisdiction basis and, with
the adoption of FAS No. 109 in 1993, classifies those net amounts as current or
noncurrent based on the balance sheet classifications of the related assets or
liabilities.
<PAGE> 14
Notes to Consolidated Financial Statements (cont'd.)
Deferred tax assets are comprised of the following:
<TABLE>
<S> <C> <C>
December 31, 1995 1994
Allowance for doubtful accounts $ 197,000 $199,400
Accrued expenses 142,300 140,000
Loss carryforwards 1,360,500 625,000
Tax credits 178,600 193,600
Other 116,400 53,900
1,994,800 1,211,900
Deferred tax asset
valuation allowance (1,383,800) (600,900)
Total deferred taxes, net $ 611,000 $611,000
</TABLE>
The Company had unused federal net operating loss carryforwards of $3,669,700
and $1,769,200, and state loss carryforwards of $1,554,100 and $427,600, and
investment and other tax credits of approximately $178,600 and $193,600
vailable to offset future tax liabilities at December 31, 1995 and December 31,
1994, respectively. The net operating losses and credits expire in varying
amounts until 2010. The use of the tax credits has been limited by the
provisions of the Tax Reform Act of 1986 to reflect the benefit associated with
an overall reduction in the corporate tax rate. The Company believes that the
(C)total deferred taxes, neta in the amount of $611,000 is more likely than not
to be realized.
9. Transactions with Related Parties
The Company has a financing agreement with Freeman A. Ford, an officer,
director, and major shareholder of the Company, under which Mr. Ford has made a
$275,000 line of credit available to the Company. Borrowings under the line of
credit bear interest at Silicon Valley Bank's prime rate plus 4%. Pursuant to
the agreement, Mr. Ford was granted a warrant to purchase 45,000 shares of
Common stock for making the line available and a warrant to purchase up to
90,000 additional shares of Common Stock under a formula based on usage of the
line of credit. At December 31, 1995 and 1994, the Company had no borrowings
under this line of credit. The line of credit terminates and the outstanding
warrants expire on March 27, 1996.
In 1984, Freeman A. Ford and Janet V. Ford (Mr. Ford's mother) purchased
$100,000 and $50,000 of the Company's convertible subordinated notes,
respectively, from the Company. (See
<PAGE> 15
Notes to Consolidated Financial Statements (cont'd.)
Note 5.) In January 1994, Mr. Ford purchased $50,000 of the Company's
convertible subordinated notes from the estate of Janet Ford.
In January 1990, David Ford, Kimberly Ford, Tod Ford, and Erin Ford, the
children of Mr. Ford, purchased a total of $125,000 of the Company's
convertible subordinated notes from certain noteholders.
In January 1993, Mr. Ford purchased $100,000 of the Company's convertible
subordinated notes from another noteholder.
In March 1993, Alan G. Carlson, a principal and owner of one of the Company's
customers, purchased $50,000 of the Company's convertible subordinated notes
from another noteholder.
In February 1996, Mr. Ford loaned the Company an additional $100,000 and Diana
Ford (Mr. Ford's wife) loaned the Company $25,000 due in April 1996. On March
27, 1996, these notes were exchanged for subordinated notes due in March 2000
as part of the Company's refinancing of the outstanding convertible
subordinated notes. (See Note 5.)
10. Employee Benefit Plans
The Company has a 401(k) retirement savings plan for all eligible employees who
have completed one year of service. Eligible employees have the option to
contribute up to 18% of their eligible salary. The Company contributes an
amount equal to 25% of the employee contribution, up to a maximum of $200 per
employee.
11. Lease Commitments
The Company's rental expense, relating primarily to a lease for its office and
manufacturing facility, amounted to $359,400 in 1995, $340,000 in 1994, and
$313,300 in 1993.
At December 31, 1995, minimum annual lease commitments under operating leases
were as follows:
<TABLE>
<S> <C>
1996 $ 377,000
1997 389,800
1998 391,900
1999 405,400
2000 139,000
Thereafter 0
Total $ 1,703,100
</TABLE>
<PAGE> 16
Notes to Consolidated Financial Statements (cont'd.)
The Company is required to pay property taxes, utilities, and insurance under
certain of these leases, some of which provide for renewal options at the end
of the initial lease term in the year 2000.
<PAGE> 17
Notes to Consolidated Financial Statements (cont'd.)
2. Net Income Per Share
Primary earnings per share were calculated as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
<S> <C>
Net income (loss) $(1,918,300) $ 454,500 $ 854,900
Average common shares
outstanding 3,102,564 3,035,137 3,051,755
Add: Exercise of options
reduced by the number of
shares purchased with
proceeds N/A 262,892 163,431
Add: Exercise of warrants
reduced by the number of
shares purchased with
proceeds N/A 118,261 100,371
Adjusted weighted average
shares outstanding 3,102,564 3,416,290 3,315,557
Earnings (loss) per share $ (0.62) $ 0.13 $0.26
</TABLE>
Primary earnings per share are calculated by dividing net income (loss) by the
weighted average number of shares issued and outstanding and shares issuable
upon exercise of dilutive stock options and warrants during each year.
Fully diluted earnings per share were calculated as follows:
<PAGE> 18
Notes to Consolidated Financial Statements (cont'd.)
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
<S> <C>
Adjusted net income (loss) $(1,918,300) $ 454,500 $ 887,400
Average common
shares outstanding 3,102,564 3,035,137 3,051,755
Add: Exercise of options
reduced by the number
with proceeds N/A 262,892 291,517
Add: Exercise of warrants
reduced by the number
of shares purchased
with proceeds N/A 118,261 118,281
Add: Conversion of
convertible debt
into shares N/A N/A 270,000
Adjusted weighted
average shares
outstanding 3,102,564 3,416,290 3,731,553
Earnings (loss) per
common share assuming
full dilution $ (0.62) $ 0.13 $0.24
</TABLE>
<PAGE> 19
Fully diluted earnings per share are calculated by dividing net income (loss),
adjusted for the dilutive after-tax effect of the interest expense associated
with the convertible debt, by the sum of the weighted average number of shares
issued and outstanding and shares issuable upon exercise of dilutive stock
options and warrants, and upon conversion of convertible debt during each year.
For the years ended December 31, 1995 and 1994, primary earnings (loss) per
share is repeated as fully diluted earnings per share as the calculation of
fully diluted (loss) earnings per share was anti-dilutive.
13. Licensing Income
During 1993, the Company entered into two license agreements with third parties
in the Far East, under which the Company received and recognized license fee
income net of foreign income taxes of $159,000. The agreements allow for the
licensee to assemble and sell the IceStor? product in certain countries using
the Company's technology and design specifications. For the terms of the
agreements (three and eight years), the Company is required to provide parts
and technical services to the licensee at prices and rates equivalent to normal
list prices.
14. Litigation
The Company is involved in certain litigation matters. Management believes
resolution of these disputes will not have a material adverse effect on the
Company's financial condition and results of operations.
During the second quarter of 1994, the Company resolved a lawsuit and recorded
other income, net of related costs, of $66,000. During the fourth quarter of
1993, the Company resolved a lawsuit and recorded other expense, including
related costs, of $249,800.
<PAGE> 20
Report of Independent Accountants
To the Board of Directors and Shareholders of FAFCO, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity, and of cash flows
present fairly, in all material respects, the financial position of FAFCO, Inc.
and its subsidiary at December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 8 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective January 1, 1993.
PriceWaterhouse LLP
San Francisco, California
March 27, 1996
<PAGE> 21
Summary of Operations
Five-Year Summary of Operations (in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993 1992 1991*
<S> <C> <C> <C> <C> <C>
Net sales $ 7,876 $ 10,526 $ 9,352 $ 7,782 $ 8,062
Income (loss) before income taxes and
extraordinary item $ (1,917) $ 504 $ 254 $ 587 $ 190
Provision for income taxes 1 49 116 242 78
Income (loss) before extraordinary item (1,918) 445 138 345 112
Extraordinary item-tax benefit resulting
from net operating loss carryforward 174 62
Cumulative effect of change in method
of accounting for income taxes 717
Net income (loss) $ (1,918) $ 455 $ 855 $ 519 $ 174
Primary net income (loss) per share before
extraordinary item $ (0.62) $ 0.13 $ 0.04 $ 0.11 $ 0.04
Primary net income per share from
extraordinary item 0.06 0.02
Primary net income per share from cumulative
effect of change in method of
accounting for income taxes 0.22
Primary net income (loss) per share $ (0.62) $ 0.13 $ 0.26 $ 0.17 $ 0.06
Fully diluted net income (loss) per share
before extraordinary item $ (0.62) $ 0.13 $ 0.05 $ 0.11 $ 0.04
Fully diluted net income per share from
extraordinary item 0.06 0.02
Fully diluted net income per share from
cumulative effect of change in method
of accounting for income taxes 0.19
Fully diluted net income (loss) per share $ (0.62) $ 0.13 $ 0.24 $ 0.17 $ 0.06
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1995 1994 1993 1992 1991*
<S> <C> <C> <C> <C> <C>
Working capital $ 222 $ 2,371 $ 1,784 $ 1,624 $ 867
Total assets 3,400 4,903 4,373 3,577 3,032
Long-term obligations 680 725 751 928 917
Shareholders' equity 615 2,530 2,038 1,177 653
</TABLE>
*Reclassified for comparative purposes.
<PAGE> 22
Summary of Operations (cont'd.)
Common Stock Data
FAFCO, Inc. Common Stock is traded on the over-the-counter market but is not
listed on an exchange or quoted on any automated quotation system. The high and
low closing bid quotations for each quarter during 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1995
High $1.50 $1.50 $1.50 $0.75
Low $1.00 $1.00 $0.75 $0.25
1994
High $1.00 $2.00 $2.00 $1.50
Low $1.00 $1.00 $1.50 $1.50
</TABLE>
The quotations above were provided by the National Quotation Bureau. All
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions. At March 1,
1996, the Company had 722 shareholders of record. FAFCO, Inc. has never paid
dividends on its Common Stock and has no plans to do so in the foreseeable
future.
<PAGE> 23
Management's Discussion and Analysis
1995 Compared With 1994
Net sales for 1995 decreased by 25.2% from $10,526,000 in 1994 to $7,876,100 in
1995. This decrease was primarily due to decreased unit sales of the Company
IceStor? products along with decreased unit sales of the Company's pool panel
products. Net sales of the Company's pool products were 19.8% lower in 1995
than in 1994 due mainly to continued economic weakness in California and
Florida, the main markets for the Company's pool products. Net sales of the
Company's IceStor? products were 31.8% lower in 1995 than in 1994 due mainly to
potential customers' beliefs that lower energy prices in the domestic
marketplace will result from planned deregulation of energy prices. This
domestic decrease was partly offset by increased foreign sales of IceStor?
products.
Pool product sales amounted to 62% of net sales in 1995 compared to 57% of net
sales in 1994. Ice Stor? sales amounted to 38% of net sales in 1995 compared to
42% in 1994. There were no significant price changes in any of the Company's
products during 1995.
Cost of goods sold decreased from $6,542,900 in 1994 to $5,637,900 in 1995
while increasing as a percentage of net sales from 62.2% in 1994 to 71.6% in
1995. The increase as a percent of sales was due mainly to the fixed costs
being allocated over significantly lower sales along with employee severance
expenses associated with a 32% reduction in the work force.
Marketing and selling expense increased from $1,767,500 (16.8% of net sales) in
1994 to $2,137,200 (27.1% of net sales) in 1995. This increase was due mainly
to one-time expenses for market research projects during the second half of
1995 along with the addition of sales personnel and increased promotional
expenses for pool products during the first half of 1995.
General and administrative expenses increased from $1,257,100 (11.9% of net
sales) in 1994 to $1,502,000 (19.1% of net sales) in 1995. These increases were
primarily due to increased personnel costs during the first half of 1995 along
with severance expense and increased legal expenses.
Research and development expenses were relatively stable in absolute dollars at
$484,300 in 1994 compared with $460,100 in 1995 while increasing from 4.6% of
net sales in 1994 to 5.8% of net sales in 1995. The increase as a percent of
sales was due entirely to the decreased level of sales in 1995.
Net interest expense increased from $79,400 (0.8% of net sales) in 1994 to
$95,300 (1.2% of net sales) in 1995. This increase was due primarily to higher
than average daily borrowing in the second half of 1995 at higher interest
rates, partially offset by lower than average daily borrowing during the first
half of 1995 compared to 1994.
Other income (expense) net included $24,000 in refunds of prior years'
insurance premiums in 1995 compared with $38,400 in 1994. Other income
(expense) net in 1994 also included $66,000 of proceeds, net of related costs,
pertaining to a legal settlement resolved during 1994.
1994 Compared With 1993
Net sales for 1994 increased by 12.6% from $9,352,200 in 1993 to $10,526,000 in
1994. This
<PAGE> 24
Management's Discussion and Analysis (cont'd.)
increase was primarily due to increased unit sales of the Company's IceStor?
products and increased unit sales of the Company's AutoPool? swimming pool
solar heating control, which was introduced in May 1993. These increases were
partially offset by decreased unit sales of the Company's pool panel products
along with decreased unit sales of the Company's domestic hot water product
(444A), which was phased out in February 1994. Net sales of the Company's pool
panel product were 16.8% lower in 1994 than in 1993. Net sales of the Company's
IceStor? products were 38.1% higher in 1994 than in 1993 due mainly to
increased domestic sales from the successful sales effort of an expanded
manufacturer's representative group along with increased foreign sales. Pool
product sales amounted to 57% of net sales in 1994 compared to 63% in 1993.
Thermal energy storage sales amounted to 42% of net sales in 1994 compared to
34% in 1993. There were no significant price changes in any of the Company's
products during 1994.
Cost of goods sold increased from $5,563,800 in 1993 to $6,542,900 in 1994 and
increased as a percentage of net sales from 59.5% in 1993 to 62.2% in 1994.
These fluctuations were due primarily to shifts in product mix between higher
and lower margin products between 1993 and 1994. There were no significant
price increases in any of the Company's raw materials in 1994.
Marketing and selling expenses increased from $1,546,900 (16.5% of net sales)
in 1993 to $1,767,500 (16.8% of net sales) in 1994. These increases were due
primarily to the addition of personnel to facilitate the sales of IceStor?
products, along with increased promotional expenses for both IceStor? and pool
products.
General and administrative expenses decreased from $1,361,100 (14.6% of net
sales) in 1993 to $1,257,100 (11.9% of net sales) in 1994. These decreases were
due mainly to the Company's efforts to reduce costs as sales increased.
Research and development expenses were relatively stable in absolute dollars at
$479,400 (5.1% of net sales) in 1993 compared with $484,300 (4.6% of net sales)
in 1994. However, the Company expects R&D expenses to increase in the future
due to increased expenditures on development of new products.
Other income (expense) included $66,000 of proceeds (net of related costs) from
resolution of lawsuits during 1994. Refunds of prior year's insurance premiums
included in other income (expense) were $38,400 in 1994 compared with $7,900 in
1993.
The geographical distribution of the Company's sales changed from 1993 to 1994.
Oklahoma and foreign sales increased from 3% and 12% of net sales in 1993 to
10% and 15%, respectively, due to increased IceStor? sales in Oklahoma and
Pacific Rim Countries. Florida, California, and other states' sales decreased
from 44%, 25%, and 16% of net sales in 1993 to 38%, 24%, and 13%, respectively,
of net sales in 1994 due mainly to decreased IceStor? sales and pool panel
sales in Florida and the fact that net sales increased significantly from 1993
to 1994.
Seasonality
Historically, the Company has experienced lower sales during the first quarter
than during other quarters of each year. In addition, sales typically have
increased significantly during the second quarter, declined slightly, and then
remained relatively constant during the third and fourth
<PAGE> 25
Management's Discussion and Analysis (cont'd.)
quarters, respectively. The Company believes that this pattern derives
primarily from the sales of solar heating products. As the Company's product
mix shifts to include a larger proportion of other products, such as the
thermal energy storage product, the traditional seasonality is being mitigated.
Net income is affected by the seasonality of sales as well as by significant
marketing and selling expenses typically incurred during the first quarter of
each year. These expenses are incurred to develop programs and materials for
use throughout the remainder of the year.
In 1993, sales experienced the traditional seasonality except that differences
between quarters was not as great as in prior years due to increased sales of
the non-seasonal IceStor? products. As a result of strong IceStor? sales, the
traditional first quarter loss was not experienced.
In 1994, sales and net income experienced their traditional seasonality, except
that sales in the fourth quarter were increased due to sales of IceStor?
product. As a result of the ice storage sales, the traditional fourth quarter
loss was not experienced.
In 1995, sales experienced the traditional seasonality except that the decline
in sales in the third and fourth quarters was more pronounced than normal due
to weak sales in both pool products and IceStor? during the second half of the
year. There were net losses in all four quarters due to sales being below the
planned levels in all four quarters.
Liquidity and Capital Resources
The Company's cash position decreased from $338,000 at 1994 fiscal year end to
$126,200 at 1995 fiscal year end, principally due to the operating losses
partially offset by a decrease in accounts receivable, bank borrowing and a
decrease in inventories.
At December 31, 1995, the Registrant's net accounts receivable had decreased to
$1,149,600 from $2,551,200 at December 31, 1994, reflecting an improvement in
promptness of payments particularly from the Registrant's IceStor? customers,
the conversion of two customers' accounts receivable into notes receivable, one
of which is secured by real property, and lower sales levels in 1995.
At December 31, 1995, the Registrant's accounts payable and other accrued
expenses had decreased to $922,900 from $1,165,100 at December 31, 1994. This
decrease is primarily due to payments of expenses resulting from collection of
receivables noted above.
At December 31, 1995, the Company's inventories had decreased to $717,200 from
$843,200 at December 31, 1994 due mainly to an inventory reduction focus within
the Company and lower sales levels offset partially by the requirement to have
inventory on hand for strong January 1996 sales and for the new product that
began shipping in February 1996.
The Company adopted SFAS 109 effective January 1, 1993. This resulted in the
recognition of a deferred tax asset, net of valuation allowance, at year end of
$611,000 in 1995 and 1994. The Company believes that it is more likely than not
that this asset will be fully realized. This belief is based upon the Company's
recent history of profitable operations prior to 1995 and the Company's
expectation that this will resume and continue far enough into the future to
realize the net deferred
<PAGE> 26
Management's Discussion and Analysis (cont'd.)
tax asset. However, there can be no assurance that the Company will return to
profitability or, if it does, that profits will be sufficient to utilize the
net deferred tax asset.
At December 31, 1995, the Registrant's current ratio was 1.11 to 1 compared
with 2.43 to 1 at December 31, 1994, as working capital decreased over the same
period to $222,400 from $2,371,600. Total assets exceeded total liabilities by
$614,700 at December 31,1995 compared with $2,530,100 at December 31, 1994.
During the second half of 1995, the Company began and is continuing an
aggressive cost reduction campaign, including the reduction of personnel from
74 employees to 48 employees. The Registrant believes that as a result of the
cost-cutting measures, its cash flow from operations, together with bank
borrowings, will be sufficient to support operations during the next twelve
months. However, if sales remain slow or decline further from current levels,
additional debt or equity financing may be required. The Company believes that
the reduced rate of sales in IceStor?, which had an adverse impact on net
revenues during the quarters ended June 30, 1995, September 30, 1995, and
December 31, 1995, will not continue during 1996 and will, therefore, not have
a negative effect on results of operations for 1996. However, if sales of
IceStor? products do not recover, the Company's results of operations will be
materially adversely affected. The Registrant has a line of credit, of which
$751,300 had been utilized and $101,400 remained available under the formula
applied to net accounts receivable. This line of credit expires on June 5,
1996.
Corporate Directory and Information
Board of Directors
Freeman A. Ford
Chairman of the Board, President, and
Chief Executive Officer
FAFCO, Inc.
William A. Berry*
Senior Vice President and
Chief Financial Officer
Compression Labs, Inc.
a manufacturer of video
conferencing equipment
Robert W. Selig, Jr.*
President
<PAGE> 27
Davis Instruments Corporation
a manufacturer of marine and
weather equipment
* Member of the Audit Committee
Executive Officers
Freeman A. Ford
President and
Chief Executive Officer
Alex N. Watt
Vice President,
Finance and Administration,
Chief Financial Officer,
and Secretary
David K. Harris
Vice President
Pool Products
Mike Anderson
Vice President
<PAGE> 28
Commercial Products
<PAGE> 29
Transfer Agent and Registrar
Bank of Boston
c/o Boston EquiServe
P.O. Box 644-02102
MS 45-02-09
Boston, Massachusetts 02102-0644
Telephone: (617) 575-3400
Legal Counsel
Wilson, Sonsini, Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Independent Accountants
Price Waterhouse LLP
555 California Street
San Francisco, California 94104
FORM 10-K
A copy of the Company's Annual
Report on Form 10-K filed with the
Securities and Exchange Commission,
including financial statement schedules
but excluding exhibits, is available
without charge upon written request to:
<PAGE> 30
FAFCO, Inc.
2690 Middlefield Road
Redwood City,
California 94063-3455
Attention: Alex N. Watt
Annual Shareholders' Meeting
The Annual Shareholders'
Meeting will be held at 3:00 p.m.
on May 2, 1996 at FAFCO, Inc.,
2690 Middlefield Road,
Redwood City, California
Telephone: (415) 363-2690
<PAGE> 1
Exhibit 21.1
Subsidiaries of Registrant
__________________________
Jurisdiction of
Name Incorporation
___________________ ________________________
The Gregory Company California
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 126,200
<SECURITIES> 0
<RECEIVABLES> 2,016,400
<ALLOWANCES> 500,300
<INVENTORY> 717,200
<CURRENT-ASSETS> 2,327,700
<PP&E> 2,345,100
<DEPRECIATION> (2,085,900)
<TOTAL-ASSETS> 3,400,400
<CURRENT-LIABILITIES> 2,105,300
<BONDS> 680,400
0
0
<COMMON> 389,000
<OTHER-SE> 225,700
<TOTAL-LIABILITY-AND-EQUITY> 3,400,400
<SALES> 7,876,100
<TOTAL-REVENUES> 7,918,800
<CGS> 5,637,900
<TOTAL-COSTS> 5,637,900
<OTHER-EXPENSES> 463,200
<LOSS-PROVISION> 33,900
<INTEREST-EXPENSE> 96,300
<INCOME-PRETAX> (1,916,700)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (1,918,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,918,300)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
