UNITED STATES
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, 1996 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)
California 94-2159547
(State or other jurisdiction of (IRS Employer Idetification No.)
incorporation or organization)
2690 Middlefield Road, Redwood City, California 94063
(Address of principal executive offices) (Zip Code)
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
---- ----
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. [X]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of February 2, 1997 was $188,400 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
December 31, 1996, was 3,298,311.
Documents Incorporated by Reference
Document Description Form 10-K Part
Portions of Exhibit 13.1 the Company's 1996 Annual Report to Shareholders
(The Annual Report)...................................................I, II, IV
The Company's Definitive Proxy Statement (the Proxy Statement) for the 1997
Annual Meeting to be held on April 24, 1997 (the Proxy Statement is expected to
be filed pursuant to Regulation 14A on or before April 30, 1997)............ III
_____________________________
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.
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
58% of net sales in 1996 compared to 62% of net sales in 1995 and 57% of net
sales in 1994. Thermal energy storage sales amounted to 42% of net sales in
1996 compared to 38% of net sales in 1995 and 42% of net sales in 1994.
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 an electronic
control system for swimming pool solar heating systems (this product was
discontinued in December 1996).
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.
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 these ice banks primarily to the commercial air conditioning
market for use in off-peak air conditioning systems.
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 water back to the pool 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.
In May 1996, the Company introduced a new and improved version of its solar
collector that has a higher thermal performance due to its unique heat exchange
tube design. The tube design incorporates molded indentations which enhance
the heat transfer coefficient by increasing fluid turbulence.
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, four-by-twelve feet or four-by-twenty
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.
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. Because of lack of demand for the Company's AutoPool control,
this product was discontinued effective January 1, 1997. The Company has
ongoing obligations to service and provide spare parts for AutoPool controls
sold prior to that time.
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 energy 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. 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.
To date, 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
usually 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 IceStor products 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, Japan, and the People's Republic
of China. These licensing agreements provide for licensees' assembly and
sale of IceStor products in those countries.
Sales by Geographic Area
The Company's net sales during 1996, 1995, and 1994 were geographically
distributed approximately as follows:
<TABLE>
<S> <C> <C> <C>
State 1996 1995 1994
California 17% 21% 24%
Florida 34% 37% 38%
Oklahoma 0% 7% 10%
Other States 35% 20% 13%
Foreign Countries 14% 15% 15%
- -------------------------------------
100% 100% 100%
</TABLE>
Three of the Company's customers, Kailay International, Ebara Corporation, and
Florida Solar, accounted for 13.8%, 11.9%, and 11.8% of the Company's fiscal
1996 net sales. Kailay International also accounted for 10.0% of the Company's
fiscal 1995 net sales. During 1995 and 1996, Kailay International and Ebara
Corporation were the licensees for the Company's IceStor products in Taiwan and
Japan, respectively, and as such, purchased IceStor products and components for
assembly into products for resale to end users in Taiwan and Japan respectively.
During 1996, Florida Solar was a distributor of this Company's pool products
and, as such, purchased pool panels and components for resale to end users in
Florida. No other customer accounted for 10% or more of the Company's net
sales in fiscal 1994, 1995, or 1996. A material reproduction in orders from
or the loss of one of the Company's major customers without an ability to
replace such lost sales would have a material adverse effect on the Company's
operating results and financial condition.
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, to date, 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, 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.
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
inprocess, 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 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. 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 which may adversely affect the Company's ability to compete in
this area.
Research and Development
For the years ended December 31, 1996, 1995, and 1994, the Company's research
and development expenses were $116,000, $460,100, and $484,300, respectively.
The majority of the research and development costs incurred in 1996 related
to an improved solar heating product for in-ground pools, which was 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. In
addition, the Company has two patent applications pending. 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 attempt to establish and preserve its right to
those product names and marks.
The Company has granted licenses to assemble and sell IceStor in Taiwan,
Korea, Japan, and the People's Republic of China to a Taiwanese company, a
Korean company, a Japanese company, and a People's Republic of China company,
respectively. See "Marketing and Sales" above.
Employees
At December 31, 1996, the Company had a total of fifty-three (53) full-time
and two (2) part-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.
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.
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 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. A lease expiring in the year 2000 covers this facility.
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 believes that its current facilities are adequate to meet its
requirements for space in the foreseeable future. Manufacturing space is
being fully utilized at the present time. However, additional demand can be
accommodated by adding second and third employee shifts.
Item 3. Legal Proceedings
There are presently no pending material legal proceedings to which the
Company is a party or to which any of its property is subject, except for
routine legal proceedings incidental to the Company's business.
The Company has received correspondence from The Coca-Cola Company claiming
that the Company's use of a polar bear design in its advertising materials
infringes upon Coca-Cola copyrights in a television commercial and
Coca-Cola's alleged unregistered polar bear design trademark for merchandise.
The Company believes that The Coca-Cola Company's allegations are unfounded,
but it is continuing to investigate and assess the matter.
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, 1996.
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 56, 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 55, 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 41, 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 51, 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.
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'sCommon
Stock, the number of shareholders of record, and information regarding
dividends is set forth under the heading "Common Stock Data" on page 17 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 17 and in the last sentence of the
text under the table entitled "Common Stock Data" on page 18 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 19 through 21 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
5 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
On December 11, 1996, FAFCO, Inc. dismissed Price Waterhouse LLP as its
independent accounts.
The reports of Price Waterhouse LLP on the financial statements for the past
two fiscal years contain no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles.
The Registrant's Audit Committee and Board of Directors participated in and
approved the decision to change independent accountants.
In connection with its audits for the two most recent fiscal years and
through December 11, 1996, there have been no disagreements with Price
Waterhouse LLP on any matter of accounting principles or practices, financial
statements disclosure, or auditing scope or procedure, which disagreements if
not resolved to the satisfaction of Price Waterhouse LLP would have caused
them to make reference thereto in their report on the financial statements
for such years.
During the two most recent fiscal years and through December 11, 1996, there
have been no reportable events as defined in Regulation S-K item 304 (a) (1)
(v).
The Registrant requested that Price Waterhouse LLP furnish it with a letter
addressed to the SEC stating whether or not it agrees with the above
statements. A copy of such letter, dated December 11, 1996, was filed as
Exhibit 16.1 of that Form 8-K.
New independent accountants.
The Registrant engaged Burr, Pilger & Mayer as its new independent accountants
as of December 11, 1996.
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.
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" 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, 1996 and
1995, the Consolidated Statement of Operations, of shareholders' equity, and
of cash flows for each of the three years in the period ended December 31,
1996, and the notes thereto appear on pages 5 through 15 of Exhibit 13.1 to
this Annual Report on Form 10-K.
2. Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedule (see page
16 of this Annual Report on Form 10-K).
The following schedule for the years ended December 31, 1996, 1995, and 1994
is included in this report. Such schedule should be read in conjunction with
the consolidated financial statements in the Annual Report.
Schedule II - 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.
Exhibit No. Description (footnotes appear at the end of the exhibit list)
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<S> <C>
3.1(1) Articles of Incorporation, as amended.
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.
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 Director's 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, 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)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated June 5, 1995.
10.19(c)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated August 7, 1995.
10.19(d)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated September 22, 1995.
10.19(e)(12) Loan Modification Agreement between Registrant, as Borrower,
and Silicon Valley Bank, as Lender, dated February 8, 1996.
10.19(f) Loan Modification Agreement between Registrant, as Borrower,
and Silicon Valley Bank, as Lender, dated October 30, 1996.
10.19(g) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated December 11, 1996.
10.19(h) Loan Modification Agreement between Registrant, as Borrower,
and Silicon Valley Bank, as Lender, dated January 6, 1997.
10.19(i) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated January 21, 1997.
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 page 15 of the 1995
Annual Report).
13.1 Registrant's 1996 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.
<TABLE>
<S> <C>
(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.
(12) Incorporated by reference to exhibits filed with Registrant's Annual
Report on form 10-K for the fiscal year ended December 31, 1995.
</TABLE>
<TABLE>
<S> <C>
(a) Reports on Form 8-K: A Report on Form 8-K dated December 13, 1996, was
filed on December 13, 1996 under Item 4, reporting a change in the
Registrant's certifying accountant.
(b) Exhibits: See subsection (a) (3) above.
(c) Financial Statement Schedules: See subsection (a) (2) above.
</TABLE>
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 4, 1997 appearing on page 16 of the 1996 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.
Burr, Pilger & Mayer
Palo Alto, California
March 28, 1997
FAFCO, Inc.
Schedule
II
Valuation and Qualifying Accounts and Reserves
<TABLE>
<S> <C> <C> <C> <C>
Balance at Additions Charged Deductions Balance at
Beginning of to Costs and End of
Period Expenses Period
1996:
Allowance for
doubtful accounts
current accounts
receivable $463,900 $50,400 $1,700(1) $512,600
short-term receivable 28,800 28,800
long-term receivable 39,100 5,100(4) 34,000
Warranty reserve 216,000 94,100 76,000(2) 234,100
Deferred tax asset
valuation allowance 1,383,800 192,000 1,191,800
1995:
Allowance for
doubtful accounts $5,700(1)
current
accounts receivable $469,100 $39,600 39,100(3) $463,900
long-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
</TABLE>
(1) Write-offs of uncollectible accounts.
(2) Cost of warranty claims processed.
(3) Reclassification to allowance for long-term notes receivable.
(4) Reclassification to allowance for short-term notes receivable.
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 28, 1997 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.
Signature Title Date
- -----------------------------------------------------------------------------
Chairman of the Board, March 28, 1997
President, and --------------
/s/Freeman A. Ford Chief Executive Officer
- ------------------ (Principal Executive Officer),
Freeman A. Ford and Director
Vice President, Finance & March 28, 1997
Administration March 28, 1997 --------------
/s/Alex N. Watt and Chief Financial Officer
- ------------------ (Principal Financial and
Alex N. Watt Accounting Officer)
/s/William A. Berry Director March 28, 1997
- ------------------- --------------
William A. Berry
/s/Robert W. Selig, Jr. Director March 28, 1997
- ----------------------- --------------
Robert W. Selig, Jr.
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 4, 1997, appearing on page 15 of the
1996 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.
Burr, Pilger & Mayer
Palo Alto, California
March 4, 1997
Index to Exhibits
<TABLE>
<S> <C> <S>
Exhibit No. Description Subsequently Numbered Pages
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) Form of Director's Warrant issued February 1988 to directors Berry
and Selig.
10.14(11) 1991 Stock Option Plan, as amended. Page 2110.14(a)(8) Form of
Stock Option Agreement used under the 1991 Stock Option Plan. Page 21
10.15(8) 1991 Director's 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, 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)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank as Lender, dated June 5, 1995.
10.19(c)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated August 7, 1995.
10.19(d)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated September 22, 1995.
10.19(e)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated February 8, 1996.
10.19(f) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated October 30, 1996.
10.19(g) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender dated, December 11, 1996.
10.19(h) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated January 6, 1997.
10.19(i) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated January 21, 1997.
10.20 Agency/Distributorship Agreement between Registrant, as Borrower,
and Silicon Valley Bank, as Lender, dated December 10, 1994. Page 34
11.1 Computation of Earnings Per Share (see Note 12 of Notes to
Consolidated Financial Statements on page 15 of the Annual Report).
13.1 Registrant's 1996 Annual Report to Shareholders. Page 44
21.1 Subsidiaries of Registrant. Page 67
23.1 Consent of Independent Accounts (see page 20).
24.1 Power of Attorney (see page 19).
</TABLE>
EXHIBIT 10.19 (f)
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of October 30, 1996, by
and between Fafco, Inc. ("Borrower') whose address is 2690 Middlefield Road,
Redwood City, CA 94063, and Silicon Valley Bank ("Bank") whose address is
3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among
other documents, an Amended and Restated Loan and Security Agreement, dated
June 5, 1996, as may be amended from time to time, (the "Loan Agreement'). The
Loan Agreement provided for, among other things, a Committed Line in the
original principal amount of One Million and 00/100 Dollars ($1,000,000.00)
(the "Revolving Facility"). Defined terms used but not otherwise defined herein
shall have the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness
is secured by the Collateral as described in the Loan Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness 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 Loan Agreement.
1. Notwithstanding anything to the contrary contained in the paragraph entitled
"Eligible Foreign Accounts", accounts from Kailay International shall be
considered eligible for the sixty (60) day period beginning as of October 18,
1996 through December 18, 1996.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any
amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness, Bank
is relying upon Borrowers 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.
Bank's agreement to modifications to the existing Indebtedness pursuant to this
Loan Modification Agreement in no way shall obligate Bank 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
Bank and Borrower to retain as liable parties all makers and endorsers of
Existing Loan Documents, unless the party is expressly released by Bank 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.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
FAFCO, INC. SILICON VALLEY BANK
By:/s/Alex N. Watt By:/s/Julie Schneider
- ------------------------------------- -------------------------------
Title: V.P. Finance & Administration Title: Assistant Vice President
EXHIBIT 10.19 (g)
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of December 11, 1996, by
and between Fafco, Inc. ("Borrower') whose address is 2690 Middlefield Road,
Redwood City, CA 94063, and Silicon Valley Bank ("Bank") whose address is
3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among
other documents, an Amended and Restated Loan and Security Agreement, dated
June 5, 1996, as may be amended from time to time, (the "Loan Agreement'). The
Loan Agreement provided for, among other things, a Committed Line in the
original principal amount of One Million and 00/100 Dollars ($1,000,000.00)
(the "Revolving Facility"). Defined terms used but not otherwise defined
herein shall have the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness
is secured by the Collateral as described in the Loan Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness 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 Loan Agreement.
1. Notwithstanding anything to the contrary contained in the paragraphs
entitled "Eligible Accounts", accounts from Kailay International or Fafco Asia
Pacific Corporation (FAPCO) shall be considered eligible to a maximum aggregate
total accounts receivable of $410,000.00, subject to all other standard
eligibility requirements as defined in the paragraph entitled "Eligible
Accounts", for the ninety (90) day period beginning as of November 26, 1995
through February 25, 1997.
2. The term "Borrowing Base", as defined in Section 2.1 entitled "Advances"
shall mean an amount equal to (i) eighty percent (80%) of Eligible Accounts
beginning as of November 25, 1997, and (ii) seventy five percent (75%) of
Eligible Accounts thereafter.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any amounts
under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness, Bank
is relying upon Borrowers 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.
Bank's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Bank 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 Bank and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released
by Bank 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.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
FAFCO, INC. SILICON VALLEY BANK
By:/s/Alex N. Watt By: /s/Julie Schneider
- ------------------------------------- --------------------------------
Title: V.P. Finance & Administration Title: Assistant Vice President
EXHIBIT 10.19 (h)
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of January 6, 1997, by and
between Fafco, Inc. ("Borrower') whose address is 2690 Middlefield Road,
Redwood City, CA 94063, and Silicon Valley Bank ("Bank") whose address is 3003
Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other
documents, an Amended and Restated Loan and Security Agreement, dated June 5,
1996, as may be amended from time to time, (the "Loan Agreement'). The Loan
Agreement provided for, among other things, a Committed Line in the original
principal amount of One Million and 00/100 Dollars ($1,000,000.00) (the
"Revolving Facility"). Defined terms used but not otherwise defined herein
shall have the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by the Collateral as described in the Loan Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness 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 Loan Agreement.
1 . Section 2.3(a) entitled "Interest Rate" is hereby amended, as of October 30,
1996, in its entirety, to read as follows:
Except as set forth in Section 2.3(b), any Advances shall bear interest, on the
average Daily Balance, at a rate equal to two (2.00) percentage points above the
Prime Rate.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any
amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness, Bank
is relying upon Borrowers 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. Bank's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Bank 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 Bank and Borrower to
retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Bank 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.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
FAFCO, INC. SILICON VALLEY BANK
By:/s/Alex N. Watt By:/s/Julie Schneider
- ------------------------------------- --------------------------------
Title: V.P. Finance & Administration Title: Assistant Vice President
EXHIBIT 10.19 (i)
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of January 21, 1997, by
and between Fafco, Inc. ("Borrower') whose address is 2690 Middlefield Road,
Redwood City, CA 94063, and Silicon Valley Bank ("Bank") whose address is 3003
Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other
documents, an Amended and Restated Loan and Security Agreement, dated June 5,
1996, as may be amended from time to time, (the "Loan Agreement'). The Loan
Agreement provided for, among other things, a Committed Line in the original
principal amount of One Million and 00/100 Dollars ($1,000,000.00) (the
"Revolving Facility"). Defined terms used but not otherwise defined herein
shall have the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by the Collateral as described in the Loan Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness 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 Loan Agreement.
1. The defined term "Committed Line is hereby amended in its entirety to read
as follows:
The principal amount of the Revolving Facility is One Million and 00/100
Dollars ($1,000,000.00). Notwithstanding the foregoing, the principal amount
shall be increased by One Hundred Thousand and 00/100 Dollars (the "Temporary
Increase Amount") until February 25, 1997. Accordingly, Borrower shall repay
to Bank all of the Temporary Increase Amount borrowed on February 25, 1997,
whereupon the maximum principal amount shall return to One Million and 00/100
Dollars ($1,000,000.00).
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any
amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing Indebtedness, Bank is
relying upon Borrowers 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. Bank's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Bank 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 Bank and Borrower
to retain as liable parties all makers and endorsers of Existing Loan
Documents, unless the party is expressly released by Bank 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.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
FAFCO, INC. SILICON VALLEY BANK
By:/s/Alex N. Watt By:/s/Julie Schneider
- ------------------------------------- --------------------------------
Title: V.P. Finance & Administration Title: Assistant Vice President
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 also licenses its IceStor products
overseas.
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 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 "off-peak" power. The
cooling energy stored in the ice is then reclaimed the next day during "peak
periods" 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.
Dear Fellow Shareholders:
In 1995, FAFCO interrupted seven years of continuous profitability with a loss
of $1,918,300 on net sales of $7,876,100. In 1996, strong growth in solar and
foreign IceStor sales combined with a substantial overhead reduction to yield a
profit of $386,800 on sales of $8,868,600. In 1997, solar and IceStor sales are
expected to grow. At the same time, our fixed overhead has been reduced to
approximately the same level as 1993. Consequently, we are hopeful that FAFCO's
profitability will continue in 1997.
Our belief is based on two simple premises. Foreign sales of our IceStor
products are expected to continue in 1997. Similarly, our newly introduced
Revolution and above ground solar pool heating products will allow us to grow
our solar business.
Foreign sales of our IceStor thermal energy storage products grew rapidly in
1996. Our IceStor products make use of our core competency in polymer heat
exchangers. This product line mitigates electrical shortages by making
efficient use of existing electrical generating capacity. Foreign sales are
expected to continue to grow in 1997 for four reasons:
- - We have focused on Asia where a warm climate, rapid growth in new
construction and limited electricity reserves create an ideal market for
thermal energy storage. The FAFCO IceStor product line allows electric
utilities to make better use of their resources.
- - Our technology lends itself to low-cost distribution through less expensive
sea container shipment combined with local assembly based on proprietary
manufacturing technology.
- - Our belief is that certain markets such as Japan and the People's Republic
of China are beginning to grow rapidly.
- - We are taking initiatives in other foreign countries, which show promise of
substantial future growth.
- - Solar sales are expected to grow in 1997 for three reasons:
- - Our Revolution solar product was introduced in mid 1996. As the name implies,
it is the most significant product improvement made by FAFCO since 1976. Our
customers are responding. We have applied for patent protection on this new
technology.
- - Our above ground pool system was introduced in 1996 and sales of this
product are expected to grow in 1997. We have applied for patent protection
for this technology as well.
- - In 1996, we successfully targeted the solar pool heating market outside of
California and Florida. We hope our success will continue in 1997.
Deregulation in the utilities industry made 1996 a disappointing year for our
domestic IceStor sales. In 1996, FAFCO management developed and implemented an
aggressive strategy to increase domestic sales. We hope to see positive results
from this strategy in 1997.
We believe that our best chance for success lies in focusing on our core
competency. In an effort to improve our business portfolio, we are no longer
producing electronic controls. Looking forward, our technical resources will
focus on supporting solar, thermal energy storage and other heat exchanger
applications that use FAFCO's core competence in manufacturing polymer heat
exchangers.
In 1996, we saw our 1995 investments in solar and IceStor begin to pay off. As
we move into 1997, we are leaner, more efficient and, frankly, a better
company. Low operating expenses combined with sales growth will allow us to
make the most of our investments and the significant opportunities we have
identified for FAFCO in 1997.
Finally, the financial turnaround in 1996 and the continuing momentum we are
seeing in 1997 would not have been possible without the dedication to
efficiency and loyalty of each of our employees. My thanks go out to each of
you.
Sincerely,
Freeman A. Ford
President
Consolidated Balance Sheet
<TABLE>
<S> <C> <C>
December 31, 1996 1995
Assets
Current assets:
Cash and cash equivalents $ 88,200 $126,200
Accounts receivable, less allowance for doubtful
accounts of $512,600 in 1996 and $463,900 in 1995 1,890,700 1,149,600
Current portion of long-term notes receivable (net) 229,100 64,000
Inventories 835,400 717,200
Prepaid expenses and other current assets 150,800 145,500
Other accounts receivable, net of allowance 4,500
Deferred tax asset, net of allowance 221,500 125,200
Total current assets 3,420,200 2,327,700
Plant and equipment, at cost 2,465,800 2,345,100
Less accumulated depreciation and amortization (2,116,200) (2,085,900)
349,600 259,200
Notes receivable and other assets (net) 65,500 327,700
Deferred tax asset, net of allowance 427,900 485,800
Total assets $4,263,200 $ 3,400,400
Liabilities and shareholders' equity
Current liabilities:
Bank line of credit $758,600 $751,300
Accounts payable and other accrued expenses 1,037,800 949,100
Accrued compensation and benefits 187,000 188,900
Accrued warranty expense 234,100 216,000
Total current liabilities 2,217,500 2,105,300
Convertible subordinated notes ($600,000 and
$425,000 were owed to related parties in 1996
and 1995, respectively) 925,000 600,000
Other non-current liabilities 26,400 80,400
Total liabilities $3,168,900 $ 2,785,700
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; 3,298,311 issued and
outstanding in 1996 and 3,112,687 issued
and outstanding in 1995 412,200 389,000
Capital in excess of par value 5,105,200 5,035,600
Notes receivable secured by Common Stock (75,100) (75,100)
Accumulated deficit (4,348,000) (4,734,800)
Total shareholders, equity $1,094,300 $ 614,700
Commitments and contingent liabilities
Total liabilities and shareholders' equity $4,263,200 $ 3,400,400
</TABLE>
The accompanying notes are an integral part of this statement.
<TABLE>
<S> <C> <C> <C>
Year ended December 31, 1996 1995 1994
Net sales $8,868,600 $7,876,100 $10,526,000
Other income (net) 54,000 39,700 108,800
Total revenues 8,922,600 7,915,800 10,634,800
Cost of goods sold 5,424,900 5,637,900 6,542,900
Marketing and selling expense 1,575,400 2,137,200 1,767,500
General and administrative expense 1,286,300 1,502,000 1,257,100
Research and development expense 116,000 460,100 484,300
Net interest expense 169,900 95,300 79,400
Total costs and expenses 8,572,500 9,832,500 10,131,200
Income (loss) before income taxes 350,100 (1,916,700) 503,600
Provision for (benefit from) income taxes (36,700) 1,600 49,100
Net income (loss) $386,800 $(1,918,300) $454,500
Primary net income (loss) per share $0.12 $(0.62) $0.13
Fully diluted net income (loss) per share $0.12 $(0.62) $0.13
</TABLE>
The accompanying notes are an integral part of this statement.
<TABLE>
<CAPTION> Number of Common Capital in Notes Retained
Shares Stock Excess of Receivable Earnings
Par Value Secured by
Common Stock
<S> <C> <C> <C> <C> <C>
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 of
other 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)
Net income for the year 386,800
Issuance of shares
pursuant to exercise of
subordinated note
conversion option 185,624 23,200 69,600
Balance at December 31,
1996 3,298,311 $412,200 $5,105,200 $(75,100) $(4,348,000)
</TABLE>
The accompanying notes are an integral part of this statement.
<TABLE>
<S> <C> <C> <C>
Year Ended December 31, 1996 1995 1994
Cash flow from Operating activities:
Net income (loss) $386,800 $(1,918,300) $454,500
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation 121,200 178,700 169,400
Allowance for doubtful accounts 48,700 33,900 51,700
Provision for inventory reserve 42,400 105,800 (800)
(Gain) loss on disposition of fixed
assets (18,700) 22,700
Change in assets and liabilities:
Change in receivables (794,300) 1,367,800 (372,400)
Change in inventories (160,600) 20,200 (86,200)
Change in prepaid expenses (5,300) (28,600) 55,900
Change in deferred tax assets (38,400)
CHange in other assets 97,100 (333,000) 9,90O
Change in payables and accrued
expenses 104,900 (288,900) 63,800
Change in other non-current
liabilities (54,000) (27,800) (6,300)
Net cash (used in) provided by
operations (270,200) (867,500) 340,200
Cash flow from investing activities:
Purchase of fixed assets (211,600) (81,300) (104,900)
Proceeds from sale of fixed assets 18,700
Net cash used in investing
activities (192,900) (81,300) (104,900)
Cash flow from financing activities:
Proceeds of subordinated debt
issuance 325,000
Proceeds from sale of common stock 92,800 7,400 46,000
Payments on line of credit (1,350,000) (490,000)
Borrowings on line of credit 1,357,300 1,241,300
Miscellaneous borrowings (21,700) (19,300)
Net cash provided by (used in)
financing activities 425,100 737,000 26,700
Net (decrease) increase in cash
and cash equivalents (38,000) (211,800) 262,000
Cash and cash equivalents,
beginning of year 126,200 338,000 76,000
Cash and cash equivalents, end
of year $88,200 $126,200 $338,000
Supplemental disclosures of
cash flow information:
Cash paid during the year for
interest $159,339 $89,800 $83,400
Net cash paid during the year
for income taxes $7,500 $49,000
</TABLE>
The accompanying notes are an integral part of this statement.
NOTE 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. Three of the Company's customers each accounted for more
than 10% of the Company's fiscal 1996 net sales. 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.
During 1996, the Company had sales to unaffiliated customers in foreign
countries amounting to 14% of total net sales. During 1995 and 1994, such sales
amounted to 15% 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 materially from those estimates.
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.
Inventories: Inventories are stated at the lower of cost or market determined
using the last-in, first-out (LIFO) method. At December 31, 1996 and 1995,
inventories would have been approximately $917,400 and $874,600, 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.
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed of: As required by generally accepted accounting principles
(GAAP), effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of." The new standard 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 new standard had no material effect on the
Consolidated Balance Sheets for 1996 and 1995 nor the Consolidated Statements
of Operations for 1996, 1995 or 1994.
Income Taxes: As required by generally accepted accounting principles (GAAP)
effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (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, Florida and foreign countries. As of December
31,1996, unsecured trade accounts receivable from customers in California,
Florida and foreign countries were $513,900, $824,400, and $789,300.
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. 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 year (see Note 12).
Accounting for Stock-Based Compensation: The FASB issued a new standard, FAS
No. 123, "Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stockbased 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,
"Accounting for Stock Issued to Employees." Entities that continue to account
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
decided to continue accounting for employee stock options and similar equity
instruments under APB Opinion 25, "Accounting for Stock Issued to Employees."
(see Note 7.)
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, l; notes receivable, short-term borrowings, accounts
payable, and accrued expenses approximate 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, 1996, the carrying amount approximates estimated
fair value of longterm debt.
2. Inventories
Inventories consist of the following:
<TABLE>
<C> <C> <C>
December 31, 1996 1995
Raw materials $370,500 $395,200
Work in progres s 100,800 118,500
Finished goods 364,100 203,500
$835,400 $717,200
</TABLE>
3. Plant and Equipment
Plant and equipment consists of the following:
<TABLE>
<C> <C> <C>
December31, 1996 1995
Machinery and equipment $1,902,800 $1,754,500
Office and computer equipment 372,000 370,500
Leasehold improvements 88,600 88,600
Vehicles 101,800 131,500
$2,465,800 $2,345,100
Less accumulated depreciation
and amortization (2,116,200) (2,085,900)
$349,600 $259,200
</TABLE>
Notes Receivable
During 1996, the Company converted $4,700 of accounts receivable from a
customer into a note receivable. During 1995, the Company converted $429,700 of
ccounts receivable from two customers into notes receivable, one of which is
secured by an interest in real property. All of the notes are being repaid in
monthly installments.
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 was $0.50 per share and the
maximum aggregate number of shares issuable upon conversion of all of the notes
was 270,000 shares.
In February 1996, the Company borrowed an additional $325,000 from certain of
the noteholders,with 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, four of the Noteholders exercised the conversion option and
acquired a total of 185,624 shares of FAFCO Common Stock of which 140,624 were
acquired by related parties. 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 has a bank line of credit secured by substantially all the assets
of the Company. The line of credit allows the Company to borrow the lesser of
$1,000,000 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 2%. The line of credit contains certain
covenants relating to working capital, current ratio, and tangible net worth,
prohibits the payment of cash dividends and expires on June 6, 1997. At
December 31, 1996 and 1995, the Company had complied with or obtained waivers
for compliance with the loan covenants.
As of December 31, 1996 and 1995, the Company had utilized $758,600 and
$751,300, respectively, of this facility.
During March 1997, the line of credit was extended through March 31, 1998.
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, 1996 and 1995. The notes are due and
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.
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 1991 Incentive Stock Option Plan under which 250,000 shares
of Common Stock were 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 execised
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.
During 1996, options were granted to purchase 236,950 shares exercisable at
$0.125 per share, the fair market value on the date of grant.
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, 1995, or 1996.
Options granted under these plans vest at 20% per year for five years from date
of grant and expire six years or ten 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.
A summary of activity under the 1981 and 1991 Incentive Stock Option Plans
follows:
<TABLE>
<S> <C> <C>
Shares Subject to Option Exercise Price Per Share
Outstanding at December 31, 1993 417,900 $0.50-0.625
Granted 0
Canceled (7,500) $0.500
Exercised (77,850) $0.500
Outstanding at December 31, 1994 332,550 $0.50-0.625
Granted 124,000 $0.50
Canceled (166,300) $0.50-0.560
Exercised (14,800) $0.500
Outstanding at December 31, 1995 275,450 $0.50-0.625
Granted 236,950 $0.125
Canceled (126,650) $0.50-0.560
Exercised 0
Outstanding at December 31, 1996
385,450 $0.125-0.625
</TABLE>
The Company applies APB Opinion 25 in accounting for its stock option plans.
Accordingly, no compensation cost has been recognized for the plan in 1995 or
1996. Had compensation cost been determined on the basis of fair value pursuant
to FASB Statement No. 123, net income and earnings per share would have been
reduced as follows:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Net income (loss) As reported $386,800 $(1,918,300) $454,500
Pro forma $367,100 $(1,919,500) $453,700
Primary earnings (loss) per
share As reported $0.12 $(0.62) $0.13
Fully diluted earnings (loss)
per share as reported $0.12 $(0.62) $0.13
Pro forma $0.11 $(0.62) $0.13
</TABLE>
The fair value of each option granted was estimated on the grant date using the
Black-Scholes model. The following assumptions were made in estimating fair
value:
<TABLE>
<CAPTION>
Assumption
<S> <C>
Dividend yield 0%
Risk-free interest rate 6.50%
Expected life 6 years
Expected volatility 96.74%
</TABLE>
Following is a summary of the status of the plans during 1996, 1995, and 1994.
<TABLE> Weighted
<CAPTION> Number Average
of Exercise
Shares Price
<S> <C> <C> <C>
Outstanding at January 1, 1996 275,450 $0.488
Granted 236,950 0.125
Exercised 0 0
Forfeited (126,950) 0.502
Outstanding at December 31, 1996 385,450 0.258
Options exercisable at December
31, 1996 199,650 0.297
Weighted average fair value of
options granted during 1996 $.0101
</TABLE>
Weighted
<TABLE> Number Average
<CAPTION> of Exercise
Shares Price
<S> <C> <C> <C>
Outstanding at January 1,1995 332,550 $0.5020
Granted 124,000 0.5100
Exercised (14,800) 0.5000
Forfeited (166,300) 0.0536
Outstanding at December31, 1995 275,450 0.4850
Options exercisable at
December 31, 1995 163,750 0.5030
Weighted average fair value of
options granted during 1995 $0.41
</TABLE>
The range of exercise prices for the options outstanding at December 31, 1996
is $0.125-$0.625 with a weighted average contractual life of 5 years. The
Company estimates that based on vesting at 20% per year at December 31, 1996,
approximately 100% of such options will eventually vest.
<TABLE>
<CAPTION> Weighted
Number Average
of Exercise
Shares Price
<S> <C> <C> <C>
Outstanding January 1, 1994 417,900 $0.501
Granted 0 N/A
Exercised (77,850) 0.500
Forfeited (7,500) 0.500
Outstanding at December 31,
1994 332,500 0.502
Options exercisable at
December 31, 1994 139,040 0.503
Weighted average fair
value of options granted
during 1994 N/A
</TABLE>
Following is a summary of the status of options outstanding at December 31,
1996:
<TABLE>
<CAPTION> Outstanding Exercisable
Weighted
Average Weighted Weighted
Exercise Number Remaining Average Average
Price Contractural Exercise Exercise
Range Number Life Price Number Price
<C> <C> <C> <C> <C> <C>
$0.625 5,000 1 $0.625 5,000 0.625
$0.500 123,500 3 $0.500 83,700 $0.500
$0.250 20,000 5 $0.250 4,000 $0.250
$0.125 236,960 6 $0.125 106,950 $0.125
----------- -------
$385,450 5 199,650
</TABLE>
The range of exercise prices for the options outstanding at December 31, 1996
is $0.125-$0.625 with a weighted average contractual life of 5 years. The
Company estimated that based on vesting at 20% per year at December 31, 1996,
approximately 100% of such options will eventually vest.
8. Income Taxes
The provisions for income taxes consist of the following:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31, 1996 1995 1994
Taxes on income:
U.S. Federal
Current $0 $0 $5,300
Deferred (40,300) 0 6,600
(40,300) 0 11,900
State
Current 1,600 1,600 43,100
Deferred 2,000 (5,900)
3,600 1,600 37,200
Net income tax
(benefit) provision $(36,700) $1,600 $49,100
</TABLE>
Effective January 1, 1993, as required by GAAP, the Company changed its method
of account from income taxes by adopting FAS No. 109.
A reconciliation of the statutory federal income tax rate with the effective
tax rate reported in the financial statements follows:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31, 1996 1995 1994
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 7.7% (1.4%) 6.0%
Tax effect of change in
valuation allowance (58.8%) 40.9% (49.4%)
Expiration of tax credits 2.0% 0.7% (18.2%)
Other 0.6% (6.2%) (0.4%)
Effective tax rate (10.5%) 0% 8.4%
</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.
Deferred tax assets are comprised of the following:
<TABLE>
<C> <C> <C>
December 31, 1996 1995
Allowance for doubtful accounts $215,600 197,000
Accrued expenses 184,300 142,300
Loss carryforwards 1,157,800 1,360,500
Tax credits 175,700 178,600
Other 107,800 116,400
1,841,200 1,994,800
Deferred tax asset
valuation allowance $(1,191,800) (1,383,800)
Total deferred taxes, net $ 649,400 $ 611,000
</TABLE>
The Company had unused federal net operating loss carryforwards of
approximately $3,191,500 and $3,669,700, state loss carryforwards of
approximately $1,083,000 and $1,554,100, and investment and other tax credits
of approximately $175,700 and $178,600 available to offset future tax
liabilities at December 31, 1996 and December 31, 1995, 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 "total deferred taxes, net"
in the amount of $649,400 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, 1996 and 1995, the Company had no borrowings
under this line of credit. The line of credit terminated and the outstanding
warrants expired 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 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 subordinated
notes. (See Note 5.)
In April 1996, the Company granted Mr. Ford a warrant to purchase 123,750
shares of Common Stock.
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 $380,300 in 1996, $359,400 in 1995, and
$340,000 in 1994.
At December 31, 1996, minimum annual lease commitments under non-cancellable
leases were as follows:
<TABLE>
<C> <C>
1997 $397,600
1998 399,700
1999 409,900
Thereafter 139,000
Total $1,346,200
</TABLE>
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.
12. Net Income Per Share
Primary earnings per share were calculated as follows:
<TABLE>
<S> <C> <C> <C>
Years ended December 31, 1996 1995 1994
Net income (loss) $386,800 $(1,918,300) $454,500
Average common shares
outstanding 3,254,066 3,102,564 3,035,137
Add: Exercise of options
reduced by the number of
shares purchased with
proceeds N/A N/A 262,892
Add: Exercise of warrants
reduced by the number of
shares purchased with
proceeds N/A N/A 118,261
Adjusted
weighted average shares
outstanding 3,254,066 3,102,564 3,416,290
Earnings(loss) per share $0.12 $(0.62) $0.13
</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:
<TABLE>
<S> <C> <C> <C>
Years ended December 31, 1996 1995 1994
Net income (loss) $386,800 $(1,918,300) $454,500
Average common shares
outstanding 3,254,066 3,102,564 3,035,137
Add: Exercise of options
reduced by the number of
shares purchased with
proceeds N/A N/A 262,892
Add: Exercise of warrants
reduced by the number of
shares purchased with
proceeds N/A 118,261 N/A
Adjusted weighted average
shares outstanding 3,254,066 3,102,564 3,416,290
Earnings (loss) per common
share assuming full
dilution $0.12 $(0.62) $0.13
</TABLE>
13. Licensing Income
During 1993, the Company entered into two licensee 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. 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.
Report to the Independent Auditors
To the Board of Directors of FAFCO, Inc.
We have audited the consolidated balnace sheet of FAFCO, Inc. and its subsidary
as of December 31, 1996 and the related consolidated statements of income,
retained earning, and cash flows for the year then ended. The financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of FAFCO, Inc. as of December 31, 1995 and
for each of the two years in the period ended December 31, 1995 were audited by
other auditors whose report dated March 27, 1996 expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we paln and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant extimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FAFCO, Inc. and its subsidiary
as of December 31, 1996 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Burr, Pilger & Mayer
Palo Alto, California
March 4, 1997
Summary of Operations
Five-Year Summary of Operations (in thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996 1995 1994 1993 1992
Net sales $8,869 $7,876 $10,526 $9,352 $7,782
Income (loss) before
income taxes and
extraordinary item $350 $(1,917)$504 $254 $587
Provision for income
taxes (37) 1 49 116 242
Income (loss) before
extraordinary item 387 (1,918) 445 138 345
Extraordinary item-tax
benefit resulting from
net operating loss
carryforward 174
Cumulative effect of
change in method of
accounting for income
taxes 717
Net income (loss) $387 $(1,918) $455 $855 $519
Primary net income
(loss) per share
before extraordinary
item $0.12 $(0.62) $0.13 $0.04 $0.11
Primary net income per
share from extraordinary
item 0.06
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 $0.12 $(0.62) $0.13 $0.26 $0.17
Fully diluted net income
(loss) per share before
extraordinary items $0.12 $(0.62) $0.13 $0.05 $0.11
Fully diluted net income
per share from
extraordinary item 0.06
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 $0.12 $(0.62) $0.13 $0.24 $0.17
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
At December 31, 1996 1995 1994 1993 1992
Working capital $1,203 $222 $2,371 $1,784 $1,624
Total assets 4,263 3,400 4,903 4,373 3,577
Long-term obligations 951 680 725 751 928
Shareholders' equity 1,094 615 2,530 2,038 1,177
</TABLE>
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 1996 and 1995 were as
follows:
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended March 31 June 30 September 30 December 31
1996 High $0.25 $0.125 $0.125 $0.125
1996 Low $0.125 $0.125 $0.125 $0.125
1995 High $1.50 $1.50 $1.50 $0.75
1995 Low $1.00 $1.00 $0.75 $0.25
</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 February
10, 1997, the Company had 726 shareholders of record. FAFCO, Inc. has never
paid dividends on its Common Stock and has no plans to do so in the
foreseeable future.
1996 Compared with 1995
Net sales for 1996 increased by 12.6% from $7,876,100 in 1995 to $8,868,600 in
1996. This increase was due primarily to increased unit sales of the Company's
IceStor and pool panel products.
Net sales of the Company's pool products were 5.9% higher in 1996 than in
1995 due mainly to increased sales of its SunSaver model inground and
aboveground pool panels partially offset by decreased sales of its Revolution
model inground pool panels and decreased sales of its proprietary line of
automatic controls, which was phased out as of January 1, 1997. Net sales of the
Company's IceStor products were 24.0% higher in 1996 than in 1995 due mainly to
increased foreign sales partially offset by decreased domestic sales. The
Company believes the decreased domestic sales are due mainly to potential
customers' beliefs that lower energy prices in the domestic market place will
result from planned deregulation of energy prices.
Pool product sales amounted to 58% of net sales in 1996 compared to 62% of net
sales in 1995 IceStor sales amounted to 42% of net sales in 1996 compared to
38% of net sales in 1995. There were no significant price changes in any of
the Company's products during 1996.
Cost of goods sold decreased from $5,637,900 (71.6% of net sales) in 1995 to
$5,424,900 (61.2% of net sales) in 1996. This decrease was due mainly to the
fixed costs being allocated over higher sales along with increased sales of
higher margin products in both the pool product line and IceStor product line.
Marketing and selling expenses decreased from $2,137,200 (27.1% of net sales)
in 1995 to $1,575,400 (17.8% of net sales) in 1996. This decrease is due
mainly to reduced promotional expenses for pool products along with reduction
in support personnel for IceStor product.
General and administrative expenses decreased from $1,502,000 (19.1% of net
sales) in 1995 to $1,286,300 (14.5% of net sales) in 1996. This decrease is
due mainly to decreased personnel costs along with decreased legal and
accounting expenses.
Research and development expenses decreased from $460,100 (5.8% of net sales)
in 1995 to $116,000 (1.3% of net sales) in 1996. This decrease was due entirely
to the reduction in personnel in late 1995 and the continued low level of
personnel in 1996.
Net interest expense increased from $95,300 (1.2% of net sales) in 1995 to
$169,900 (1.9% of net sales) in 1996. This increase is due primarily to the
higher average daily borrowing in 1996 at higher interest rates than in 1995.
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's IceStor products along with decreased unit sales of the company's
pool panel products. Net sales of the Company's 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
market place will result from planned deregualtion 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 sals in 1994. IceStor 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 form 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 severence
expenses associated with a 32% reduction in the work force.
Marketing and selling expenses increased from $1,767,500 (16.8% of net sales
in 1994 to $2,137,200 (27,1% of net sales) in 1995. The 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 expenses 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 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.
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 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 1994 and 1996, 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 $126,200 at 1995 fiscal year end to
$88,200 at 1996 fiscal year end, principally due to increased accounts
receivable and increased inventories partially offset by increased borrowings
and increased accounts payable.
At December 31, 1996, the Registrant's net accounts receivable had increased
to $ 1,890,700 from $1,149,600 at December 31, 1995, primarily as a result of
increased sales in November and December 1996.
At December 31, 1996, the Registrant's accounts payable and other accrued
expenses had increased to $1,037,800 from $949,100 at December 31, 1995. This
increase is primarily due to expenses resulting from the increased sales in
November and December 1996.
At December 31, 1996, the Registrant's inventories had increased to $835,400
from $717,200 at December 31, 1995. This increase was due mainly to a buildup
of inventories for increased January 1997 sales.
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 $649,400 in 1996 and $611,000 in 1995. 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, its return to profitability in 1996, and the Company's expectation that
this will continue far enough into the future to realize the net deferred tax
asset. However, there can be no assurance that the Company will continue
profitability or, if it does, that profits will be sufficient to utilize the
net deferred tax asset.
At December 31, 1996, the Registrant's current ratio was 1.54 to I compared
with 1.11 to I at December 31, 1995 and working capital increased over the
same period to $1,202,700 from $222,400. Total assets exceeded total
liabilities by $1,094,300 at December 31, 1996 compared with $614,700 at
December 31, 1995.
During the second half of 1995, the Company began and has continued an
aggressive cost reduction campaign. 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. The foregoing statement of how long the Company's capital resources
are expected to last is a forwardlooking statement involving risks and
uncertainties, including the amount of the Company's sales and the ability of
the Company to control its operating expenses, including the need to invest in
sales and marketing activities in 1997. However, if sales decline from current
levels, additional debt or equity financing may be required. The Registrant
has a line of credit, of which $758,600 had been utilized and $70,600 remained
available under the formula applied to net accounts receivable. This line of
credit expires on March 31, 1998.
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Freeman A. Ford
Chairman of the Board, President, and Chief Executive Officer FAFCO, Inc.
William A. Berry*
Senior Vice President and Chief Financial Officer Electric Power Research
Institute a private, nonprofit, research organization doing collaborative
research for the electricity industry.
Robert W. Selig,Jr.*
President Davis Instruments Corporation a manufacturer of marine and weather
equipment.
*Audit Committee Member
Executive Officers
Freeman A. Ford
Chairman of the Board, President, andChief 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, Commercial Products
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
A Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Independent Accounts
Burr, Pilger & Mayer
A Professional Corporation
261 Hamilton Avenue
Palo Alto, California 94301
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:
FAFCO, Inc.
2690 Middlefield Road
Redwood City, California 94063
Attention: Alex N. Watt
Annual Shareholders' Meeting
The Annual Shareholders' Meeting will be held at 3:00 p.m. on April 24, 1997 at
FAFCO, Inc., 2690 Middlefield Road, Redwood City, California 94063-3455,
Telephone: (415) 363-2690
[ARTICLE] 5
[RESTATED]
[CIK] 0000352956
[NAME] FAFCO, INC.
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] JAN-01-1996
[CASH] 88,200
[SECURITIES] 0
[RECEIVABLES] 2,736,600
[ALLOWANCES] 574,400
[INVENTORY] 835400
[CURRENT-ASSETS] 3420200
[PP&E] 2465800
[DEPRECIATION] (2116200)
[TOTAL-ASSETS] 4263200
[CURRENT-LIABILITIES] 2217500
[BONDS] 951400
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 412200
[OTHER-SE] 682100
[TOTAL-LIABILITY-AND-EQUITY] 4263200
[SALES] 8868600
[TOTAL-REVENUES] 8922600
[CGS] 5424900
[TOTAL-COSTS] 5424900
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 75200
[INTEREST-EXPENSE] 169900
[INCOME-PRETAX] 350100
[INCOME-TAX] (36700)
[INCOME-CONTINUING] 386800
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 386800
[EPS-PRIMARY] .12
[EPS-DILUTED] .12
</TABLE>
