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
For the fiscal year ended December 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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
incorporation or organization) (IRS Employer Identification No.)
2690 Middlefield Road, Redwood City, California 94063
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 650/363-2690
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 March 10, 2000 was $358,200, 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, 1999, was 3,303,311.
Documents Incorporated by Reference
Document Description Form 10-K Part
Portions of Exhibit 13.1 (the Company's 1999 Annual Report to Shareholders)
(the "Annual Report") .............................................I, II, IV
The Company's Definitive Proxy Statement (the "Proxy Statement") for the
2000 Annual Meeting of Stockholders to be held on May 4, 2000
(the Proxy Statement is expected to be filed pursuant to Regulation 14A on
or before April 15, 2000) ....................................... 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 60% of net sales in 1999 compared to 53% of net
sales in 1998 and 56% of net sales in 1997. Thermal energy storage sales
amounted to 40% of net sales in 1999 compared to 47% of net sales in 1998
and 44% of net sales in 1997.
The Company manufactures products for the solar heating of water for low and
medium temperature applications. From the inception of the Company's
predecessor as a sole proprietorship in 1969 until 1976, efforts were largely
devoted to the refinement of the Company's initial product, a solar heating
system for swimming pools - a low temperature solar application. Since that
time, the Company has focused on increasing its share of the pool heating
market by extending its network of independent distributors, decreasing its
manufacturing costs, and improving its initial product. In 1983, a passive
domestic hot water heating system, the 444, was introduced (this product was
discontinued in early 1994). In 1987, the Company introduced a thermal
energy storage system based on the same heat exchanger technology as is used
in its swimming pool heating systems. In 1993, the Company introduced a
state-of-the-art control system for swimming pool solar heating systems
(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 (650)
363-2690.
Safe Harbor Statement
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of the
risk factors set forth on page 16 of the Annual Report under the heading
"Factors Affecting Future Results" which is incorporated herein by reference
and elsewhere in this Form 10-K.
Markets
Swimming Pool Heating
Low temperature solar applications developed because of the cost
effectiveness of solar systems in heating a large 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 "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 and 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
exchanger 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 meters,
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% 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. AutoPool has built-in "intelligence" that allows it to
optimize the heating and filtration time for the swimming pool and can
also control non-conventional solar swimming pool heaters. 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.
Thermal Energy Storage
The Company's thermal energy storage ("IceStor?") systems utilize nighttime
electric 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 a building's air conditioning equipment to significantly reduce
electrical power requirements for cooling during times of high power demand
and high electrical cost.
Cool storage systems offer power utilities a solution to a fundamental,
long-term problem: increased peak demand for power during periods of
limited available capacity (i.e., during business hours). IceStor?
technology shifts power 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 typical distributor's sales personnel are generally assigned
to contractor accounts and seek 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 for failure
to provide adequate sales, installation and service support for the
Company's products. In such instances, the Company has generally been able
to find qualified replacements.
All work relating to the installation of FAFCO solar systems is covered
by a full one-year warranty provided by the distributor. The Company's
solar collectors used to be covered by a ten-year limited warranty,
which was changed to a ten-year full warranty beginning in 1991.
Its automatic controls, pumps, and drain-down valves are covered by a
three-year limited warranty. FAFCO warranties cover defects in materials
and workmanship provided that the related products are used for their
intended purpose.
FAFCO solar systems are designed to require only minimal maintenance,
which can be performed either by the consumer using an owner's manual or
by the distributor's service personnel.
Thermal Energy Storage Systems
The Company markets its 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, to design-and-build, heating, ventilating,
and air-conditioning companies in Taiwan, Korea, Japan, and The Peoples
Republic of China. These licensing agreements provide for licensees'
assembly, sales, support, and maintenance of IceStor? products in those
countries.
Sales by Geographic Area
The Company's net sales during 1999, 1998, and 1997 were geographically
distributed approximately as follows:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
California 24% 19% 22%
Florida 33% 31% 31%
Other U.S. 17% 14% 19%
Foreign Countries 26% 36% 28%
100% 100% 100%
</TABLE>
One of the Company's customers, Ebara Corporation, accounted for 17.7% of
the Company's fiscal 1999 net sales, 23.4% of the Company's fiscal 1998 net
sales and 18.6% of the Company's fiscal 1997 net sales. During 1997, 1998
and 1999 Ebara Corporation was the licensee for the Company's IceStorT
products in Japan, and, as such, purchased IceStorT products and components
for assembly into products for resale to end users in Japan. No other
customer accounted for 10% or more of the Company's net sales in
fiscal 1997, 1998 or 1999. Any material cancellation, reduction
or rescheduling of orders from a major customer, particularly Ebara
Corporation, or the loss of any such customer would have a material
adverse effect in the Company's financial condition and operation results.
Foreign sales of the Company's products are made through independent
foreign distributors and licensees. Sales to foreign distributors and
licensees are shipped directly from the Company's facilities in California
and invoiced in U.S. dollars. Export sales are subject to certain
controls and restrictions, including tariffs and import duties, and
are subject to certain risks, including changing regulatory requirements
of foreign jurisdictions and transportation delays and interruptions;
however, the Company has not experienced any material difficulties in
the past 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 would
have 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 it 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 heat exchangers used in solar heating applications and off-peak
cooling applications and associated accessories. 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 heat exchangers are produced 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 resins employed by the Company 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 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 currently obtained from single sources. The Company believes these
items could be supplied by the Company's other qualified sources if
sufficient lead-time were provided. The Company attempts to maintain
additional inventory of such materials to mitigate the risk of supply
shortages; however, any prolonged inability to obtain such items would have
a material adverse effect on the Company's results of operations.
To date, the Company has not experienced any significant manufacturing
problems or delays due to shortages of materials.
Quality assurance is performed by FAFCO at its manufacturing facility.
Test and inspection procedures are a part of substantially all production
and assembly operations. In addition, the Company uses it own diagnostic
equipment and laboratory to continually test and inspect raw materials,
work in process, and finished goods.
Competition
The Company's solar heating products currently compete directly with solar
heating products offered by other domestic and international 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 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.
Research and Development
For the years ended December 31, 1999, 1998, and 1997, the Company's
research and development expenses were $327,600, $194,100, and $202,800,
respectively.
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 three United States patents and has two patents
pending relating to certain aspects of its products and manufacturing
technology. These patents expire at various times between March 2000 and
July 2003. However, the Company believes that patent protection is secondary
to such factors as ongoing product development and refinement, the knowledge
and experience of its personnel, and their ability to design, manufacture,
and successfully market the Company's products.
From time to time, the Company has registered as trademarks certain product
names and marks in order to preserve its right to those product names and
marks.
The Company has granted licenses to assemble and sell IceStor? systems in
Taiwan, Korea, Japan, and the Peoples Republic of China to local
manufacturers. See "Marketing and Sales" above.
Employees
At December 31, 1999, the Company had a total of 62 full-time employees,
including nine in marketing, five in research and development, 36 in
manufacturing, and 12 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. To the Company's
knowledge, 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 Operations - Seasonality" on page 16 of the Annual Report, which
information is incorporated herein by reference.
Segment Information
Following the sale of the business of the Company's subsidiary, The Gregory
Company, in 1988, the Company has only had continuing operations in the
polymer heat exchanger segment.
Environmental Regulations
The Company is subject to a number of environmental regulations concerning
potential air and water pollution. However, such regulations have not in
the past had, and are not expected to have, any material adverse effect on
the Company's business. However, 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. This lease has an option to extend through 2005. The
Company has exercised its option to extend this lease through June, 2005.
See Note 10 of Notes to Consolidated Financial Statements on page 12
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 near future. Manufacturing space is being
fully utilized at the present time. However, additional demand can be
accommodated by adding additional employee shifts.
Item 3. Legal Proceedings
There are presently no material pending legal proceedings to which the
Company is a party or to which any of its property is subject, except for
ordinary routine legal proceedings incidental to the Company's business.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of security holders during
the fourth quarter of its fiscal year ended December 31, 1999.
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 59, 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 58, serves as Executive Vice President 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 44, serves as Vice President, Sales. Mr. Harris joined
the Company in August 1981 as a sales representative and has held the
positions of Pool Builder Manager, National Sales Manager-Pool Products,
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).
Nancy I. Garvin, age 54, serves as Vice President, Finance. Ms. Garvin
joined the Company in May 1974 as an accounting clerk and has since held
the positions of Accounting Manager and Controller with the Company.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Information regarding the market for and market prices of the Company's
Common Stock, the number of shareholders of record, and information
regarding dividends is set forth under the heading "Common Stock Data" on
page 15 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 15 and in the last sentence of
the text under the table entitled "Common Stock Data" on page 15 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 16 and 17 of the Annual
Report, which information is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The following discussion about the Company's market risk exposure involves
forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed
to market risk related to changes in interest rates, foreign currency
exchange rates and equity security price risk. The Company does not use
derivative financial instruments for any purpose, including hedging interest
and foreign exchange risks.
The Company is exposed to financial market risks, including changes in
foreign currency exchange rates and interest rates. The Company attempts
to minimize its currency fluctuation risk by pricing its overseas product
sales and license fees in United States dollars. A 10% change in the
foreign currency exchange rates would not have a material impact on the
Company's results of operations.
The Company maintains short-term investments consisting of variable interest
accounts. However, due to the short-term nature of the Company's debt
investments, the impact of interest rate changes would not have a material
impact on the value of such investments.
The Company's interest rate exposure on rate debt obligations is currently
relatively insignificant. As a result, the Company does not actively manage
the risk associated with these obligations. The impact of interest rate
changes would not have a material impact on the Company's results of
operations.
The Company currently holds no marketable equity securities of other issuers
that are subject to market price volatility.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company are set forth on pages 3
through 13 of the Annual Report, which information is incorporated herein
by reference. The supplementary financial information requirements of
Regulation S-K Item 302 do not apply to the Company, because the Company
does not meet the tests set forth therein.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors and nominees for 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 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 - Section 16(a) Beneficial Ownership Reporting 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, 1999 and 1998, the Consolidated Statement of Operations,
of Shareholders' Equity and Cash Flows for each of the three
years in the period ended December 31, 1999, and the notes
thereto appear on pages 4 through 15 of the Annual Report.
2. Financial Statement Schedules
The following schedule for the years ended December 31, 1999,
1998, and 1997 is included in this report. Such schedule
should be read in conjunction with the consolidated financial
statements in the Annual Report.
Report of Independent Accountants on Financial Statement Schedule
(see page17).
Schedule II - Valuation and Qualifying Accounts and Reserves
(see page 18).
Schedule X - Supplementary Income Statement Information
(see page 19).
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. Index to Exhibits
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)
<TABLE>
<S> <C>
3.1(1) Articles of Incorporation, as amended.
3.2(3) Bylaws, as amended.
3.2(a) Bylaws Certificate of Amendment.
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), 4.2(b) and 4.3 - 4.3(e).
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 Directors' Stock Option Plan.
10.15(a)(8)* Form of Nonstatutory Stock Option Agreement used
under 1991 Director's Stock Option Plan.
10.16(8)* Employee Stock Purchase Plan.
10.16(a)(8)* Form of Subscription Agreement used under Employee
Stock Purchase Plan.
10.17(9) Licensing Agreement and Addendum between the
Registrant, as Licensor, and Jang-Han Systems
Engineering, as Licensee, 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)(13) Loan Modification agreement between Registrant as
Borrower, and Silicon Valley Bank, as Lender, dated
October 30, 1996.
10.19(g)(13) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, as Lender, dated
December 11, 1996.
10.19(h)(13) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, as Lender, dated
January 6, 1997.
10.19(i)(13) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, as Lender, dated
January 21, 1997.
10.19(j)(14) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, a Lender, dated
April 1, 1998.
10.19(k) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, a Lender, dated
March 22, 1999.
10.19(1) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, a Lender, dated
March 22, 2000.
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 Registrant's
1999 Annual Report).
13.1 Registrant's 1999 Annual Report to Shareholders.
18.1(14) Letter re change in Accounting Principle from Burr,
Pilger & Mayer dated November 5, 1997.
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 exhibit filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
(13) Incorporated by reference to exhibit filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
(14) Incorporated by reference to exhibit filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
(15) Incorporated by reference to exhibit filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
(b) Reports on Form 8-K: No Reports on Form 8-K were filed by the Company
during the fourth quarter of 1999 .
(c) Exhibits: See subsection (a) (3) above.
(d) 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 3, 2000 appearing on page 14 of the 1999 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
San Francisco, California
March 3, 2000
FAFCO, Inc.
Schedule
II
Valuation and Qualifying Accounts and Reserves
<TABLE>
Balance at Additions Charged
Beginning of to Costs and Balance at End
<S> <C> <C> <C> <C>
Description Period Expenses Deductions of Period
1999:
Allowance for
doubtful
accounts
current
accounts
receivable $ 536,300 $ 91,200 $ 309,700(1) $ 317,800
short-term
receivable 27,600 27,600
long-term
receivalbe 29,300 2,400 31,700
Warranty reserve 232,200 177,000 126,500(2) 282,700
Deferred tax
asset
valuation
allowance 173,200 143,600 29,600
1998:
Allowance for
doubtful
accounts
current
accounts
receivable $ 540,100 $ 53,900 $ 57,700(1) $ 536,300
short-term
receivable 126,400 126,400(1)
long-term
receivable 29,300 29,300
Warranty reserve 211,000 190,600 169,400(2) 232,200
Deferred tax
asset
valuation
allowance 708,000 534,800 173,200
1997:
Allowance for
doubtful
accounts
current
accounts
receivable $ 512,600 $ 172,600 $ 145,100(1) $ 540,100
short-term
receivable 28,800 97,600 126,400
long-term
receivable 34,000 4,700(3) 29,300
Warranty reserve 234,100 85,600 108,700(2) 211,000
Deferred tax
asset
valuation
allowance 1,191,800 483,800 708,000
</TABLE>
(1) Write-off of uncollectible accounts.
(2) Cost of warranty claims processed.
(3) 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 29, 2000 FAFCO, Inc.
/s/ Freeman A. Ford
Freeman A. Ford,
Chairman of Board,
President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Freeman A. Ford and Nancy I. Garvin, or either of them, his
attorneys-in-fact, each with the power of substitution, for him in any
and all capacities, to sign any amendments to this Annual Report on
Form 10-K and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that either of said attorneys-in-fact,
or his substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C> <C>
Signature Title Date
Chairman of the Board, President and March 29, 2000
/s/ Freeman A. Ford Chief Executive Officer (Principal
Freeman A. Ford Executive Officer) and Director
Vice President, Finance and March 29, 2000
/s/ Nancy I. Garvin Chief Financial Officer (Principal
Nancy I. Garvin Financial and Accounting Officer)
/s/ William A. Berry Director March 29, 2000
William A. Berry
/s/Robert W. Selig,Jr. Director March 29, 2000
Robert W. Selig, Jr.
/s/ William Chisholm Director March 29, 2000
William Chisholm
/s/David Ford Director March 29, 2000
David Ford
</TABLE>
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) and
related prospectuses of FAFCO, Inc. of our report dated March 3, 2000,
appearing on page 14 of the 1999 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 17 of this Form 10-K.
Burr, Pilger & Mayer
San Francisco, California
April 5, 2000
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Exhibit No. Description
3.1(1) Articles of Incorporation, as amended.
3.2(3) Bylaws, as amended.
3.2(a) Bylaws Certificate of Amendment
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), 4.2(b) and 4.3 - 4.3(e).
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 Directors' Stock Option Plan.
10.15(a)(8)* Form of Nonstatutory Stock Option Agreement used
under 1991 Director's Stock Option Plan.
10.16(8)* Employee Stock Purchase Plan.
10.16(a)(8)* Form of Subscription Agreement used under Employee
Stock Purchase Plan.
10.17(9) Licensing Agreement and Addendum between the
Registrant, as Licensor, and Jang-Han Systems
Engineering, as Licensee, 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)(13) Loan Modification agreement between Registrant as
Borrower, and Silicon Valley Bank, as Lender, dated
October 30, 1996.
10.19(g)(13) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, as Lender, dated
December 11, 1996.
10.19(h)(13) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, as Lender, dated
January 6, 1997.
10.19(i)(13) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, as Lender, dated
January 21, 1997.
10.19(j)(14) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, a Lender, dated
April 1, 1998.
10.19(k) (15) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, a Lender, dated
March 22, 1999.
10.19(l) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, a Lender, dated
March 22, 2000.
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 the 1997 Annual
Report).
13.1 Registrant's 1997 Annual Report to Shareholders.
18.1(14) Letter re change in Accounting Principle from Burr,
Pilger & Mayer dated November 5, 1997.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants (see page 20)
24.16 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 exhibit filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
(13) Incorporated by reference to exhibit filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
(14) Incorporated by reference to exhibit filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
(15) Incorporated by reference to exhibit filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
(b) Reports on Form 8-K: No Reports on Form 8-K were filed by the Company
during the fourth quarter of 1999 .
(c) Exhibits: See subsection (a) (3) above.
(d) Financial Statement Schedules: See subsection (a) (2) above.
</TABLE>
EXHIBIT 10.19(L)
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of March 27, 2000, by and
between FAFCO, Inc. ("Borrower") and Silicon Valley Bank ("Bank").
1. DESCRIPTION OF EXISTING INDEBTNESS: 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"). The Loan agreement,
has been modified, pursuant to among other documents, a Loan Modification
Agreement dated October 13, 1999, pursuant to which, a Term Loan in the
principal amount of Five Hundred Thousand and 00/100 Dollars ($500,000.00)
was made available to Borrower. 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 "Maturity Date" is hereby amended in its entirety
to read as: June 30, 2000.
B. Waiver of Financial Covenant Defaults.
1. Bank hereby waives Borrower's existing defaults under the Loan
Agreement by virtue of Borrower's failure to comply with the Tangible
Net Worth covenant as of month ended February 29, 2000. Bank's waiver
of Borrower's compliance of this covenant shall apply only to the
foregoing period. Accordingly, for the month ending March 31, 200,
Borrower shall be in compliance with the Tangible Net Worth covenant.
Bank's agreement to waive the above-described default (1) in no way
shall be deemed an agreement by the Bank to waive Borrower's
compliance with the above-described covenant as of all other dated an
(2) shall not limit or impair the Bank's right to demand strict
performance of this covenant as of all other dates and (3) shall not
limit or impair the Bank's right to demand strict performance of all
other covenants as of any date.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount
of Five Hundred and 00/100 Dollars ($500.00) (the "Loan Fee") plus all out-
of-pocket expenses.
6. 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.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Bank is relying upon Borrower's representations, warranties, and agreements,
as set forth in the Existing Loan Documents. Except as expressly modified
pursuant to this Loan Modification Agreement, the terms of the Existing Loan
Documents remain unchanged and in full force and effect. 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.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
FAFCO, INC. SILICON VALLEY BANK
By:______________________ By:____________________
Name:____________________ Name:__________________
Title:___________________ Title:_________________
EXHIBIT 13.1
FAFCO, INC.
a manufacturer of polymer heat exchangers
1999 Annual Report
(Annual Report Cover)
The Company
FAFCO was formed in 1969, was incorporated in 1972, and has produced
over one million polymer heat exchangers, primarily for the solar
heating and thermal energy storage markets. FAFCO is the leading U.S.
manufacturer of solar heating panels, with nearly twice the installed
base of solar panel systems of its nearest competitor. In addition,
FAFCO is the leading producer of polymer heat exchangers for thermal
energy storage applications. FAFCO's IceStorT product line of thermal
energy storage equipment significantly increases the effective capacity
of electric utilities without the burden of adding new capacity. FAFCO
has been issued more than 20 patents.
President's Letter
FAFCO was founded in 1969 and incorporated in 1972 to
manufacture polymer heat exchangers currently used in the
solar and thermal energy storage (TES) markets worldwide.
Net sales declined by 5.5% to $10,621,700 in 1999, primarily
due to reduced Asian TES sales. Net profit was $241,000
compared with $841,600 in 1998. In addition to the sales
decline noted above, this decrease was due in large part to
costs associated with terminating the Company's business
relationship with the Tampa distributor of its pool products
along with start-up costs to open a Company office in Tampa.
Solar sales were up significantly. Current trends and the
strength of the economy suggest a continuing upward trend in
solar sales.
Thermal energy storage uses FAFCO's unique polymer heat
exchangers to shift peak electrical loads to off-peak times.
This reduces the necessity to add new generation capacity to
meet peak loads. FAFCO's TES products are sold principally
in the United States and Asian markets.
In September 1999, FAFCO paid off $925,000 of subordinated
debt. On December 31, 1999, FAFCO has used $461,500 of its
combined $1,500,000 credit facilities.
In 1999, FAFCO filed patent applications on manufacturing
technology that is expected to come on line in 2000. The
new technology will obsolete current processes and will
offer greater flexibility to manufacture polymer heat
exchangers.
The rapid growth of the Internet benefits FAFCO every day in
countless ways. The Internet notwithstanding, there is an
increasing need to add and remove heat from buildings,
factories, and processes around the world. FAFCO intends to
apply its new technology to the growing heat exchange
market. FAFCO's past and future success depend on
increasingly satisfying our customers and upon the
dedication, skill, and loyalty of our fellow workers.
Sincerely,
Freeman A. Ford
President
Consolidated Balance Sheet
<TABLE>
<S> <C> <C>
December 31, 1999 1998
Assets
Current assets:
Cash and cash equivalents $ 64,800 $ 477,500
Accounts receivable, less allowance
for doubtful accounts of $317,800
in 1999 and $536,300 in 1998 1,752,000 1,876,600
Current portion of long-term notes
receivable (net) 87,600
Inventories 1,041,600 1,265,400
Prepaid expenses and other current
assets 254,200 183,500
Other accounts receivable, net of
allowance 27,700 7,300
Deferred tax asset, net of allowance 189,500 273,000
Total current assets 3,329,800 4,170,900
Plant and equipment, at cost 3,330,100 2,901,900
Less accumulated depreciation and
amortization (2,407,700) (2,318,500)
922,400 583,400
Notes receivable and other assets
(net) 31,300 58,200
Deferred tax asset, net of allowance 703,300 564,500
Total assets $4,986,800 $5,377,000
Liabilities and shareholders' equity
Current liabilities:
Bank line of credit $ 461,500 $ 0
Accounts payable and other accrued
expenses 802,500 1,065,600
Accrued compensation and benefits 281,100 217,300
Accrued warranty expense 282,700 232,200
Other current liabilities 15,000
Income taxes payable 18,600
Total current liabilities 1,842,800 1,533,700
Convertible subordinated notes
($600,000 was owed to related
parties in 1998) 925,000
Other non-current liabilities 16,600 31,900
Total liabilities $1,859,400 $2,490,600
Commitments and contingent liabilities
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;
3,303,311 issued and outstanding
in 1999 and 1998 412,800 412,800
Capital in excess of par value 5,107,100 5,107,100
Notes receivable secured by Common
Stock (75,100) (75,100)
Accumulated deficit (2,317,400) (2,558,400)
Total shareholders' equity 3,127,400 2,886,400
Total liabilities and shareholders'
equity $4,986,800 $5,377,000
</TABLE>
The accompanying notes are an integral part of this statement.
<TABLE>
Consolidated Statement of Operations
<S> <C> <C> <C>
Year ended December 31, 1999 1998 1997
Net sales $ 10,621,700 $ 11,235,800 $ 10,551,500
Other income (net) 17,100 30,600 171,800
Total revenues 10,638,800 11,266,400 10,723,300
Cost of goods sold 6,436,400 6,801,700 5,956,500
Marketing and selling expense 1,854,300 1,942,800 1,770,000
General and administrative
expense 1,752,600 1,480,200 1,776,100
Research and development expense 327,600 194,100 202,800
Net interest expense 71,700 113,400 128,700
Total costs and expenses 10,442,600 10,532,200 9,834,100
Income before income taxes 196,200 734,200 889,200
Provision for (benefit from)
income taxes (44,800) (107,400) 23,200
Net income $ 241,000 841,600 $ 866,000
Basic net income per share $ 0.07 0.25 $ 0.26
Diluted net income per share $ 0.06 0.20 $ 0.22
</TABLE>
The accompanying notes are an integral part of this statement.
Consolidated Statement of Shareholders' Equity
<TABLE>
Notes
Receivable
Number Capital in Secured by Retained Total
of Common Excess of Common Earnings Shareholder
Shares Stock Par Value Stock Deficit Equity
Balance at
December
<S> <C> <C> <C> <C> <C> <C>
31, 1996 3,298,311 412,200 5,105,200 (75,100) (4,266,000) 1,176,300
Net income
for the
year 866,000
Balance at
December
31, 1997 3,298,311 412,200 5,105,200 (75,100) (3,400,000) 2,042,300
Net income
for the
year 841,600
Issuance
of shares
upon
exercise
of a stock
option 5,000 600 1,900
Balance at
December
31, 1998 3,303,311 412,800 5,107,100 (75,100) (2,558,400) 2,886,400
Net income
for the
year 241,000
Balance at
December
31, 1999 3,303,311 412,800 5,107,100 (75,100) (2,317,400) 3,127,400
</TABLE>
The accompanying notes are an integral part of this statement.
Consolidated Statement of Cash Flows
<TABLE>
<S> <C> <C> <C>
Year Ended December 31, 1999 1998 1997
Cash flow from operating
activities:
Net income $ 241,000 $ 841,600 $ 866,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation 184,400 137,600 130,700
Write offs and allowance for
doubtful accounts 165,500 53,900 265,500
Gain on sale of fixed assets (2,400) (19,000)
Change in assets and liabilities:
Accounts receivables 13,100 (92,200) (215,900)
Inventories 223,800 (182,500) (165,500)
Prepaid expenses and other current
assets (70,700) (9,500) (23,200)
Deferred tax assets (55,300) (168,400) (19,700)
Notes receivable and other assets 40,100 94,200 54,600
Payables, accrued expenses and
other current liabilities (152,400) 119,600 (44,800)
Other non-current liabilities (15,300) (23,200) 28,700
Net cash provided by operations 571,800 752,100 876,400
Cash flow from investing activities:
Purchase of fixed assets (523,400) (342,400) (159,700)
Proceeds from sale of fixed assets 2,400 19,000
Net cash used in investing activities (521,000) (323,400) (159,700)
Cash flow from financing activities:
Proceeds from sale of common stock 2,500
Repayment of subordinated debt (925,000)
Borrowings (payments) on line of
credit 461,500 (758,600)
Net cash (used in) provided by
financing activities (463,500) 2,500 (758,600)
Net increase (decrease) in cash and
cash equivalents (412,700) 431,200 (41,900)
Cash and cash equivalents,
beginning of year 477,500 46,300 88,200
Cash and cash equivalents, end
of year $ 64,800 $ 477,500 $ 46,300
Supplemental disclosures of
cash flow information:
Cash paid during the year for
interest $ 109,400 $ 123,100 $ 142,100
Net cash paid during the year
for income taxes $ 69,800 $ 63,000 $ 10,000
Noncash transaction (account
receivable converted to note
receivable) $ 126,400
</TABLE>
The accompanying notes are an integral part of this statement.
Notes to Consolidated Financial Statements
1) Organization and Summary of Signif cant Accounting Policies
The Company designs, develops, manufactures, and markets polymer heat
exchangers for use in solar heating systems for swimming pools and thermal
energy storage systems for commercial and industrial cooling. The heat
exchangers for solar heating systems are sold to wholesalers and
distributors primarily in California and Florida and in other locations in
the United States and overseas. The heat exchangers for thermal energy
storage systems are marketed through manufacturers' representatives
throughout the United States and internationally. 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. The subsidiary currently has no ongoing business activities.
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 first-in, first-out (FIFO) method.
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: Long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Impairments
are recorded when indications of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying value.
Income Taxes: 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.
Earnings per Common Share: Basic earnings per common share is computed
using the weighted average number of shares outstanding. Diluted earnings
per common share is computed using the weighted average number of shares
outstanding adjusted for the incremental shares attributed to outstanding
options and warrants to purchase common stock and shares issuable upon
conversion of certain convertible securities.
Warranties: In the normal course of business, the Company makes certain
warranties as to workmanship and materials. Product warranty periods
range from two to fifteen 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.Accounting for Stock-Based Compensation: The Company
has elected to account for stock-based compensation under the intrinsic
value method in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. Under this method, no compensation expense is recorded
for stock options granted when the exercise price of the option granted
is equal to or exceeds the fair market value of the Company's common stock.
The Company makes the pro forma disclosures of stock-based compensation
required by SFAS No. 123.
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, 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, 1999, the carrying amount approximates
estimated fair value of long-term debt.
Recently Issued Accounting Pronouncements: The Financial Accounting
Standards Board (FASB) has issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard establishes a new model
for accounting for derivatives and hedging activities. Since there is
no derivative and hedging activity within the Company, application of this
standard, required in the first quarter of 2001 as a result of the Issuance
of SFAS No. 137, is not expected to have an impact on the results and
financial position of the Company.
Reclassifications: Certain reclassifications have been made in the prior
year's statements in order to conform to the presentation in the current year.
2) Inventories Consist of the Following:
<TABLE>
<S> <C> <C>
December 31, 1999 1998
Raw materials $ 499,400 $ 661,800
Work in progress 220,000 211,500
Finished goods 322,200 392,100
$ 1,041,600 $ 1,265,400
</TABLE>
3) Plant and Equipment
Plant and equipment consists of the following:
<TABLE>
<S> <C> <C>
December 31, 1999 1998
Machinery and equipment $ 2,445,000 $ 2,191,500
Office and computer equipment 578,300 488,600
Leasehold improvements 88,600 88,600
Vehicles 218,200 133,200
$ 3,330,100 $ 2,901,900
Less accumulated depreciation
and amortization (2,407,700) (2,318,500)
$ 922,400 $ 583,400
</TABLE>
As of December 31, 1999 and December 31, 1998, the Company had $375,000
and $169,700, respectively, of construction in progress that is included
in the above asset balances by category. These assets are expected to be
placed in service during the year ended December 31, 2000.
4) Subordinated Notes and Warrants
At December 31, 1998 and 1997, subordinated notes consisted of $925,000
of notes bearing interest at 11% per annum payable quarterly with
warrants attached to purchase Common Stock. The Company paid off the
notes and accrued interest in September 1999. The exercise price of the
warrants is $0.125 per share, the maximum aggregate number of shares
issuable upon exercise of the warrants is 555,000, and the unexercised
warrants expire March 27, 2000.
5) Bank Borrowing
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 1.5%. The
line of credit agreement contains certain covenants relating to working
capital, current ratio, and tangible net worth, prohibits the payment of
cash dividends, and expires on June 30, 2000. At December 31, 1999 and
1998, the Company had complied with the loan covenants.
As of December 31, 1999, the Company had an outstanding balance on this line
of credit of $461,500.
As of December 31, 1998 and 1997, the Company had no outstanding balances ]
under the bank line of credit.
In addition to the line of credit, the Company has a 36-month term loan
available in the amount of $500,000 bearing interest at prime plus 1.8%.
At December 31, 1999, the Company had no outstanding balance on this loan.
6) 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, 1999 and 1998. 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 have
been issued thereunder since 1991.
The Company has a 1991 Incentive Stock Option Plan under which 500,000
shares of Common Stock have been reserved for issuance to employees and
consultants. During 1999, the Company granted options to purchase 136,000
shares, exercisable at $0.50 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. No options were granted
or exercised during 1997 or 1998. During 1999, the Company granted options
to purchase 20,000 shares, exercisable at $0.50 per share, the fair
market value on the date of grant.
Options granted under these plans become exercisable at a rate of 20%
per year for five years from date of grant and expire six years or ten
years from date of grant.
A summary of activity under the 1981 and 1991 Incentive Stock Option
Plans follows:
<TABLE>
Shares Subject Exercise Price
to Option Per Share
<S> <C> <C>
Outstanding at December 31, 1996 385,450 $ 0.125-0.625
Granted 21,000 $ 0.125
Canceled (31,500) $ 0.125-0.625
Exercised 0 0
Outstanding at December 31, 1997 374,950 $ 0.125-0.500
Granted 0 0
Canceled (5,500) $ 0.125-0.500
Exercised 0 0
Outstanding at December 31, 1998 369,450 $ 0.125-0.500
Granted 136,000 $ 0.500-0.550
Canceled (117,500) $ 0.500
Outstanding at December 31, 1999 387,950 $0.125-0.550
</TABLE>
The Company applies the intrinsic value method of accounting for its stock
option plans. Accordingly, no compensation cost has been recognized for the
plan in 1999, 1998, or 1997. 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>
1999 1998 1997
Net income
<S> <C> <C> <C>
As reported $ 241,000 $ 841,600 $ 866,000
Pro forma $ 232,700 $ 832,200 $ 860,200
Basic earnings
per share
As reported $ 0.07 $ 0.25 $ 0.26
Pro forma $ 0.07 $ 0.25 $ 0.26
Diluted earnings
per share
As reported $ 0.06 $ 0.20 $ 0.22
Pro forma $ 0.06 $ 0.19 $ 0.22
</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>
<S> <C> <C> <C>
Assumption 1999 1998 1997
Dividend yield 0% 0% 0%
Risk-free interest rate 6.5% 5.0% 5.55%
Expected life 10 years 10 years 10 years
Expected volatility 134.4% 121.9% 141.1%
</TABLE>
Following is a summary of the status of the plans during 1999, 1998, and 1997.
<TABLE>
Number of Weighted Average
Shares Exercise Price
Options exercisable
<S> <C> <C>
at December 31, 1999 321,250 0.298
Weighted average
fair value of options
granted during 1999 $0.2427
</TABLE>
<TABLE>
Number of Weighted Average
Shares Exercise Price
Options exercisable
<S> <C> <C>
at December 31, 1998 283,250 0.299
Weighted average
fair value of options
granted during 1998 N/A
</TABLE>
<TABLE>
Number of Weighted Average
Shares Exercise Price
Options exercisable
<S> <C> <C>
at December 31, 1997 231,150 0.282
Weighted average
fair value of options
granted during 1997 $0.123
</TABLE>
Following is a summary of the status of options outstanding at
December 31, 1999:
<TABLE>
Outstanding Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
<S> <C> <C> <C> <C> <C>
Price Number Life Price Number Price
$0.250 20,000 2 $0.250 16,000 $0.250
$0.125 231,950 3 $0.125 178,750 $0.125
$0.500 111,000 10 $0.500 101,500 $0.500
$0.550 25,000 10 $0.550 25,000 $0.500
387,950 321,250
</TABLE>
7) Income Taxes
The provisions for income taxes consist of the following:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31, 1999 1998 1997
Taxes on income:
U.S. Federal
Current $ 4,000 $ 9,000 $ 12,000
Deferred (56,200) (183,400) (28,400)
$ (52,200) $ (174,400) $ (16,400)
State
Current 6,000 52,000 20,000
Deferred 1,400 15,000 9,600
$ 7,400 $ 67,000 $ 29,600
Foreign
Current 0 0 10,000
Deferred 0 0 0
$ 0 $ 0 $ 10,000
Net income tax
(benefit)
provision $ (44,800) $ (107,400) $ 23,200
</TABLE>
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, 1999 1998 1997
Statutory federal
income tax rate 34.0% 34.0% 34.0%
Effect on tax rate
resulting from:
State and foreign
income taxes,
net of federal
tax benefit (0.4%) 8.2% 2.2%
Tax effect of change
in valuation
allowance (71.9%) (65.2%) (36.6%)
Expiration of
tax credits 8.2% 2.5% 1.7%
Other 7.3% 5.9% 1.3%
Effective tax rate (22.8%) (14.6%) 2.6%
</TABLE>
The Company records its deferred taxes on a tax jurisdiction basis and
classifies those net amounts as current or noncurrent based on the
balance sheet classifications.
Deferred tax assets are comprised of the following:
<TABLE>
<S> <C> <C>
December 31, 1999 1998
Allowance for doubtful accounts $ 148,800 $ 222,600
Accrued expenses 121,400 97,300
Loss carryforwards 595,700 598,500
Tax credits 29,600 48,800
Other 26,900 43,500
922,400 1,010,700
Deferred tax asset
valuation allowance (29,600) (173,200)
Total deferred taxes,
net $ 892,800 $ 837,500
</TABLE>
At December 31, 1999, the Company had unused federal net operating loss
carryforwards of approximately $1,734,600, Florida loss carryforwards of
approximately $162,900, and investment and other federal tax credits of
approximately $29,600 available to offset future tax liabilities. 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 $892,800 is more likely than not
to be realized.8) Transactions with Related PartiesAt December 31, 1998
and 1997, $600,000 in principal amount of the Company's subordinated
notes (see Note 4) were held by Mr. Freeman A. Ford, an officer, director,
and major shareholder of the Company, and his immediate family
members. These notes were paid off in September 1999.
9) 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 15% of their eligible salary. The Company contributes
an amount equal to 25% of the employee contribution, up to a maximum
of $400 per employee per year.
10) Lease Commitments
The Company's rental expense, relating primarily to a lease for its office
and manufacturing facility, amounted to $417,100 in 1999, $384,300 in 1998,
and $393,400 in 1997. At December 31, 1999, minimum annual lease commitments
under non-cancelable leases were as follows:
<TABLE>
<S> <C>
2000 448,800
2001 436,700
2002 427,000
2003 427,000
2004 427,000
2005 213,500
Total $ 2,380,000
</TABLE>
The Company is required to pay property taxes, utilities, and insurance
under certain of these leases. The Company has exercised its option to
extend the lease on its premises through June 2005.
11) Net Income Per Share
Basic earnings per share were calculated as follows:
<TABLE>
<S> <C> <C> <C>
Years ended December 31, 1999 1998 1997
Net income $ 241,000 $ 841,600 $ 866,000
Average common shares outstanding 3,303,311 3,303,311 3,298,311
Earnings per share $ 0.07 $ 0.25 $ 0.26
</TABLE>
Basic earnings per share are calculated by dividing net income by the
weighted average number of shares issued and outstanding. ]
Diluted earnings per share were calculated as follows:
<TABLE>
<S> <C> <C> <C>
Years ended December 31, 1999 1998 1997
Adjusted net income $ 241,000 $ 841,600 $ 866,000
Average co mon shares outstanding 3,303,311 3,303,311 3,298,311
Add: Exercise of options reduced
by the number of shares purchased
with proceeds 271,523 325,849 186,026
Add: Exercise of warrants r duced
by the number of shares purchased
with proceeds 87,039 102,361 63,173
Add: Expense of warrants attached
to debt reduced by the number of
shares purchased with proceeds 438,158 472,778 384,231
Adjusted weighted average shares
outstanding 4,100,032 4,204,299 3,931,741
Earnings per common share assuming
full dilution $ 0.06 $ 0.2 0 $ 0.22
</TABLE>
12) Licensing Income
During 1997, the Company entered into a licensee agreement with a third
party in the Far East under which the Company received and recognized
license fee income net of foreign income taxes of $90,000. The agreement
allows for the licensee to assemble and sell the IceStorT product in
certain countries using the Company's technology and design specifications.
For the term of the agreement (eight years), the Company is required to
provide parts and technical services to the licensee at prices and rates
equivalent to normal list prices.
13) Litigation
The Company is involved in certain litigation matters. Management believes
resolution of these disputes will not have a material adverse effect on the
Company's financial condition and results of operation.
14) Business Segment and Concentration of Credit Risk
Business Segment: The Company operates in one business segment, the
development, production and marketing of polymer heat exchangers for the
solar and thermal energy storage markets worldwide.
<TABLE>
<S> <C> <C> <C>
Product Line 1999 1998 1997
Net Sales Solar $ 6,370,000 $ 5,899,500 $ 5,918,100
Thermal Energy Storage 4,251,700 5,336,300 4,633,400
$10,621,700 $11,235,800 $10,551,500
</TABLE>
Geographic information for revenues and long-lived assets for the year
ended December 31, 1999, 1998, and 1997 are as follows:
<TABLE>
1999 1998 1997
<S> <C> <C> <C>
Net Sales Domestic $ 7,841,500 $ 7,235,900 $ 7,555,300
Foreign Japan 1,876,600 2,634,100 1,961,600
Other 903,600 1,365,800 1,034,600
$10,621,700 $11,235,800 $10,551,500
Long-lived assets Domestic $ 922,400 $ 583,400 $ 378,600
$ 922,400 $ 583,400 $ 378,600
</TABLE>
For fiscal 1999-1998, and 1997, the Company had one major customer who
individually accounted for 10% or more of sales totaling $1,876,600,
$2,634,100 and $1,961,600 in 1999, 1998, and 1997, respectively.
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, 1999, unsecured trade accounts receivable from customers
in California, Florida, and foreign countries were $393,600, $1,057,400,
and $476,500, respectively.
Report of Independent Auditors
To the Board of Directors and Stockholders of FAFCO, Inc.
We have audited the accompanying consolidated balance sheets of FAFCO, Inc.
(a California corporation) and its subsidiary as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period
ended December 31, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Burr, Pilger & Mayer
San Francisco, California
March 3, 2000
Summary of Operations
Five-Year Summary of Operations (in thousands, except per share data)
<TABLE>
Year Ended
<S> <C> <C> <C> <C> <C>
December 31, 1999 1998 1997 1996 1995
Net sales $ 10,622 $ 11,236 $ 10,552 $ 8,869 $ 7,876
Income (loss) before
income taxes $ 196 $ 734 $ 889 $ 274 $(1,857)
(Benefit from)
provision for income
taxes $ (107) $ 23 $ (37) $ 1
Net income (loss) $ 241 $ 841 $ 866 $ 311 $(1,858)
Basic net income (loss)
per share $ 0.07 $ 0.25 $ 0.26 $ 0.10 $ (0.60)
Diluted net income
(loss) per share $ 0.06 $ 0.20 $ 0.22 $ 0.10 $ (0.60)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
At December 31, 1999 1998 1997 1996 1995
Working capital $ 1,487 $ 2,637 $ 2,007 $ 1,285 $ 379
Total assets $ 4,987 $ 5,377 $ 4,437 $ 4,345 $ 3,557
Long-term obligations $ 17 $ 957 $ 980 $ 951 $ 680
Shareholders' equity $ 3,127 $ 2,886 $ 2,042 $ 1,176 $ 772
</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 1999 and
1998 were as follows:
<TABLE>
<S> <C> <C> <C> <C>
Quarter Ended March 31 June 30 September 30 December 31
1999 High $1.00 $1.00 $1.00 $0.75
1999 Low $0.94 $1.00 $0.75 $0.25
1998 High $0.75 $0.75 $0.94 $0.94
1998 Low $0.75 $0.75 $0.94 $0.94
</TABLE>
The quotations above were provided by the National Quotation Bureau.
All quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions. At March 14, 2000, the Company had 692 shareholders of
record. FAFCO, Inc. has never paid dividends on its Common Stock, has no
plans to do so in the foreseeable future and is prohibited from so doing
(see Note 6).
Management's Discussion and Analysis
This Annual Report to Shareholders contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward-looking statements as a
result of the risk factors set forth below under the heading "Factors
Affecting Future Results" and elsewhere in this Annual Report to Shareholders.
1999 Compared with 1998
Net sales for 1999 decreased by 5.5% from $11,235,800 in 1998 to $10,621,700
in 1999. This decrease was due to decreased sales of the Company's IceStorT
products partially offset by increased unit sales of the Company's pool
products.
Net sales of the Company's IceStorT products were 20.3% lower in 1999 than
in 1998 due to decreased foreign sales. Pool product sales were 8% higher
in 1999 than in 1998 due to increased unit sales. Pool product sales
amounted to 60% of net sales in 1999 compared to 53% of net sales in 1998.
IceStorT sales amounted to 40% of net sales in 1999 compared to 47% of
net sales in 1998.
Cost of goods sold decreased in absolute dollars from $6,801,700 in 1998
to $6,436,400 in 1999 while remaining stable as a percentage of net sales
(60.5% in 1998 compared to 60.6% in 1999).
Marketing and selling expenses decreased in absolute dollars from
$1,942,800 in 1998 (17.3% of net sales) to $1,854,300 (17.5% of net sales)
in 1999. These decreases were due to small decreases in a variety of
expense categories, no one of which is by itself significant.
General and administrative expenses increased from $1,480,200 (13.2% of
net sales) in 1998 to $1,752,600 (16.5% of net sales) in 1999. These
increases were due to a bad debt write-off as the result of terminating
the Comany's business relationship with the Tampa distributor of its pool
products. This business termination also resulted in general and
administrative start-up costs to open a Company sales office in Tampa.
Research and development expenses increased from $194,100 (1.7% of net
sales) in 1998 to $327,600 (3.1% of net sales) in 1999. These increases
were due mainly to an increased personnel and projects.
Net interest expense decreased from $113,400 (1.0% of net sales) in 1998
to $71,700 (0.7% of net sales) in 1999. This decrease was due primarily
to paying off the Company's subordinated debt in September 1999.
1998 Compared with 1997
Net sales for 1998 increased by 6.5% from $10,551,500 in 1997 to
$11,235,800 in 1998. This increase was due to increased unit sales of
the Company's IceStorT products.
Net sales of the Company's pool products were relatively stable due to
increased unit sales of the Company's SunSaverT product offset by price
decreases due to competitive market pressures. Net sales of the Company's
IceStorT products were 15.2% higher in 1998 than in 1997 due
mainly to increased foreign sales. Pool product sales amounted to 53%
of net sales in 1998 compared to 56% of net sales in 1997. IceStorT
sales amounted to 47% of net sales in 1998 compared to 44% of net sales
in 1997.
Cost of goods sold increased from $5,956,500 (56.5% of net sales) in
1997 to $6,801,700 (60.5% of net sales) in 1998. This increase was
due primarily to increased sales of lower margin products in both the
pool and the IceStorT lines.
Marketing and selling expenses increased from $1,770,000 (16.8% of net
sales) in 1997 to $1,942,800 (17.3% of net sales) in 1998. This
increase was due mainly to increased sales and promotional activities in
1998 as compared to 1997.
General and administrative expenses decreased from $1,776,100 (16.8% of
net sales) in 1997 to $1,480,200 (13.2% of net sales) in 1998. These
decreases were due mainly to bonus and profit-sharing expenses incurred
in 1997 which were not incurred in 1998.
Research and development expenses were relatively stable at $202,800
(1.9% of net sales) in 1997 compared with $194,100 (1.7% of net sales)
in 1998. This was due mainly to the stabilization in the number of
projects designed to improve current products and to develop potential
new products, and in the personnel to implement those projects.
Net interest expense was also relatively stable at $128,700 (1.2% of net
sales) in 1997 compared with $113,400 (1.0% of net sales) in 1998.
This decrease was due mainly to lower average daily borrowing in 1998
along with lower interest rates.
Seasonality
Historically, the Company has experienced lower solar 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. As the Company's product mix shifts to include a larger
proportion of other products, such as the thermal energy storage products,
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 1999, sales of solar heating products experienced their typical
seasonality. Sales and net income decreased in the third and fourth
quarters due to decreased sales of IceStorT products.
In 1998 sales and net income experienced their typical seasonality.
In 1997 sales and net income experienced their typical seasonality, except
that sales of pool panel products in the first quarter increased as a
result of the unusually dry and warm weather in both California and Florida.
As a result of the increased sales of pool panel products the traditional
first quarter loss was not experienced.
Liquidity and Capital Resources
The Company's cash position decreased from $477,500 at 1998 fiscal year end
to $64,800 at 1999 fiscal year end, principally due to cash flow from
financing activities (payment of subordinated debt) offset in part by
borrowings on line of credit, and investing activities (purchase of
fixed assets.
At December 31, 1999 the Company's net accounts receivable had decreased
to $1,752,000 from $1,876,600 at December 31, 1998. This decrease was
due primarily to lower sales during the fourth quarter of 1999.
At December 31, 1999, the Company's accounts payable and other accrued
expenses had decreased to $802,500 from $1,065,600 at December 31, 1998.
This decrease was due primarily to decreased inventory levels.
At December 31, 1999 the Company's inventories had decreased to $1,041,600
from $1,265,400 at December 31, 1998. This decrease was due primarily to
an inventory management program implemented during the year.
At December 31, 1999, net plant and equipment had increased to $922,400
from $583,400 at December 31, 1998. The main reason for this increase was
the construction of new production equipment developed to improve
processes and products.
The Company had a deferred tax asset, net of valuation allowance, at
year-end of $892,800 in 1999 and $837,500 in 1998. 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. 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, 1999, the Company's current ratio was 1.81 to 1 compared
with 2.72 to 1 at December 31, 1998 and working capital decreased over the
same period to $1,487,000 from $2,637,200. Total assets exceeded total
liabilities by $3,127,400 at December 31, 1999 compared with $2,886,400 at
December 31, 1998.
The Company believes that 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 forward-looking statement involving risks and
uncertainties, including the amount of the Company's sales and the ability
of the Company to control its operating expenses. However, if sales decline
from current levels additional debt or equity financing may be required.
here can be no assurance that financing, if required, would be available on
favorable terms or at all or that such financing will not significantly
dilute the ownership interests and rights of existing shareholders.
The Company has a line of credit, of which $461,500 had been utilized and
$538,500 remained available under the formula applied to net accounts
receivable at December 31,1999. This line of credit expires on June 30, 2000.
In addition to the line of credit, the Company has a 36-month time loan
available in the amount of $500,000 bearing interest at prime plus 1.8%.
At December 31, 1999, the Company had no outstanding balance on this loan.
Factors Affecting Future Results
Export sales are subject to certain controls and restrictions, including
tariffs and import duties and are subject to certain risks, including
changing regulatory requirements of foreign jurisdictions and transportation
delays and interruptions; however, the Company has not experienced any
material difficulties in the past relating to such limitations.
Corporate Directory and Information
Board of Directors
Freeman A. Ford
Chairman of the Board, President, and
Chief Executive Officer
FAFCO, Inc.
William A. Berry*
Senior Vice President and
Chief Financial Officer
Electric Power Research Institute
a private, nonprofit, research organization
doing collaborative research for the
electricity industry.
William F. Chisholm
Manager
Bain & Company
a management consultant firm
David F. Ford
President
Danger! Books
a publishing and sales company
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, and
Chief Executive Officer
Alex N. Watt
Executive Vice President and Secretary
David K. Harris
Vice President, Sales
Solar Products
Nancy I. Garvin
Vice President, Finance
Transfer Agent and Registrar
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
Telephone: (212) 509-4000
Web Site: http://www.continentalstock.com
Legal Counsel
Wilson, Sonsini, Goodrich & Rosati
A Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Independent Accountants
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 94063-3455
Attention: Alex N. Watt
Annual Shareholders' Meeting
The Annual Shareholders' Meeting will be held at 3:00 p.m.
on May 4, 2000 at FAFCO, Inc., 2690 Middlefield Road,
Redwood City, California 94063-3455, Telephone: (650) 363-2690
FAFCO, Inc.
2690 Middlefield Road
Redwood City, California 94063-3455
650.363.2690
http://www.fafco.com
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
1. THE GREGORY COMPANY
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