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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
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:
1999 1998 1997
California 24% 19% 22%
Florida 33% 31% 31%
Other U.S. 17% 14% 19%
Foreign Countries 26% 36% 28%
100% 100% 100%
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)
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.
* Denotes a management contract or compensatory plan or arrangement.
(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.
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
Balance at Additions Charged
Beginning of to Costs and Balance at End
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
(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.
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
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
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.
* Denotes a management contract or compensatory plan or arrangement.
(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.