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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the fiscal year ended December 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ________________ to _______________.
Commission file number 0-10120
FAFCO, Inc.
(Exact name of registrant as specified in its charter)
California 94-2159547
(State or other jurisdiction of (IRS Employer Idetification No.)
incorporation or organization)
2690 Middlefield Road, Redwood City, California 94063
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 415/363-2690
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.125 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of February 2, 1997 was $188,400 based
upon the average of the bid and ask prices reported for such date by the
National Quotation Bureau. For purposes of this disclosure, shares of
Common Stock held by persons who hold more than 5% of the outstanding shares
of Common Stock and shares held by executive officers and directors of the
registrant have been excluded in that such persons may be deemed to be
affiliates as that term is defined under the rules and regulations
promulgated under the Securities Act of 1933. This determination is not
necessarily conclusive for other purposes.
The number of shares of the registrant's Common Stock outstanding as of
December 31, 1996, was 3,298,311.
Documents Incorporated by Reference
Document Description Form 10-K Part
Portions of Exhibit 13.1 the Company's 1996 Annual Report to Shareholders
(The Annual Report)...................................................I, II, IV
The Company's Definitive Proxy Statement (the Proxy Statement) for the 1997
Annual Meeting to be held on April 24, 1997 (the Proxy Statement is expected to
be filed pursuant to Regulation 14A on or before April 30, 1997)............ III
_____________________________
With the exception of the information specifically incorporated by reference
in Parts I, II, III and IV of this Form 10-K, neither the Company's Annual
Report nor the Company's Proxy Statement is to be deemed filed as part of this
report.
PART I
Item 1. Business
Introduction
FAFCO, Inc. (FAFCO, the Company, or Registrant) designs, develops, manufactures,
and markets solar heating systems for swimming pools and thermal energy storage
systems for commercial and industrial cooling. Pool product sales amounted to
58% of net sales in 1996 compared to 62% of net sales in 1995 and 57% of net
sales in 1994. Thermal energy storage sales amounted to 42% of net sales in
1996 compared to 38% of net sales in 1995 and 42% of net sales in 1994.
The Company manufactures products for the solar heating of water for low and
medium temperature applications. From the inception of the Company's
predecessor as a sole proprietorship in 1969 until 1976, efforts were largely
devoted to the refinement of the Company's initial product, a solar heating
system for swimming pools - a low temperature solar application. Since that
time, the Company has focused on increasing its share of the pool heating
market by extending its network of independent distributors, decreasing its
manufacturing costs, and improving its initial product. In 1983, a passive
domestic hot water heating system, the 444, was introduced (this product was
discontinued in early 1994). In 1987, the Company introduced a thermal energy
storage system based on the same heat exchanger technology as is used in its
swimming pool heating systems. In 1993, the Company introduced an electronic
control system for swimming pool solar heating systems (this product was
discontinued in December 1996).
FAFCO, Inc. was incorporated under the laws of the State of California in 1972.
Its principal executive offices are located at 2690 Middlefield Road, Redwood
City, California. Its telephone number at that address is (415) 363-2690.
Markets
Swimming Pool Heating
Low temperature solar applications developed because of the cost effectiveness
of solar systems in heating a high volume of water to produce a small
temperature change. The market for swimming pool heating developed for
several reasons. First, pool owners normally use their pools when solar
energy is abundant (during daylight hours and the summer swimming season).
Second, pools already have two elements needed for low temperature water
heating: storage (the pool water) and circulation (the existing pool pump and
associated plumbing). Third, pool owners are an easily identifiable market.
Thermal Energy Storage
FAFCO also designs, develops, manufactures, and markets a static, glycol ice
builder for the thermal storage market. Since the product's introduction,
FAFCO has sold these ice banks primarily to the commercial air conditioning
market for use in off-peak air conditioning systems.
Products
Swimming Pool Heating
The FAFCO solar pool heating system is composed of six to twelve solar
collectors, a sun sensor, an automatic control, and associated accessories.
The collectors and sensor are typically mounted on the roof of a pool owner's
home and connected to the pool pump and automatic control.
The customer sets the automatic control for the desired water temperature and,
when the sensor detects that there is sufficient solar energy for the system
to function efficiently, the automatic control directs the flow of water from
the pool to the collectors. The water absorbs heat as it passes through the
collectors and then flows back to the pool. When the desired water temperature
is achieved or when there is insufficient solar energy, the automatic control
redirects the flow of water back to the pool and water is drained from the
collectors. When the water temperature drops or there is sufficient solar
energy, the system is reactivated automatically.
In February 1996, the Company introduced a version of its solar pool heating
system specifically designed for above ground swimming pools. This system is
composed of one or two solar collectors optimized for use in heating above
ground swimming pools and designed to lie flat on the ground or to be mounted
on a rack on the ground.
In May 1996, the Company introduced a new and improved version of its solar
collector that has a higher thermal performance due to its unique heat exchange
tube design. The tube design incorporates molded indentations which enhance
the heat transfer coefficient by increasing fluid turbulence.
The Company's solar collectors are composed entirely of a polyolefin material
(a high molecular weight polymer compound) and made up of small round tubes
formed side by side in a rectangular shape either one-by-two meter,
four-by-eight feet, four-by-ten feet, four-by-twelve feet or four-by-twenty
feet in size, with submanifolds and header pipes thermoformed on each end.
This design provides for a maximum heating surface and even water flow in order
to transfer 75 to 90 percent of the available solar energy to the pool water.
The polyolefin material, which has been specially formulated by the Company, is
black in color (to optimize solar energy absorption) and has the inherent
advantages over other possible materials of lower cost, lighter weight, and
higher resistance to the corrosive effects of pool chemicals and degradation
resulting from ultraviolet radiation, heat, and other environmental effects.
In May 1993, the Company introduced a proprietary microprocessor-based
control (AutoPool) for its solar pool heating systems. Prior to May 1993,
the Company had a private label arrangement with an automatic control
manufacturer. Because of lack of demand for the Company's AutoPool control,
this product was discontinued effective January 1, 1997. The Company has
ongoing obligations to service and provide spare parts for AutoPool controls
sold prior to that time.
Domestic Water Heating
In 1981, the Company began the design and development of an advanced passive
solar domestic water heating system, the 444. In the second quarter of 1983,
the Company began manufacturing and selling the 444 and has sold
approximately 13,000 systems to date.
Because of lack of demand for the Company's solar domestic water heating
system, this product has been discontinued, effective the first quarter of
1994. The Company has ongoing obligations to service, and provide spare
parts for, domestic water heaters sold prior to that time.
Thermal Energy Storage
The Company's thermal energy storage (IceStor) systems utilize nighttime
electrical capacity to create stored cooling energy. This is normally done
by storing inexpensive "off-peak" energy in the form of either chilled water
or ice. The next day, this stored cooling capacity is used in conjunction
with the building's air conditioning equipment to significantly reduce
electrical requirements for cooling during times of high electrical demand
and high electrical cost.
Cool storage systems offer electrical utilities a solution to their
fundamental, long-term problem: increasing peak demand for power during
periods of limited available capacity (i.e. during business hours). IceStor
technology shifts energy consumption to off-peak periods when there is
available capacity and lower demand.
Marketing and Sales
Solar Systems
FAFCO markets its solar systems and controls in the United States through
independent distributors who sell directly to end users. Distributors
generally have sales, installation, and service personnel who are supported
by extensive FAFCO marketing and technical materials, as well as in-depth
factory and field training programs.
The majority of sales personnel employed by the typical distributor are
assigned to retrofit sales, which are sales to existing pool owners.
Retrofit sales are generated through direct mail, customer referrals,
canvassing, and, to a lesser extent, selected media advertising. The balance
of the distributor's sales personnel are generally assigned to contractor
accounts seeking referrals for new construction sales. FAFCO usually
provides direct mail literature and other advertising materials to distributors
and mails or places these materials with local advertisers on the distributors'
behalf and partially at the distributors' expense. In certain instances,
distributors will also engage in direct mailing and advertising.
In the past, the Company has canceled several distributor agreements for reasons
of inadequate performance by the distributor, primarily failure to provide
adequate sales, installation and service support for the Company's products.
To date, the Company has generally been able to find qualified replacements.
All work relating to the installation of FAFCO solar systems is covered by a
full one-year warranty provided by the distributor. The Company's solar
collectors used to be covered by a ten-year limited warranty, which was
changed to a ten-year full warranty beginning in 1991. Its automatic controls,
pumps, and drain-down valves are covered by a three-year limited warranty.
FAFCO warranties cover defects in materials and workmanship provided that the
related products are used for their intended purpose.
FAFCO solar systems are designed to require only minimal maintenance, which can
usually be performed either by the consumer using an owner's manual or by the
distributor's service personnel.
Thermal Energy Storage Systems
The Company markets its IceStor products through independent contractors who
design and build heating and cooling systems for commercial and industrial
applications. The Company has also licensed its IceStor products for sale
overseas, including to design-and-build, heating, ventilating, and
air-conditioning companies in Taiwan, Korea, Japan, and the People's Republic
of China. These licensing agreements provide for licensees' assembly and
sale of IceStor products in those countries.
Sales by Geographic Area
The Company's net sales during 1996, 1995, and 1994 were geographically
distributed approximately as follows:
State 1996 1995 1994
California 17% 21% 24%
Florida 34% 37% 38%
Oklahoma 0% 7% 10%
Other States 35% 20% 13%
Foreign Countries 14% 15% 15%
- -------------------------------------
100% 100% 100%
Three of the Company's customers, Kailay International, Ebara Corporation, and
Florida Solar, accounted for 13.8%, 11.9%, and 11.8% of the Company's fiscal
1996 net sales. Kailay International also accounted for 10.0% of the Company's
fiscal 1995 net sales. During 1995 and 1996, Kailay International and Ebara
Corporation were the licensees for the Company's IceStor products in Taiwan and
Japan, respectively, and as such, purchased IceStor products and components for
assembly into products for resale to end users in Taiwan and Japan respectively.
During 1996, Florida Solar was a distributor of this Company's pool products
and, as such, purchased pool panels and components for resale to end users in
Florida. No other customer accounted for 10% or more of the Company's net
sales in fiscal 1994, 1995, or 1996. A material reproduction in orders from
or the loss of one of the Company's major customers without an ability to
replace such lost sales would have a material adverse effect on the Company's
operating results and financial condition.
Foreign sales of the Company's products are made through independent foreign
distributors and licensees. Sales to foreign distributors and licensees are
shipped directly from the Company's facilities in California and invoiced in
U.S. dollars. Export sales are subject to certain controls and restrictions,
including tariffs and import duties, and are subject to certain risks,
including changing regulatory requirements of foreign jurisdictions and
transportation delays and interruptions; however, to date, the Company has
not experienced any material difficulties relating to such limitations.
Backlog
Sales to solar distributors are made against individual purchase orders rather
than through volume purchase arrangements. The Company typically ships its
products within one to five days of receipt of an order; therefore, the
Company's backlog at any date is usually insignificant and is not a meaningful
indicator of future sales. FAFCO distributors tend to order frequently in
small quantities in order to minimize their inventory levels and match
inventory levels with current installation schedules.
Sales of IceStor products are made against individual purchase orders to
general contractors or Heating, Ventilating, and Air Conditioning ("HVAC")
contractors for specific new construction projects or for retrofit in
existing buildings. The Company typically ships these products within six
weeks or less of receipt of an order; therefore, the Company's backlog with
respect to IceStor products at any date is also usually insignificant and
not a meaningful indicator of future sales.
Government Tax Incentives
Although the Company's operations are not directly subject to extensive
governmental regulations, the existence or lack of federal, state, and local
tax incentives for the sale and installation of solar systems has a substantial
impact on the Company's business. There is currently no federal tax credit for
solar heating systems, and state solar tax credits are available only in a few
states. The Company does not anticipate that solar tax credits will become
available for solar heating systems in any additional states, nor does in
anticipate a significant increase in sales due to existing or future tax
credits.
Manufacturing
FAFCO's manufacturing activities consist primarily of the production of
polyolefin solar collectors and IceStor heat exchangers, automatic controls,
components for its solar systems, and IceStor containers. A total system
approach is emphasized in order to ensure the effectiveness and reliability of
the Company's products after they have been installed, eliminating the need
for distributors to rely upon materials from other suppliers.
The Company's solar pool heating system utilizes collectors produced from
polyolefin resins using a patented extrusion and thermoforming process. The
Company's IceStor system utilizes heat exchangers, which are also made from
polyolefin resins using a patented extrusion and thermoforming process.
Substantially all equipment used in these processes has been designed and built
by the Company's research and development engineers.
The Company's resins are a petroleum by-product. The market price of these
resins has fluctuated over the years with an increase in 1990 and early 1991
due to tensions in the Middle East, followed by a stabilization after the
completion of Desert Storm. It is expected that the price of the Company's
resins will continue to fluctuate as a result of domestic and international
political and economic conditions.
FAFCO has qualified multiple sources of supply for all of its resins,
materials, and subassemblies. However, certain materials and subassemblies
are obtained from single sources. The Company believes these items could be
supplied by the Company's other qualified sources if sufficient lead-time were
provided. The Company attempts to maintain additional inventory of such
materials to mitigate the risk of supply shortages; however, any prolonged
inability to obtain such items would have a material adverse effect on the
Company's results of operations. To date, the Company has not experienced
any significant manufacturing problems or delays due to shortages of materials.
Quality assurance is performed by FAFCO at its manufacturing facility. Test
and inspection procedures are a part of substantially all production and
assembly operations. In addition, the Company uses it own diagnostic
equipment and laboratory to continually test and inspect raw materials, work
inprocess, and finished goods.
Competition
The Company's solar heating products currently compete directly with solar
heating products offered by less than ten other manufacturers of solar heating
systems, and indirectly with conventional heating systems.
The Company believes that the principal competitive factors in the markets for
FAFCO solar products and controls are (i) product performance and reliability;
(ii) marketing and technical support from the manufacturer for distribution
channels; (iii) selling, installation, and service capabilities of distribution
channels; and (iv) price. The Company believes that it competes favorably with
respect to all of these factors. However, certain of its competitors may have
greater financial, marketing, and technological resources than those of the
Company.
A number of companies in the United States manufacture thermal energy storage
systems of various types similar to the Company's IceStor product. The
industry is in the early stages of development and additional competitors
are expected to enter the market over time. At the present time, the Company
believes that the main competitive factors in the thermal energy storage market
are performance, reliability, and price. The Company believes that it competes
favorably with respect to these factors. However, several of its competitors
have greater financial, marketing, and technological resources than those of
the Company which may adversely affect the Company's ability to compete in
this area.
Research and Development
For the years ended December 31, 1996, 1995, and 1994, the Company's research
and development expenses were $116,000, $460,100, and $484,300, respectively.
The majority of the research and development costs incurred in 1996 related
to an improved solar heating product for in-ground pools, which was introduced
in April 1996.
The Company currently uses consulting engineers, in addition to staff engineers,
who are responsible for existing product improvement, applications engineering,
and new product research and development. The Company is exploring other
potential revenue-producing uses for its polyolefin extrusions.
Patents, Trademarks, and Licenses
FAFCO currently holds four United States patents and one foreign patent
relating to certain aspects of its products and manufacturing technology. In
addition, the Company has two patent applications pending. These patents
expire at various times between March 1997 and July 2003. However, the Company
believes that patent protection is secondary to such factors as ongoing product
development and refinement, the knowledge and experience of its personnel, and
their ability to design, manufacture, and successfully market the Company's
products.
From time to time, the Company has registered as trademarks certain product
names and marks in order attempt to establish and preserve its right to
those product names and marks.
The Company has granted licenses to assemble and sell IceStor in Taiwan,
Korea, Japan, and the People's Republic of China to a Taiwanese company, a
Korean company, a Japanese company, and a People's Republic of China company,
respectively. See "Marketing and Sales" above.
Employees
At December 31, 1996, the Company had a total of fifty-three (53) full-time
and two (2) part-time employees, including eight (8) in marketing, two (2)
in research and development, thirty (30) in manufacturing, and eight (8) in
general management and administration. The Company also uses temporary
employees from agencies to fill seasonal needs. The Company has never had a
work stoppage. No employees are represented by a labor organization.
Seasonality
Information regarding the seasonality of the Company's business is set forth
in "Management's Discussion and Analysis of Financial Condition and Results of
Operation - Seasonality" on page 20 of the Annual Report, which information is
incorporated herein by reference.
Environmental Regulations
The Company is subject to a number of environmental regulations concerning
potential air and water pollution. However, such regulations have not in
the past had any material adverse effect on the Company's business. There
can be no assurance that compliance with existing or future regulations will
not require the expenditure of funds or the modification of the Company's
manufacturing process, which could have a material adverse effect on the
Company's business or financial condition.
Item 2. Properties
The Company's principal executive offices and manufacturing facilities for
its products are located in a single 42,500 square foot facility in Redwood
City, California. A lease expiring in the year 2000 covers this facility.
See Note 11 of "Notes to Consolidated Financial Statements" on page 14 of
the Annual Report, which information is incorporated herein by reference.
The Company believes that its current facilities are adequate to meet its
requirements for space in the foreseeable future. Manufacturing space is
being fully utilized at the present time. However, additional demand can be
accommodated by adding second and third employee shifts.
Item 3. Legal Proceedings
There are presently no pending material legal proceedings to which the
Company is a party or to which any of its property is subject, except for
routine legal proceedings incidental to the Company's business.
The Company has received correspondence from The Coca-Cola Company claiming
that the Company's use of a polar bear design in its advertising materials
infringes upon Coca-Cola copyrights in a television commercial and
Coca-Cola's alleged unregistered polar bear design trademark for merchandise.
The Company believes that The Coca-Cola Company's allegations are unfounded,
but it is continuing to investigate and assess the matter.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of security holders during
the fourth quarter of its fiscal year ended December 31, 1996.
Executive Officers of the Registrant
The executive officers of the Company are set forth below. All officers
serve at the pleasure of the Board of Directors. There are no family
relationships between any executive officers or directors.
Freeman A. Ford, age 56, serves as Chairman of the Board, President, and
Chief Executive Officer. Mr. Ford, a co-founder of the Company, has served
as Chairman of the Board since 1972, as Chief Executive Officer of the
Company since May 1979, and as President since September 1984. Mr. Ford is
also a Director of H.B. Fuller Company.
Alex N. Watt, age 55, serves as Vice President of Finance and Administration,
Chief Financial Officer, and Secretary. Mr. Watt joined the Company as its
Vice President-Finance and Chief Financial Officer in July 1984, and has
served as Secretary since March 1985.
David Harris, age 41, serves as Vice President, Pool Products. Mr. Harris
joined the Company in August 1981 as a sales representative and has held the
positions of Pool Builder Manager, National Sales Manager-Pool Products,
Pacific Northwestern Region Sales Manager, National Sales Manager-Solar
Division, National Sales Manager, Vice President-Sales and Marketing (from
June 1988 until April 1993), and President-Pool Products Division (from May
1993 until May 1995).
Michael Anderson, age 51, has served as Vice President, Commercial Products
since May 1995. Mr. Anderson joined the Company in September 1984 as Vice
President, Sales and Marketing and held that position until February 1987.
Mr. Anderson served as President of Marcus Company, a manufacturer's
representative for HVAC and refrigeration products from March 1987 until May
1993, when he rejoined the Company as President, Commercial Products Division.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information regarding the market for and market prices of the Company'sCommon
Stock, the number of shareholders of record, and information regarding
dividends is set forth under the heading "Common Stock Data" on page 17 of
the Annual Report, which information is incorporated herein by reference.
Item 6. Selected Financial Data
Selected financial data for the Company is set forth in the table entitled
"Five-Year Summary of Operations" on page 17 and in the last sentence of the
text under the table entitled "Common Stock Data" on page 18 of the Annual
Report, which information is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations is set forth under the heading
"Management's Discussion and Analysis" on pages 19 through 21 of the Annual
Report, which information is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company are set forth on pages
5 through 15 of the Annual Report, which information is incorporated herein
by reference. The supplementary financial information of selected quarterly
financial data is not required under Regulation S-K Item 302, because the
Company does not meet the tests set forth therein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On December 11, 1996, FAFCO, Inc. dismissed Price Waterhouse LLP as its
independent accounts.
The reports of Price Waterhouse LLP on the financial statements for the past
two fiscal years contain no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles.
The Registrant's Audit Committee and Board of Directors participated in and
approved the decision to change independent accountants.
In connection with its audits for the two most recent fiscal years and
through December 11, 1996, there have been no disagreements with Price
Waterhouse LLP on any matter of accounting principles or practices, financial
statements disclosure, or auditing scope or procedure, which disagreements if
not resolved to the satisfaction of Price Waterhouse LLP would have caused
them to make reference thereto in their report on the financial statements
for such years.
During the two most recent fiscal years and through December 11, 1996, there
have been no reportable events as defined in Regulation S-K item 304 (a) (1)
(v).
The Registrant requested that Price Waterhouse LLP furnish it with a letter
addressed to the SEC stating whether or not it agrees with the above
statements. A copy of such letter, dated December 11, 1996, was filed as
Exhibit 16.1 of that Form 8-K.
New independent accountants.
The Registrant engaged Burr, Pilger & Mayer as its new independent accountants
as of December 11, 1996.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding directors is to be set forth under the heading "Election
of Directors - Nominees" in the Company's Proxy Statement, which information
is incorporated herein by reference.
Information regarding executive officers is set forth under the caption
"Executive Officers of the Registrant" in Part I of this Form 10-K, which
information is incorporated into this Item 10 by reference.
Information regarding the filing of reports by insiders under Section 16(a)
of the Exchange Act is to be set forth under the heading "Election of
Directors Compliance" in the Company's Proxy Statement, which information is
incorporated herein by reference.
Item 11. Executive Compensation
Information regarding the Company's remuneration of its executive officers
and directors is to be set forth under the headings "Election of Directors -
Executive Compensation" and "Election of Directors - Director Compensation"
in the Company's Proxy Statement, which information is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding the security ownership of certain beneficial owners
and management is to be set forth under the headings "Election of Directors -
Security Ownership" and "Information Concerning Solicitation and Voting -
Record Date and Outstanding Shares" in the Company's Proxy Statement, which
information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is to
be set forth under the headings "Election of Directors - Nominees" and
"Election of Directors - Certain Transactions" in the Company's Proxy
Statement, which information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Financial Statements
The consolidated balance sheets for the years ended December 31, 1996 and
1995, the Consolidated Statement of Operations, of shareholders' equity, and
of cash flows for each of the three years in the period ended December 31,
1996, and the notes thereto appear on pages 5 through 15 of Exhibit 13.1 to
this Annual Report on Form 10-K.
2. Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedule (see page
16 of this Annual Report on Form 10-K).
The following schedule for the years ended December 31, 1996, 1995, and 1994
is included in this report. Such schedule should be read in conjunction with
the consolidated financial statements in the Annual Report.
Schedule II - Valuation and Qualifying Accounts and Reserves
Schedules not included in these financial statement schedules have been omitted
because they are not applicable or the required information is shown in the
financial statements or notes thereto.
3. The following exhibits are filed as part of or incorporated by reference,
to the extent indicated herein, in this Annual Report on Form 10-K.
Exhibit No. Description (footnotes appear at the end of the exhibit list)
3.1(1) Articles of Incorporation, as amended.
3.2(3) Bylaws, as amended.
4.1(1) Stock Purchase Agreement dated April 14, 1977, between
Registrant and certain investors.
4.2(3) 10% Convertible Subordinated Notes Purchase Agreement dated
March 27, 1984, between Registrant and certain investors.
4.2(a)(2) Amendment to Subordinated Note Purchase Agreement dated March
27, 1990.
4.2(b)(9) Amendment to 10% Subordinated Note Agreement dated March 25,
1991.
4.3(4)* Security and Guaranty Agreement and Common Stock Purchase
Warrant between the Registrant and Freeman A. Ford dated
February 16, 1987.
4.3(a)(5)* Amendment to the Security and Guaranty Agreement between the
Registrant and Freeman A. Ford dated December 8, 1987.
4.3(b)(6)* Amendment to the Security and Guaranty Agreement between the
Registrant and Freeman A. Ford dated February 1, 1988.
4.3(c)(7)* Second Amendment to the Promissory Notes between the
Registrant and Freeman A. Ford dated March 26, 1991.
4.3(d)(9) Form of Common Stock Purchase Warrant issued March 25, 1993 by
the Registrant to Freeman A. Ford.
4.3(e)(9) Amendment to the Promissory Notes between the Registrant and
Freeman A. Ford dated March 25, 1993.
4.4(10) Common Stock Warrant issued January 19, 1994 to B. Severns.
4.5 Reference Exhibits 3.1 and 3.2.
10.1 Reference Exhibit 4.1.
10.2 Reference Exhibit 4.2, 4.2(a), and 4.2(b).
10.3(7)* 1981 Incentive Stock Option Plan.
10.4(7)* Form of 1981 Incentive Stock Option Agreement.
10.8(1) Standard Form of Distributor Agreement.
10.9(7) Lease Agreement and Addenda for 2690 Middlefield Road, Redwood
City, California, between Registrant, as Lessee, and Beals
Martin and Associates, as Lessor, dated January 18, 1990.
10.10(3) FAFCO Solar Partners II Certificate of Limited Partnership and Limited Partnership Agreement.
10.11 Reference Exhibits 4.3, 4.3(a), 4.3(b), 4.3(c), 4.3(d), and 4.3(e).
10.12(6) Licensing Agreement between the Registrant, as Licensor, and Enercon Engineering, as Licensee, dated May 20, 1988.
10.13(6)* Form of Director's Warrant issued February 1988 to directors Berry and Selig.
10.14(11)* 1991 Stock Option Plan, as amended.
10.14(a)(8)* Form of Stock Option Agreement used under the 1991 Stock Option Plan.
10.15(8)* 1991 Director's Stock Option Plan.
10.15(a)(8)* Form of Nonstatutory Stock Option Agreement used under 1991
Director's Stock Option Plan.
10.16(8)* Employee Stock Purchase Plan.
10.16(a)(8)* Form of Subscription Agreement used under Employee Stock
Purchase Plan.
10.17(9) Licensing Agreement and Addendum between the Registrant, as
Licensor, and Jang-Han Systems Engineering, as Licensee, dated
January 1, 1993.
10.18(10) Export - Import and Technical License Agreement between the
Registrant, as Licensor, and Ebara Corporation, as Licensee,
dated October 22, 1993.
10.19(10) Business Loan Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated, June 10, 1992.
10.19(a)(10) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated March 8, 1994.
10.19(b)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated June 5, 1995.
10.19(c)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated August 7, 1995.
10.19(d)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated September 22, 1995.
10.19(e)(12) Loan Modification Agreement between Registrant, as Borrower,
and Silicon Valley Bank, as Lender, dated February 8, 1996.
10.19(f) Loan Modification Agreement between Registrant, as Borrower,
and Silicon Valley Bank, as Lender, dated October 30, 1996.
10.19(g) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated December 11, 1996.
10.19(h) Loan Modification Agreement between Registrant, as Borrower,
and Silicon Valley Bank, as Lender, dated January 6, 1997.
10.19(i) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated January 21, 1997.
10.20(11) Agency/Distributorship Agreement between Registrant, as
Manufacturer, and Jabria Establishment, as Agent/
Distributorship, dated December 10, 1994.
11.1 Computation of Earnings Per Share (see Note 12 of Notes to
Consolidated Financial Statements on page 15 of the 1995
Annual Report).
13.1 Registrant's 1996 Annual Report to Shareholders.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants (see page 20).
24.1 Power of Attorney (see page 19).
27.1 Financial Data Schedule.
* 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 exhibits filed with Registrant's Annual
Report on form 10-K for the fiscal year ended December 31, 1995.
(a) Reports on Form 8-K: A Report on Form 8-K dated December 13, 1996, was
filed on December 13, 1996 under Item 4, reporting a change in the
Registrant's certifying accountant.
(b) Exhibits: See subsection (a) (3) above.
(c) Financial Statement Schedules: See subsection (a) (2) above.
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors of FAFCO, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated March 4, 1997 appearing on page 16 of the 1996 Annual Report to
Shareholders of FAFCO, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item
14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
Burr, Pilger & Mayer
Palo Alto, California
March 28, 1997
FAFCO, Inc.
Schedule
II
Valuation and Qualifying Accounts and Reserves
Balance at Additions Charged Deductions Balance at
Beginning of to Costs and End of
Period Expenses Period
1996:
Allowance for
doubtful accounts
current accounts
receivable $463,900 $50,400 $1,700(1) $512,600
short-term receivable 28,800 28,800
long-term receivable 39,100 5,100(4) 34,000
Warranty reserve 216,000 94,100 76,000(2) 234,100
Deferred tax asset
valuation allowance 1,383,800 192,000 1,191,800
1995:
Allowance for
doubtful accounts $5,700(1)
current
accounts receivable $469,100 $39,600 39,100(3) $463,900
long-term receivable 39,100 39,100
Warranty reserve 247,000 10,500 41,500(2) 216,000
Deferred tax asset
valuation allowance 600,900 782,900 1,383,800
1994:
Allowance for
doubtful accounts
current accounts
receivable $417,400 $52,600 $900(1) $469,100
long-term
receivable
Warranty reserve 280,300 71,800 105,100(2) 247,000
Deferred tax asset
valuation allowance 893,900 293,000 600,900
(1) Write-offs of uncollectible accounts.
(2) Cost of warranty claims processed.
(3) Reclassification to allowance for long-term notes receivable.
(4) Reclassification to allowance for short-term notes receivable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 28, 1997 FAFCO, Inc.
/s/Freeman A. Ford
- -------------------
Freeman A. Ford,
Chairman of the Board,
President, and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Freeman A.
Ford and Alex N. Watt, or either of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact, or his substitute or substitutes, may do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- -----------------------------------------------------------------------------
Chairman of the Board, March 28, 1997
President, and --------------
/s/Freeman A. Ford Chief Executive Officer
- ------------------ (Principal Executive Officer),
Freeman A. Ford and Director
Vice President, Finance & March 28, 1997
Administration March 28, 1997 --------------
/s/Alex N. Watt and Chief Financial Officer
- ------------------ (Principal Financial and
Alex N. Watt Accounting Officer)
/s/William A. Berry Director March 28, 1997
- ------------------- --------------
William A. Berry
/s/Robert W. Selig, Jr. Director March 28, 1997
- ----------------------- --------------
Robert W. Selig, Jr.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-75201, 2-86299, 2-95390 and 33-76220) of
FAFCO, Inc. of our report dated March 4, 1997, appearing on page 15 of the
1996 Annual Report to Shareholders, which is incorporated by reference in
this Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report on the Financial Statement Schedule,which appears on
page 18 of this Form 10-K.
Burr, Pilger & Mayer
Palo Alto, California
March 4, 1997
Index to Exhibits
Exhibit No. Description Subsequently Numbered Pages
3.1(1) Articles of Incorporation, as amended.
3.1(8) Form of Amended and Restated Articles of Incorporation, to be
filed following shareholder approval.3.2(3) Bylaws, as amended.
4.1(1) Stock Purchase Agreement dated as of April 14, 1977, between
Registrant and certain investors.
4.2(3) 10% Convertible Subordinated Notes Purchase Agreement dated as of
March 27, 1984, between Registrant and certain investors.
4.2(a)(2) Amendment to Subordinated Note Purchase Agreement dated March 27,
1990.
4.2(b)(9) Amendment to 10% Subordinated Note Agreement dated March 25, 1993.
4.3(4) Security and Guaranty Agreement and Common Stock Purchase Warrant
between the Registrant and Freeman A. Ford dated February 16, 1987.
4.3(a)(5) Amendment to the Security and Guaranty Agreement between the
Registrant and Freeman A. Ford dated December 8, 1987.
4.3(b)(6) Amendment to the Security and Guaranty Agreement between the
Registrant and Freemen A. Ford dated February 1, 1988.
4.3(c)(7) Second Amendment to the Promissory Notes between the Registrant
and Freeman A. Ford dated March 26, 1991.
4.3(d)(9) Form of Common Stock Purchase Warrant issued March 25, 1993 by the
Registrant to Freeman A. Ford.
4.3(e)(9) Amendment to the Promissory Notes between the Registrant and
Freeman A. Ford dated March 25, 1993.
4.4 Common Stock Warrant issued January 19, 1994 to B. Severns.
4.5 Reference Exhibits 3.1 and 3.2.
10.1 Reference Exhibit 4.1.
10.2 Reference Exhibit 4.2, 4.2(a), and 4.2(b).
10.3(7) 1981 Incentive Stock Option Plan.
10.4(7) Form of 1981 Incentive Stock Option Agreement.
10.8(1) Standard form of Distributor Agreement.
10.9(7) Lease Agreement and Addenda for 2690 Middlefield Road, Redwood
City, California, between Registrant, as Lessee, and Beals Martin
and Associates, as Lessor, dated January 18, 1990.
10.10(3) FAFCO Solar Partners II Certificate of Limited Partnership and
Limited Partnership Agreement.
10.11 Reference Exhibit 4.3, 4.3(a), 4.3(b), 4.3(c), 4.3(d), and 4.3(e).
10.12(6) Licensing Agreement between the Registrant, as Licensor, and
Enercon Engineering, as Licensee, dated May 20, 1988.
10.13(6) Form of Director's Warrant issued February 1988 to directors Berry
and Selig.
10.14(11) 1991 Stock Option Plan, as amended. Page 2110.14(a)(8) Form of
Stock Option Agreement used under the 1991 Stock Option Plan. Page 21
10.15(8) 1991 Director's Stock Option Plan.
10.15(a)(8) Form of Nonstatutory Stock Option Agreement used under 1991
Director's Stock Option Plan.
10.16(8) Employee Stock Purchase Plan.
10.16(a)(8) Form of Subscription Agreement used under Employee Stock Purchase
Plan.
10.17(9) Licensing Agreement and Addendum between the Registrant, as
Licensor, and Jang-Han Systems Engineering, as Licensee, dated
January 1, 1993.
10.18(10) Export - Import and Technical License Agreement between the
Registrant, as Licensor, and Ebara Corporation, as Licensee, dated
October 22, 1993.
10.19(10) Business Loan Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated, June 10, 1992.
10.19(a)(10) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated March 8, 1994.
10.19(b)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank as Lender, dated June 5, 1995.
10.19(c)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated August 7, 1995.
10.19(d)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated September 22, 1995.
10.19(e)(12) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated February 8, 1996.
10.19(f) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated October 30, 1996.
10.19(g) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender dated, December 11, 1996.
10.19(h) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated January 6, 1997.
10.19(i) Loan Modification Agreement between Registrant, as Borrower, and
Silicon Valley Bank, as Lender, dated January 21, 1997.
10.20 Agency/Distributorship Agreement between Registrant, as Borrower,
and Silicon Valley Bank, as Lender, dated December 10, 1994. Page 34
11.1 Computation of Earnings Per Share (see Note 12 of Notes to
Consolidated Financial Statements on page 15 of the Annual Report).
13.1 Registrant's 1996 Annual Report to Shareholders. Page 44
21.1 Subsidiaries of Registrant. Page 67
23.1 Consent of Independent Accounts (see page 20).
24.1 Power of Attorney (see page 19).