-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PBubNoanZwpExPfIayRr9F0QiNzt6vSEI3JIi5+iCuVp9tTLCo255KPZjubiBQ2g qLehAGxxLZrweGR4f60paA== 0000352956-97-000003.txt : 19970401 0000352956-97-000003.hdr.sgml : 19970401 ACCESSION NUMBER: 0000352956-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAFCO INC CENTRAL INDEX KEY: 0000352956 STANDARD INDUSTRIAL CLASSIFICATION: HEATING EQUIPMENT, EXCEPT ELECTRIC & WARM AIR FURNACES [3433] IRS NUMBER: 942159547 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10120 FILM NUMBER: 97570848 BUSINESS ADDRESS: STREET 1: 2690 MIDDLEFIELD RD CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 4153632690 MAIL ADDRESS: STREET 1: 2690 MIDDLEFIELD ROAD CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-K 1 FORM 10K 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).
EX-1 2 LOAN MODIFICATION AGREEMENT DATED 10/31/96 EXHIBIT 10.19 (f) LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of October 30, 1996, by and between Fafco, Inc. ("Borrower') whose address is 2690 Middlefield Road, Redwood City, CA 94063, and Silicon Valley Bank ("Bank") whose address is 3003 Tasman Drive, Santa Clara, CA 95054. 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, an Amended and Restated Loan and Security Agreement, dated June 5, 1996, as may be amended from time to time, (the "Loan Agreement'). The Loan Agreement provided for, among other things, a Committed Line in the original principal amount of One Million and 00/100 Dollars ($1,000,000.00) (the "Revolving Facility"). Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness." 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement. Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. Modification(s) to Loan Agreement. 1. Notwithstanding anything to the contrary contained in the paragraph entitled "Eligible Foreign Accounts", accounts from Kailay International shall be considered eligible for the sixty (60) day period beginning as of October 18, 1996 through December 18, 1996. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that it has no defenses against the obligations to pay any amounts under the Indebtedness. 6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrowers representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. This Loan Modification Agreement is executed as of the date first written above. BORROWER: BANK: FAFCO, INC. SILICON VALLEY BANK By:/s/Alex N. Watt By:/s/Julie Schneider - ------------------------------------- ------------------------------- Title: V.P. Finance & Administration Title: Assistant Vice President EX-2 3 LOAN MODIFICATION AGREEMENT DATED 12/11/96 EXHIBIT 10.19 (g) LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of December 11, 1996, by and between Fafco, Inc. ("Borrower') whose address is 2690 Middlefield Road, Redwood City, CA 94063, and Silicon Valley Bank ("Bank") whose address is 3003 Tasman Drive, Santa Clara, CA 95054. 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, an Amended and Restated Loan and Security Agreement, dated June 5, 1996, as may be amended from time to time, (the "Loan Agreement'). The Loan Agreement provided for, among other things, a Committed Line in the original principal amount of One Million and 00/100 Dollars ($1,000,000.00) (the "Revolving Facility"). Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness." 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement. Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. Modification(s) to Loan Agreement. 1. Notwithstanding anything to the contrary contained in the paragraphs entitled "Eligible Accounts", accounts from Kailay International or Fafco Asia Pacific Corporation (FAPCO) shall be considered eligible to a maximum aggregate total accounts receivable of $410,000.00, subject to all other standard eligibility requirements as defined in the paragraph entitled "Eligible Accounts", for the ninety (90) day period beginning as of November 26, 1995 through February 25, 1997. 2. The term "Borrowing Base", as defined in Section 2.1 entitled "Advances" shall mean an amount equal to (i) eighty percent (80%) of Eligible Accounts beginning as of November 25, 1997, and (ii) seventy five percent (75%) of Eligible Accounts thereafter. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that it has no defenses against the obligations to pay any amounts under the Indebtedness. 6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrowers representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. This Loan Modification Agreement is executed as of the date first written above. BORROWER: BANK: FAFCO, INC. SILICON VALLEY BANK By:/s/Alex N. Watt By: /s/Julie Schneider - ------------------------------------- -------------------------------- Title: V.P. Finance & Administration Title: Assistant Vice President EX-3 4 LOAN MODIFICATION AGREEMENT DATED 1/6/97 EXHIBIT 10.19 (h) LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of January 6, 1997, by and between Fafco, Inc. ("Borrower') whose address is 2690 Middlefield Road, Redwood City, CA 94063, and Silicon Valley Bank ("Bank") whose address is 3003 Tasman Drive, Santa Clara, CA 95054. 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, an Amended and Restated Loan and Security Agreement, dated June 5, 1996, as may be amended from time to time, (the "Loan Agreement'). The Loan Agreement provided for, among other things, a Committed Line in the original principal amount of One Million and 00/100 Dollars ($1,000,000.00) (the "Revolving Facility"). Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness." 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement. Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. Modification(s) to Loan Agreement. 1 . Section 2.3(a) entitled "Interest Rate" is hereby amended, as of October 30, 1996, in its entirety, to read as follows: Except as set forth in Section 2.3(b), any Advances shall bear interest, on the average Daily Balance, at a rate equal to two (2.00) percentage points above the Prime Rate. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that it has no defenses against the obligations to pay any amounts under the Indebtedness. 6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrowers representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. This Loan Modification Agreement is executed as of the date first written above. BORROWER: BANK: FAFCO, INC. SILICON VALLEY BANK By:/s/Alex N. Watt By:/s/Julie Schneider - ------------------------------------- -------------------------------- Title: V.P. Finance & Administration Title: Assistant Vice President EX-4 5 LOAN MODIFICATION AGREEMENT DATED 1/21/97 EXHIBIT 10.19 (i) LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of January 21, 1997, by and between Fafco, Inc. ("Borrower') whose address is 2690 Middlefield Road, Redwood City, CA 94063, and Silicon Valley Bank ("Bank") whose address is 3003 Tasman Drive, Santa Clara, CA 95054. 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, an Amended and Restated Loan and Security Agreement, dated June 5, 1996, as may be amended from time to time, (the "Loan Agreement'). The Loan Agreement provided for, among other things, a Committed Line in the original principal amount of One Million and 00/100 Dollars ($1,000,000.00) (the "Revolving Facility"). Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as the "Indebtedness." 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement. Hereinafter, the above-described security documents and guaranties, together with all other documents securing repayment of the Indebtedness shall be referred to as the "Security Documents". Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. Modification(s) to Loan Agreement. 1. The defined term "Committed Line is hereby amended in its entirety to read as follows: The principal amount of the Revolving Facility is One Million and 00/100 Dollars ($1,000,000.00). Notwithstanding the foregoing, the principal amount shall be increased by One Hundred Thousand and 00/100 Dollars (the "Temporary Increase Amount") until February 25, 1997. Accordingly, Borrower shall repay to Bank all of the Temporary Increase Amount borrowed on February 25, 1997, whereupon the maximum principal amount shall return to One Million and 00/100 Dollars ($1,000,000.00). 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that it has no defenses against the obligations to pay any amounts under the Indebtedness. 6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrowers representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. This Loan Modification Agreement is executed as of the date first written above. BORROWER: BANK: FAFCO, INC. SILICON VALLEY BANK By:/s/Alex N. Watt By:/s/Julie Schneider - ------------------------------------- -------------------------------- Title: V.P. Finance & Administration Title: Assistant Vice President EX-5 6 ANNUAL REPORT FAFCO, Inc. designs, manufactures and markets heat exchangers made primarily of polymers for use in solar swimming pool heating and for thermal energy storage. FAFCO markets its swimming pool products in the United States and overseas through independent distributors who sell directly to end users. The Company markets its IceStor products in the United States through independent manufacturers' representatives. The Company also licenses its IceStor products overseas. FAFCO has manufactured over one million polymer heat exchangers since its incorporation in 1972. The heat exchangers are made using proprietary and patented processing technology. The Company is the largest manufacturer of solar pool heating systems in the United States. In 1987, FAFCO introduced IceStor, a static glycol ice builder for the thermal storage market. The FAFCO IceStor utilizes a variation of the Company's polymer heat exchanger placed in a galvanized steel container. The IceStor products, a demand-side management for electric utilities, use chilled glycol flowing through the heat exchanger to convert a static volume of water in the container to ice. The ice is made at night using less expensive "off-peak" power. The cooling energy stored in the ice is then reclaimed the next day during "peak periods" to provide space or process cooling. The result is lowered cooling costs. FAFCO's products are manufactured and marketed with a common founding strategy outlined below: - - The choice of markets where high market share or growth are likely. - - A high value-added manufacturing process that minimizes direct labor in favor of proprietary processes. - - An effort to maximize gross margin based on sophisticated manufacturing in high volume to enable economies of scale. - - Experienced management whose capabilities exceed the immediate demands of the business. - - A resolution to combine the foregoing to build a large and successful enterprise. Dear Fellow Shareholders: In 1995, FAFCO interrupted seven years of continuous profitability with a loss of $1,918,300 on net sales of $7,876,100. In 1996, strong growth in solar and foreign IceStor sales combined with a substantial overhead reduction to yield a profit of $386,800 on sales of $8,868,600. In 1997, solar and IceStor sales are expected to grow. At the same time, our fixed overhead has been reduced to approximately the same level as 1993. Consequently, we are hopeful that FAFCO's profitability will continue in 1997. Our belief is based on two simple premises. Foreign sales of our IceStor products are expected to continue in 1997. Similarly, our newly introduced Revolution and above ground solar pool heating products will allow us to grow our solar business. Foreign sales of our IceStor thermal energy storage products grew rapidly in 1996. Our IceStor products make use of our core competency in polymer heat exchangers. This product line mitigates electrical shortages by making efficient use of existing electrical generating capacity. Foreign sales are expected to continue to grow in 1997 for four reasons: - - We have focused on Asia where a warm climate, rapid growth in new construction and limited electricity reserves create an ideal market for thermal energy storage. The FAFCO IceStor product line allows electric utilities to make better use of their resources. - - Our technology lends itself to low-cost distribution through less expensive sea container shipment combined with local assembly based on proprietary manufacturing technology. - - Our belief is that certain markets such as Japan and the People's Republic of China are beginning to grow rapidly. - - We are taking initiatives in other foreign countries, which show promise of substantial future growth. - - Solar sales are expected to grow in 1997 for three reasons: - - Our Revolution solar product was introduced in mid 1996. As the name implies, it is the most significant product improvement made by FAFCO since 1976. Our customers are responding. We have applied for patent protection on this new technology. - - Our above ground pool system was introduced in 1996 and sales of this product are expected to grow in 1997. We have applied for patent protection for this technology as well. - - In 1996, we successfully targeted the solar pool heating market outside of California and Florida. We hope our success will continue in 1997. Deregulation in the utilities industry made 1996 a disappointing year for our domestic IceStor sales. In 1996, FAFCO management developed and implemented an aggressive strategy to increase domestic sales. We hope to see positive results from this strategy in 1997. We believe that our best chance for success lies in focusing on our core competency. In an effort to improve our business portfolio, we are no longer producing electronic controls. Looking forward, our technical resources will focus on supporting solar, thermal energy storage and other heat exchanger applications that use FAFCO's core competence in manufacturing polymer heat exchangers. In 1996, we saw our 1995 investments in solar and IceStor begin to pay off. As we move into 1997, we are leaner, more efficient and, frankly, a better company. Low operating expenses combined with sales growth will allow us to make the most of our investments and the significant opportunities we have identified for FAFCO in 1997. Finally, the financial turnaround in 1996 and the continuing momentum we are seeing in 1997 would not have been possible without the dedication to efficiency and loyalty of each of our employees. My thanks go out to each of you. Sincerely, Freeman A. Ford President Consolidated Balance Sheet December 31, 1996 1995 Assets Current assets: Cash and cash equivalents $ 88,200 $126,200 Accounts receivable, less allowance for doubtful accounts of $512,600 in 1996 and $463,900 in 1995 1,890,700 1,149,600 Current portion of long-term notes receivable (net) 229,100 64,000 Inventories 835,400 717,200 Prepaid expenses and other current assets 150,800 145,500 Other accounts receivable, net of allowance 4,500 Deferred tax asset, net of allowance 221,500 125,200 Total current assets 3,420,200 2,327,700 Plant and equipment, at cost 2,465,800 2,345,100 Less accumulated depreciation and amortization (2,116,200) (2,085,900) 349,600 259,200 Notes receivable and other assets (net) 65,500 327,700 Deferred tax asset, net of allowance 427,900 485,800 Total assets $4,263,200 $ 3,400,400 Liabilities and shareholders' equity Current liabilities: Bank line of credit $758,600 $751,300 Accounts payable and other accrued expenses 1,037,800 949,100 Accrued compensation and benefits 187,000 188,900 Accrued warranty expense 234,100 216,000 Total current liabilities 2,217,500 2,105,300 Convertible subordinated notes ($600,000 and $425,000 were owed to related parties in 1996 and 1995, respectively) 925,000 600,000 Other non-current liabilities 26,400 80,400 Total liabilities $3,168,900 $ 2,785,700 Shareholders' equity: Preferred Stock-authorized 1,000,000 shares of $1.00 par value, none of which has been issued Common Stock-authorized 10,000,000 shares of $0.125 par value; 3,298,311 issued and outstanding in 1996 and 3,112,687 issued and outstanding in 1995 412,200 389,000 Capital in excess of par value 5,105,200 5,035,600 Notes receivable secured by Common Stock (75,100) (75,100) Accumulated deficit (4,348,000) (4,734,800) Total shareholders, equity $1,094,300 $ 614,700 Commitments and contingent liabilities Total liabilities and shareholders' equity $4,263,200 $ 3,400,400
The accompanying notes are an integral part of this statement. Year ended December 31, 1996 1995 1994 Net sales $8,868,600 $7,876,100 $10,526,000 Other income (net) 54,000 39,700 108,800 Total revenues 8,922,600 7,915,800 10,634,800 Cost of goods sold 5,424,900 5,637,900 6,542,900 Marketing and selling expense 1,575,400 2,137,200 1,767,500 General and administrative expense 1,286,300 1,502,000 1,257,100 Research and development expense 116,000 460,100 484,300 Net interest expense 169,900 95,300 79,400 Total costs and expenses 8,572,500 9,832,500 10,131,200 Income (loss) before income taxes 350,100 (1,916,700) 503,600 Provision for (benefit from) income taxes (36,700) 1,600 49,100 Net income (loss) $386,800 $(1,918,300) $454,500 Primary net income (loss) per share $0.12 $(0.62) $0.13 Fully diluted net income (loss) per share $0.12 $(0.62) $0.13
The accompanying notes are an integral part of this statement.
Number of Common Capital in Notes Retained Shares Stock Excess of Receivable Earnings Par Value Secured by Common Stock Balance at December 31,1993 3,051,755 $381,500 $5,026,600 $(99,100) $(3,271,000) Net income for the year 454,500 Cancellation of shares and related notes receivable of other notes receivable (32,000) (4,000) (20,000) 24,000 Cancellation of shares in satisfaction of other notes receivable (11,218) (1,400) (7,000) Issuance of shares pursuant to exercise of Directors' Warrants 15,000 1,900 5,600 Issuance of shares under the 1981 Employee Incentive Stock Option Plan 77,850 9,700 29,200 Cancellation of shares pursuant to a rescission offer (500) (100) (300) Balance at December 31, 1994 3,100,887 $387,600 $5,034,100 $(75,100) $(2,816,500) Net loss for the year (1,918,300) Cancellation of shares in satisfaction of other notes receivable (3,000) (400) (4,100) Issuance of shares under the 1981 Employee Incentive Stock Option Plan 8,800 1,100 3,300 Issuance of shares under the 1991 Employee Incentive Stock Option Plan 6,000 700 2,300 Balance at December 31, 1995 3,112,687 $389,000 $5,035,600 $(75,100) $4,734,800) Net income for the year 386,800 Issuance of shares pursuant to exercise of subordinated note conversion option 185,624 23,200 69,600 Balance at December 31, 1996 3,298,311 $412,200 $5,105,200 $(75,100) $(4,348,000)
The accompanying notes are an integral part of this statement. Year Ended December 31, 1996 1995 1994 Cash flow from Operating activities: Net income (loss) $386,800 $(1,918,300) $454,500 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 121,200 178,700 169,400 Allowance for doubtful accounts 48,700 33,900 51,700 Provision for inventory reserve 42,400 105,800 (800) (Gain) loss on disposition of fixed assets (18,700) 22,700 Change in assets and liabilities: Change in receivables (794,300) 1,367,800 (372,400) Change in inventories (160,600) 20,200 (86,200) Change in prepaid expenses (5,300) (28,600) 55,900 Change in deferred tax assets (38,400) CHange in other assets 97,100 (333,000) 9,90O Change in payables and accrued expenses 104,900 (288,900) 63,800 Change in other non-current liabilities (54,000) (27,800) (6,300) Net cash (used in) provided by operations (270,200) (867,500) 340,200 Cash flow from investing activities: Purchase of fixed assets (211,600) (81,300) (104,900) Proceeds from sale of fixed assets 18,700 Net cash used in investing activities (192,900) (81,300) (104,900) Cash flow from financing activities: Proceeds of subordinated debt issuance 325,000 Proceeds from sale of common stock 92,800 7,400 46,000 Payments on line of credit (1,350,000) (490,000) Borrowings on line of credit 1,357,300 1,241,300 Miscellaneous borrowings (21,700) (19,300) Net cash provided by (used in) financing activities 425,100 737,000 26,700 Net (decrease) increase in cash and cash equivalents (38,000) (211,800) 262,000 Cash and cash equivalents, beginning of year 126,200 338,000 76,000 Cash and cash equivalents, end of year $88,200 $126,200 $338,000 Supplemental disclosures of cash flow information: Cash paid during the year for interest $159,339 $89,800 $83,400 Net cash paid during the year for income taxes $7,500 $49,000
The accompanying notes are an integral part of this statement. NOTE TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of - Significant Accounting Policies The Company designs, develops, manufactures and markets solar heating systems for swimming pools and thermal energy storage systems for commercial and industrial cooling. The solar heating systems are sold to wholesalers and distributors primarily in California and Florida and in other locations in the United States and overseas. Thermal energy storage systems are marketed through manufacturers' representatives throughout the United States and internationally. Three of the Company's customers each accounted for more than 10% of the Company's fiscal 1996 net sales. One of the Company's customers accounted for 10% of the Company's fiscal 1995 net sales. No customer accounted for 10% or more of the Company's sales in fiscal 1994. During 1996, the Company had sales to unaffiliated customers in foreign countries amounting to 14% of total net sales. During 1995 and 1994, such sales amounted to 15% of total net sales. A summary of significant accounting policies follows: Principles of Consolidation: The consolidated financial statements include the accounts of FAFCO, Inc. and its wholly-owned subsidiary. All significant inter-company balances and transactions have been eliminated in consolidation. Revenue Recognition: Revenues on sales of products are recognized at the time of shipment of goods or performance of service. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents include highly liquid investments with a maturity of three months or less. Inventories: Inventories are stated at the lower of cost or market determined using the last-in, first-out (LIFO) method. At December 31, 1996 and 1995, inventories would have been approximately $917,400 and $874,600, respectively, if the first-in, first-out method had been used. Plant and Equipment: Plant and equipment are stated based on historical cost adjusted for accumulated depreciation. Depreciation and amortization of plant and equipment, excluding vehicles and leasehold improvements, are determined using accelerated methods. For vehicles and leasehold improvements, the straight line method is used. The estimated useful lives of the assets range between three and ten years. Minor replacements, improvements, maintenance and repairs are expensed as incurred. Major replacements and improvements are capitalized and depreciated over the remaining useful life of the related asset. Gains and losses on sales and retirement of plant and equipment are credited or charged to income. Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of: As required by generally accepted accounting principles (GAAP), effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of." The new standard provides guidance on when to recognize and how to measure impairment losses of long- lived assets and certain identifiable intangibles and how to value long-lived assets to be disposed of. The new standard had no material effect on the Consolidated Balance Sheets for 1996 and 1995 nor the Consolidated Statements of Operations for 1996, 1995 or 1994. Income Taxes: As required by generally accepted accounting principles (GAAP) effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS No. 109), on a prospective basis. The new standard requires an asset and liability approach for financial accounting and reporting for income taxes. Under this approach, deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. (See Note 8.) Concentration of Credit Risk: Most of the Company's business activity is with customers located in California, Florida and foreign countries. As of December 31,1996, unsecured trade accounts receivable from customers in California, Florida and foreign countries were $513,900, $824,400, and $789,300. Warranties: In the normal course of business, the Company makes certain warranties as to workmanship and materials. Product warranty periods range from two to ten years for full coverage. The estimated future expense of these warranties is accrued at the time of sale. The estimates inherent in accounting for such warranties are reviewed and revisions to previous estimates are made as required to reflect the most current information available. Net Income per Share: Net income per share is based on the sum of the weighted average number of shares issued and outstanding during the year (see Note 12). Accounting for Stock-Based Compensation: The FASB issued a new standard, FAS No. 123, "Accounting for Stock-Based Compensation," which contains a fair value-based method for valuing stockbased compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period. Alternatively, the standard permits entities to continue accounting for employee stock options and similar equity instruments under APB Opinion 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in FAS No. 123 had been adopted. The Company has decided to continue accounting for employee stock options and similar equity instruments under APB Opinion 25, "Accounting for Stock Issued to Employees." (see Note 7.) Disclosures About Fair Value of Financial Instruments: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Current Assets and Current Liabilities: The carrying value of cash equivalents, accounts receivable, l; notes receivable, short-term borrowings, accounts payable, and accrued expenses approximate fair value because of their short maturity. Long-Term Debt: The fair value of the Company's long-term debt is estimated based on the borrowing rates currently available to the Company for loans with similar terms. At December 31, 1996, the carrying amount approximates estimated fair value of longterm debt. 2. Inventories Inventories consist of the following: December 31, 1996 1995 Raw materials $370,500 $395,200 Work in progres s 100,800 118,500 Finished goods 364,100 203,500 $835,400 $717,200
3. Plant and Equipment Plant and equipment consists of the following: December31, 1996 1995 Machinery and equipment $1,902,800 $1,754,500 Office and computer equipment 372,000 370,500 Leasehold improvements 88,600 88,600 Vehicles 101,800 131,500 $2,465,800 $2,345,100 Less accumulated depreciation and amortization (2,116,200) (2,085,900) $349,600 $259,200
Notes Receivable During 1996, the Company converted $4,700 of accounts receivable from a customer into a note receivable. During 1995, the Company converted $429,700 of ccounts receivable from two customers into notes receivable, one of which is secured by an interest in real property. All of the notes are being repaid in monthly installments. 5. Convertible Subordinated Notes The notes outstanding at December 31, 1995 were due on March 27, 1996, bore interest at 10% per annum payable quarterly, and were partially convertible into Common Stock of the Company at any time at the option of the holder. The notes were subordinated to any bank debt or other senior indebtedness (as defined) of the Company. The Company could, at its option, call the notes for redemption at any time. The conversion price was $0.50 per share and the maximum aggregate number of shares issuable upon conversion of all of the notes was 270,000 shares. In February 1996, the Company borrowed an additional $325,000 from certain of the noteholders,with interest at 12%, in the form of bridge financing, through March 27, 1996, $125,000 of which was from related parties (see Note 9). On March 27, 1996, four of the Noteholders exercised the conversion option and acquired a total of 185,624 shares of FAFCO Common Stock of which 140,624 were acquired by related parties. On March 27, 1996, the Company exchanged the $600,000 of convertible subordinated notes and the $325,000 of bridge notes for new notes, due March 27, 2000, bearing interest at 11% per annum payable quarterly and warrants to purchase Common Stock. The exercise price of the warrants is $0.125 per share, the maximum aggregate number of shares issuable is 555,000, and the unexercised warrants expire March 27, 2000. 6. Bank Line of Credit The Company has a bank line of credit secured by substantially all the assets of the Company. The line of credit allows the Company to borrow the lesser of $1,000,000 or an amount determined by a formula applied to net accounts receivable, inventories, and net plant and equipment. Amounts borrowed bear interest at the bank's prime rate plus 2%. The line of credit contains certain covenants relating to working capital, current ratio, and tangible net worth, prohibits the payment of cash dividends and expires on June 6, 1997. At December 31, 1996 and 1995, the Company had complied with or obtained waivers for compliance with the loan covenants. As of December 31, 1996 and 1995, the Company had utilized $758,600 and $751,300, respectively, of this facility. During March 1997, the line of credit was extended through March 31, 1998. 7. Shareholders' Equity The Board of Directors, without shareholder approval, may determine the rights, preferences, privileges, and restrictions of the Company's unissued Preferred Stock. Such shares may be issued in one or more series. In 1980, the Company issued 202,300 shares of Common Stock at a price of $2.43 per share in exchange for non-interest bearing promissory notes, which have a balance due of $75,100 at December 31, 1996 and 1995. The notes are due and payable and the Company intends to pursue collection of these notes. In the event that any of the notes are uncollectible, the Company will demand surrender of the related shares issued and will cancel and write off the related notes receivable balance. Under the Company's Employee Stock Purchase Plan, 150,000 shares of Common Stock have been reserved for issuance at 85% of fair market value as of specified dates. The Plan was suspended in 1991 and no shares were issued thereunder since 1991. The Company has a 1991 Incentive Stock Option Plan under which 250,000 shares of Common Stock were reserved for issuance to employees and consultants. During November 1994, the Board of Directors approved an increase in the number of shares of Common Stock reserved for issuance to a total of 500,000 shares subject to shareholder approval, which was obtained in April 1995. During 1993, options were granted to purchase 214,000 shares exercisable at $0.50 per share, the fair market value on the date of grant. No options were granted or execised under the 1991 plan during 1994. During 1995, options were granted to purchase 124,000 shares exercisable at $0.56 per share, the fair market value on the date of grant. During 1995, options to purchase 6,000 shares were exercised. During 1996, options were granted to purchase 236,950 shares exercisable at $0.125 per share, the fair market value on the date of grant. The Company has a 1991 Director's Stock Option Plan under which 50,000 shares of Common Stock are reserved for issuance. During 1991, options were granted to purchase a total of 20,000 shares at $0.50 per share, the fair market value at date of grant, to two outside directors. During 1993, options were granted to purchase a total of 10,000 shares at $0.50 per share, the fair market value at date of grant, to two outside directors. None of these options have been exercised. No options were granted or exercised during 1994, 1995, or 1996. Options granted under these plans vest at 20% per year for five years from date of grant and expire six years or ten years from date of grant. During 1994, the Company granted nonqualified options to purchase a total of 43,218 shares at $0.75 per share to a consultant and four employees and during 1995, the Company granted nonqualified options to purchase 20,000 shares at $0.56 per share to a consultant. These options were fully vested at the date of grant and expire six years from date of grant. None of these options have been exercised. During 1995, options to purchase 234 shares were canceled. A summary of activity under the 1981 and 1991 Incentive Stock Option Plans follows: Shares Subject to Option Exercise Price Per Share Outstanding at December 31, 1993 417,900 $0.50-0.625 Granted 0 Canceled (7,500) $0.500 Exercised (77,850) $0.500 Outstanding at December 31, 1994 332,550 $0.50-0.625 Granted 124,000 $0.50 Canceled (166,300) $0.50-0.560 Exercised (14,800) $0.500 Outstanding at December 31, 1995 275,450 $0.50-0.625 Granted 236,950 $0.125 Canceled (126,650) $0.50-0.560 Exercised 0 Outstanding at December 31, 1996 385,450 $0.125-0.625
The Company applies APB Opinion 25 in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for the plan in 1995 or 1996. Had compensation cost been determined on the basis of fair value pursuant to FASB Statement No. 123, net income and earnings per share would have been reduced as follows: 1996 1995 1994 Net income (loss) As reported $386,800 $(1,918,300) $454,500 Pro forma $367,100 $(1,919,500) $453,700 Primary earnings (loss) per share As reported $0.12 $(0.62) $0.13 Fully diluted earnings (loss) per share as reported $0.12 $(0.62) $0.13 Pro forma $0.11 $(0.62) $0.13
The fair value of each option granted was estimated on the grant date using the Black-Scholes model. The following assumptions were made in estimating fair value:
Assumption Dividend yield 0% Risk-free interest rate 6.50% Expected life 6 years Expected volatility 96.74%
Following is a summary of the status of the plans during 1996, 1995, and 1994. Weighted
Number Average of Exercise Shares Price Outstanding at January 1, 1996 275,450 $0.488 Granted 236,950 0.125 Exercised 0 0 Forfeited (126,950) 0.502 Outstanding at December 31, 1996 385,450 0.258 Options exercisable at December 31, 1996 199,650 0.297 Weighted average fair value of options granted during 1996 $.0101
Weighted Number Average
of Exercise Shares Price Outstanding at January 1,1995 332,550 $0.5020 Granted 124,000 0.5100 Exercised (14,800) 0.5000 Forfeited (166,300) 0.0536 Outstanding at December31, 1995 275,450 0.4850 Options exercisable at December 31, 1995 163,750 0.5030 Weighted average fair value of options granted during 1995 $0.41
The range of exercise prices for the options outstanding at December 31, 1996 is $0.125-$0.625 with a weighted average contractual life of 5 years. The Company estimates that based on vesting at 20% per year at December 31, 1996, approximately 100% of such options will eventually vest.
Weighted Number Average of Exercise Shares Price Outstanding January 1, 1994 417,900 $0.501 Granted 0 N/A Exercised (77,850) 0.500 Forfeited (7,500) 0.500 Outstanding at December 31, 1994 332,500 0.502 Options exercisable at December 31, 1994 139,040 0.503 Weighted average fair value of options granted during 1994 N/A
Following is a summary of the status of options outstanding at December 31, 1996:
Outstanding Exercisable Weighted Average Weighted Weighted Exercise Number Remaining Average Average Price Contractural Exercise Exercise Range Number Life Price Number Price $0.625 5,000 1 $0.625 5,000 0.625 $0.500 123,500 3 $0.500 83,700 $0.500 $0.250 20,000 5 $0.250 4,000 $0.250 $0.125 236,960 6 $0.125 106,950 $0.125 ----------- ------- $385,450 5 199,650
The range of exercise prices for the options outstanding at December 31, 1996 is $0.125-$0.625 with a weighted average contractual life of 5 years. The Company estimated that based on vesting at 20% per year at December 31, 1996, approximately 100% of such options will eventually vest. 8. Income Taxes The provisions for income taxes consist of the following: Years Ended December 31, 1996 1995 1994 Taxes on income: U.S. Federal Current $0 $0 $5,300 Deferred (40,300) 0 6,600 (40,300) 0 11,900 State Current 1,600 1,600 43,100 Deferred 2,000 (5,900) 3,600 1,600 37,200 Net income tax (benefit) provision $(36,700) $1,600 $49,100
Effective January 1, 1993, as required by GAAP, the Company changed its method of account from income taxes by adopting FAS No. 109. A reconciliation of the statutory federal income tax rate with the effective tax rate reported in the financial statements follows: Years Ended December 31, 1996 1995 1994 Statutory federal income tax (benefit) rate 34.0% (34.0%) 34.0% Effect on tax rate resulting from: State and foreign income taxes, net of federal tax benefit 7.7% (1.4%) 6.0% Tax effect of change in valuation allowance (58.8%) 40.9% (49.4%) Expiration of tax credits 2.0% 0.7% (18.2%) Other 0.6% (6.2%) (0.4%) Effective tax rate (10.5%) 0% 8.4%
The Company records its deferred taxes on a tax jurisdiction basis and, with the adoption of FAS No. 109 in 1993, classifies those net amounts as current or noncurrent based on the balance sheet classifications. Deferred tax assets are comprised of the following: December 31, 1996 1995 Allowance for doubtful accounts $215,600 197,000 Accrued expenses 184,300 142,300 Loss carryforwards 1,157,800 1,360,500 Tax credits 175,700 178,600 Other 107,800 116,400 1,841,200 1,994,800 Deferred tax asset valuation allowance $(1,191,800) (1,383,800) Total deferred taxes, net $ 649,400 $ 611,000
The Company had unused federal net operating loss carryforwards of approximately $3,191,500 and $3,669,700, state loss carryforwards of approximately $1,083,000 and $1,554,100, and investment and other tax credits of approximately $175,700 and $178,600 available to offset future tax liabilities at December 31, 1996 and December 31, 1995, respectively. The net operating losses and credits expire in varying amounts until 2010. The use of the tax credits has been limited by the provisions of the Tax Reform Act of 1986 to reflect the benefit associated with an overall reduction in the corporate tax rate. The Company believes that the "total deferred taxes, net" in the amount of $649,400 is more likely than not to be realized. 9. Transactions with Related Parties The Company has a financing agreement with Freeman A. Ford, an officer, director, and major shareholder of the Company, under which Mr. Ford has made a $275,000 line of credit available to the Company. Borrowings under the line of credit bear interest at Silicon Valley Bank's prime rate plus 4%. Pursuant to the agreement, Mr. Ford was granted a warrant to purchase 45,000 shares of Common Stock for making the line available and a warrant to purchase up to 90,000 additional shares of Common Stock under a formula based on usage of the line of credit. At December 31, 1996 and 1995, the Company had no borrowings under this line of credit. The line of credit terminated and the outstanding warrants expired on March 27, 1996. In 1984, Freeman A. Ford and Janet V. Ford (Mr. Ford's mother) purchased $100,000 and $50,000 of the Company's convertible subordinated notes, respectively, from the Company. (See Note 5.) In January 1994, Mr. Ford purchased $50,000 of the Company's convertible subordinated notes from the estate of Janet Ford. In January 1990, David Ford, Kimberly Ford, Tod Ford, and Erin Ford, the children of Mr. Ford, purchased a total of $125,000 of the Company's convertible subordinated notes from certain noteholders. In January 1993, Mr. Ford purchased $100,000 of the Company's convertible subordinated notes from another noteholder. In March 1993, Alan G. Carlson, a principal and owner of one of the Company's customers, purchased $50,000 of the Company's convertible subordinated notes from another noteholder. In February 1996, Mr. Ford loaned the Company an additional $100,000 and Diana Ford (Mr. Ford's wife) loaned the Company $25,000 due in April 1996. On March 27, 1996, these notes were exchanged for subordinated notes due in March 2000 as part of the Company's refinancing of the outstanding subordinated notes. (See Note 5.) In April 1996, the Company granted Mr. Ford a warrant to purchase 123,750 shares of Common Stock. 10. Employee Benefit Plans The Company has a 401 (k) retirement savings plan for all eligible employees who have completed one year of service. Eligible employees have the option to contribute up to 18% of their eligible salary. The Company contributes an amount equal to 25% of the employee contribution, up to a maximum of $200 per employee. 11. Lease Commitments The Company's rental expense, relating primarily to a lease for its office and manufacturing facility, amounted to $380,300 in 1996, $359,400 in 1995, and $340,000 in 1994. At December 31, 1996, minimum annual lease commitments under non-cancellable leases were as follows: 1997 $397,600 1998 399,700 1999 409,900 Thereafter 139,000 Total $1,346,200
The Company is required to pay property taxes, utilities, and insurance under certain of these leases, some of which provide for renewal options at the end of the initial lease term in the year 2000. 12. Net Income Per Share Primary earnings per share were calculated as follows: Years ended December 31, 1996 1995 1994 Net income (loss) $386,800 $(1,918,300) $454,500 Average common shares outstanding 3,254,066 3,102,564 3,035,137 Add: Exercise of options reduced by the number of shares purchased with proceeds N/A N/A 262,892 Add: Exercise of warrants reduced by the number of shares purchased with proceeds N/A N/A 118,261 Adjusted weighted average shares outstanding 3,254,066 3,102,564 3,416,290 Earnings(loss) per share $0.12 $(0.62) $0.13
Primary earnings per share are calculated by dividing net income (loss) by the weighted average number of shares issued and outstanding and shares issuable upon exercise of dilutive stock options and warrants during each year. Fully diluted earnings per share were calculated as follows: Years ended December 31, 1996 1995 1994 Net income (loss) $386,800 $(1,918,300) $454,500 Average common shares outstanding 3,254,066 3,102,564 3,035,137 Add: Exercise of options reduced by the number of shares purchased with proceeds N/A N/A 262,892 Add: Exercise of warrants reduced by the number of shares purchased with proceeds N/A 118,261 N/A Adjusted weighted average shares outstanding 3,254,066 3,102,564 3,416,290 Earnings (loss) per common share assuming full dilution $0.12 $(0.62) $0.13
13. Licensing Income During 1993, the Company entered into two licensee agreements with third parties in the Far East, under which the Company received and recognized license fee income net of foreign income taxes of $159,000. The agreements allow for the licensee to assemble and sell the IceStor product in certain countries using the Company's technology and design specifications. For the terms of the agreements (three and eight years), the Company is required to provide parts and technical services to the licensee at prices and rates equivalent to normal list prices. 14. The Company is involved in certain litigation matters. Management believes resolution of these disputes will not have a material adverse effect on the Company's financial condition and results of operations. Report to the Independent Auditors To the Board of Directors of FAFCO, Inc. We have audited the consolidated balnace sheet of FAFCO, Inc. and its subsidary as of December 31, 1996 and the related consolidated statements of income, retained earning, and cash flows for the year then ended. The financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of FAFCO, Inc. as of December 31, 1995 and for each of the two years in the period ended December 31, 1995 were audited by other auditors whose report dated March 27, 1996 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we paln and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant extimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FAFCO, Inc. and its subsidiary as of December 31, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Burr, Pilger & Mayer Palo Alto, California March 4, 1997 Summary of Operations Five-Year Summary of Operations (in thousands, except per share data) Year Ended December 31, 1996 1995 1994 1993 1992 Net sales $8,869 $7,876 $10,526 $9,352 $7,782 Income (loss) before income taxes and extraordinary item $350 $(1,917)$504 $254 $587 Provision for income taxes (37) 1 49 116 242 Income (loss) before extraordinary item 387 (1,918) 445 138 345 Extraordinary item-tax benefit resulting from net operating loss carryforward 174 Cumulative effect of change in method of accounting for income taxes 717 Net income (loss) $387 $(1,918) $455 $855 $519 Primary net income (loss) per share before extraordinary item $0.12 $(0.62) $0.13 $0.04 $0.11 Primary net income per share from extraordinary item 0.06 Primary net income per share from cumulative effect of change in method of accounting for income taxes 0.22 Primary net income (loss) per share $0.12 $(0.62) $0.13 $0.26 $0.17 Fully diluted net income (loss) per share before extraordinary items $0.12 $(0.62) $0.13 $0.05 $0.11 Fully diluted net income per share from extraordinary item 0.06 Fully diluted net income per share from cumulative effect of change in method of accounting for income taxes 0.19 Fully diluted net income (loss) per share $0.12 $(0.62) $0.13 $0.24 $0.17
At December 31, 1996 1995 1994 1993 1992 Working capital $1,203 $222 $2,371 $1,784 $1,624 Total assets 4,263 3,400 4,903 4,373 3,577 Long-term obligations 951 680 725 751 928 Shareholders' equity 1,094 615 2,530 2,038 1,177
Common Stock Data FAFCO, Inc. Common Stock is traded on the over-the-counter market but is not listed on an exchange or quoted on any automated quotation system. The high and low closing bid quotations for each quarter during 1996 and 1995 were as follows: Quarter Ended March 31 June 30 September 30 December 31 1996 High $0.25 $0.125 $0.125 $0.125 1996 Low $0.125 $0.125 $0.125 $0.125 1995 High $1.50 $1.50 $1.50 $0.75 1995 Low $1.00 $1.00 $0.75 $0.25
The quotations above were provided by the National Quotation Bureau. All quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. At February 10, 1997, the Company had 726 shareholders of record. FAFCO, Inc. has never paid dividends on its Common Stock and has no plans to do so in the foreseeable future. 1996 Compared with 1995 Net sales for 1996 increased by 12.6% from $7,876,100 in 1995 to $8,868,600 in 1996. This increase was due primarily to increased unit sales of the Company's IceStor and pool panel products. Net sales of the Company's pool products were 5.9% higher in 1996 than in 1995 due mainly to increased sales of its SunSaver model inground and aboveground pool panels partially offset by decreased sales of its Revolution model inground pool panels and decreased sales of its proprietary line of automatic controls, which was phased out as of January 1, 1997. Net sales of the Company's IceStor products were 24.0% higher in 1996 than in 1995 due mainly to increased foreign sales partially offset by decreased domestic sales. The Company believes the decreased domestic sales are due mainly to potential customers' beliefs that lower energy prices in the domestic market place will result from planned deregulation of energy prices. Pool product sales amounted to 58% of net sales in 1996 compared to 62% of net sales in 1995 IceStor sales amounted to 42% of net sales in 1996 compared to 38% of net sales in 1995. There were no significant price changes in any of the Company's products during 1996. Cost of goods sold decreased from $5,637,900 (71.6% of net sales) in 1995 to $5,424,900 (61.2% of net sales) in 1996. This decrease was due mainly to the fixed costs being allocated over higher sales along with increased sales of higher margin products in both the pool product line and IceStor product line. Marketing and selling expenses decreased from $2,137,200 (27.1% of net sales) in 1995 to $1,575,400 (17.8% of net sales) in 1996. This decrease is due mainly to reduced promotional expenses for pool products along with reduction in support personnel for IceStor product. General and administrative expenses decreased from $1,502,000 (19.1% of net sales) in 1995 to $1,286,300 (14.5% of net sales) in 1996. This decrease is due mainly to decreased personnel costs along with decreased legal and accounting expenses. Research and development expenses decreased from $460,100 (5.8% of net sales) in 1995 to $116,000 (1.3% of net sales) in 1996. This decrease was due entirely to the reduction in personnel in late 1995 and the continued low level of personnel in 1996. Net interest expense increased from $95,300 (1.2% of net sales) in 1995 to $169,900 (1.9% of net sales) in 1996. This increase is due primarily to the higher average daily borrowing in 1996 at higher interest rates than in 1995. 1995 Compared with 1994 Net sales for 1995 decreased by 25.2% from $10,526,000 in 1994 to $7,876,100 in 1995. This decrease was primarily due to decreased unit sales of the Company's IceStor products along with decreased unit sales of the company's pool panel products. Net sales of the Company's were 19.8% lower in 1995 than in 1994 due mainly to continued economic weakness in California and Florida, the main markets for the Company's pool products. Net sales of the Company's IceStor products were 31.8% lower in 1995 than in 1994 due mainly to potential customers' beliefs that lower energy prices in the domestic market place will result from planned deregualtion of energy prices. This domestic decrease was partly offset by increased foreign sales of IceStor products. Pool product sales amounted to 62% of net sales in 1995 compared to 57% of net sals in 1994. IceStor sales amounted to 38% of net sales in 1995 compared to 42% in 1994. There were no significant price changes in any of the Company's products during 1995. Cost of goods sold decreased from $6,542,900 in 1994 to $5,637,900 in 1995 while increasing as a percentage of net sales form 62.2% in 1994 to 71.6% in 1995. The increase as a percent of sales was due mainly to the fixed costs being allocated over significantly lower sales along with employee severence expenses associated with a 32% reduction in the work force. Marketing and selling expenses increased from $1,767,500 (16.8% of net sales in 1994 to $2,137,200 (27,1% of net sales) in 1995. The increase was due mainly to one-time expenses for market research projects during the second half of 1995 along with the addition of sales personnel and increased promotional expenses for pool products during the first half of 1995. General and administrative expenses increased from $1,257,100 (11.9% of net sales) in 1994 to $1,502,000 (19.1% of net sales) in 1995. These increases were primarily due to increased personnel costs during the first half of 1995 along with severance expenses and increased legal expenses. Research and development expenses were relatively stable in absolute dollars at $484,300 in 1994 compared with $460,100 in 1995 while increasing from 4.6% of net sales in 1994 to 5.8% of net sales in 1995. The increase as a percent of sales was due entirely to the decreased level of sales in 1995. Net interest expense increased from $79,400 (0.8% of net sales) in 1994 to $95,300 (1.2% of net sales) in 1995. This increase was due primarily to higher than average daily borrowing during the first half of 1995 compared to 1994. Other income (expense) net included $24,000 in refunds of prior years' insurance premiums in 1995 compared with $38,400 in 1994. Other income (expense) net in 1994 also included $66,000 of proceeds, net of related costs, pertaining to a legal settlement resolved during 1994. Seasonality Historically, the Company has experienced lower sales during the first quarter than during other quarters of each year. In addition, sales typically have increased significantly during the second quarter, declined slightly, and then remained relatively constant during the third and fourth quarters, respectively. The Company believes that this pattern derives primarily from the sales of solar heating products. As the Company's product mix shifts to include a larger proportion of other products, such as the thermal energy storage product, the traditional seasonality is being mitigated. Net income is affected by the seasonality of sales as well as by significant marketing and selling expenses typically incurred during the first quarter of each year. These expenses are incurred to develop programs and materials for use throughout the remainder of the year. In 1994 and 1996, sales and net income experienced their traditional seasonality, except that sales in the fourth quarter were increased due to sales of IceStor product. As a result of the ice storage sales, the traditional fourth quarter loss was not experienced. In 1995, sales experienced the traditional seasonality except that the decline in sales in the third and fourth quarters was more pronounced than normal due to weak sales in both pool products and IceStor during the second half of the year. There were net losses in all four quarters due to sales being below the planned levels in all four quarters. Liquidity and Capital Resources The Company's cash position decreased from $126,200 at 1995 fiscal year end to $88,200 at 1996 fiscal year end, principally due to increased accounts receivable and increased inventories partially offset by increased borrowings and increased accounts payable. At December 31, 1996, the Registrant's net accounts receivable had increased to $ 1,890,700 from $1,149,600 at December 31, 1995, primarily as a result of increased sales in November and December 1996. At December 31, 1996, the Registrant's accounts payable and other accrued expenses had increased to $1,037,800 from $949,100 at December 31, 1995. This increase is primarily due to expenses resulting from the increased sales in November and December 1996. At December 31, 1996, the Registrant's inventories had increased to $835,400 from $717,200 at December 31, 1995. This increase was due mainly to a buildup of inventories for increased January 1997 sales. The Company adopted SFAS 109 effective January 1, 1993. This resulted in the recognition of a deferred tax asset, net of valuation allowance, at year end of $649,400 in 1996 and $611,000 in 1995. The Company believes that it is more likely than not that this asset will be fully realized. This belief is based upon the Company's recent history of profitable operations prior to 1995, its return to profitability in 1996, and the Company's expectation that this will continue far enough into the future to realize the net deferred tax asset. However, there can be no assurance that the Company will continue profitability or, if it does, that profits will be sufficient to utilize the net deferred tax asset. At December 31, 1996, the Registrant's current ratio was 1.54 to I compared with 1.11 to I at December 31, 1995 and working capital increased over the same period to $1,202,700 from $222,400. Total assets exceeded total liabilities by $1,094,300 at December 31, 1996 compared with $614,700 at December 31, 1995. During the second half of 1995, the Company began and has continued an aggressive cost reduction campaign. The Registrant believes that as a result of the cost-cutting measures, its cash flow from operations, together with bank borrowings, will be sufficient to support operations during the next twelve months. The foregoing statement of how long the Company's capital resources are expected to last is a forwardlooking statement involving risks and uncertainties, including the amount of the Company's sales and the ability of the Company to control its operating expenses, including the need to invest in sales and marketing activities in 1997. However, if sales decline from current levels, additional debt or equity financing may be required. The Registrant has a line of credit, of which $758,600 had been utilized and $70,600 remained available under the formula applied to net accounts receivable. This line of credit expires on March 31, 1998. BOARD OF DIRECTORS EXECUTIVE OFFICERS Freeman A. Ford Chairman of the Board, President, and Chief Executive Officer FAFCO, Inc. William A. Berry* Senior Vice President and Chief Financial Officer Electric Power Research Institute a private, nonprofit, research organization doing collaborative research for the electricity industry. Robert W. Selig,Jr.* President Davis Instruments Corporation a manufacturer of marine and weather equipment. *Audit Committee Member Executive Officers Freeman A. Ford Chairman of the Board, President, andChief Executive Officer Alex N. Watt Vice President, Finance and Administration,Chief Financial Officer, and Secretary David K. Harris Vice President, Pool Products Mike Anderson Vice President, Commercial Products Transfer Agent and Registrar Bank of Boston C/o Boston EquiServe P.O. Box 644-02102 MS 45-02-09 Boston, Massachusetts 02102-0644 Telephone: (617) 575-3400 Legal Counsel Wilson, Sonsini, Goodrich & Rosati A Professional Corporation 650 Page Mill Road Palo Alto, California 94304 Independent Accounts Burr, Pilger & Mayer A Professional Corporation 261 Hamilton Avenue Palo Alto, California 94301 Form 10-K A copy of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission, including financial statement schedules but excluding exhibits, is available without charge upon written request to: FAFCO, Inc. 2690 Middlefield Road Redwood City, California 94063 Attention: Alex N. Watt Annual Shareholders' Meeting The Annual Shareholders' Meeting will be held at 3:00 p.m. on April 24, 1997 at FAFCO, Inc., 2690 Middlefield Road, Redwood City, California 94063-3455, Telephone: (415) 363-2690 EX-6 7 FINANCIAL DATA SCHEDULE [ARTICLE] 5 [RESTATED] [CIK] 0000352956 [NAME] FAFCO, INC. [PERIOD-TYPE] YEAR [FISCAL-YEAR-END] DEC-31-1996 [PERIOD-END] JAN-01-1996 [CASH] 88,200 [SECURITIES] 0 [RECEIVABLES] 2,736,600 [ALLOWANCES] 574,400 [INVENTORY] 835400 [CURRENT-ASSETS] 3420200 [PP&E] 2465800 [DEPRECIATION] (2116200) [TOTAL-ASSETS] 4263200 [CURRENT-LIABILITIES] 2217500 [BONDS] 951400 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 412200 [OTHER-SE] 682100 [TOTAL-LIABILITY-AND-EQUITY] 4263200 [SALES] 8868600 [TOTAL-REVENUES] 8922600 [CGS] 5424900 [TOTAL-COSTS] 5424900 [OTHER-EXPENSES] 0 [LOSS-PROVISION] 75200 [INTEREST-EXPENSE] 169900 [INCOME-PRETAX] 350100 [INCOME-TAX] (36700) [INCOME-CONTINUING] 386800 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 386800 [EPS-PRIMARY] .12 [EPS-DILUTED] .12
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