-----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, UTGg6rMrbxT/NTT7w3DWvOhfh9qiJhJ0tNq2n/0u6GLMduszEQyI3etq2Kb34jIn 4qUbHKWubSql3KF1uDNtNA== 0000891618-02-001591.txt : 20020415 0000891618-02-001591.hdr.sgml : 20020415 ACCESSION NUMBER: 0000891618-02-001591 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10120 FILM NUMBER: 02596639 BUSINESS ADDRESS: STREET 1: 2690 MIDDLEFIELD RD CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 6503632690 MAIL ADDRESS: STREET 1: 2690 MIDDLEFIELD ROAD CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-K405 1 f80281e10-k405.txt FORM 10-K FOR YEAR ENDED 12/31/2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _______________. Commission file number 0-10120 FAFCO, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 94-2159547 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 435 OTTERSON DRIVE, CHICO, CALIFORNIA 95928 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 530/332-2100 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 20, 2002 was $877,490 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 February 20, 2002, was 3,855,591. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT DESCRIPTION FORM 10-K PART - -------------------- -------------- Portions of Exhibit 13.1 (the Company's 2001 Annual Report to Shareholders) (the "Annual Report")....................................I, II, IV ----------------------------- With the exception of the information specifically incorporated by reference in Parts I, II and IV of this Form 10-K, the Company's Annual Report is not 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 75% of net sales in 2001 compared to 66% of net sales in 2000 and 60% of net sales in 1999. Thermal energy storage sales amounted to 25% of net sales in 2001 compared to 34% of net sales in 2000 and 40% of net sales in 1999. 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 line, 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 product line. FAFCO, Inc. was incorporated under the laws of the State of California in 1972. Its principal executive offices are located at 435 Otterson Drive, Chico, California. Its telephone number at that address is (530) 332-2100. SAFE HARBOR STATEMENT This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors described in this Form 10-K as well as those set forth on page 18 of the Annual Report under the heading "Factors Affecting Future Results" which is incorporated herein by reference and elsewhere in this Form 10-K. MARKETS Swimming Pool Heating Low temperature solar applications developed because of the cost effectiveness of solar systems in heating a large volume of water to produce a small temperature change. The market for swimming pool heating developed for several reasons. First, pool owners normally use their pools when solar energy is abundant (during daylight hours and the summer swimming season). Second, pools already have two elements needed for low temperature water heating: storage (the pool water) and circulation (the existing pool pump and associated plumbing). Third, pool owners are an easily identifiable market. 2 Thermal Energy Storage FAFCO also designs, develops, manufactures, and markets a static, glycol ice builder for the thermal storage market. Since the product's introduction, FAFCO has sold "ice banks" primarily to the commercial air conditioning market for use in off-peak air conditioning systems. PRODUCTS Swimming Pool Heating The FAFCO solar pool heating system is composed of six to twelve solar collectors, a sun sensor, an automatic control, and associated accessories. The collectors and sensor are typically mounted on the roof of a pool owner's home and connected to the pool pump and automatic control. The customer sets the automatic control for the desired water temperature and, when the sensor detects that there is sufficient solar energy for the system to function efficiently, the automatic control directs the flow of water from the pool to the collectors. The water absorbs heat as it passes through the collectors and then flows back to the pool. When the desired water temperature is achieved or when there is insufficient solar energy, the automatic control redirects the flow of water back to the pool and water is drained from the collectors. When the water temperature drops and there is sufficient solar energy, the system is reactivated automatically. In February 1996, the Company introduced a version of its solar pool heating system specifically designed for above-ground swimming pools. This system is composed of one or two solar collectors optimized for use in heating above-ground swimming pools and designed to lie flat on the ground or to be mounted on a rack on the ground. In May 1996, the Company introduced a new and improved version of its solar collector that has a higher thermal performance due to its unique heat exchanger tube design. The tube design incorporates molded indentations, which enhance the heat transfer coefficient by increasing fluid turbulence. The Company's solar collectors are composed entirely of a polyolefin material (a high molecular weight polymer compound) and made up of small round tubes formed side by side in a rectangular shape either one-by-two meters, four-by-eight feet, four-by-ten feet, four-by-twelve feet or four-by-twenty feet in size, with submanifolds and header pipes thermoformed on each end. This design provides for a maximum heating surface and even water flow in order to transfer 75% to 90% of the available solar energy to the pool water. The polyolefin material, which has been specially formulated by the Company, is black in color (to optimize solar energy absorption) and has the inherent advantages over other possible materials of lower cost, lighter weight, and higher resistance to the corrosive effects of pool chemicals and degradation resulting from ultraviolet radiation, heat, and other environmental effects. In May 1993, the Company introduced a proprietary microprocessor-based control (AutoPool) for its solar pool heating systems. Prior to May 1993, the Company had a private label arrangement with an automatic control manufacturer. AutoPool has built-in "intelligence" that 3 allows it to optimize the heating and filtration time for the swimming pool and can also control non-conventional solar swimming pool heaters. Because of lack of demand for the Company's AutoPool Control, this product was discontinued effective January 1, 1997. The Company has ongoing obligations to service and provide spare parts for AutoPool controls sold prior to that time. Thermal Energy Storage The Company's thermal energy storage ("IceStor(TM)") systems utilize nighttime electric capacity to create stored cooling energy. This is normally done by storing inexpensive "off-peak" energy in the form of either chilled water or ice. The next day this stored cooling capacity is used in conjunction with a building's air conditioning equipment to significantly reduce electrical power requirements for cooling during times of high power demand and high electrical cost. Cool storage systems offer power utilities a solution to a fundamental, long-term problem: increased peak demand for power during periods of limited available capacity (i.e., during business hours). IceStor(TM) technology shifts power consumption to off-peak periods when there is available capacity and lower demand. MARKETING AND SALES Solar Systems FAFCO markets its solar systems in the United States through independent distributors who sell directly to end users. Distributors generally have sales, installation, and service personnel who are supported by extensive FAFCO marketing and technical materials as well as in-depth factory and field training programs. The majority of sales personnel employed by the typical distributor are assigned to retrofit sales, which are sales to existing pool owners. Retrofit sales are generated through direct mail, customer referrals, canvassing, and, to a lesser extent, selected media advertising. The balance of the typical distributor's sales personnel are generally assigned to contractor accounts and seek referrals for new construction sales. FAFCO usually provides direct mail literature and other advertising materials to distributors and mails or places these materials with local advertisers on the distributors' behalf and partially at the distributors' expense. In certain instances, distributors will also engage in direct mailing and advertising. In addition, the Company recently established a sales office in Florida to serve the local market. In the past, the Company has canceled several distributor agreements for reasons of inadequate performance by the distributor, primarily for failure to provide adequate sales, installation and service support for the Company's products. In such instances, the Company has generally been able to find qualified replacements. All work relating to the installation of FAFCO solar systems is covered by a full one-year warranty provided by the distributor. The Company's solar collectors used to be covered by a ten-year limited warranty, which was changed to a ten-year full warranty beginning in 1991. Its 4 automatic controls, pumps, and drain-down valves are covered by a three-year limited warranty. FAFCO warranties cover defects in materials and workmanship provided that the related products are used for their intended purpose. FAFCO solar systems are designed to require only minimal maintenance, which can be performed either by the consumer using an owner's manual or by the distributor's service personnel. Thermal Energy Storage Systems The Company markets its IceStor(TM) products through independent contractors who design and build heating and cooling systems for commercial and industrial applications. The Company has also licensed its IceStor(TM) products for sale overseas, to design-and-build, heating, ventilating, and air-conditioning companies in Taiwan, Korea, Japan, and The Peoples Republic of China. These licensing agreements provide for licensees' assembly, sales, support, and maintenance of IceStor(TM) products in those countries. SALES BY GEOGRAPHIC AREA The Company's net sales during 2001, 2000, and 1999 were geographically distributed approximately as follows:
2001 2000 1999 ---- ---- ---- California 30% 22% 24% Florida 34% 38% 33% Other U.S. 18% 14% 17% Foreign Countries 18% 26% 26% --- --- --- 100% 100% 100% --- --- ---
During 2001, no single customer accounted for 10% or more of the Company's net sales. Two of the Company's customers, Ebara Corporation and Florida Solar, accounted for 19.3% and 10.4% of the Company's fiscal 2000 net sales. Ebara Corporation accounted for 17.7% of the Company's fiscal 1999 net sales. During 1999, 2000 and 2001 Ebara Corporation was the licensee for the Company's IceStor(TM) products in Japan, and, as such, purchased IceStor(TM) products and components for assembly into products for resale to end users in Japan. During 2000, Florida Solar was a distributor of the 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 1999 or 2000. Any material cancellation, reduction or rescheduling of orders from a major customer, or the loss of any such customer would have a material adverse effect in the Company's financial condition and operation results. Foreign sales of the Company's products are made through independent foreign distributors and licensees. Sales to foreign distributors and licensees are shipped directly from the Company's facilities in California and invoiced in U.S. dollars. Export sales are subject to certain controls and restrictions, including tariffs and import duties, and are subject to certain risks, including changing regulatory requirements of foreign jurisdictions and transportation delays and interruptions; however, the Company has not experienced any material difficulties in the past relating to such limitations. 5 BACKLOG Sales to solar products 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(TM) 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(TM) products at any date is also usually insignificant and not a meaningful indicator of future sales. GOVERNMENT TAX INCENTIVES Although the Company's operations are not directly subject to extensive governmental regulations, the existence or lack of federal, state, and local tax incentives for the sale and installation of solar systems would have a substantial impact on the Company's business. There is currently no federal tax credit for solar heating systems and state solar tax credits are available only in a few states. The Company does not anticipate that solar tax credits will become available for solar heating systems in any additional states, nor does it anticipate a significant increase in sales due to existing or future tax credits. 6 MANUFACTURING FAFCO's manufacturing activities consist primarily of the production of polyolefin heat exchangers used in solar heating applications and off-peak cooling applications and associated accessories. A total system approach is emphasized in order to ensure the effectiveness and reliability of the Company's products after they have been installed, eliminating the need for distributors to rely upon materials from other suppliers. The Company's heat exchangers are produced from polyolefin resins using a patented extrusion and thermoforming process. Substantially all equipment used in these processes has been designed and built by the Company's research and development engineers. The resins employed by the Company are a petroleum by-product. The market price of these resins has fluctuated over the years with an increase in 1990 and early 1991 due to tensions in the Middle East, followed by a stabilization after the completion of Desert Storm. It is expected that the price of the resins will continue to fluctuate as a result of domestic and international political and economic conditions. FAFCO has qualified multiple sources of supply for all of its resins, materials, and subassemblies. However, certain materials and subassemblies are currently obtained from single sources. The Company believes these items could be supplied by the Company's other qualified sources if sufficient lead-time were provided. The Company attempts to maintain additional inventory of such materials to mitigate the risk of supply shortages; however, any prolonged inability to obtain such items would have a material adverse effect on the Company's results of operations. To date, the Company has not experienced any significant manufacturing problems or delays due to shortages of materials. Quality assurance is performed by FAFCO at its manufacturing facility. Test and inspection procedures are a part of substantially all production and assembly operations. In addition, the Company uses it own diagnostic equipment and laboratory to continually test and inspect raw materials, work in process, and finished goods. COMPETITION The Company's solar heating products currently compete directly with solar heating products offered by other domestic and international manufacturers of solar heating systems, and indirectly with conventional heating systems. The Company believes that the principal competitive factors in the markets for FAFCO solar products are (i) product performance and reliability; (ii) marketing and technical support from the manufacturer for distribution channels; (iii) selling, installation, and service capabilities of distribution channels; and (iv) price. The Company believes that it competes favorably with respect to all of these factors. However, certain of its competitors may have greater financial, marketing, and technological resources than those of the Company. A number of companies in the United States manufacture thermal energy storage systems of various types similar to the Company's IceStor(TM) product. The industry is in the early stages of development and additional competitors are expected to enter the market over time. 7 At the present time, the Company believes that the main competitive factors in the thermal energy storage market are performance, reliability, and price. The Company believes that it competes favorably with respect to these factors. However, several of its competitors have greater financial, marketing, and technological resources than those of the Company. RESEARCH AND DEVELOPMENT For the years ended December 31, 2001, 2000, and 1999, the Company's research and development expenses were $239,400, $294,500, and $327,600, respectively. The Company currently uses consulting engineers, in addition to staff engineers, who are responsible for existing product improvement, applications engineering, and new product research and development. The Company is exploring other potential revenue-producing uses for its polyolefin extrusions. PATENTS, TRADEMARKS AND LICENSES FAFCO currently holds four United States patents and has two patents pending relating to certain aspects of its products and manufacturing technology. These patents expire at various times between July 2003 and December 2017. However, the Company believes that patent protection is secondary to such factors as ongoing product development and refinement, the knowledge and experience of its personnel, and their ability to design, manufacture, and successfully market the Company's products. From time to time, the Company has registered as trademarks certain product names and marks in order to preserve its right to those product names and marks. The Company has granted licenses to assemble and sell IceStor(TM) systems in Taiwan, Korea, Japan, and the Peoples Republic of China to local manufacturers. See "Marketing and Sales" above. EMPLOYEES At December 31, 2001, the Company had a total of 63 regular employees and 14 "temporary" employees for a total of 77 full-time employees in the Chico, CA facility, these employees included 6 in marketing, 5 in research and development, 51 in manufacturing, and 15 in general management and administration. The Company also uses temporary employees from agencies to fill seasonal needs. The Company has never had a work stoppage. To the Company's knowledge, no employees are represented by a labor organization. At December 31, 2001, the Company had a total of 19 "leased" employees in their Tampa, Florida sales office. SEASONALITY Information regarding the seasonality of the Company's business is set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Seasonality" on page 16 of the Annual Report, which information is incorporated herein by reference. 8 SEGMENT INFORMATION The Company believes it has operations in only a single market segment, the polymer heat exchanger segment. ENVIRONMENTAL REGULATIONS The Company is subject to a number of environmental regulations concerning potential air and water pollution. However, such regulations have not in the past had, and are not expected to have, any material adverse effect on the Company's business. However, there can be no assurance that compliance with existing or future regulations will not require the expenditure of funds or the modification of the Company's manufacturing process, which could have a material adverse effect on the Company's business or financial condition. ITEM 2. Properties The Company's principal executive offices and manufacturing facilities for its products are located in a single 57,500 square foot facility that the Company owns in Chico, California. The Company believes that its current facilities are adequate to meet its requirements for space in the near future. Manufacturing space is being fully utilized at the present time. However, additional demand can be accommodated by adding additional employee shifts. ITEM 3. Legal Proceedings There are presently no material pending legal proceedings to which the Company is a party or to which any of its property is subject, except for ordinary routine legal proceedings incidental to the Company's business. ITEM 4. Submission of Matters to a Vote of Security Holders The Company did not submit any matter to a vote of security holders during the fourth quarter of its fiscal year ended December 31, 2001. The executive officers of the Company are set forth below under Item 10. All officers serve at the pleasure of the Board of Directors. 9 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters Information regarding the market for and market prices of the Company's Common Stock, the number of shareholders of record, and information regarding dividends is set forth under the heading "Common Stock Data" on page 14 of the Annual Report, which information is incorporated herein by reference. ITEM 6. Selected Financial Data Selected financial data for the Company is set forth in the table entitled "Five-Year Summary of Operations" on page 15 and in the last sentence of the text under the table entitled "Common Stock Data" on page 15 of the Annual Report, which information is incorporated herein by reference. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information regarding Management's Discussion and Analysis of Financial Condition and Results of Operations is set forth under the heading "Management's Discussion and Analysis," on pages 16 through 18 of the Annual Report, which information is incorporated herein by reference. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk The following discussion about the Company's market risk exposure involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates, foreign currency exchange rates and equity security price risk. The Company does not use derivative financial instruments for any purpose, including hedging interest and foreign exchange risks. The Company is exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. The Company attempts to minimize its currency fluctuation risk by pricing its overseas product sales and license fees in United States dollars. A 10% change in the foreign currency exchange rates would not have a material impact on the Company's results of operations. The Company maintains short-term investments consisting of variable interest accounts. However, due to the short-term nature of the Company's debt investments, the impact of interest rate changes would not have a material impact on the value of such investments. The Company's interest rate exposure on rate debt obligations is currently relatively insignificant. As a result, the Company does not actively manage the risk associated with these obligations. Interest rate changes would not have a material impact on the Company's results of operations. 10 The Company currently holds no marketable equity securities of other issuers that are subject to market price volatility. ITEM 8. Financial Statements and Supplementary Data The consolidated financial statements of the Company are set forth on pages 3 through 13 of the Annual Report, which information is incorporated herein by reference. The supplementary financial information requirements of Regulation S-K Item 302 do not apply to the Company, because the Company does not meet the tests set forth therein. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III ITEM 10. Directors and Executive Officers of the Registrant Freeman A. Ford, age 61, 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 60, serves as Executive Vice President and Secretary. Mr. Watt joined the Company as its Vice President-Finance and Chief Financial Officer in July 1984, and has served as Secretary since March 1985. David Harris, age 46, serves as Vice President, Sales. Mr. Harris joined the Company in August 1981 as a sales representative and has held the positions of Pool Builder Manager, National Sales Manager-Pool Products, Pacific Northwestern Region Sales Manager, National Sales Manager-Solar Division, National Sales Manager, Vice President-Sales and Marketing (from June 1988 until April 1993) and President-Pool Products Division (from May 1993 until May 1995). Nancy I. Garvin, age 56, serves as Vice President, Finance. Ms. Garvin joined the Company in May 1974 as an accounting clerk and has since held the positions of Accounting Manager and Controller with the Company. Mr. William A. Berry, age 63, is Senior Vice President and Chief Financial Officer of the Electric Power Research Institute, an energy industry research consortium. Mr. Berry has served as a Director of the Board since 1974 and is also a member of the Audit Committee. Mr. Robert W. Selig, Jr., age 62, is President of Davis Instruments Corporation, a manufacturer and distributor of marine and weather equipment. Mr. Selig has served as a Director of the Board since 1974 and is also a member of the Audit Committee. Mr. William F. Chisholm, age 33, is a Partner at Symphony Technology Group, a venture capital firm. Mr. Chisholm has served as a Director of the Board since 1999. 11 Mr. David F. Ford, age 34, is President of Danger! Books, a book publisher and distributor. Mr. Ford has served as a Director of the Board since 1999. David Ford and William Chisholm are the son and son-in-law, respectively, of Mr. Freeman A. Ford. Based solely on its review of the copies of Forms 3, 4 and 5 received by the Company, or written representations from certain reporting persons that no Forms 5 were required for such persons, the Company believes that, during the fiscal year ended December 31, 2001, all filing requirements under Section 16(a) of the Securities Exchange Act applicable to its officers, directors and 10% shareholders were complied with. ITEM 11. Executive Compensation The following table sets forth for the three years ended December 31, 2001 certain information as to the compensation paid by the Company to the Chief Executive Officer and the other executive officers of the Company who received salary and bonus compensation of $100,000 or more (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION OTHER AWARDS ANNUAL SECURITIES ALL OTHER NAME AND SALARY BONUS COMPENSATION UNDERLYING COMPENSATION PRINCIPAL POSITION YEAR ($) ($) ($)(1) OPTIONS (#) ($)(2) - ------------------------- ----- -------- ------ ------------ ------------ ------------ Freeman A. Ford 2001 $156,000 $3,615 -- 0 $2,488 Chairman of the Board 2000 $156,000 $0 -- 0 $1,662 Chief Executive Officer 1999 155,793 4,569 -- 25,000 1,662 Alex N. Watt 2001 137,238 3,180 -- 0 2,218 Executive Vice President 2000 137,035 0 -- 0 2,218 1999 131,779 3,865 -- 25,000 2,218 David K. Harris 2001 139,877 21,177 -- 0 578 Vice President Sales 2000 143,633 0 -- 0 542 and Marketing 1999 131,779 3,865 -- 25,000 494
- ---------- (1) Excludes certain perquisites and other benefits that did not exceed the lesser of $50,000 or 10% of any officer's total salary and bonus. (2) Consists of premiums paid by the Company for term life insurance The Company did not make any grant of stock options to the Named Executive Officers during the Last Fiscal Year. 12 The following table sets forth information regarding the value of all unexercised stock options and warrants held by the Named Executive Officers as of the end of the Last Fiscal Year. AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR-END AND FISCAL YEAR-END OPTION AND WARRANTY VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED IN- OPTIONS/ THE-MONEY WARRANTS AT OPTIONS/WARRANTS FISCAL YEAR-END AT FISCAL YEAR-END (#) ($)(1) --------------- ------------------ SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE (#) VALUE REALIZED UNEXERCISABLE UNEXERCISABLE ---- --------------- -------------- ------------- ------------- Freeman A. Ford 0 N/A 112,250/0 87,250/0 Alex N. Watt 0 N/A 72,950/0 47,950/0 David K. Harris 0 N/A 72,950/0 47,950/0
- ---------- (1) Based on the last reported sale price for the Company's Common Stock for the last trading day prior to 2001 fiscal year-end of $0.10, all outstanding options and warrants were underwater. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth the beneficial ownership of Common Stock of the Company as of February 20, 2002 by (1) each person known by the Company to beneficially own more than 5% of the Company's Common Stock, (2) each director and nominee for director, (3) the named executive officers of the Company, and (4) all current directors and executive officers as a group:
SHARES OF COMMON STOCK BENEFICIALLY OWNED ---------------------------------- NUMBER OF PERCENT OF NAME OF BENEFICIAL OWNER SHARES(1) TOTAL(2) - ------------------------ --------- ---------- Freeman A. Ford.................................... 2,111,096(3) 50.8% c/o FAFCO, Inc. 435 Otterson Drive Chico, California 95928 Alex N. Watt....................................... 95,136(4) 2.3% David K. Harris.................................... 87,199(5) 2.1% Robert W. Selig, Jr................................ 48,528(6) 1.2% William A. Berry................................... 12,500(7) * William F. Chisholm................................ 28,750(8) * David F. Ford...................................... 56,300(9) 1.4% Nancy I. Garvin.................................... 35,907(10) * All current directors and executive officers as a 2,475,416(11) 59.6% group (8 persons)
- ---------- 13 * Less than 1%. (1) Except as otherwise indicated in the footnotes to this table or as otherwise provided by community property laws, the beneficial owner has sole voting and investment power with respect to all shares. (2) Based on shares of Common Stock outstanding as of the February 20, 2002. (3) Includes (i) 298,000 shares held of record by trusts for the benefit of Freeman Ford's children, for which he and his spouse serve as trustees and as to which shares he disclaims beneficial ownership, (ii) 449,344 shares jointly owned by Freeman Ford and his spouse, and (iii) 112,250 shares issuable upon exercise of options and warrants held by Freeman Ford exercisable within 60 days of the February 20, 2002. (4) Includes (i) 72,950 shares issuable upon exercise of outstanding options exercisable within 60 days of the February 20, 2002 held by Mr. Watt and (ii) 3,000 shares held by Mr. Watt and Sandra S. Watt as joint tenants. (5) Includes 72,950 shares issuable upon exercise of outstanding options exercisable within 60 days of the February 20, 2002 held by Mr. Harris. (6) Includes (i) 15,000 shares issuable upon exercise of outstanding options exercisable within 60 days of the February 20, 2002 held by Mr. Selig, and (ii) 5,700 shares held by trusts for the benefit of Mr. Selig's children, as to which he disclaims beneficial ownership. (7) Includes 5,000 shares issuable upon exercise of outstanding options exercisable within 60 days of the February 20, 2002 held by Mr. Berry. (8) Includes (i) 6,000 shares issuable upon exercise of outstanding options exercisable within 60 days of the February 20, 2002 by Mr. Chisholm and (ii) 18,750 shares jointly owned by Mr. Chisholm and his wife. (9) Includes 36,938 shares issuable upon exercise of outstanding options held by David Ford exercisable within 60 days of the February 20, 2002. (10) Includes (i) 23,800 shares issuable upon exercise of outstanding options exercisable within 60 days of the February 20, 2002 held by Ms. Garvin. (11) Includes (i) 281,950 shares issuable upon exercise of outstanding options exercisable within 60 days of the February 20, 2002 held by four executive officers (one of whom is also a director), and (ii) 62,938 shares issuable upon exercise of outstanding options exercisable within 60 days of the February 20, 2002 held by four outside directors. ITEM 13. Certain relationships and related transactions. By virtue of his position as Chairman of the Board, President and Chief Executive Office of the Company and his beneficial ownership of approximately 50.8% of the Company's Common Stock as of the Record Date, Freeman A. Ford may be deemed to be a "parent" and/or "control person" of the Company within the meaning of the rules and regulations promulgated under the Securities Act of 1933, as amended. Freeman A. Ford can elect a majority of the Board of Directors and controls any shareholder vote that does not require a supermajority with respect to which his shares are eligible to be voted. In addition, Freeman A. Ford, his son (David F. Ford) and his son-in-law (William Chisholm) comprise three out of five directors of the Company. During 2000, Freeman A. Ford, David F. Ford (Freeman A. Ford's son) and Kimberley Ford Chisholm (Freeman A. Ford's daughter and William Chisholm's spouse) exercised options to purchase, at a purchase price of $0.125 per share, 240,000, 18,750 and 18,750 shares of FAFCO Common Stock, respectively. During January 2002, the Company raised $500,000 in debt financing through the issuance of subordinated promissory notes (the "Notes"). The Notes have a term of three years and accrue interest at an annual rate of 10%, payable quarterly. The notes may be prepaid at any time. To the extent any Note is not prepaid by the first anniversary of the issuance date, the applicable interest rate will increase to 12% per annum. 14 In connection with the issuance of the Notes, the Company issued warrants to purchase an aggregate of 100,000 shares of our common stock to the investors (the "Warrants"). The Warrants have an exercise price of $.125 per share and a term of three years from the date of issuance. To the extent that any Note has not been prepaid by the first anniversary of the issuance date, the Company is required to issue additional Warrants to purchase 1,000 shares of our common stock for each $10,000 of principal that remains outstanding. Freeman A. Ford, our Chairman and Chief Executive Officer, and Diana V. Ford (Mr. Ford's wife) purchased $150,000 of the principal amount raised, and received Warrants to purchase 30,000 shares of common stock. 15 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, 2001 and 2000, the Consolidated Statement of Operations, of Shareholders' Equity and Cash Flows for each of the three years in the period ended December 31, 2001, and the notes thereto appear on pages 3 through 13 of the Annual Report. 2. Financial Statement Schedules The following schedule for the years ended December 31, 2001, 2000, and 1999 is included in this report. Such schedule should be read in conjunction with the consolidated financial statements in the Annual Report. Report of Independent Accountants on Financial Statement Schedule (see page 19). Schedule II - Valuation and Qualifying Accounts and Reserves (see page 20). Schedules not included in these financial statement schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3. Index to Exhibits The following exhibits are filed as part of or incorporated by reference, to the extent indicated herein, in this Annual Report on Form 10-K. 16
EXHIBIT NO. DESCRIPTION (FOOTNOTES APPEAR AT THE END OF THE EXHIBIT LIST) - ----------- ------------------------------------------------------------ 3.1(1) Articles of Incorporation, as amended. 3.2(3) Bylaws, as amended. 3.2(a)(15) Certificate of Amendment of Bylaws. 4.1 Reference Exhibits 3.1 and 3.2. 10.1 Reference Exhibit 4.1. 10.2(7)* 1981 Incentive Stock Option Plan. 10.3(7)* Form of 1981 Incentive Stock Option Agreement. 10.4(1) Standard Form of Distributor Agreement. 10.5(6) Licensing Agreement between the Registrant, as Licensor, and Enercon Engineering, as Licensee, dated May 20, 1988. 10.6(11)* 1991 Stock Option Plan, as amended. 10.6(a)(8)* Form of Stock Option Agreement used under the 1991 Stock Option Plan. 10.7(8)* 1991 Directors' Stock Option Plan. 10.7(a)(8)* Form of Nonstatutory Stock Option Agreement used under 1991 Director's Stock Option Plan. 10.8(8)* Employee Stock Purchase Plan. 10.8(a)(8)* Form of Subscription Agreement used under Employee Stock Purchase Plan. 10.9(9) Licensing Agreement and Addendum between the Registrant, as Licensor, and Jang-Han Systems Engineering, as Licensee, dated January 1, 1993. 10.10(10) Export - Import and Technical License Agreement between the Registrant, as Licensor, and Ebara Corporation, as Licensee, dated October 22, 1993. 10.11(14) Construction Trust Deed between Registrant as Trustor and Butte Community Bank as Lender, dated April 13, 2000. 10.11(a)(15) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender dated April 13, 2000. 10.11(b)(15) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender dated October 16, 2000. 10.11(c)(15) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender dated December 15, 2000. 10.11(d)(15) Business Loan Agreement between Registrant as Borrower and Butte Community Bank as Lender, dated May 15, 2000. 10.11(e)(15) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender dated May 9, 2001. 10.11(f)(15) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender, dated May 15, 2000. 10.11(g)(15) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender dated January 26, 2001. 10.11(h) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender dated July 26, 2001. 10.12(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 11 of Notes to Consolidated Financial Statements on Registrant's 2001 Annual Report). 13.1 Registrant's 2001 Annual Report to Shareholders. 18.1(12) Letter re change in Accounting Principle from Burr, Pilger & Mayer dated November 5, 1997. 21.1(13) Subsidiaries of Registrant. 23.1 Consent of Independent Accountants 24.1 Power of Attorney (see page 21).
17 * Denotes a management contract or compensatory plan or arrangement. - -------------------------------------------------------------------------------- (1) Incorporated by reference to exhibit filed with Registrant's Registration Statement on Form S-1 (File No. 2-72297) filed May 14, 1981. (2) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. (3) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1983. (4) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. (5) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. (6) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. (7) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. (8) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (9) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (10) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (11) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (12) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10K for the fiscal year ended December 31, 1998. (13) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10K for the fiscal year ended December 31, 1999. (14) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10K for the fiscal year ended December 31, 2000. (15) Previously Filed - ------------- (b) Reports on Form 8-K: No Reports on Form 8-K were filed by the Company during the fourth quarter of 2001. (c) Exhibits: See subsection (a) (3) above. (d) Financial Statement Schedules: See subsection (a) (2) above. 18 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 8, 2002 appearing on page 14 of the 2001 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, LLP San Francisco, California March 8, 2002 19 FAFCO, INC. SCHEDULE II Valuation and Qualifying Accounts and Reserves
Balance at Additions Charged Beginning of to Costs and Balance at End of Description Period Expenses Deductions Period - ----------- ------------ ----------------- ---------- ----------------- 2001: Allowance for doubtful accounts $400,000 $79,600 $ $479,600 current accounts receivable short-term receivable long-term receivable Warranty reserve 287,700 141,500 177,200(2) 252,000 Deferred tax asset valuation allowance 11,500 11,500 2000 Allowance for doubtful accounts current accounts receivable $317,800 $89,000 $6,800(1) $400,000 short-term receivable 27,600 27,600(1) long-term receivable 31,700 31,700(1) Warranty reserve 282,700 156,700 151,700(2) 287,700 Deferred tax asset valuation allowance 29,600 18,100 11,500 1999: Allowance for doubtful accounts current accounts receivable $536,300 $91,200 $309,700(1) $317,800 short-term receivable 27,600 27,600 long-term receivable 29,300 2,400 31,700 Warranty reserve 232,200 177,000 126,500(2) 282,700 Deferred tax asset valuation allowance 173,200 143,600 29,600
(1) Write-off of uncollectible accounts. (2) Cost of warranty claims processed. 20 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, 2002 FAFCO, Inc. /s/ Freeman A. Ford ---------------------------------------- Freeman A. Ford, Chairman of Board, President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Freeman A. Ford and Nancy I. Garvin, or either of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - ------------------------- ------------------------------------ --------------- /s/ Freeman A. Ford Chairman of the Board, President and March 28, 2002 - ------------------------ Chief Executive Officer (Principal Freeman A. Ford Executive Officer) and Director /s/ Nancy I. Garvin Vice President, Finance and March 28, 2002 - ------------------------ Chief Financial Officer (Principal Nancy I. Garvin Financial and Accounting Officer) /s/ William A. Berry Director March 28, 2002 - ------------------------ William A. Berry /s/Robert W. Selig, Jr. Director March 28, 2002 - ------------------------ Robert W. Selig, Jr. /s/ William Chisholm Director March 28, 2002 - ------------------------ William Chisholm /s/David Ford Director March 28, 2002 - ------------------------ David Ford
21 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION (FOOTNOTES APPEAR AT THE END OF THE EXHIBIT LIST) - ----------- ------------------------------------------------------------ 3.1(1) Articles of Incorporation, as amended. 3.2(3) Bylaws, as amended. 3.2(a)(15) Certificate of Amendment of Bylaws. 4.1 Reference Exhibits 3.1 and 3.2. 10.1 Reference Exhibit 4.1. 10.2(7)* 1981 Incentive Stock Option Plan. 10.3(7)* Form of 1981 Incentive Stock Option Agreement. 10.4(1) Standard Form of Distributor Agreement. 10.5(6) Licensing Agreement between the Registrant, as Licensor, and Enercon Engineering, as Licensee, dated May 20, 1988. 10.6(11)* 1991 Stock Option Plan, as amended. 10.6(a)(8)* Form of Stock Option Agreement used under the 1991 Stock Option Plan. 10.7(8)* 1991 Directors' Stock Option Plan. 10.7(a)(8)* Form of Nonstatutory Stock Option Agreement used under 1991 Director's Stock Option Plan. 10.8(8)* Employee Stock Purchase Plan. 10.8(a)(8)* Form of Subscription Agreement used under Employee Stock Purchase Plan. 10.9(9) Licensing Agreement and Addendum between the Registrant, as Licensor, and Jang-Han Systems Engineering, as Licensee, dated January 1, 1993. 10.10(10) Export - Import and Technical License Agreement between the Registrant, as Licensor, and Ebara Corporation, as Licensee, dated October 22, 1993. 10.11(14) Construction Trust Deed between Registrant as Trustor and Butte Community Bank as Lender, dated April 13, 2000. 10.11(a)(15) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender dated April 13, 2000. 10.11(b)(15) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender dated October 16, 2000. 10.11(c)(15) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender dated December 15, 2000. 10.11(d)(15) Business Loan Agreement between Registrant as Borrower and Butte Community Bank as Lender, dated May 15, 2000. 10.11(e)(15) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender dated May 9, 2001. 10.11(f)(15) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender, dated May 15, 2000. 10.11(g)(15) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender dated January 26, 2001. 10.11(h) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender dated July 26, 2001. 10.12(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 11 of Notes to Consolidated Financial Statements on Registrant's 2001 Annual Report). 13.1 Registrant's 2001 Annual Report to Shareholders. 18.1(12) Letter re change in Accounting Principle from Burr, Pilger & Mayer dated November 5, 1997. 21.1(13) Subsidiaries of Registrant. 23.1 Consent of Independent Accountants 24.1 Power of Attorney (see page 21).
* Denotes a management contract or compensatory plan or arrangement. - -------------------------------------------------------------------------------- (1) Incorporated by reference to exhibit filed with Registrant's Registration Statement on Form S-1 (File No. 2-72297) filed May 14, 1981. (2) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. (3) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1983. (4) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. (5) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. (6) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. (7) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. (8) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (9) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (10) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (11) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (12) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10K for the fiscal year ended December 31, 1998. (13) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10K for the fiscal year ended December 31, 1999. (14) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10K for the fiscal year ended December 31, 2000. (15) Previously Filed EX-10.11(H) 3 f80281ex10-11h.txt EXHIBIT 10.11(H) EXHIBIT 10.11(h) PROMISSORY NOTE
- -------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL/COLL ACCOUNT OFFICER INITIALS $1,000,000.00 07-26-2001 08-10-2002 400707337 016/6666 120144 019 - -------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. - --------------------------------------------------------------------------------------------------------
BORROWER: FAFCO, INC. LENDER: BUTTE COMMUNITY BANK 435 OTTERSON DRIVE CHICO OFFICE CHICO, CA 95928 2041 FOREST AVE. CHICO, CA 95928 - -------------------------------------------------------------------------------- PRINCIPAL INITIAL DATE OF AMOUNT: $1,000,000.00 RATE: 8.250% NOTE: JULY 26, 2001 PROMISE TO PAY. FAFCO, INC. ("BORROWER") PROMISES TO PAY TO BUTTE COMMUNITY BANK ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF ONE MILLION & 00/100 DOLLARS ($1,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE. PAYMENT. BORROWER WILL PAY THIS LOAN ON DEMAND. PAYMENT IN FULL IS DUE IMMEDIATELY UPON LENDER'S DEMAND. IF NO DEMAND IS MADE, BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON AUGUST 10, 2002. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH PAYMENT DATE, BEGINNING SEPTEMBER 10, 2001, WITH ALL SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. UNLESS OTHERWISE AGREED OR REQUIRED BY APPLICABLE LAW, PAYMENTS WILL BE APPLIED FIRST TO ACCRUED UNPAID INTEREST, THEN TO PRINCIPAL, AND ANY REMAINING AMOUNT TO ANY UNPAID COLLECTION COSTS AND LATE CHARGES. THE ANNUAL INTEREST RATE FOR THIS NOTE IS COMPUTED ON A 365/360 BASIS; THAT IS, BY APPLYING THE RATIO OF THE ANNUAL INTEREST RATE OVER A YEAR OF 360 DAYS, MULTIPLIED BY THE OUTSTANDING PRINCIPAL BALANCE, MULTIPLIED BY THE ACTUAL NUMBER OF DAYS THE PRINCIPAL BALANCE IS OUTSTANDING. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is Lender's Prime Rate (the "Index"). This is the rate Lender charges, or would charge, on 90-day unsecured loans to the most creditworthy corporate customers. This rate may or may not be the lowest rate available from Lender at any given time. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often that each DAY. Borrower understands that Lender may make loans based on other rates as well. THE INDEX CURRENTLY IS 6.750%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 1.500 PERCENTAGE POINTS OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 8.250%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST CHARGE OF $50.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Butte Community Bank, CHICO OFFICE, 2041 FOREST AVE, CHICO, CA 95928. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% OF THE REGULARLY SCHEDULED PAYMENT OR $5.00, WHICHEVER IS GREATER. INTEREST AFTER DEFAULT. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, the total sum due under this Note will bear interest from the date of acceleration or maturity at the variable interest rate on this Note. DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note: PAYMENT DEFAULT. Borrower fails to make any payment when due under this Note. OTHER DEFAULTS. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the load. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired. INSECURITY. Lender in good faith believes itself insecure. CURE PROVISIONS. If any default, other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. Borrower also will pay any court costs, in addition to all other sums provided by law. GOVERNING LAW. THIS NOTE WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS NOTE HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of BUTTE County, State of California. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $10.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts. PROMISSORY NOTE LOAN NO. 400707337 (CONTINUED) PAGE 2 ================================================================================ LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested orally by Borrower or as provided in this paragraph. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of their authority; ALEX N. WATT, EXECUTIVE VP/SECRETARY OF FAFCO, INC.; NANCY L. GARVIN, VICE PRESIDENT OF FINANCE OF FAFCO, INC.; AND FREEMAN A. FORD, PRESIDENT OF FAFCO, INC. Borrower agrees to be liable for all sums either; (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (A) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (B) Borrower or any guarantor ceases doing business or is insolvent; (C) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (D) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (E) Lender in good faith believes itself insecure. SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successor and assigns. NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Please notify us if we report any inaccurate information about your account(s) to a consumer reporting agency. Your written notice describing specific inaccuracy(ies) should be sent to us at the following address: Butte Community Bank 672 Pearson Rd Paradise, Ca 95969 GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Note on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, and notice of dishonor. Upon any change in terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without consent of or notice to anyone other than the party with whom the modification in made. The obligations under this Note are joint and several. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. BORROWER: FAFCO, INC. By:_____________________________________________ NANCY L. GARVIN, VICE PRESIDENT OF FINANCE OF FAFCO, INC. EX-13.1 4 f80281ex13-1.txt EXHIBIT 13.1 EXHIBIT 13.1 - -------------------------------------------------------------------------------- THE COMPANY - -------------------------------------------------------------------------------- [GRAPHIC OF THE COMPANY FACILITY] FAFCO was formed in 1969, incorporated in 1972, and has produced over 1.3 million polymer heat exchangers, primarily for the solar heating and thermal energy storage markets. FAFCO is the leading U.S. manufacturer of solar heating panels, with nearly twice the installed base of solar systems of its nearest competitor. In addition, FAFCO is a leading producer of polymer heat exchangers for thermal energy storage applications. FAFCO's IceStor(TM) product line of thermal energy storage equipment significantly increases the effective capacity of electric utilities without the burden of adding new capacity. FAFCO has nearly thirty issued or pending patents. PAGE 1 PRESIDENT'S LETTER [GRAPHIC -- PRESIDENT'S PICTURE] FAFCO was founded in 1969 and incorporated in 1972 to manufacture polymer heat exchangers currently used in the solar and thermal energy storage (TES) markets worldwide. FAFCO is also one of the oldest and largest producers of solar pool heating panels in the United States. Net sales increased by 5.4% to $12,100,300 in 2001, primarily due to increased solar product sales. Net income was $91,500 compared with a net loss of $60,200 in 2000. On August 31, 2000, FAFCO moved from leased facilities in Redwood City, to a new 57,500 square foot plant on 6 acres that is owned by the Company in Chico, California. Our new Chico location provides access to undergraduate and graduate college students, eases the financial burden of new home ownership for our employees, and is supportive of commercial enterprise. The monthly debt service on FAFCO's ultramodern plant is significantly less than the monthly lease payments at our former location. 2001 was a year of building a new team in Chico and completing our plant and its associated equipment. Since our arrival in Chico we have hired approximately 85 new employees, installed automatic resin/additive mixing equipment, brought on line our patented continuous molding process and completed development of our dedicated Thermal Energy Storage system (TES). In addition, we have prototyped an all-polymer solar hot water heating system and have patented and put into production an automated process for making TES heat exchangers. Solar product sales were up significantly in 2001. This increase came primarily from higher in-ground pool solar sales in California and increased sales of our above-ground pool solar heaters. Sales in California and the above-ground pool market nationwide were driven in a large part by the California energy crisis and an increase in natural gas prices. Our U.S. thermal energy storage business was down in 2001. However, we believe that the industry as a whole made a turn-around in 2001 and that there are a number of new emerging market areas that will afford an opportunity for significant growth in 2002. Our foreign TES business declined somewhat due to the Japanese economic recession. We expect a modest recovery in 2002. In summary, FAFCO has invested over five million dollars in new plant and new processing equipment which will serve the company for decades. Our more than ten million dollars of physical assets are complemented by energetic, highly productive and dedicated employees. Our new physical assets combined with our new team make FAFCO stronger than it has been for many years. Sincerely, Freeman A. Ford President PAGE 2 CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001 2000 ----------- ---------- Assets Current assets: Cash and cash equivalents $ 121,200 $ 10,100 Accounts receivable, less allowance for doubtful accounts of $479,600 in 2001 and $400,000 in 2000 1,620,500 1,969,400 Inventories 1,171,800 1,225,900 Prepaid expenses and other current assets 174,200 211,500 Other accounts receivable, net of allowance 35,500 21,600 Deferred tax asset, net of allowance 249,600 215,700 ----------- ---------- Total current assets 3,372,800 3,654,200 ----------- ---------- Property, plant and equipment, at cost 8,190,400 7,104,000 Less accumulated depreciation and amortization (2,079,500) (1,760,000) ----------- ---------- 6,110,900 5,344,000 ----------- ---------- Other assets (net) 7,200 9,300 Deferred tax asset, net of allowance 565,200 648,600 ----------- ---------- Total assets $10,056,100 $9,656,100 ----------- ---------- Liabilities and shareholders' equity Current liabilities: Bank line of credit $ 768,700 $ 450,500 Notes Payable to bank -- current portion 282,600 143,000 Accounts payable and other accrued expenses 1,357,700 1,744,700 Accrued compensation and benefits 355,200 267,800 Accrued warranty expense 252,000 287,700 Other current liabilities 3,100 5,100 ----------- ---------- Total current liabilities 3,019,300 2,898,800 ----------- ---------- Mortgage 3,340,000 3,366,500 Notes payable to bank -- less current portion 432,200 224,000 Other non-current liabilities 35,400 34,200 ----------- ---------- Total liabilities $6,826,900 $6,523,500 ----------- ---------- Commitments and contingent liabilities Shareholders' equity: Preferred Stock-authorized 1,000,000 shares of $1.00 par value, none of which has been issued Common Stock-authorized 10,000,000 shares of $0.125 par value; 3,855,591 and 3,834,791 issued and outstanding at December 31, 2001 and 2000 respectively $ 481,900 $ 479,300 Capital in excess of par value 5,108,500 5,106,000 Notes receivable secured by Common Stock (75,100) (75,100) Accumulated deficit (2,286,100) (2,377,600) ----------- ---------- Total shareholders' equity $3,229,200 $3,132,600 Commitments and contingent liabilities ----------- ---------- Total liabilities and shareholders' equity $10,056,100 $9,656,100 ----------- ----------
The accompanying notes are an integral part of this statement PAGE 3 CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 2000 1999 ------------ ------------ ------------ Net Sales $ 12,100,300 $ 11,481,500 $ 10,621,700 Other income (net) 32,800 (7,400) 17,100 ------------ ------------ ------------ Total revenues 12,133,100 11,474,100 10,638,800 ------------ ------------ ------------ Cost of goods sold 7,146,300 7,380,500 6,436,400 Marketing and selling expense 2,371,900 2,162,200 1,854,300 General and administrative expense 1,782,000 1,786,500 1,752,600 Research and development expense 239,400 294,500 327,600 Net interest expense 438,600 93,200 71,700 Relocation costs (net) (202,100) ------------ ------------ ------------ Total costs and expense 11,978,200 11,514,800 10,442,600 ------------ ------------ ------------ Income (loss) before income taxes 154,900 (40,700) 196,200 Provision for (benefit from) income taxes 63,400 19,500 (44,800) ------------ ------------ ------------ Net income (loss) $ 91,500 $ (60,200) $ 241,000 ------------ ------------ ------------ Basic net income (loss) per share $ 0.02 $ (0.02) $ 0.07 ------------ ------------ ------------ Diluted net income (loss) per share $ 0.02 $ (0.02) $ 0.06 ------------ ------------ ------------
The accompanying notes are an integral part of this statement PAGE 4 CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
NOTES RECEIVABLE NUMBER CAPITAL IN SECURED BY RETAINED TOTAL OF COMMON EXCESS OF COMMON EARNINGS SHAREHOLDERS SHARES STOCK PAR VALUE STOCK DEFICIT EQUITY --------- -------- ---------- ---------- ----------- ------------ BALANCE AT DECEMBER 31, 1998 3,303,311 $412,800 $5,107,100 $(75,100) $(2,558,400) $2,886,400 Net income for the year 241,000 241,000 --------- -------- ---------- -------- ----------- ---------- BALANCE AT DECEMBER 31, 1999 3,303,311 $412,800 $5,107,100 $(75,100) $(2,317,400) $3,127,400 Net loss for the year (60,200) (60,200) Issuance of shares upon exercise of stock warrants 540,000 67,500 67,500 Purchase of stock (8,520) (1,000) (1,100) (2,100) --------- -------- ---------- -------- ----------- ---------- BALANCE AT DECEMBER 31, 2000 3,834,791 $479,300 $5,106,000 $(75,100) $(2,377,600) $3,132,600 Net income for the year 91,500 91,500 Issuance of shares upon exercise of stock warrants 20,800 2,600 2,500 5,100 --------- -------- ---------- -------- ----------- ---------- BALANCE AT DECEMBER 31, 2001 3,855,591 $481,900 $5,108,500 $(75,100) $(2,286,100) $3,229,200
PAGE 5 CONSOLIDATED STATEMENT OF CASH FLOW
YEAR ENDED DECEMBER 31, 2001 2000 1999 ----------- ----------- ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) $ 91,500 $ (60,200) $ 241,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 485,500 289,000 184,400 Write offs and allowance for doubtful accounts 79,600 89,100 165,500 (Gain) loss on disposition of fixed assets 4,600 (2,400) Change in assets and liabilities: Accounts receivable 255,400 (300,400) 13,100 Inventories 54,100 (184,300) 223,800 Prepaid expenses and other assets 37,300 42,700 (70,700) Deferred tax assets 49,500 28,500 (55,300) Other assets (net) 2,100 22,000 40,100 Accounts payable, accrued expenses and other current liabilities (303,800) 924,000 (152,400) Other non-current liabilities 1,200 17,600 (15,300) ----------- ----------- ----------- Net cash provided by operations $ 752,400 $ 872,600 $ 571,800 ----------- ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of fixed assets (1,252,400) (4,715,200) (523,400) Proceeds from disposition of fixed assets 2,400 ----------- ----------- ----------- Net cash used in investing activities $(1,252,400) $(4,715,200) $ (521,000) ----------- ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from exercise of warrants 67,500 Proceeds from exercise of stock options 5,100 Repurchase of common stock (2,100) Repayment of subordinated debt (925,000) Proceeds from bank line of credit 2,747,700 Repayment of bank line of credit (2,429,500) (11,000) Proceeds from notes payable to bank 499,900 3,733,500 461,500 Repayment of notes payable to bank (190,000) Repayment of mortgage (22,100) ----------- ----------- ----------- Net cash provided by (used in) financing activities 611,100 3,787,900 (463,500) ----------- ----------- ----------- Net increase (decrease) in cash & cash equivalents 111,100 (54,700) (412,700) Cash and cash equivalents, beginning of period 10,100 64,800 477,500 ----------- ----------- ----------- Cash and cash equivalents, end of period $ 121,200 $ 10,100 $ 64.800 ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 434,900 $ 76,275 $ 109,400 Income taxes $ 69,800 ----------- ----------- -----------
The accompanying notes are an integral part of this statement PAGE 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company designs, develops, manufactures, and markets polymer heat exchangers for use in solar heating systems for swimming pools and thermal energy storage systems for commercial and industrial cooling. The heat exchangers for solar heating systems are sold to wholesalers and distributors primarily in California and Florida and in other locations throughout the United States and overseas. The heat exchangers for thermal energy storage systems are marketed through manufacturers' representatives throughout the United States and internationally. A summary of significant accounting policies follows: PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant inter-company balances and transactions have been eliminated in consolidation. The subsidiary currently has no ongoing business activities. REVENUE RECOGNITION: Revenues on sales of products or services are recognized at the time of shipment of goods or performance of services. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 maturity of three months or less. INVENTORIES: Inventories are stated at the lower of cost or market determined using the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated based on historical cost adjusted for accumulated depreciation. Depreciation and amortization of plant and equipment, excluding the building, vehicles and leasehold improvements, are determined using accelerated methods. For the building, vehicles and leasehold improvements, the straight-line method is used. The estimated useful lives of the assets, with the exception of the building, and leasehold improvements range between three and ten years. The estimated useful life of the building and leasehold improvements is 39.5 years. Minor replacements, improvements, maintenance, and repairs are expensed as incurred. Major replacements and improvements are capitalized and depreciated over the remaining useful life of the related asset. Gains and losses on sales and retirement of plant and equipment are credited or charged to income. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF: Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairments are recorded when indications of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying value. INCOME TAXES: Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. EARNINGS PER COMMON SHARE: Basic earnings (loss) per common share are computed using the weighted average number of shares outstanding. Diluted earnings (loss) per common share are computed using the weighted average number of shares outstanding adjusted for potentially dilutive incremental shares attributed to outstanding options and warrants to purchase common stock and shares issuable upon conversion of certain convertible securities. WARRANTIES: In the normal course of business, the Company makes certain warranties as to workmanship and materials. Product warranty periods range from two to fifteen years for full coverage. The estimated future expense of these warranties is accrued at the time of sale. The estimates inherent in accounting for such warranties are reviewed and revisions to previous estimates are made as required reflecting the most current information available. ACCOUNTING FOR STOCK-BASED COMPENSATION: The Company has elected to account for stock-based compensation under the intrinsic value method in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. Under this method, no compensation expense is recorded for stock options granted when the exercise price of the option granted is equal to or exceeds the fair market value of the Company's common stock. The Company makes the pro forma disclosures of stock-based compensation required by SFAS No. 123. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Current Assets and Current Liabilities: The carrying value of cash equivalents, accounts receivable, notes receivable, short-term borrowings, accounts payable, and accrued expenses approximate fair value because of their short maturity. Long-Term Debt: The fair value of the Company's long-term debt is estimated based on the borrowing rates currently PAGE 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) available to the Company for loans with similar terms. At December 31, 2001, the carrying amount approximated estimated fair value of long-term debt. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Accounting for Business Combinations. This statement requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of intangible assets separately from goodwill. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and intangible assets with indefinite life are not amortized. Instead of amortizing goodwill and intangible assets deemed to have an indefinite life, the statement requires a test for impairment to be performed annually, or immediately if conditions indicate that such an impairment could exist. The amortization period of intangible assets with finite lives will no longer be limited to forty years. This statement is effective for fiscal years beginning after December 15, 2001, and permits early adoption for fiscal years beginning after March 15, 2001. In August 2001, the FASB issued SFAS no. 144, "Accounting for the Impairment or Disposal of Long Lived Assets" which addresses financial accounting and reporting for the impairment and disposal of long-lived assets with adoption required no later than fiscal year 2003. The Company does not believe that any of these recent accounting pronouncements will have a material impact on their financial position or results of operations. 2) INVENTORIES: Inventories consist of the following:
DECEMBER 31, 2001 2000 ---------- ---------- Raw materials $515,700 $606,500 Work in progress 230,200 269,900 Finished goods 425,900 349,500 ---------- ---------- $1,171,800 $1,225,900 ========== ==========
3) PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consist of the following:
DECEMBER 31, 2001 2000 ---------- ---------- Building $3,679,100 $3,441,400 Land 550,400 550,400 Machinery and Equipment 2,590,900 2,332,500 Office and computer Equipment 474,900 510,800 Leasehold Improvements 585,200 Vehicles 309,900 268,900 ---------- ---------- $8,190,400 $7,104,000 ========== ========== Less accumulated depreciation and amortization (2,079,500) (1,760,000) ---------- ---------- $6,110,900 $5,344,000 ========== ==========
As of December 31, 2001, construction costs for the Company's new office and manufacturing facility in Chico are complete at $3,679,100. Interest was capitalized in connection with construction costs. The capitalized interest was recorded as part of the asset to which it relates and is amortized over the asset's useful life. No interest was capitalized in 2001. In 2000 $89,300 in interest cost was capitalized. As of December 31, 2001 and 2000, the Company had $226,800 and $448,700, respectively, of construction in progress that is included in the above asset balances by category. These assets are expected to be placed in service during the year ending December 31, 2002. As of December 31, 2001 and 2000, the Company had written off $166,100 and $936,700, respectively, in fully depreciated assets. These assets were scrapped or abandoned as a result of the Company's relocation to Chico, California. 4) SUBORDINATED NOTES AND WARRANTS During January 2002, the Company issued $500,000 in principal amount of subordinated notes, accompanied by warrants to purchase up to 200,000 shares of the common stock of the company. The warrants have an exercise price of $0.125 per share. The three-year notes bear interest, payable quarterly, at an initial annual rate of 10%, and 12% for all periods after the first anniversary of the date of the notes. The notes are subordinated to bank borrowings and other secured indebtedness for money borrowed. The Company may at its option call the notes for redemption at any time with ten (10) days notice. Holders of the notes are entitled to certain rights with respect to registration of the common stock issuable upon exercise of the warrants. PAGE 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5) BANK BORROWING The Company has a bank line of credit secured by substantially all the assets of the Company other than real estate. The line of credit allows the Company to borrow the lesser of $1,000,000 or an amount determined by a formula applied to net accounts receivable, inventories, and net plant and equipment. Amounts borrowed bear interest at the bank's prime rate plus 1.5%. The line of credit agreement contains certain covenants relating to working capital, current ratio, and tangible net worth, prohibits the payment of cash dividends, and expires on August 10, 2002. At December 31, 2001 and 2000, the Company had complied with or obtained waivers of compliance with the loan covenants. As of December 31, 2001 and 2000, the Company had utilized $768,700 and $450,500, respectively, of this facility. In addition to the line of credit, the Company has a 36-month term loan in the amount of $445,000 bearing interest at prime plus 1.5%. At December 31, 2001, the Company had an outstanding balance of $223,300 on this loan facility. The Company also has a 60-month term loan available in the amount of $500,000 bearing interest at prime plus 1.5%. At December 31, 2001, the Company had outstanding balance of $453,700 on this loan facility. The Company also has a $3,400,000 mortgage loan with a maturity date of June 10, 2030. Principal and interest at 9.05% are amortized over a 29 1/2 year term from January 10, 2001. The pricing is fixed for five-year increments. The interest rate will be changed on June 10th of those five-year periods to accrue at Prime plus .05%. The balance on this mortgage at December 31, 2001 was $3,377,800. As of December 31, 2001 the aggregate amount of principal maturities on bank borrowings over each of the succeeding years is as follows:
YEAR ENDING DECEMBER 31, ------------ 2002 $1,051,300 2003 191,000 2004 135,500 2005 147,700 2006 89,100 Thereafter 3,208,900 ---------- ---------- TOTAL $4,823,500 ========== ==========
6) SHAREHOLDERS' EQUITY The Board of Directors, without shareholder approval, may determine the rights, preferences, privileges, and restrictions of the Company's unissued Preferred Stock. Such shares may be issued in one or more series. In 1980, the Company issued 202,300 shares of Common Stock at a price of $2.43 per share in exchange for non-interest bearing promissory notes, which have a balance due of $75,100 at December 31, 2001 and 2000. 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 non-collectible, the Company will demand surrender of the related shares issued and will cancel and write off the related notes receivable balance. The Company has a 1991 Incentive Stock Option Plan under which 500,000 shares of Common Stock have been reserved for issuance to employees and consultants. During 1999, the Company granted options to purchase 136,000 shares, exercisable at $0.50 per share, the fair market value on the date of grant. During 2000 and 2001, no options were granted and options to purchase 800 and 20,000 shares were exercised in 2000 and 2001 respectively. No new grants may be made under this plan. The Company has a 1991 Director's Stock Option Plan under which 50,000 shares of Common Stock are reserved for issuance. During 1999, the Company granted options to purchase 20,000 shares, exercisable at $0.50 per share, the fair market value on the date of grant. No new grants may be made under this plan. Options granted under these plans become exercisable at a rate of 20% per year for five years from date of grant and expire six years or ten years from date of grant. The following is a summary of activity under the 1981 and 1991 Incentive Stock Option Plans:
SHARES SUBJECT EXERCISE PRICE TO OPTION PER SHARE -------------- -------------- OUTSTANDING AT DECEMBER 31, 1998 369,450 $0.125-0.500 Granted 136,000 $0.500-0.550 Canceled (117,500) $0.500 OUTSTANDING AT DECEMBER 31, 1999 387,950 $0.125-0.550 Canceled (52,200) $0.125-0.550 Exercised (800) $0.125 OUTSTANDING AT DECEMBER 31, 2000 334,950 $0.125-0.550 Canceled (12,500) $0.125-0.550 Exercised (20,000) $0.25 OUTSTANDING AT DECEMBER 31, 2001 302,450 $0.125-0.550 ======= ============
PAGE 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company applies the intrinsic value method of accounting for its stock option plans. Accordingly, no compensation cost has been recognized for the plan in 2001, 2000, or 1999. 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:
2001 2000 1999 ------- -------- -------- Net income (loss) As reported $91,500 $(60,200) $241,000 Pro forma $91,500 $(60,200) $232,700 Basic earnings per share As reported $ 0.02 $ (0.02) $ 0.07 Pro forma $ 0.02 $ (0.02) $ 0.07 Diluted earnings per share As reported $ 0.02 $ (0.02) $ 0.06 Pro forma $ 0.02 $ (0.02) $ 0.06
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 2001 2000 1999 ---- ---- -------- Dividend yield 0% 0% 0% Risk-free interest rate N/A N/A 6.5% Expected life N/A N/A 10 years Volatility N/A N/A 134.4%
The following is a summary of the status of the plans during 2001, 2000, and 1999.
WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE --------- -------------- Options exercisable at December 31, 2001 299,150 $0.266 Weighted average fair value of options granted during 2001 N/A
WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE --------- -------------- Options exercisable at December 31, 2000 308,550 $0.291 Weighted average fair value of options granted during 2000 N/A
WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE --------- -------------- Options exercisable at December 31, 1999 321,250 $0.298 Weighted average fair value of options granted during 1999 $ 0.2427
PAGE 10 ' NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Following is a summary of the status of options outstanding at December 31, 2001:
OUTSTANDING EXERCISABLE - ----------------------------- -------------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Contractual Exercise Exercise Price Number Life Price Number Price - -------- ------- ----------- -------- ------- --------- $0.125 191,950 1 $0.125 190,150 $0.125 $0.500 85,500 8 $0.500 84,000 $0.500 $0.550 25,000 8 $0.550 25,000 $0.500 ------- ------- 302,450 299,150 ======= =======
7) INCOME TAXES The provisions for income taxes consist of the following:
YEARS ENDED DECEMBER 31, 2001 2000 1999 ------- ------- -------- Taxes on income: U.S. Federal Current $ 4,000 $ 4,000 $ 4,000 Deferred 48,000 27,100 (56,200) ------- ------- -------- 52,000 31,100 (52,200) ------- ------- -------- State Current 8,000 3,200 6,000 Deferred 3,400 (14,800) 1,400 ------- ------- -------- 11,400 (11,600) 7,400 ------- ------- -------- Net income tax provision (benefit) $63,400 $19,500 $(44,800) ======= ======= ========
A reconciliation of the statutory federal income tax rate with the effective tax rate reported in the financial statements follows:
YEAR ENDED DECEMBER 31, 2001 2000 1999 ------ ------ ------ Statutory federal Income tax rate 34.0% 34.0% 34.0% Effect on tax rate Resulting from State and foreign income taxes, net of federal tax benefit 7.4% (17.0%) (0.4%) Tax effect of change in valuation allowance (7.4%) (26.5%) (71.9%) Expiration of tax credits 6.1% 22.0% 8.2% Other 0.8% 16.0% 7.3% ---- ----- ----- Effective tax rate 40.9% 28.5% (22.8%) ==== ===== =====
The Company records its deferred taxes on a tax jurisdiction basis and classifies those net amounts as current or noncurrent based on the balance sheet classifications. Deferred tax assets are comprised of the following:
DECEMBER 31, 2001 2000 1999 -------- -------- -------- Allowance for doubtful accounts $188,600 $157,400 $148,800 Accrued expenses 133,400 135,500 121,400 Loss carry forwards 503,800 549,300 595,700 Tax credits 11,500 29,600 Other (11,000) 22,100 26,900 -------- -------- -------- 814,800 875,800 922,400 Deferred tax asset valuation allowance (11,500) (29,600) -------- -------- -------- Total deferred taxes, net $814,800 $864,300 $892,800 ======== ======== ========
PAGE 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 2001, the Company had unused federal net operating loss carry forwards of approximately $1,470,000 and Florida loss carry forwards of approximately $109,300. The net operating losses expire in varying amounts until 2010. The Company believes that the "total deferred taxes, net" in the amount of $814,800 are more likely than not to be realized. 8) TRANSACTIONS WITH RELATED PARTIES At December 31, 1998, $600,000 in principal amount of the Company's subordinated notes was held by Mr. Freeman A. Ford, an officer, director, and major shareholder of the Company, and his immediate family members. These notes were paid off in September 1999. During January 2002, Mr. Ford and his wife, Dianna V. Ford, acquired $150,000 in principal amount of the Company's subordinated notes (see Note 4). 9) EMPLOYEE BENEFIT PLANS The Company has a 401(k) retirement savings plan for all eligible employees who have completed one year of service. Eligible employees have the option to contribute up to 15% of their eligible salary. The Company contributes an amount equal to 50% of the employee contribution, up to a maximum of $750 per employee per year. 10) LEASE COMMITMENTS Rental expense, relating primarily to a lease for the Company's former office and manufacturing facility, amounted to $51,600 in 2001, $275,700 in 2000, and $417,100 in 1999. At December 31, 2001, minimum annual lease commitments under non-cancelable leases, primarily for the Company's facility in Tampa, Florida, were as follows: 2002 69,700 2003 66,500 2004 53,000 2005 50,900 ----- -------- Total $240,100 ===== ========
The Company terminated its lease for its Redwood City office and manufacturing facility as of August 31, 2000. Total credits realized as a result of lease termination agreements amounted to $1,040,000. 11) NET INCOME PER SHARE Basic earnings per share were calculated as follows:
YEARS ENDED DECEMBER 31, 2001 2000 1999 ---------- ---------- ---------- Net income (loss) $ 91,500 $ (60,200) $ 241,000 Average common shares outstanding 3,851,845 3,711,566 3,303,311 ---------- ---------- ---------- Earnings per share $0.02 $(0.02) $0.07 ========== ========== ==========
Diluted earnings per share are calculated by dividing net income by the weighted average number of shares issued and outstanding. Diluted earnings per share were calculated as follows:
YEAR ENDED DECEMBER 31, 2001 2000 1999 ---------- ---------- ---------- Adjusted net income (loss) $ 91,500 $ (60,200) $ 241,000 Average common shares outstanding 3,851,845 3,711,566 3,303,311 Add: Exercise of options reduced by the number of shares purchased with proceeds 123,397 N/A 271,523 Add: Exercise of warrants reduced by the number of shares purchased with proceeds 57,455 N/A 87,039 Add: Expense of warrants attached to debt reduced by the number of shares purchased with proceeds N/A N/A 438,158 Adjusted weighted average shares outstanding 4,032,697 3,711,566 4,100,032 Earnings per common share assuming full dilution 0.02 (0.02) 0.06
PAGE 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12) LITIGATION The Company is involved in certain litigation matters. Management believes resolution of these disputes will not have a material adverse effect on the Company's financial condition and results of operation. 13) BUSINESS SEGMENT AND CONCENTRATION OF CREDIT RISK BUSINESS SEGMENT: The Company operates in one business segment, the development, production and marketing of polymer heat exchangers for the solar and thermal energy storage markets worldwide.
PRODUCT LINE 2001 2000 1999 ----------- ----------- ----------- Net Sales Pool Products $9,071,200 $7,580,600 $ 6,370,000 Thermal Energy 3,029,100 3,900,900 4,251,700 Storage ----------- ----------- ----------- $12,100,300 $11,481,500 $10,621,700 =========== =========== ===========
Geographic information for revenues and long-lived assets for the year ended December 31, 2001, 2000, and 1999 are as follows:
2001 2000 1999 ---------- ---------- ---------- Net Sales Domestic $9,862,700 $8,416,500 $7,841,500 Foreign Japan 1,128,300 2,218,500 1,876,600 Other 1,109,300 846,500 903,600 ----------- ----------- ----------- $12,100,300 $11,481,500 $10,621,700 =========== =========== =========== Long-lived assets Domestic $6,110,900 $5,344,000 $922,400 =========== =========== ===========
For fiscal 2001, the Company had no single customer who accounted for 10% or more of sales. For fiscal 2000, the Company had two major customers who individually accounted for 19.3% and 10.4% of sales, respectively. For fiscal 1999, the Company had one major customer who individually accounted for 17.7% of sales. 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, 2001, unsecured trade accounts receivable from customers in California, Florida, and foreign countries were $540,400, $1,177,300 and $203,200 respectively. For fiscal year 2001, the Company had two major customers who individually accounted for 10% or more of Accounts Receivable totaling $230,400 and $276,400. The Company had a bank balance in excess of the $100,000 federally insured limit in the amount of $92,800 at December 31, 2001. PAGE 13 REPORT OF INDEPENDENT AUDITORS [BPM LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of FAFCO, Inc. We have audited the accompanying consolidated balance sheets of FAFCO, Inc. (a California corporation) and its subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material reinstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FAFCO, Inc. and its subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ BURR, PILGER & MAYER, LLP - ---------------------------------------- San Francisco, California March 8, 2002 PAGE 14 FIVE-YEAR SUMMARY OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- Net sales $ 12,100 $ 11,482 $ 10,622 $ 11,236 $ 10,552 Income (loss) before income taxes $ 155 $ (41) $ 196 $ 734 $ 889 Provision for (benefit from) income taxes $ 63 $ 19 $ (45) $ (107) $ 23 Net income (loss) $ 92 $ (60) $ 241 $ 841 $ 866 Basic net income (loss) per share $ 0.02 $ (0.02) $ 0.07 $ 0.25 $ 0.26 Diluted net income (loss) per share $ 0.02 $ (0.02) $ 0.06 $ 0.20 $ 0.22
AT DECEMBER 31, 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Working capital $ 354 $ 756 $ 1,487 $ 2,637 $ 2,007 Total assets 10,056 9,656 4,987 5,377 4,437 Long-term obligations 3,808 3,625 17 957 980 Shareholders' equity 3,229 3,133 3,127 2,886 2,042
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 2001 and 2000 were as follows:
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- 2000 High $0.25 $0.25 $0.25 $0.35 2000 Low $0.25 $0.25 $0.25 $0.25 2001 High $0.25 $0.50 $0.70 $0.55 2001 Low $0.05 $0.05 $0.35 $0.30
The National Quotation Bureau provided the quotations above. All quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. At February 20, 2002, the Company had 660 shareholders of record. The Company has never paid dividends on its Common Stock, has no plans to do so in the foreseeable future and is prohibited from so doing under it's bank credit line covenants. PAGE 15 MANAGEMENT'S DISCUSSION AND ANALYSIS This Annual Report to Shareholders contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below under the heading "Factors Affecting Future Results" and elsewhere in this Annual Report to Shareholders. 2001 COMPARED WITH 2000 Net sales for 2001 increased by 5.4% to $12,100,300 from $11,481,500 in 2000 due mainly to increased unit sales of pool products partially offset by decreased sales of the Company's IceStor products. Net sales of the Company's pool products were 19.7% higher in 2001 than in 2000 due mainly to increased unit sales. IceStor product sales were 22.3% lower in 2001 than in 2000 due to softness in the domestic market along with a decrease in international sales to Japan and Taiwan offset in part by increased sales to Korea. Pool product sales amounted to 75% of net sales in 2001 compared to 66% of net sales in 2000. IceStor sales amounted to 25% of net sales in 2001 compared to 34% in 2000. Cost of goods sold decreased to $7,146,300 (59.1% of net sales) in 2001 from $7,380,500 (64.3% of net sales) in 2000. This decrease was due primarily to increased sales of the Company's higher margin pool products along with decreased sales of the lower margin IceStor products, combined with increased efficiencies realized as a result of the Company's relocation from Redwood City to Chico, California. Marketing and selling expenses increased to $2,371,900 (19.6% of net sales) in 2001 from $2,162,200 (18.8% of net sales) in 2000. These increases were due primarily to increased costs associated with the Company's office in Tampa, Florida combined with increased personnel costs. General and administrative expenses were stable at $1,782,000 (14.7% of net sales) in 2001 and $1,786,500 (15.6% of net sales) in 2000. Research and development expenses decreased from $239,400 (2.0% of net sales) in 2001 from $294,500 (2.6% of net sales) in 2000. Net interest expense increased to $438,200 (3.6% of net sales) in 2001 from $93,200 (0.8% of net sales) in 2000. This increase was due to increased bank borrowing (primarily attributable to the Company's mortgage) during 2001, offset slightly by decreased borrowing costs. Other income (net) includes $102,500 in grant income from the California Energy Commission related to an energy efficiency program in which the Company participated. SEASONALITY Historically, the Company has experienced lower solar sales during the first quarter than during other quarters of each year. In addition, sales typically have increased significantly during the second quarter, declined slightly, and then remained relatively constant during the third and fourth quarters. 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 2000 and 2001, sales and net income experienced their typical seasonality. 2000 COMPARED WITH 1999 Net sales for 2000 increased by 8.1% to $11,481,500 from $10,621,700 in 1999. This increase was due mainly to increased pool product sales partially offset by decreased sales of the Company's IceStor products. Net sales of the Company's pool products were 19.0% higher in 2000 than in 1999 due mainly to increased unit sales. IceStor(TM) product sales were 8.3% lower in 2000 than in 1999 due to softness in the domestic energy storage market. Pool product sales amounted to 66% of net sales in 2000 compared to 60% of net sales in 1999. IceStor sales amounted to 34% of net sales in 2000 compared to 40% in 1999. Cost of goods sold increased to $7,380,500 (64.3% of net sales) in 2000 from $6,436,400 (60.6% of net sales) in 1999. This increase was primarily due to inefficiencies in the production process experienced during the Company's relocation from Redwood City to Chico, California. Marketing and selling expense increased to $2,162,200 (18.8% of net sales) in 2000 from $1,854,300 (17.5% of net sales) in 1999 and general and administrative expense increased to $1,786,500 (15.6% of sales) in 2000 from $1,752,600 (16.5% of net sales) in 1999. These increases were due to costs associated with expanding the operations of the Company's office in Tampa, Florida. Research and development expense decreased to $294,500 (2.6% of net sales) in 2000 from $327,600 (3.1% of net sales) in 1999. Net interest expense increased to $93,200 (0.8% of net sales) in 2000 from $71,700 (0.7% of net sales) in 1999. The Company's relocation expense for the year 2000 amounted to $832,900 (7.2% of net sales). This expense was offset by lease termination credits in the amount of $1,040,000, resulting in a net gain of $202,100. PAGE 16 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES The Company's cash position increased from $10,100 at 2000 fiscal year end to $121,200 at 2001 fiscal year end, principally due to increased cash receipts during late December. At December 31, 2001, the Company's net accounts receivable had decreased to $1,620,500 from $1,969,400 at December 31, 2000. This decrease was due primarily to increased collections, partially offset by increased sales. At December 31, 2001, the Company's accounts payable and other accrued expenses had decreased to $1,357,700 from $1,744,700 at December 31, 2000. This decrease was due primarily to a decrease in accrued liabilities, primarily construction costs, utilities and in-transit inventory, offset in part by an increase to accounts payable. At December 31, 2001 the Company's inventories remained constant at $1,171,800 relative to $1,225,900 at December 31, 2000. At December 31, 2001, net property, plant and equipment had increased to $6,110,900 from $5,344,000 at December 31, 2000. This increase was due primarily to completion of the Company's new office and manufacturing facility along with construction of new production equipment developed to improve processes and products. The Company had a deferred tax asset, net of valuation allowance, at year-end of $814,800 in 2001 and $864,300 in 2000. 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 history of profitable operations with the exception of fiscal year 2000. 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 asset. At December 31, 2001, the Company's current ratio was 1.12 compared with 1.26 at December 31, 2000 and working capital decreased over the same period to $353,500 from $755,500. Total assets exceeded total liabilities by $3,229,200 at December 31, 2001 compared with $3,132,600 at December 31, 2000. The Company believes that its cash flow from operations, together with bank borrowings and the issuance of $500,000 in convertible subordinated notes as discussed in Note 4, will be sufficient to support operations during the next twelve months. The foregoing statement of how long the Company's capital resources are expected to last is a forward-looking statement involving risks and uncertainties, including the amount of the Company's sales and the ability of the Company to control its operating expenses. If sales decline from current levels additional debt or equity financing may be required. There can be no assurance that financing, if required, would be available on favorable terms or at all or that such financing would not significantly dilute the ownership interests and rights of existing shareholders. The Company has a line of credit, of which $768,700 had been utilized and $231,300 remained available under the formula applied to net accounts receivable at December 31, 2001. This line of credit expires on August 10, 2002. In addition to the line of credit, the Company has a 36-month term loan facility in the amount of $445,000, bearing interest at prime plus 1.5%. At December 31, 2001, the Company had an outstanding balance of $223,300 on this loan facility. The Company also has a 60-month term loan facility available in the amount of $500,000 bearing interest at prime plus 1.5%. At December 31, 2001, the Company had outstanding balance of $453,700 on this loan facility. PAGE 17 MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED) The Company has outstanding promissory notes with an aggregate principal amount of $500,000 ("the Notes"). The principal amount of the Notes is due and payable in January 2005. Interest is payable quarterly at a rate of 10% per annum, increasing to 12% per annum starting in January 2003. In addition, at December 31, 2001, the Company owed an aggregate of $4,823,500 under various bank credit facilities. Payments due under these credit facilities are as follows:
TOTAL AMOUNTS COMMITTED AMOUNT OF COMMITMENT EXPIRATION PER PERIOD --------- --------------------------------------------------------- Less than year 1-3 years Over 4 years Over 5 years -------------- --------- ------------ ------------ Line of credit $768,700 $768,700 Bank term loans 677,000 244,800 $380,300 $51,900 Mortgage 3,377,800 37,800 93,900 78,000 3,168,100 ---------- ---------- -------- ------- ---------- Total $4,823,500 $1,051,300 $474,200 $129,900 $3,168,100 ========== ========== ======== ======== ==========
The bank may accelerate payment of the amount owed if we fail to meet financial and other covenants set forth in the loan agreements. FACTORS AFFECTING FUTURE RESULTS U.S. Economics Conditions: A protracted U.S. recession would adversely impact new housing and commercial construction in our largest market, which in turn would cause us to miss our revenue growth goals. Asian Economic Conditions: Sales in these Asian countries account for virtually all our international sales, and contribute a significant portion of our overall revenues. In the event that these economics experience declining growth or accelerated contraction in 2002, our sales in this region will be adversely impacted. Growth of U.S. Thermal Energy Storage (TES) Market: Our ability to increase sales of our thermal energy storage products is dependent on growth in the overall market because opportunities for market share growth are limited. An extended recession in the general economy, a general decline in construction of commercial properties or a decline in energy prices would all adversely affect demand for thermal energy storage systems. Growth of California TES Market: California is our single largest domestic market and the single largest potential source of increased revenues in 2002. A substantial abatement of the energy crisis in California or a further worsening of economic conditions in California would adversely impact projected demand for our products. Destabilizing Incidents: Additional destabilizing events such as terrorist attacks or overseas conflicts, if they occur, could disrupt our supply chain, increase our materials costs, reduce demand for our products, and otherwise negatively impact our operating results. Materials Prices: Raw materials including resins account for a major portion of our cost of sales. Any increase in these prices because of supply shortages or otherwise would reduce our operating margins and adversely impact our profitability. Export sales are subject to certain controls and restrictions, including tariffs and import duties and are subject to certain risks, including changing regulatory requirements of foreign jurisdictions and transportation delays and interruptions. However, the Company has not experienced any material difficulties in the past relating to such limitations. PAGE 18 NOTES PAGE 19 CORPORATE DIRECTORY AND INFORMATION BOARD OF DIRECTORS Freeman A. Ford Chairman of the Board, President, and Chief Executive Officer FAFCO, Inc. William A. Berry* Senior Vice President and Chief Financial Officer Electric Power Research Institute a private, nonprofit, research organization doing collaborative research for the electricity industry William F. Chisholm Partner Symphony Technology Group a venture capital firm David F. Ford President Danger! Books a publishing and sales company Robert W. Selig, Jr.* President Davis Instruments Corporation a manufacturer of marine and weather equipment ---------------------- *Audit Committee Member EXECUTIVE OFFICERS Freeman A. Ford Chairman of the Board, President, and Chief Executive Officer Alex N. Watt Executive Vice President and Secretary David K. Harris Vice President, Sales Nancy I. Garvin Vice President, Finance TRANSFER AGENT AND REGISTRAR Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 Telephone: (212) 509-4000 Web Site: http://www.continentalstock.com LEGAL COUNSEL Wilson, Sonsini, Goodrich & Rosati A Professional Corporation 650 Page Mill Road Palo Alto, California 94304 INDEPENDENT ACCOUNTANTS Burr, Pilger & Mayer A Professional Corporation 261 Hamilton Avenue Palo Alto, California 94301 FORM 10-K A copy of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission, including financial statement schedules but excluding exhibits, is available without charge upon written request to: FAFCO, Inc. 435 Otterson Drive Chico, California 95928 ANNUAL SHAREHOLDERS' MEETING The Annual Shareholders' Meeting will be held on June 7, 2002 at: FAFCO, Inc. 435 Otterson Drive Chico, California 95928 Telephone: (530) 332-2100 PAGE 20 EX-23.1 5 f80281ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-75201, 2-86299, 2-95390 and 33-76220) and related prospectuses of FAFCO, Inc. of our report dated March 8, 2002, appearing on page 14 of the 2001 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 20 of this Form 10-K. Burr, Pilger & Mayer, LLP San Francisco, California March 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----