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