EX-13.1 10 f71326ex13-1.txt EXHIBIT 13.1 1 Exhibit 13.1 -------------------------------------------------------------------------------- THE COMPANY -------------------------------------------------------------------------------- FAFCO was formed in 1969, was incorporated in 1972, and has produced over one 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 panel systems of its nearest competitor. In addition, FAFCO is the 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 been issued more than 20 patents. FAFCO page 2 2 -------------------------------------------------------------------------------- PRESIDENT'S LETTER -------------------------------------------------------------------------------- [GRAPHIC] FAFCO was founded in 1969 and incorporated in 1972 to manufacture polymer heat OMITTED][GRAPHIC OMITTED] exchangers currently used in the solar and thermal energy storage (TES) markets worldwide. FAFCO is the oldest and largest producer of solar pool heating panels in the United States. Net sales increased by 8.1% to $11,481,500 in 2000, primarily due to increased solar product sales. Net loss was $60,200 compared with a net profit of $241,000 in 1999. 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 allows 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 its former monthly lease payments. Solar product sales were up significantly over the prior year. In addition to solar product sales increasing overall, FAFCO's company office in Tampa is fully operational and doing extremely well. FAFCO is also promoting other miscellaneous pool products through its direct sales channel, pool retail and pool wholesale channels of distribution. Significant increases in natural gas prices and energy shortages in California also bode well for demand in the solar energy products market. Our thermal energy storage (TES) products use FAFCO's unique polymer heat exchangers to shift peak electrical loads to off-peak times. This reduces the necessity to add new generation capacity to meet peak loads. FAFCO's TES products are sold primarily in the United States and Asian markets. TES offers business a way to mitigate the current California electrical shortage by shifting from peak to off peak for a fraction of the cost of new capacity. We believe an increase in the California TES market could significantly increase demand for our TES products. FAFCO has applied for several patents on new manufacturing processes, which substantially enhance its products while lowering the cost of manufacturing. FAFCO'S move to Chico has afforded it an opportunity to reenergize the company with approximately 50 new employees. The dedication and experience of FAFCO's original staff when combined with the new energy and enthusiasm of its Chico employees, promises a new chapter in FAFCO's long history. A combination of new markets, new products, and new manufacturing process opportunities gives all of us at FAFCO optimism for the success of our new location. Sincerely, Freeman A. Ford President FAFCO page 3 3 -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET --------------------------------------------------------------------------------
DECEMBER 31, 2000 1999 --------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 10,100 $ 64,800 Accounts receivable, less allowance for doubtful accounts of $400,000 in 2000 and $317,800 in 1999 1,969,400 1,752,000 Inventories 1,225,900 1,041,600 Prepaid expenses and other current assets 211,500 254,200 Other accounts receivable, net of allowance 21,600 27,700 Deferred tax asset, net of allowance 215,700 189,500 ----------- ----------- Total current assets 3,654,200 3,329,800 ----------- ----------- Property, plant and equipment, at cost 7,104,000 3,330,100 Less accumulated depreciation and amortization (1,760,000) (2,407,700) ----------- ----------- 5,344,000 922,400 ----------- ----------- Notes receivable and other assets (net) 9,300 31,300 Deferred tax asset, net of allowance 648,600 703,300 ----------- ----------- Total assets $ 9,656,100 $ 4,986,800 ----------- ----------- Liabilities and shareholders' equity Current liabilities: Bank line of credit $ 450,500 $ 461,500 Notes Payable to bank - current portion 143,000 Accounts payable and other accrued expenses 1,744,700 802,500 Accrued compensation and benefits 267,800 281,100 Accrued warranty expense 287,700 282,700 Other current liabilities 5,100 15,000 ----------- ----------- Total current liabilities $ 2,898,800 1,842,800 ----------- ----------- Mortgage 3,366,500 Notes payable to bank - less current portion 224,000 Other non-current liabilities 34,200 16,600 ----------- ----------- Total liabilities $ 6,523,500 $ 1,859,400 ----------- ----------- 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; 3,834,791 and 3,303,311 issued and outstanding at December 31, 2000 and 1999 respectively 479,300 412,800 Capital in excess of par value 5,106,000 5,107,100 Notes receivable secured by Common Stock (75,100) (75,100) Accumulated deficit (2,377,600) (2,317,400) ----------- ----------- Total shareholders' equity $ 3,132,600 $ 3,127,400 Commitments and contingent liabilities ----------- ----------- Total liabilities and shareholders' equity $ 9,656,100 $ 4,986,800 ----------- -----------
The accompanying notes are an integral part of this statement FAFCO page 4 4 -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF OPERATIONS --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000 1999 1998 Net Sales $ 11,481,500 $ 10,621,70 $ 11,235,800 Other income (net) (7,400) 17,100 30,600 ------------ ------------ ------------ Total revenues 11,474,100 10,638,800 11,266,400 ------------ ------------ ------------ Cost of goods sold 7,380,500 6,436,400 6,801,700 Marketing & selling expense 2,162,200 1,854,300 1,942,800 General & administrative expense 1,786,500 1,752,600 1,480,200 Research & development expense 294,500 327,600 194,100 Net interest expense 93,200 71,700 113,400 Relocation costs (net) (202,100) ------------ ------------ ------------ Total costs & expense 11,514,800 10,442,600 10,532,200 ------------ ------------ ------------ (Loss): income before income taxes (40,700) 196,200 734,200 Provision for (benefit from) income taxes 19,500 (44,800) (107,400) ------------ ------------ ------------ Net (loss) income $ (60,200) $ 241,000 $ 841,600 ------------ ------------ ------------ Basic net (loss) income per share $ (0.02) $ 0.07 $ 0.25 ------------ ------------ ------------ Diluted net (loss) income per share $ (0.02) $ 0.06 $ 0.20 ------------ ------------ ------------
The accompanying notes are an integral part of this statement FAFCO page 5 5 -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF SHAREHOLDERS' 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, 1997 $3,298,311 $412,200 $5,105,200 $(75,100) $(3,400,000) $2,042,300 Net income for the year 841,600 841,600 Issuance of shares upon exercise of a stock option 5,000 600 1,900 2,500 ---------- -------- ---------- -------- ----------- ---------- 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
FAFCO page 6 6 -------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------- CASH FLOW FROM OPERATING ACTIVITIES: Net (loss) income $ (60,200) $ 241,000 $ 841,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 289,000 184,400 137,600 Write offs and allowance for doubtful accounts 89,100 165,500 53,900 (Gain) loss on disposition of fixed assets 4,600 (2,400) (19,000) Change in assets and liabilities: Accounts receivable (300,400) 13,100 (92,200) Inventories (184,300) 223,800 (182,500) Prepaid expenses and other assets 42,700 (70,700) (9,500) Deferred tax assets 28,500 (55,300) (168,400) Notes receivable and other assets 22,000 40,100 94,200 Accounts payable, accrued expenses and other current liabilities 924,000 (152,400) 119,600 Other non-current liabilities 17,600 (15,300) (23,200) ----------- ----------- ----------- Net cash provided by operations 872,600 571,800 752,100 ----------- ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of fixed assets (4,715,200) (523,400) (342,400) Proceeds from disposition of fixed assets 2,400 19,000 ----------- ----------- ----------- Net cash used in investing activities (4,715,200) (521,000) (323,400) ----------- ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from exercise of warrants 67,500 2,500 Repurchase of common stock (2,100) Repayment of subordinated debt (925,000) Repayment of bank line of credit (11,000) Borrowings from bank 3,733,500 461,500 ----------- ----------- ----------- Net cash provided by (used in) financing activities 3,787,900 (463,500) 2,500 ----------- ----------- ----------- Net (decrease) increase in cash & cash equivalents (54,700) (412,700) 431,200 Cash and cash equivalents, beginning of period 64,800 477,500 46,300 ----------- ----------- ----------- Cash and cash equivalents, end of period $ 10,100 $ 64,800 $ 477,500 ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest, net of amount capitalized ($89,300) $ 76,275 $ 109,400 $ 123,100 Income taxes $ 69,800 $ 63,000 ----------- ----------- -----------
The accompanying notes are an integral part of this statement FAFCO page 7 7 -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENT -------------------------------------------------------------------------------- 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 in 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 are recognized at the time of shipment of goods or performance of service. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash equivalents include highly liquid investments with a maturity of three months or less. INVENTORIES: Inventories are stated at the lower of cost or market determined using the 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 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, range between three and ten years. The estimated useful life of the building 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 (loss) earnings per common share is computed using the weighted average number of shares outstanding. Diluted (loss) earnings per common share is 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 to reflect 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 FAFCO page 8 8 -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) -------------------------------------------------------------------------------- available to the Company for loans with similar terms. At December 31, 2000, the carrying amount approximated estimated fair value of long-term debt. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards Board (FASB) has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard establishes a new model for accounting for derivatives and hedging activities. Since there is no derivative and hedging activity within the Company, application of this standard, required in the first quarter of 2001 as a result of the Issuance of SFAS No. 137, is not expected to have an impact on the results and financial position of the Company. 2) INVENTORIES CONSIST OF THE FOLLOWING:
DECEMBER 31, 2000 1999 ------------------------------------------------ Raw materials $ 606,500 $ 499,400 Work in progress 269,900 220,000 Finished goods 349,500 322,200 ---------- ---------- $1,225,900 $1,041,600 ========== ==========
3) PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following:
DECEMBER 31, 2000 1999 ------------------------------------------------------ Building $ 3,441,400 Land 550,400 Machinery and equipment 2,332,500 $ 2,445,000 Office and computer equipment 510,800 578,300 Leasehold improvements 88,600 Vehicles 268,900 218,200 ----------- ----------- $ 7,104,000 $ 3,330,100 =========== =========== Less accumulated deprecation and amortization (1,760,000) (2,407,700) ----------- ----------- $ 5,344,000 $ 922,400 =========== ===========
As of December 31, 2000, construction costs for the Company's new office and manufacturing facility in Chico are substantially complete at $3,441,400. Additional costs will continue to be incurred over the next few months; however, these costs are not expected to exceed 10% of the already incurred costs. Interest is capitalized in connection with construction costs. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's useful life. In 2000 $89,300 in interest cost was capitalized. No interest was capitalized in 1999 and 1998. As of December 31, 2000 and 1999, the Company had $448,700 and $375,000, 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, 2001. As of December 31, 2000, the Company had written off $936,700 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 At December 31, 1998, subordinated notes consisted of $925,000 of notes bearing interest at 11% per annum payable quarterly with warrants attached to purchase Common Stock. The Company paid off the notes and accrued interest in September 1999. Warrants for 540,000 shares at $0.125 per share were exercised during the first quarter of 2000, and the unexercised warrants expired March 27, 2000. 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, 2001. At December 31, 2000 and 1999, the Company had complied with or obtained waivers for compliance with the loan covenants. As of December 31, 2000 and 1999, the Company had utilized $450,500 and $461,500, 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, 2000, the Company had an outstanding balance of $367,000 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, 2000, the Company had no outstanding balance on this facility. The Company also has a 29-1/2 year mortgage in the amount of $3,400,000 bearing interest at 9.05% per year fixed for five years. The balance on this mortgage at December 31, 2000 was $3,400,000. 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 FAFCO page 9 9 -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) -------------------------------------------------------------------------------- in exchange for non-interest bearing promissory notes, which have a balance due of $75,100 at December 31, 2000 and 1999. The notes are due and payable and the Company intends to pursue collection of these notes. In the event that any of the notes are uncollectible, the Company will demand surrender of the related shares issued and will cancel and write off the related notes receivable balance. Under the Company's Employee Stock Purchase Plan, 150,000 shares of Common Stock have been reserved for issuance at 85% of fair market value as of specified dates. The Plan was suspended in 1991 and no shares have been issued thereunder since 1991. 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. The Company has a 1991 Director's Stock Option Plan under which 50,000 shares of Common Stock are reserved for issuance. No options were granted or exercised during 1998. 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. During 2000 no options were granted and options to purchase 800 shares were exercised. 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. A summary of activity under the 1981 and 1991 Incentive Stock Option Plans as follows:
SHARES SUBJECT EXERCISE PRICE TO OPTION PER SHARE ---------------------------------------------------------- OUTSTANDING AT DECEMBER 31, 1997 374,950 $0.125-0.625 Granted 0 0.125 Canceled (5,500) $0.125-0.625 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 ======= ============
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 2000, 1999, or 1998. 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:
2000 1999 1998 ------------------------------------------------------------------ Net (loss) income As reported $(60,200) $241,000 $841,600 Pro forma (60,200) 232,700 832,200 Basic earnings per share As reported (0.02) 0.07 0.25 Pro forma (0.02) 0.07 0.25 Diluted earnings per share As reported (0.02) 0.06 0.20 Pro forma (0.02) 0.06 0.19
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 2000 1999 1998 ----------------------------------------------------- Dividend yield 0% 0% 0% Risk-free interest rate 6.5% 5.0% Expected life 10 years 10 years Expected volatility 134.4% 121.9% ======= ======= =======
Following is a summary of the status of the plans during 2000, 1999, and 1998.
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 ======= =====
WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE -------------------------------------------------------- Options exercisable at December 31, 1998 283,250 0.299 Weighted average fair value of options granted during 1998 N/A ======= =====
FAFCO page 10 10 -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) -------------------------------------------------------------------------------- Following is a summary of the status of options outstanding at December 31, 2000: OUTSTANDING EXERCISABLE ----------------------------------------------------------- Weighted Average Weighted Weighted Remaining Average Average Exercise Contractual Exercise Exercise Price Number Life Price Number Price ----------------------------------------------------------- $0.250 20,000 1 $0.250 20,000 $0.250 $0.125 201,950 2 $0.125 178,350 $0.125 $0.500 88,000 9 $0.500 85,200 $0.500 $0.550 25,000 9 $0.550 25,000 $0.500 ------ ------- --- ------ ------- ------ 334,950 308,550 ====== ======= === ====== ======= ====== 7) INCOME TAXES The provisions for income taxes consist of the following:
YEARS ENDED DECEMBER 31, 2000 1999 1998 --------------------------------------------------------- Taxes on income: U.S. Federal Current 4,000 $ 4,000 $ 9,000 Deferred 27,100 (56,200) (183,400) -------- --------- --------- $ 31,100 $ (52,200) $(174,400) -------- --------- --------- State Current 3,200 6,000 52,000 Deferred (14,800) 1,400 15,000 -------- --------- --------- (11,600) $ 7,400 67,000 -------- --------- --------- Net income tax (benefit) provision 19,500 $ (44,800) (107,400) -------- --------- ---------
A reconciliation of the statutory federal income tax rate with the effective tax rate reported in the financial statements follows:
YEAR ENDED DECEMBER 31, 2000 1999 1998 -------------------------------------------------- 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 (17.0%) (0.4%) 8.2% Tax effect of change in valuation allowance (26.5%) (71.9%) (65.2%) Expiration of tax credits 22.0% 8.2% 2.5% Other 16.0% 7.3% 5.9% ---- ----- ----- Effective tax rate 28.5% (22.8%) (14.6%) ==== ===== =====
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, 2000 1999 1998 ------------------------------------------------------------------- Allowance for doubtful accounts 157,400 148,800 222,600 Accrued expenses 135,500 121,400 97,300 Loss carry forwards 549,300 595,700 598,500 Tax credits 11,500 29,600 48,800 Other 22,100 26,900 43,500 --------- -------- ---------- 875,800 922,400 1,010,700 Deferred tax asset valuation allowance (11,500) (29,600) (173,200) --------- -------- ---------- Total deferred taxes, net $ 864,300 $892,800 $ 837,500 ========= ======== ==========
FAFCO page 11 11 -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) -------------------------------------------------------------------------------- At December 31, 2000, the Company had unused federal net operating loss carry forwards of approximately $1,600,700, Florida loss carry forwards of approximately $139,800, and investment and other federal tax credits of approximately $11,500 available to offset future tax liabilities. The net operating losses and credits expire in varying amounts until 2010. The use of the tax credits has been limited by the provisions of the Tax Reform Act of 1986 to reflect the benefit associated with an overall reduction in the corporate tax rate. The Company believes that the "total deferred taxes, net" in the amount of $864,300 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 (see Note 4) were 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. 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 25% of the employee contribution, up to a maximum of $400 per employee per year. 10) LEASE COMMITMENTS The former rental expense, relating primarily to a lease for its former office and manufacturing facility, amounted to $275,700 in 2000, $417,100 in 1999, and $384,300 in 1998. At December 31, 2000, minimum annual lease commitments under non-cancelable leases, primarily for office equipment, were as follows: 2001 25,800 2002 16,800 2003 12,200 2004 700 ------- Total $55,500 =======
The Company terminated its lease for its Redwood City office and manufacturing facility as of August 31, 2000. Total revenues 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, 2000 1999 1998 ------------------------------------------------------ Net (loss) income $ (60,200) $ 241,000 $ 841,600 Average common shares outstanding 3,711,566 3,303,311 3,303,311 ---------- ---------- --------- Earnings per share $ (0.02) $ 0.07 $ 0.25 ========== ========== =========
Basic earnings per share are calculated by dividing net income by the weighted average number of shares issued and outstanding.
YEAR ENDED DECEMBER 31, 2000 1999 1998 Adjusted net (loss) Income $ (60,200) $ 241,000 $ 841,600 Average com- mon shares outstanding 3,711,566 3,303,311 3,303,311 Add: Exercise of options reduced by the number of shares purchased with proceeds N/A 271,523 325,849 Add: Exercise of warrants re- duced by the number of shares purchased with proceeds N/A 87,039 102,361 Add: Expense of warrants attached to debt reduced by the number of shares purchased with proceeds N/A 438,158 472,778 Adjusted weighted average shares outstanding 3,711,566 4,100,032 4,204,299 Earnings per common share assuming full dilution (0.02) 0.06 0.20
FAFCO page 12 12 -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENT (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 2000 1999 1998 ----------- ----------- ----------- Net Sales Pool Products $ 7,580,600 $ 6,370,000 5,899,500 ----------- ----------- ----------- Thermal Energy Storage 3,900,900 4,251,700 5,336,300 ----------- ----------- ----------- $11,481,500 $10,621,700 $11,235,800 =========== =========== ===========
Geographic information for revenues and long-lived assets for the year ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998 ----------- ----------- ----------- Net Sales Domestic $ 8,416,500 $ 7,841,500 $ 7,235,900 Foreign Japan 2,218,500 1,876,600 2,634,100 Other 846,500 903,600 1,365,800 ----------- ----------- ----------- $11,481,500 $10,621,700 $11,235,800 =========== =========== =========== Long-lived assets Domestic $ 5,344,000 $ 922,400 $ 583,400 ----------- ----------- ----------- $ 5,344,000 $ 922,400 $ 583,400 =========== =========== ===========
For fiscal 2000, the Company had two major customers who individually accounted for 10% or more of sales totaling $2,218,500 and $1,193,500. For fiscal 1999 and 1998, the Company had one major customer who individually accounted for 10% or more of sales totaling $1,876,600 and $2,634,100. 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, 2000, unsecured trade accounts receivable from customers in California, Florida, and foreign countries were $462,600, $1,204,800 and $522,300 respectively. FAFCO page 13 13 -------------------------------------------------------------------------------- SUMMARY OF OPERATIONS -------------------------------------------------------------------------------- BPM BURR, PILGER & MAYER LLP Accounts and Consultants 600 California Street, Suite 1300 San Francisco, CA 94108 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, 2000 and 1999, 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, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits We conducted our audits in accordance with auditing standards generally accepted in the United States of America. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant 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 financial statements referred to above present fairly, in all material respects, the financial position of FAFCO, Inc. and its subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. San Francisco, California March 16, 2001 FAFCO page 14 14 -------------------------------------------------------------------------------- SUMMARY OF OPERATIONS -------------------------------------------------------------------------------- FIVE-YEAR SUMMARY OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------- Net sales $11,482 $10,622 $11,236 $10,552 $8,869 ------- ------- ------- ------- ------ (Loss) income before income taxes $ (41) $ 196 $ 734 $ 889 $ 274 ------- ------- ------- ------- ------ Provision for (benefit from) income taxes $ 19 $ (45) $ (107) $ 23 $ (37) ------- ------- ------- ------- ------ Net (loss) income $ (60) $ 241 $ 841 $ 866 $ 311 ------- ------- ------- ------- ------ Basic net (loss) income per share $ (0.02) $ 0.07 $ 0.25 $ 0.26 $ 0.10 ------- ------- ------- ------- ------ Diluted net (loss) income per share $ (0.02) $ 0.06 $ 0.20 $ 0.22 $ 0.10 ------- ------- ------- ------- ------ AT DECEMBER 31, 2000 1999 1998 1997 1997 -------------------------------------------------------------------------------------------------- Working capital $ 756 $ 1,487 $ 2,637 $ 2,007 $1,285 ------- ------- ------- ------- ------ Total assets 9,656 4,987 5,377 4,437 4,345 Long-term obligations 3,625 17 957 980 951 Shareholders' equity 3,133 3,127 2,886 2,042 1,176
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 2000 and 1999 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 1999 High $1.00 $1.00 $1.00 $0.75 1999 Low $0.94 $1.00 $0.75 $0.25 ===== ===== ===== =====
The quotations above were provided by the National Quotation Bureau. All quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transaction. At March 14, 2001, the Company had 698 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 (see Note 6). FAFCO page 15 15 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) -------------------------------------------------------------------------------- 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. 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 revenues in the amount of $1,040,000, resulting in a net gain of $202,100. 1999 COMPARED WITH 1998 Net sales for 1999 decreased by 5.5% from $11,235,800 in 1998 to $10,621,700 in 1999. This decrease was due to decreased sales of the Company's IceStor(TM) products partially offset by increased unit sales of the Company's pool products. Net sales of the Company's IceStor(TM) products were 20.3% lower in 1999 than in 1998 due to decreased foreign sales. Pool product sales were 8% higher in 1999 than in 1998 due to increased unit sales. Pool product sales amounted to 60% of net sales in 1999 compared to 53% of net sales in 1998. IceStor(TM) sales amounted to 40% of net sales in 1999 compared to 47% of net sales in 1998. Cost of goods sold decreased in absolute dollars from $6,801,700 in 1998 to $6,436,400 in 1999 while remaining stable as a percentage of net sales (60.5% in 1998 compared to 60.6% in 1999). Marketing and selling expenses decreased in absolute dollars from $1,942,800 in 1998 (17.3% of net sales) to $1,854,300 (17.5% of net sales) in 1999. These decreases were due to small decreases in a variety of expense categories, no one of which is by itself significant. General and administrative expenses increased from $1,480,200 (13.2% of net sales) in 1998 to $1,752,600 (16.5% of net sales) in 1999. These increases were due to a bad debt write-off as the result of terminating the Company's business relationship with the Tampa distributor of its pool products. This business termination also resulted in general and administrative start-up costs to open a Company sales office in Tampa. Research and development expenses increased from $194,100 (1.7% of net sales) in 1998 to $327,600 (3.1% of net sales) in 1999. These increases were due mainly to an increased personnel and projects. Net interest expense decreased from $113,400 (1.0% of net sales) in 1998 to $71,700 (0.7% of net sales) in 1999. This decrease was due primarily to paying off the Company's subordinated debt in September 1999. 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. As the Company's product mix shifts to include a larger proportion of other products, such as the thermal energy storage products, the traditional seasonality is being mitigated. Net income is affected by the seasonality of sales as well as by significant marketing and selling expenses typically incurred during the first quarter of each year. These expenses are incurred to develop programs and materials for use throughout the remainder of the year. In 1999 and 2000, sales and net income experienced their typical seasonality. FAFCO page 16 16 -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Company's cash position decreased from $64,800 at 1999 fiscal year end to $10,100 at 2000 fiscal year end, principally due to cash flow from investing activities (purchase of fixed assets) and from operating activities (increase in payables, accrued expenses and other current liabilities) offset by bank borrowings and increased accounts receivable and inventories. At December 31, 2000, the Company's net accounts receivable had increased to $1,969,400 from $1,752,000 at December 31, 1999. This increase was due primarily to increased sales during the fourth quarter of 2000. At December 31, 2000, the Company's accounts payable and other accrued expenses had increased to $1,744,700 from $802,500 at December 31, 1999. This increase was due primarily to purchases of fixed assets along with increased inventories, partially offset by an increase in bank borrowings At December 31, 2000 the Company's inventories had increased to $1,225,900 from $1,041,600 at December 31, 1999. This increase was due to accommodate an increase in orders received for delivery during January 2001. At December 31, 2000, net property, plant and equipment had increased to $5,344,000 from $922,400 at December 31, 1999. The main reason for this increase was the construction of the Company's new office and manufacturing facility along with land acquisition and 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 $864,300 in 2000 and $892,800 in 1999. 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 prior to the 2000 fiscal year. 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, 2000, the Company's current ratio was 1.26 to 1 compared with 1.81 at December 31, 1999 and working capital decreased over the same period to $755,500 from $1,487,000. Total assets exceeded total liabilities by $3,132,700 at December 31, 2000 compared with $3,127,400 at December 31, 1999. The Company believes that its cash flow from operations, together with bank borrowings, will be sufficient to support operations during the next twelve months. The foregoing statement of how long the Company's capital resources are expected to last is a 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. However, 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 will not significantly dilute the ownership interests and rights of existing shareholders. The Company has a line of credit, of which $450,500 had been utilized and $549,500 remained available under the formula applied to net accounts receivable at December 31,2000. This line of credit expires on August 10, 2001. 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, 2000, the Company had an outstanding balance of $367,000 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, 2000, the Company had no outstanding balance on this loan facility. FACTORS AFFECTING FUTURE RESULTS 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. FAFCO page 17 17 -------------------------------------------------------------------------------- NOTES -------------------------------------------------------------------------------- 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 Manager Bain & Company a management consultant 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 28, 2001 at: FAFCO, Inc. 435 Otterson Drive Chico, California 95928 Telephone: (530) 332-2100 FAFCO page 18