UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X]	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1996 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange 	Act of 1934 (No Fee Required) For the transition period from ________________ to _______________. Commission file number 0-10120 FAFCO, Inc. (Exact name of registrant as specified in its charter) California	 94-2159547 (State or other jurisdiction of (IRS Employer Idetification No.) incorporation or organization) 2690 Middlefield Road, Redwood City, California	 94063 (Address of principal executive offices)	 (Zip Code) Registrant's telephone number, including area code: 415/363-2690 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.125 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant as of February 2, 1997 was $188,400 based upon the average of the bid and ask prices reported for such date by the National Quotation Bureau. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by executive officers and directors of the registrant have been excluded in that such persons may be deemed to be affiliates as that term is defined under the rules and regulations promulgated under the Securities Act of 1933. This determination is not necessarily conclusive for other purposes. The number of shares of the registrant's Common Stock outstanding as of December 31, 1996, was 3,298,311. Documents Incorporated by Reference Document Description	 Form 10-K Part Portions of Exhibit 13.1 the Company's 1996 Annual Report to Shareholders 	(The Annual Report)...................................................I, II, IV The Company's Definitive Proxy Statement (the Proxy Statement) for the	1997 Annual Meeting to be held on April 24, 1997 (the Proxy Statement is 	expected to be filed pursuant to Regulation 14A on or before April 30, 1997)............ III _____________________________ With the exception of the information specifically incorporated by reference in Parts I, II, III and IV of this Form 10-K, neither the Company's Annual Report nor the Company's Proxy Statement is to be deemed filed as part of this report. PART I Item 1.	Business Introduction FAFCO, Inc. (FAFCO, the Company, or Registrant) designs, develops, manufactures, and markets solar heating systems for swimming pools and thermal energy storage systems for commercial and industrial cooling. Pool product sales amounted to 58% of net sales in 1996 compared to 62% of net sales in 1995 and 57% of net sales in 1994. Thermal energy storage sales amounted to 42% of net sales in 1996 compared to 38% of net sales in 1995 and 42% of net sales in 1994. The Company manufactures products for the solar heating of water for low and medium temperature applications. From the inception of the Company's predecessor as a sole proprietorship in 1969 until 1976, efforts were largely devoted to the refinement of the Company's initial product, a solar heating system for swimming pools - a low temperature solar application. Since that time, the Company has focused on increasing its share of the pool heating market by extending its network of independent distributors, decreasing its manufacturing costs, and improving its initial product. In 1983, a passive domestic hot water heating system, the 444, was introduced (this product was discontinued in early 1994). In 1987, the Company introduced a thermal energy storage system based on the same heat exchanger technology as is used in its swimming pool heating systems. In 1993, the Company introduced an electronic control system for swimming pool solar heating systems (this product was discontinued in December 1996). FAFCO, Inc. was incorporated under the laws of the State of California in 1972. Its principal executive offices are located at 2690 Middlefield Road, Redwood City, California. Its telephone number at that address is (415) 363-2690. Markets Swimming Pool Heating Low temperature solar applications developed because of the cost effectiveness of solar systems in heating a high volume of water to produce a small temperature change. The market for swimming pool heating developed for several reasons. First, pool owners normally use their pools when solar energy is abundant (during daylight hours and the summer swimming season). Second, pools already have two elements needed for low temperature water heating: storage (the pool water) and circulation (the existing pool pump and associated plumbing). Third, pool owners are an easily identifiable market. Thermal Energy Storage FAFCO also designs, develops, manufactures, and markets a static, glycol ice builder for the thermal storage market. Since the product's introduction, FAFCO has sold these ice banks primarily to the commercial air conditioning market for use in off-peak air conditioning systems. Products Swimming Pool Heating The FAFCO solar pool heating system is composed of six to twelve solar collectors, a sun sensor, an automatic control, and associated accessories. The collectors and sensor are typically mounted on the roof of a pool owner's home and connected to the pool pump and automatic control. The customer sets the automatic control for the desired water temperature and, when the sensor detects that there is sufficient solar energy for the system to function efficiently, the automatic control directs the flow of water from the pool to the collectors. The water absorbs heat as it passes through the collectors and then flows back to the pool. When the desired water temperature is achieved or when there is insufficient solar energy, the automatic control redirects the flow of water back to the pool and water is drained from the collectors. When the water temperature drops or there is sufficient solar energy, the system is reactivated automatically. In February 1996, the Company introduced a version of its solar pool heating system specifically designed for above ground swimming pools. This system is composed of one or two solar collectors optimized for use in heating above ground swimming pools and designed to lie flat on the ground or to be mounted on a rack on the ground. In May 1996, the Company introduced a new and improved version of its solar collector that has a higher thermal performance due to its unique heat exchange tube design. The tube design incorporates molded indentations which enhance the heat transfer coefficient by increasing fluid turbulence. The Company's solar collectors are composed entirely of a polyolefin material (a high molecular weight polymer compound) and made up of small round tubes formed side by side in a rectangular shape either one-by-two meter, four-by-eight feet, four-by-ten feet, four-by-twelve feet or four-by-twenty feet in size, with submanifolds and header pipes thermoformed on each end. This design provides for a maximum heating surface and even water flow in order to transfer 75 to 90 percent of the available solar energy to the pool water. The polyolefin material, which has been specially formulated by the Company, is black in color (to optimize solar energy absorption) and has the inherent advantages over other possible materials of lower cost, lighter weight, and higher resistance to the corrosive effects of pool chemicals and degradation resulting from ultraviolet radiation, heat, and other environmental effects. In May 1993, the Company introduced a proprietary microprocessor-based control (AutoPool) for its solar pool heating systems. Prior to May 1993, the Company had a private label arrangement with an automatic control manufacturer. Because of lack of demand for the Company's AutoPool control, this product was discontinued effective January 1, 1997. The Company has ongoing obligations to service and provide spare parts for AutoPool controls sold prior to that time. Domestic Water Heating In 1981, the Company began the design and development of an advanced passive solar domestic water heating system, the 444. In the second quarter of 1983, the Company began manufacturing and selling the 444 and has sold approximately 13,000 systems to date. Because of lack of demand for the Company's solar domestic water heating system, this product has been discontinued, effective the first quarter of 1994. The Company has ongoing obligations to service, and provide spare parts for, domestic water heaters sold prior to that time. Thermal Energy Storage The Company's thermal energy storage (IceStor) systems utilize nighttime electrical capacity to create stored cooling energy. This is normally done by storing inexpensive "off-peak" energy in the form of either chilled water or ice. The next day, this stored cooling capacity is used in conjunction with the building's air conditioning equipment to significantly reduce electrical requirements for cooling during times of high electrical demand and high electrical cost. Cool storage systems offer electrical utilities a solution to their fundamental, long-term problem: increasing peak demand for power during periods of limited available capacity (i.e. during business hours). IceStor technology shifts energy consumption to off-peak periods when there is available capacity and lower demand. Marketing and Sales Solar Systems FAFCO markets its solar systems and controls in the United States through independent distributors who sell directly to end users. Distributors generally have sales, installation, and service personnel who are supported by extensive FAFCO marketing and technical materials, as well as in-depth factory and field training programs. The majority of sales personnel employed by the typical distributor are assigned to retrofit sales, which are sales to existing pool owners. Retrofit sales are generated through direct mail, customer referrals, canvassing, and, to a lesser extent, selected media advertising. The balance of the distributor's sales personnel are generally assigned to contractor accounts seeking referrals for new construction sales. FAFCO usually provides direct mail literature and other advertising materials to distributors and mails or places these materials with local advertisers on the distributors' behalf and partially at the distributors' expense. In certain instances, distributors will also engage in direct mailing and advertising. In the past, the Company has canceled several distributor agreements for reasons of inadequate performance by the distributor, primarily failure to provide adequate sales, installation and service support for the Company's products. To date, the Company has generally been able to find qualified replacements. All work relating to the installation of FAFCO solar systems is covered by a full one-year warranty provided by the distributor. The Company's solar collectors used to be covered by a ten-year limited warranty, which was changed to a ten-year full warranty beginning in 1991. Its automatic controls, pumps, and drain-down valves are covered by a three-year limited warranty. FAFCO warranties cover defects in materials and workmanship provided that the related products are used for their intended purpose. FAFCO solar systems are designed to require only minimal maintenance, which can usually be performed either by the consumer using an owner's manual or by the distributor's service personnel. Thermal Energy Storage Systems The Company markets its IceStor products through independent contractors who design and build heating and cooling systems for commercial and industrial applications. The Company has also licensed its IceStor products for sale overseas, including to design-and-build, heating, ventilating, and air-conditioning companies in Taiwan, Korea, Japan, and the People's Republic of China. These licensing agreements provide for licensees' assembly and sale of IceStor products in those countries. Sales by Geographic Area The Company's net sales during 1996, 1995, and 1994 were geographically distributed approximately as follows: State 1996 1995 1994 California 17% 21% 24% Florida 34% 37% 38% Oklahoma 0% 7% 10% Other States 35% 20% 13% Foreign Countries 14% 15% 15% - ------------------------------------- 100% 100% 100% Three of the Company's customers, Kailay International, Ebara Corporation, and Florida Solar, accounted for 13.8%, 11.9%, and 11.8% of the Company's fiscal 1996 net sales. Kailay International also accounted for 10.0% of the Company's fiscal 1995 net sales. During 1995 and 1996, Kailay International and Ebara Corporation were the licensees for the Company's IceStor products in Taiwan and Japan, respectively, and as such, purchased IceStor products and components for assembly into products for resale to end users in Taiwan and Japan respectively. During 1996, Florida Solar was a distributor of this Company's pool products and, as such, purchased pool panels and components for resale to end users in Florida. No other customer accounted for 10% or more of the Company's net sales in fiscal 1994, 1995, or 1996. A material reproduction in orders from or the loss of one of the Company's major customers without an ability to replace such lost sales would have a material adverse effect on the Company's operating results and financial condition. Foreign sales of the Company's products are made through independent foreign distributors and licensees. Sales to foreign distributors and licensees are shipped directly from the Company's facilities in California and invoiced in U.S. dollars. Export sales are subject to certain controls and restrictions, including tariffs and import duties, and are subject to certain risks, including changing regulatory requirements of foreign jurisdictions and transportation delays and interruptions; however, to date, the Company has not experienced any material difficulties relating to such limitations. Backlog Sales to solar distributors are made against individual purchase orders rather than through volume purchase arrangements. The Company typically ships its products within one to five days of receipt of an order; therefore, the Company's backlog at any date is usually insignificant and is not a meaningful indicator of future sales. FAFCO distributors tend to order frequently in small quantities in order to minimize their inventory levels and match inventory levels with current installation schedules. Sales of IceStor products are made against individual purchase orders to general contractors or Heating, Ventilating, and Air Conditioning ("HVAC") contractors for specific new construction projects or for retrofit in existing buildings. The Company typically ships these products within six weeks or less of receipt of an order; therefore, the Company's backlog with respect to IceStor products at any date is also usually insignificant and not a meaningful indicator of future sales. Government Tax Incentives Although the Company's operations are not directly subject to extensive governmental regulations, the existence or lack of federal, state, and local tax incentives for the sale and installation of solar systems has a substantial impact on the Company's business. There is currently no federal tax credit for solar heating systems, and state solar tax credits are available only in a few states. The Company does not anticipate that solar tax credits will become available for solar heating systems in any additional states, nor does in anticipate a significant increase in sales due to existing or future tax credits. Manufacturing FAFCO's manufacturing activities consist primarily of the production of polyolefin solar collectors and IceStor heat exchangers, automatic controls, components for its solar systems, and IceStor containers. A total system approach is emphasized in order to ensure the effectiveness and reliability of the Company's products after they have been installed, eliminating the need for distributors to rely upon materials from other suppliers. The Company's solar pool heating system utilizes collectors produced from polyolefin resins using a patented extrusion and thermoforming process. The Company's IceStor system utilizes heat exchangers, which are also made from polyolefin resins using a patented extrusion and thermoforming process. Substantially all equipment used in these processes has been designed and built by the Company's research and development engineers. The Company's resins are a petroleum by-product. The market price of these resins has fluctuated over the years with an increase in 1990 and early 1991 due to tensions in the Middle East, followed by a stabilization after the completion of Desert Storm. It is expected that the price of the Company's resins will continue to fluctuate as a result of domestic and international political and economic conditions. FAFCO has qualified multiple sources of supply for all of its resins, materials, and subassemblies. However, certain materials and subassemblies are obtained from single sources. The Company believes these items could be supplied by the Company's other qualified sources if sufficient lead-time were provided. The Company attempts to maintain additional inventory of such materials to mitigate the risk of supply shortages; however, any prolonged inability to obtain such items would have a material adverse effect on the Company's results of operations. To date, the Company has not experienced any significant manufacturing problems or delays due to shortages of materials. Quality assurance is performed by FAFCO at its manufacturing facility. Test and inspection procedures are a part of substantially all production and assembly operations. In addition, the Company uses it own diagnostic equipment and laboratory to continually test and inspect raw materials, work inprocess, and finished goods. Competition The Company's solar heating products currently compete directly with solar heating products offered by less than ten other manufacturers of solar heating systems, and indirectly with conventional heating systems. The Company believes that the principal competitive factors in the markets for FAFCO solar products and controls are (i) product performance and reliability; (ii) marketing and technical support from the manufacturer for distribution channels; (iii) selling, installation, and service capabilities of distribution channels; and (iv) price. The Company believes that it competes favorably with respect to all of these factors. However, certain of its competitors may have greater financial, marketing, and technological resources than those of the Company. A number of companies in the United States manufacture thermal energy storage systems of various types similar to the Company's IceStor product. The industry is in the early stages of development and additional competitors are expected to enter the market over time. At the present time, the Company believes that the main competitive factors in the thermal energy storage market are performance, reliability, and price. The Company believes that it competes favorably with respect to these factors. However, several of its competitors have greater financial, marketing, and technological resources than those of the Company which may adversely affect the Company's ability to compete in this area. Research and Development For the years ended December 31, 1996, 1995, and 1994, the Company's research and development expenses were $116,000, $460,100, and $484,300, respectively. The majority of the research and development costs incurred in 1996 related to an improved solar heating product for in-ground pools, which was introduced in April 1996. The Company currently uses consulting engineers, in addition to staff engineers, who are responsible for existing product improvement, applications engineering, and new product research and development. The Company is exploring other potential revenue-producing uses for its polyolefin extrusions. Patents, Trademarks, and Licenses FAFCO currently holds four United States patents and one foreign patent relating to certain aspects of its products and manufacturing technology. In addition, the Company has two patent applications pending. These patents expire at various times between March 1997 and July 2003. However, the Company believes that patent protection is secondary to such factors as ongoing product development and refinement, the knowledge and experience of its personnel, and their ability to design, manufacture, and successfully market the Company's products. From time to time, the Company has registered as trademarks certain product names and marks in order attempt to establish and preserve its right to those product names and marks. The Company has granted licenses to assemble and sell IceStor in Taiwan, Korea, Japan, and the People's Republic of China to a Taiwanese company, a Korean company, a Japanese company, and a People's Republic of China company, respectively. See "Marketing and Sales" above. Employees At December 31, 1996, the Company had a total of fifty-three (53) full-time and two (2) part-time employees, including eight (8) in marketing, two (2) in research and development, thirty (30) in manufacturing, and eight (8) in general management and administration. The Company also uses temporary employees from agencies to fill seasonal needs. The Company has never had a work stoppage. No employees are represented by a labor organization. Seasonality Information regarding the seasonality of the Company's business is set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operation - Seasonality" on page 20 of the Annual Report, which information is incorporated herein by reference. Environmental Regulations The Company is subject to a number of environmental regulations concerning potential air and water pollution. However, such regulations have not in the past had any material adverse effect on the Company's business. There can be no assurance that compliance with existing or future regulations will not require the expenditure of funds or the modification of the Company's manufacturing process, which could have a material adverse effect on the Company's business or financial condition. Item 2.	Properties The Company's principal executive offices and manufacturing facilities for its products are located in a single 42,500 square foot facility in Redwood City, California. A lease expiring in the year 2000 covers this facility. See Note 11 of "Notes to Consolidated Financial Statements" on page 14 of the Annual Report, which information is incorporated herein by reference. The Company believes that its current facilities are adequate to meet its requirements for space in the foreseeable future. Manufacturing space is being fully utilized at the present time. However, additional demand can be accommodated by adding second and third employee shifts. Item 3.	Legal Proceedings There are presently no pending material legal proceedings to which the Company is a party or to which any of its property is subject, except for routine legal proceedings incidental to the Company's business. The Company has received correspondence from The Coca-Cola Company claiming that the Company's use of a polar bear design in its advertising materials infringes upon Coca-Cola copyrights in a television commercial and Coca-Cola's alleged unregistered polar bear design trademark for merchandise. The Company believes that The Coca-Cola Company's allegations are unfounded, but it is continuing to investigate and assess the matter. Item 4.	Submission of Matters to a Vote of Security Holders The Company did not submit any matter to a vote of security holders during the fourth quarter of its fiscal year ended December 31, 1996. Executive Officers of the Registrant The executive officers of the Company are set forth below. All officers serve at the pleasure of the Board of Directors. There are no family relationships between any executive officers or directors. Freeman A. Ford, age 56, serves as Chairman of the Board, President, and Chief Executive Officer. Mr. Ford, a co-founder of the Company, has served as Chairman of the Board since 1972, as Chief Executive Officer of the Company since May 1979, and as President since September 1984. Mr. Ford is also a Director of H.B. Fuller Company. Alex N. Watt, age 55, serves as Vice President of Finance and Administration, Chief Financial Officer, and Secretary. Mr. Watt joined the Company as its Vice President-Finance and Chief Financial Officer in July 1984, and has served as Secretary since March 1985. David Harris, age 41, serves as Vice President, Pool Products. Mr. Harris joined the Company in August 1981 as a sales representative and has held the positions of Pool Builder Manager, National Sales Manager-Pool Products, Pacific Northwestern Region Sales Manager, National Sales Manager-Solar Division, National Sales Manager, Vice President-Sales and Marketing (from June 1988 until April 1993), and President-Pool Products Division (from May 1993 until May 1995). Michael Anderson, age 51, has served as Vice President, Commercial Products since May 1995. Mr. Anderson joined the Company in September 1984 as Vice President, Sales and Marketing and held that position until February 1987. Mr. Anderson served as President of Marcus Company, a manufacturer's representative for HVAC and refrigeration products from March 1987 until May 1993, when he rejoined the Company as President, Commercial Products Division. PART II Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters Information regarding the market for and market prices of the Company'sCommon Stock, the number of shareholders of record, and information regarding dividends is set forth under the heading "Common Stock Data" on page 17 of the Annual Report, which information is incorporated herein by reference. Item 6.	Selected Financial Data Selected financial data for the Company is set forth in the table entitled "Five-Year Summary of Operations" on page 17 and in the last sentence of the text under the table entitled "Common Stock Data" on page 18 of the Annual Report, which information is incorporated herein by reference. Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations Information regarding Management's Discussion and Analysis of Financial Condition and Results of Operations is set forth under the heading "Management's Discussion and Analysis" on pages 19 through 21 of the Annual Report, which information is incorporated herein by reference. Item 8.	Financial Statements and Supplementary Data The consolidated financial statements of the Company are set forth on pages 5 through 15 of the Annual Report, which information is incorporated herein by reference. The supplementary financial information of selected quarterly financial data is not required under Regulation S-K Item 302, because the Company does not meet the tests set forth therein. Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On December 11, 1996, FAFCO, Inc. dismissed Price Waterhouse LLP as its independent accounts. The reports of Price Waterhouse LLP on the financial statements for the past two fiscal years contain no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. The Registrant's Audit Committee and Board of Directors participated in and approved the decision to change independent accountants. In connection with its audits for the two most recent fiscal years and through December 11, 1996, there have been no disagreements with Price Waterhouse LLP on any matter of accounting principles or practices, financial statements disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Price Waterhouse LLP would have caused them to make reference thereto in their report on the financial statements for such years. During the two most recent fiscal years and through December 11, 1996, there have been no reportable events as defined in Regulation S-K item 304 (a) (1) (v). The Registrant requested that Price Waterhouse LLP furnish it with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of such letter, dated December 11, 1996, was filed as Exhibit 16.1 of that Form 8-K. New independent accountants. The Registrant engaged Burr, Pilger & Mayer as its new independent accountants as of December 11, 1996. PART III Item 10.	Directors and Executive Officers of the Registrant Information regarding directors is to be set forth under the heading "Election of Directors - Nominees" in the Company's Proxy Statement, which information is incorporated herein by reference. Information regarding executive officers is set forth under the caption "Executive Officers of the Registrant" in Part I of this Form 10-K, which information is incorporated into this Item 10 by reference. Information regarding the filing of reports by insiders under Section 16(a) of the Exchange Act is to be set forth under the heading "Election of Directors Compliance" in the Company's Proxy Statement, which information is incorporated herein by reference. Item 11.	Executive Compensation Information regarding the Company's remuneration of its executive officers and directors is to be set forth under the headings "Election of Directors - Executive Compensation" and "Election of Directors - Director Compensation" in the Company's Proxy Statement, which information is incorporated herein by reference. Item 12.	Security Ownership of Certain Beneficial Owners and Management Information regarding the security ownership of certain beneficial owners and management is to be set forth under the headings "Election of Directors - Security Ownership" and "Information Concerning Solicitation and Voting - Record Date and Outstanding Shares" in the Company's Proxy Statement, which information is incorporated herein by reference. Item 13.	Certain Relationships and Related Transactions Information regarding certain relationships and related transactions is to be set forth under the headings "Election of Directors - Nominees" and "Election of Directors - Certain Transactions" in the Company's Proxy Statement, which information is incorporated herein by reference. PART IV Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)	Documents filed as part of this report: 1. Financial Statements The consolidated balance sheets for the years ended December 31, 1996 and 1995, the Consolidated Statement of Operations, of shareholders' equity, and of cash flows for each of the three years in the period ended December 31, 1996, and the notes thereto appear on pages 5 through 15 of Exhibit 13.1 to this Annual Report on Form 10-K. 2. Financial Statement Schedules Report of Independent Accountants on Financial Statement Schedule (see page 16 of this Annual Report on Form 10-K). The following schedule for the years ended December 31, 1996, 1995, and 1994 is included in this report. Such schedule should be read in conjunction with the consolidated financial statements in the Annual Report. Schedule II - Valuation and Qualifying Accounts and Reserves Schedules not included in these financial statement schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3.	The following exhibits are filed as part of or incorporated by reference, to the extent indicated herein, in this Annual Report on Form 10-K. Exhibit No.	Description (footnotes appear at the end of the exhibit list) 3.1(1)	 Articles of Incorporation, as amended. 3.2(3)	 Bylaws, as amended. 4.1(1)	 Stock Purchase Agreement dated April 14, 1977, between Registrant and certain investors. 4.2(3)	 10% Convertible Subordinated Notes Purchase Agreement dated March 27, 1984, between Registrant and certain investors. 4.2(a)(2)	 Amendment to Subordinated Note Purchase Agreement dated March 27, 1990. 4.2(b)(9)	 Amendment to 10% Subordinated Note Agreement dated March 25, 1991. 4.3(4)* 	Security and Guaranty Agreement and Common Stock Purchase Warrant between the Registrant and Freeman A. Ford dated February 16, 1987. 4.3(a)(5)*	 Amendment to the Security and Guaranty Agreement between the Registrant and Freeman A. Ford dated December 8, 1987. 4.3(b)(6)*	 Amendment to the Security and Guaranty Agreement between the Registrant and Freeman A. Ford dated February 1, 1988. 4.3(c)(7)*	 Second Amendment to the Promissory Notes between the Registrant and Freeman A. Ford dated March 26, 1991. 4.3(d)(9)	 Form of Common Stock Purchase Warrant issued March 25, 1993 by the Registrant to Freeman A. Ford. 4.3(e)(9)	 Amendment to the Promissory Notes between the Registrant and Freeman A. Ford dated March 25, 1993. 4.4(10)	 Common Stock Warrant issued January 19, 1994 to B. Severns. 4.5	 Reference Exhibits 3.1 and 3.2. 10.1	 Reference Exhibit 4.1. 10.2	 Reference Exhibit 4.2, 4.2(a), and 4.2(b). 10.3(7)*	 1981 Incentive Stock Option Plan. 10.4(7)*	 Form of 1981 Incentive Stock Option Agreement. 10.8(1)	 Standard Form of Distributor Agreement. 10.9(7)	 Lease Agreement and Addenda for 2690 Middlefield Road, Redwood City, California, between Registrant, as Lessee, and Beals Martin and Associates, as Lessor, dated January 18, 1990. 10.10(3)	 FAFCO Solar Partners II Certificate of Limited Partnership and Limited Partnership Agreement. 10.11	 Reference Exhibits 4.3, 4.3(a), 4.3(b), 4.3(c), 4.3(d), and 4.3(e). 10.12(6)	 Licensing Agreement between the Registrant, as Licensor, and Enercon Engineering, as Licensee, dated May 20, 1988. 10.13(6)*	 Form of Director's Warrant issued February 1988 to directors Berry and Selig. 10.14(11)*	 1991 Stock Option Plan, as amended. 10.14(a)(8)*	 Form of Stock Option Agreement used under the 1991 Stock Option Plan. 10.15(8)*	 1991 Director's Stock Option Plan. 10.15(a)(8)*	 Form of Nonstatutory Stock Option Agreement used under 1991 Director's Stock Option Plan. 10.16(8)*	 Employee Stock Purchase Plan. 10.16(a)(8)*	 Form of Subscription Agreement used under Employee Stock Purchase Plan. 10.17(9)	 Licensing Agreement and Addendum between the Registrant, as Licensor, and Jang-Han Systems Engineering, as Licensee, dated January 1, 1993. 10.18(10)	 Export - Import and Technical License Agreement between the Registrant, as Licensor, and Ebara Corporation, as Licensee, dated October 22, 1993. 10.19(10)	 Business Loan Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated, June 10, 1992. 10.19(a)(10)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated March 8, 1994. 10.19(b)(12)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated June 5, 1995. 10.19(c)(12)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated August 7, 1995. 10.19(d)(12)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated September 22, 1995. 10.19(e)(12)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated February 8, 1996. 10.19(f)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated October 30, 1996. 10.19(g)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated December 11, 1996. 10.19(h)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated January 6, 1997. 10.19(i)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated January 21, 1997. 10.20(11) 	Agency/Distributorship Agreement between Registrant, as Manufacturer, and Jabria Establishment, as Agent/ Distributorship, dated December 10, 1994. 11.1	 Computation of Earnings Per Share (see Note 12 of Notes to Consolidated Financial Statements on page 15 of the 1995 Annual Report). 13.1	 Registrant's 1996 Annual Report to Shareholders. 21.1	 Subsidiaries of Registrant. 23.1	 Consent of Independent Accountants (see page 20). 24.1 	 Power of Attorney (see page 19). 27.1	 Financial Data Schedule. * 	Denotes a Management Contract or Compensatory Plan or Arrangement. (1) Incorporated by reference to exhibit filed with Registrant's Registration Statement on Form S-1 (File No. 2-72297) filed May 14, 1981. (2) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. (3) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1983. (4) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. (5) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. (6) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. (7) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. (8) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (9) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (10) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (11) Incorporated by reference to exhibit filed with Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (12) Incorporated by reference to exhibits filed with Registrant's Annual Report on form 10-K for the fiscal year ended December 31, 1995. (a)	Reports on Form 8-K: A Report on Form 8-K dated December 13, 1996, was filed on December 13, 1996 under Item 4, reporting a change in the Registrant's certifying accountant. (b)	Exhibits: See subsection (a) (3) above. (c)	Financial Statement Schedules: See subsection (a) (2) above. Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of FAFCO, Inc.: Our audits of the consolidated financial statements referred to in our report dated March 4, 1997 appearing on page 16 of the 1996 Annual Report to Shareholders of FAFCO, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Burr, Pilger & Mayer Palo Alto, California March 28, 1997 FAFCO, Inc. Schedule II Valuation and Qualifying Accounts and Reserves Balance at Additions Charged Deductions Balance at Beginning of to Costs and End of Period Expenses Period 1996: Allowance for doubtful accounts current accounts receivable $463,900 $50,400 $1,700(1) $512,600 short-term receivable 28,800 28,800 long-term receivable 39,100 5,100(4) 34,000 Warranty reserve 216,000 94,100 76,000(2) 234,100 Deferred tax asset valuation allowance 1,383,800 192,000 1,191,800 1995: Allowance for doubtful accounts $5,700(1) current accounts receivable $469,100 $39,600 39,100(3) $463,900 long-term receivable 39,100 39,100 Warranty reserve 247,000 10,500 41,500(2) 216,000 Deferred tax asset valuation allowance 600,900 782,900 1,383,800 1994: Allowance for doubtful accounts current accounts receivable $417,400 $52,600 $900(1) $469,100 long-term receivable Warranty reserve 280,300 71,800 105,100(2) 247,000 Deferred tax asset valuation allowance 893,900 293,000 600,900 (1) Write-offs of uncollectible accounts. (2) Cost of warranty claims processed. (3) Reclassification to allowance for long-term notes receivable. (4) Reclassification to allowance for short-term notes receivable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 28, 1997	FAFCO, Inc. /s/Freeman A. Ford		 - ------------------- Freeman A. Ford, Chairman of the Board, President, 	and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Freeman A. Ford and Alex N. Watt, or either of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature	 Title	 Date - ----------------------------------------------------------------------------- Chairman of the Board, March 28, 1997 President, and	 -------------- /s/Freeman A. Ford		 Chief Executive Officer - ------------------ (Principal Executive Officer), Freeman A. Ford and Director 	Vice President, Finance & March 28, 1997 Administration	March 28, 1997 -------------- /s/Alex N. Watt		 and Chief Financial Officer - ------------------ (Principal Financial and Alex N. Watt Accounting Officer) /s/William A. Berry		 Director	 March 28, 1997 - ------------------- -------------- William A. Berry /s/Robert W. Selig, Jr.		 Director	 March 28, 1997 - ----------------------- -------------- Robert W. Selig, Jr. CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-75201, 2-86299, 2-95390 and 33-76220) of FAFCO, Inc. of our report dated March 4, 1997, appearing on page 15 of the 1996 Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule,which appears on page 18 of this Form 10-K. Burr, Pilger & Mayer Palo Alto, California March 4, 1997 Index to Exhibits Exhibit No. Description Subsequently Numbered Pages 3.1(1)	 Articles of Incorporation, as amended. 3.1(8)	 Form of Amended and Restated Articles of Incorporation, to be filed following shareholder approval.3.2(3)	Bylaws, as amended. 4.1(1)	 Stock Purchase Agreement dated as of April 14, 1977, between Registrant and certain investors. 4.2(3)	 10% Convertible Subordinated Notes Purchase Agreement dated as of March 27, 1984, between Registrant and certain investors. 4.2(a)(2)	 Amendment to Subordinated Note Purchase Agreement dated March 27, 1990. 4.2(b)(9)	 Amendment to 10% Subordinated Note Agreement dated March 25, 1993. 4.3(4)	 Security and Guaranty Agreement and Common Stock Purchase Warrant between the Registrant and Freeman A. Ford dated February 16, 1987. 4.3(a)(5)	 Amendment to the Security and Guaranty Agreement between the Registrant and Freeman A. Ford dated December 8, 1987. 4.3(b)(6)	 Amendment to the Security and Guaranty Agreement between the Registrant and Freemen A. Ford dated February 1, 1988. 4.3(c)(7)	 Second Amendment to the Promissory Notes between the Registrant and Freeman A. Ford dated March 26, 1991. 4.3(d)(9)	 Form of Common Stock Purchase Warrant issued March 25, 1993 by the Registrant to Freeman A. Ford. 4.3(e)(9)	 Amendment to the Promissory Notes between the Registrant and Freeman A. Ford dated March 25, 1993. 4.4	 Common Stock Warrant issued January 19, 1994 to B. Severns. 4.5	 Reference Exhibits 3.1 and 3.2. 10.1	 Reference Exhibit 4.1. 10.2	 Reference Exhibit 4.2, 4.2(a), and 4.2(b). 10.3(7)	 1981 Incentive Stock Option Plan. 10.4(7)	 Form of 1981 Incentive Stock Option Agreement. 10.8(1)	 Standard form of Distributor Agreement. 10.9(7)	 Lease Agreement and Addenda for 2690 Middlefield Road, Redwood City, California, between Registrant, as Lessee, and Beals Martin and Associates, as Lessor, dated January 18, 1990. 10.10(3)	 FAFCO Solar Partners II Certificate of Limited Partnership and Limited Partnership Agreement. 10.11	 Reference Exhibit 4.3, 4.3(a), 4.3(b), 4.3(c), 4.3(d), and 4.3(e). 10.12(6)	 Licensing Agreement between the Registrant, as Licensor, and Enercon Engineering, as Licensee, dated May 20, 1988. 10.13(6)	 Form of Director's Warrant issued February 1988 to directors Berry and Selig. 10.14(11)	 1991 Stock Option Plan, as amended.	Page 2110.14(a)(8)	Form of Stock Option Agreement used under the 1991 Stock Option Plan. Page 21 10.15(8)	 1991 Director's Stock Option Plan. 10.15(a)(8)	 Form of Nonstatutory Stock Option Agreement used under 1991 Director's Stock Option Plan. 10.16(8)	 Employee Stock Purchase Plan. 10.16(a)(8)	 Form of Subscription Agreement used under Employee Stock Purchase Plan. 10.17(9)	 Licensing Agreement and Addendum between the Registrant, as Licensor, and Jang-Han Systems Engineering, as Licensee, dated January 1, 1993. 10.18(10)	 Export - Import and Technical License Agreement between the Registrant, as Licensor, and Ebara Corporation, as Licensee, dated October 22, 1993. 10.19(10)	 Business Loan Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated, June 10, 1992. 10.19(a)(10)	Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated March 8, 1994. 10.19(b)(12)	Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank as Lender, dated June 5, 1995. 10.19(c)(12)	Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated August 7, 1995. 10.19(d)(12)	Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated September 22, 1995. 10.19(e)(12)	Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated February 8, 1996. 10.19(f)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated October 30, 1996. 10.19(g)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender dated, December 11, 1996. 10.19(h)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated January 6, 1997. 10.19(i)	 Loan Modification Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated January 21, 1997. 10.20	 Agency/Distributorship Agreement between Registrant, as Borrower, and Silicon Valley Bank, as Lender, dated December 10, 1994.	 Page 34 11.1	 Computation of Earnings Per Share (see Note 12 of Notes to Consolidated Financial Statements on page 15 of the Annual Report). 13.1	 Registrant's 1996 Annual Report to Shareholders. Page 44 21.1	 Subsidiaries of Registrant.	 Page 67 23.1	 Consent of Independent Accounts (see page 20). 24.1	 Power of Attorney (see page 19).