SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from ________________ to _______________.
Commission file number 0-10120
FAFCO, Inc.
(Exact name of registrant as specified in its charter)
California 94-2159547
(State or other jurisdiction of incorporation
or organization) (IRS Employer Identification No.)
2690 Middlefield Road, Redwood City, California 94063
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 650/363-2690
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 __ _
__was , 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, 1997, was 3,298,311.
Documents Incorporated by Reference
Document Description Form 10-K Part
Portions of Exhibit 13.1 (the Company's 1997 Annual Report to
Shareholders
(the "Annual Report")
.................................................................
................................I, II, IV
The Company's Definitive Proxy Statement (the "Proxy
Statement") for the
1998 Annual Meeting of Stockholders to be held on May 14, 1998
(the Proxy Statement is
expected to be filed pursuant to Regulation 14A on or before
April 30, 1998) .................... 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 56% of net sales in 1997 compared to 58% of net sales in 1996
and 62% of net sales in 1995. Thermal energy storage sales
amounted to 44% of net sales in 1997 compared to 42% of net sales
in 1996 and 38% of net sales in 1995.
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 a state-of-the-art 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 (650) 363-2690.
Safe Harbor Language for Form 10-K
This Annual Report of Form 10-K contains forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the
risk factors set forth on page 19 of the Annual Report under the
heading "Factors Affecting Future Results" and elsewhere in
this Form 10-K.
Markets
Swimming Pool Heating
Low temperature solar applications developed because of the cost
effectiveness of solar systems in heating a large volume of water
to produce a small temperature change. The market for swimming
pool heating developed for several reasons. First, pool owners
normally use their pools when solar energy is abundant (during
daylight hours and the summer swimming season). Second, pools
already have two elements needed for low temperature water
heating: storage (the pool water) and circulation (the existing
pool pump and associated plumbing). Third, pool owners are an
easily identifiable market.
Thermal Energy Storage
FAFCO also designs, develops, manufactures, and markets a static,
glycol ice builder for the thermal storage market. Since the
product's introduction, FAFCO has sold "ice banks" primarily to
the commercial air conditioning market for use in off-peak air
conditioning systems.
Products
Swimming Pool Heating
The FAFCO solar pool heating system is composed of six to twelve
solar collectors, a sun sensor, an automatic control, and
associated accessories. The collectors and sensor are typically
mounted on the roof of a pool owner's home and connected to the
pool pump and automatic control.
The customer sets the automatic control for the desired water
temperature and, when the sensor detects that there is sufficient
solar energy for the system to function efficiently, the
automatic control directs the flow of water from the pool to the
collectors. The water absorbs heat as it passes through the
collectors and then flows back to the pool. When the desired
water temperature is achieved or when there is insufficient solar
energy, the automatic control redirects the flow of water back to
the pool and water is drained from the collectors. When the
water temperature drops and there is sufficient solar energy, the
system is reactivated automatically.
In February 1996, the Company introduced a version of its solar
pool heating system specifically designed for above-ground
swimming pools. This system is composed of one or two solar
collectors optimized for use in heating above-ground swimming
pools and designed to lie flat on the ground or to be mounted on
a rack on the ground.
In May 1996, the Company introduced a new and improved version of
its solar collector that has a higher thermal performance due to
its unique heat exchanger tube design. The tube design
incorporates molded indentations, which enhance the heat transfer
coefficient by increasing fluid turbulence.
The Company's solar collectors are composed entirely of a
polyolefin material (a high molecular weight polymer compound)
and made up of small round tubes formed side by side in a
rectangular shape either one-by-two meters, four-by-eight feet,
four-by-ten feet, four-by-twelve feet or four-by-twenty feet in
size, with submanifolds and header pipes thermoformed on each
end. This design provides for a maximum heating surface and even
water flow in order to transfer 75% to 90% of the available solar
energy to the pool water. The polyolefin material, which has
been specially formulated by the Company, is black in color (to
optimize solar energy absorption) and has the inherent advantages
over other possible materials of lower cost, lighter weight, and
higher resistance to the corrosive effects of pool chemicals and
degradation resulting from ultraviolet radiation, heat, and other
environmental effects.
In May 1993, the Company introduced a proprietary microprocessor-
based control (AutoPool) for its solar pool heating systems.
Prior to May 1993, the Company had a private label arrangement
with an automatic control manufacturer. AutoPool has built-in
"intelligence" that allows it to optimize the heating and
filtration time for the swimming pool and can also control non-
conventional solar swimming pool heaters. Because of lack of
demand for the Company's AutoPool Control, this product was
discontinued effective January 1, 1997. The Company has ongoing
obligations to service and provide spare parts for AutoPool
controls sold prior to that time.
Thermal Energy Storage
The Company's thermal energy storage ("IceStor?") systems
utilize nighttime electric capacity to create stored cooling
energy. This is normally done by storing inexpensive "off-
peak" energy in the form of either chilled water or ice. The
next day this stored cooling capacity is used in conjunction with
a building's air conditioning equipment to significantly reduce
electrical power requirements for cooling during times of high
power demand and high electrical cost.
Cool storage systems offer power utilities a solution to a
fundamental, long-term problem: increasing peak demand for power
during periods of limited available capacity (i.e., during
business hours). IceStor? technology shifts 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 typical
distributor's sales personnel are generally assigned to
contractor accounts and seek referrals for new construction
sales.
FAFCO usually provides direct mail literature and other
advertising materials to distributors and mails or places these
materials with local advertisers on the distributors' behalf and
partially at the distributors' expense. In certain instances,
distributors will also engage in direct mailing and advertising.
In the past, the Company has canceled several distributor
agreements for reasons of inadequate performance by the
distributor, primarily for failure to provide adequate sales,
installation and service support for the Company's products. In
such instances, the Company has generally been able to find
qualified replacements.
All work relating to the installation of FAFCO solar systems is
covered by a full one-year warranty provided by the distributor.
The Company's solar collectors used to be covered by a ten-year
limited warranty, which was changed to a ten-year full warranty
beginning in 1991. Its automatic controls, pumps, and drain-down
valves are covered by a three-year limited warranty. FAFCO
warranties cover defects in materials and workmanship provided
that the related products are used for their intended purpose.
FAFCO solar systems are designed to require only minimal
maintenance, which can be performed either by the consumer using
an owner's manual or by the distributor's service personnel.
Thermal Energy Storage Systems
The Company markets its IceStor? 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, to design-and-
build, heating, ventilating, and air-conditioning companies in
Taiwan, Korea, Japan, and The Peoples Republic of China. These
licensing agreements provide for licensees' assembly and sale of
IceStor? products in those countries.
Sales by Geographic Area
The Company's net sales during 1997, 1996 and, 1995 were
geographically distributed approximately as follows:
1997 1996 1995
California 22% 17% 21%
Florida 31% 34% 37%
Oklahoma 3% 0% 7%
Other U.S. 16% 35% 20%
Foreign
Countries 28% 14% 15%
100% 100% 100%
One of the Company's customers, Ebara Corporation, accounted for
18.6% of the Company's fiscal 1997 net sales. Three of the
Company's customers, Kailay International (now known as FAPCO),
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, 1996 and 1997, Kailay International
and Ebara Corporation were the licensees for the Company's
IceStorT products in Taiwan and Japan, respectively, and, as
such, purchased IceStorT 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
the Company's pool products and, as such, purchased pool panels
and components for resale to end users in Florida. No other
customer accounted for 10% or more of the Company's net sales in
fiscal 1995, 1996 or 1997. Any material cancellation, reduction
or rescheduling of orders from these major customers, or the loss
of any such customer, would have a material adverse effect in the
Company's financial condition and operation results.
Foreign sales of the Company's products are made through
independent foreign distributors and licensees. Sales to foreign
distributors and licensees are shipped directly from the
Company's facilities in California and invoiced in U.S. dollars.
Export sales are subject to certain controls and restrictions,
including tariffs and import duties, and are subject to certain
risks, including changing regulatory requirements of foreign
jurisdictions and transportation delays and interruptions;
however, the Company has not experienced any material
difficulties in the past relating to such limitations. The
financial crisis in Southeast Asia has not had any noticeable
negative effect on sales; however, there is no assurance that
sales will not be negatively affected if the crisis worsens or is
prolonged.
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 would have a substantial impact on
the Company's business. There is currently no federal tax credit
for solar heating systems and state solar tax credits are
available only in a few states. The Company does not anticipate
that solar tax credits will become available for solar heating
systems in any additional states, nor does it anticipate a
significant increase in sales due to existing or future tax
credits.
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 resins employed by the Company are a petroleum by-product.
The market price of these resins has fluctuated over the years
with an increase in 1990 and early 1991 due to tensions in the
Middle East, followed by a stabilization after the completion of
Desert Storm. It is expected that the price of the resins will
continue to fluctuate as a result of domestic and international
political and economic conditions.
FAFCO has qualified multiple sources of supply for all of its
resins, materials, and subassemblies. However, certain materials
and subassemblies are currently obtained from single sources.
The Company believes these items could be supplied by the
Company's other qualified sources if sufficient lead-time were
provided. The Company attempts to maintain additional inventory
of such materials to mitigate the risk of supply shortages;
however, any prolonged inability to obtain such items would have
a material adverse effect on the Company's results of operations.
To date, the Company has not experienced any significant
manufacturing problems or delays due to shortages of materials.
Quality assurance is performed by FAFCO at its manufacturing
facility. Test and inspection procedures are a part of
substantially all production and assembly operations. In
addition, the Company uses it own diagnostic equipment and
laboratory to continually test and inspect raw materials, work in
process, and finished goods.
Competition
The Company's solar heating products currently compete directly
with solar heating products offered by less than ten other
domestic and international manufacturers of solar heating
systems, and indirectly with conventional heating systems.
The Company believes that the principal competitive factors in
the markets for FAFCO solar products are (i) product performance
and reliability; (ii) marketing and technical support from the
manufacturer for distribution channels; (iii) selling,
installation, and service capabilities of distribution channels;
and (iv) price. The Company believes that it competes favorably
with respect to all of these factors. However, certain of its
competitors may have greater financial, marketing, and
technological resources than those of the Company.
A number of companies in the United States manufacture thermal
energy storage systems of various types similar to the Company's
IceStor? 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.
Research and Development
For the years ended December 31, 1997, 1996, and 1995, the
Company's research and development expenses were $202,800,
$116,000, and $460,100, respectively. The majority of the
research and development costs incurred in 1995 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 two United States patents and one foreign
patent relating to certain aspects of its products and
manufacturing technology. These patents expire at various times
between March 1998 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 to 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 Peoples Republic of China to a
Taiwanese company, a Korean company, a Japanese company, and a
Peoples Republic of China company, respectively. See "Marketing
and Sales" above.
Employees
At December 31, 1997, the Company had a total of 52 full-time
employees, including eight in marketing, two in research and
development, 32 in manufacturing, and 10 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 Operations - Seasonality" on
page 18 of the Annual Report, which information is incorporated
herein by reference.
Segment Information
Following the sale of the business of the Company's subsidiary,
The Gregory Company, in 1988, the Company has only had continuing
operations in the energy products segment.
Environmental Regulations
The Company is subject to a number of environmental regulations
concerning potential air and water pollution. However, such
regulations have not in the past had, and are not expected to
have, any material adverse effect on the Company's business.
However, there can be no assurance that compliance with existing
or future regulations will not require the expenditure of funds
or the modification of the Company's manufacturing process, which
could have a material adverse effect on the Company's business or
financial condition.
Item 2. Properties
The Company's principal executive offices and manufacturing
facilities for its products are located in a single 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 13 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 near future.
Manufacturing space is being fully utilized at the present time.
However, additional demand can be accommodated by adding
additional employee shifts.
Item 3. Legal Proceedings
There are presently no material pending legal proceedings to
which the Company is a party or to which any of its property is
subject, except for ordinary routine legal proceedings incidental
to the Company's business.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of security
holders during the fourth quarter of its fiscal year ended
December 31, 1997.
ART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Information regarding the market for and market prices of the
Company's Common Stock, the number of shareholders of record, and
information regarding dividends is set forth under the heading
"Common Stock Data" on page 16 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 16 and in
the last sentence of the text under the table entitled "Common
Stock Data" on page 16 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 17
through 19 of the Annual Report, which information is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company are set
forth on pages 4 through 15 of the Annual Report, which
information is incorporated herein by reference. The
supplementary financial information requirements of Regulation S-
K Item 302 do not apply to the Company, because the Company does
not meet the tests set forth therein.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On December 11, 1996, FAFCO, Inc. dismissed Price Waterhouse LLP
as its independents 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 fiscal year 1995 through
December 11, 1996, there were no disagreements with Price
Waterhouse LLP on any matter of accounting principles or
practices, financial statements disclosure, or auditing scope of
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
statemetns for such years.
During fiscal year 1995 through December 11, 1996, there were 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 a Current Report
on Form 8-K of the Company dated as of such date.
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 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 - Beneficial Ownership Reporting
Compliance Section 16(a) of the Exchange Act" in the Company's
Proxy Statement, which information is incorporated herein by
reference.
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 57, 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 56, 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 42, 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).
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, 1997 and 1996, the Consolidated Statement of Operations,
of Shareholders' Equity and Cash Flows for each of the three
years in the period ended December 31, 1997, and the notes
thereto appear on pages 4 through 15 of the Annual Report.
2. Financial Statement Schedules
The following schedule for the years ended December 31, 1997,
1996, and 1995 is included in this report. Such schedule
should be read in conjunction with the consolidated financial
statements in the Annual Report.
Report of Independent Accountants on Financial Statement
Schedule (see page 18).
Schedule II - Valuation and Qualifying Accounts and Reserves
(see page 19).
Schedules not included in these financial statement schedules
have been omitted because they are not applicable or the
required information is shown in the financial statements or
notes thereto.
3. Index to Exhibits
The following exhibits are filed as part of or incorporated by
reference, to the extent indicated herein, in this Annual
Report on Form 10-K.
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 Directors' 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)(13) Loan Modification agreement between Registrant as
Borrower, and Silicon Valley Bank, as Lender, dated
October 30, 1996.
10.19(g)(13) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, as Lender, dated
December 11, 1996.
10.19(h)(13) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, as Lender, dated
January 6, 1997.
10.19(i)(13) 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 the 1997 Annual
Report).
13.1 Registrant's 1997 Annual Report to Shareholders.
16.1(14) Letter from Price Waterhouse LLP dated December 11,
1996 re change in Registrant's Certifying
Accountants.
18.1(15) Letter re change in Accounting Principle from Burr,
Pilger & Meyer dated November 5, 1997.
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 exhibit filed with Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
(13) Incorporated by reference to exhibit filed with
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
(14) Incorporated by reference to exhibit filed
with Registrant's Report on Form 8-K for the quarter ended
December 31, 1996.
(15) Incorporated by reference to exhibit filed with
Registrant's Quarterly Report on Form 10Q for the fiscal
quarter ended September 30, 1997.
(b) Reports on Form 8-K: No Reports on Form 8-K were filed by
the Company during the fourth quarter of 1997 .
(c) Exhibits: See subsection (a) (3) above.
(d) 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 17, 1998 appearing on page 15 of the
1997 Annual Report to Shareholders of FAFCO, Inc. (which report
and consolidated financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an
audit of the Financial Statement Schedule listed in Item 14(a) of
this Form 10-K. In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements.
Burr, Pilger & Mayer LLP
San Francisco, California
March 17, 1998
FAFCO, Inc.
Schedule
II
Valuation and Qualifying Accounts and Reserves
Balance at Additions Balance
Begining of to Costs and at End
Period Expenses Deductions of Period
1997:
Allowance for
doubtful accounts
current accounts
receivable $ 512,600 $ 172,600 $ 145,100(1) $ 540,100
short-term
receivable 28,800 97,600 126,400
long-term
receivable 34,000 4,700(4) 29,300
Warranty reserve 234,100 85,600 108,700(2) 211,000
Deferred tax asset
valuation allowance 1,191,800 483,800 708,000
1996:
Allowance for
doubtful accounts
current accounts
receivable $ 463,900 $ 50,400 $ 1,700 $ 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 600,900 782,900 1,383,800
1995:
Allowance for
doubtful accounts
current accounts $ 5,700(1)
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
(1) Write-off 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: ______________ 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, President and
Chief executive Officer (Principal
/s/Freeman A. Ford Chief Executive Officer (Principal
Freeman A. Ford Executive Officer) and Director
Vice President, Finance & Administration
/s/Alex N. Watt and Chief Financial Officer (Principal
Alex N. Watt Financial and Accounting Officer)
/s/William A. Berry Director
William A. Berry
/s/Robert W. Selig, Jr. Director
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) and related prospectuses of FAFCO, Inc. of
our report dated March 17, 1998, appearing on page 15 of the 1997
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 17 of this Form 10-K.
Burr, Pilger & Mayer
San Francisco, California
March 17, 1998
ITEMS
Exhibit No. Description
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 Directors' 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)(13) Loan Modification agreement between Registrant as
Borrower, and Silicon Valley Bank, as Lender, dated
October 30, 1996.
10.19(g)(13) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, as Lender, dated
December 11, 1996.
10.19(h)(13) Loan Modification Agreement between Registrant, as
Borrower, and Silicon Valley Bank, as Lender, dated
January 6, 1997.
10.19(i)(13) 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 the 1997 Annual
Report).
13.1 Registrant's 1997 Annual Report to Shareholders.
16.1(14) Letter from Price Waterhouse LLP dated December 11,
1996 re change in Registrant's Certifying
Accountants.
18.1(15) Letter re change in Accounting Principle from Burr,
Pilger & Meyer dated November 5, 1997.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants (see page 20)
24.2 Power of Attorney (see page 19).
27.1 Financial Data Schedule.
2
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