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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, 2000 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.)
435 OTTERSON DRIVE, CHICO, CALIFORNIA 95928
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 530/332-2100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.125 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
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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 May 15, 2001 was $165,425 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 May 15,
2001, was 3,834,791.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT DESCRIPTION FORM 10-K PART
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Portions of Exhibit 13.1 (the Company's 2000 Annual Report to Shareholders)
(the "Annual Report")........................................................I, II, IV
-----------------------------
With the exception of the information specifically incorporated by reference in
Parts I, II and IV of this Form 10-K, the Company's Annual Report is not to be
deemed filed as part of this report.
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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 66% of net sales in 2000 compared to 60% of net sales in 1999 and
53% of net sales in 1998. Thermal energy storage sales amounted to 34% of net
sales in 2000 compared to 40% of net sales in 1999 and 47% of net sales in 1998.
The Company manufactures products for the solar heating of water for low and
medium temperature applications. From the inception of the Company's predecessor
as a sole proprietorship in 1969 until 1976, efforts were largely devoted to the
refinement of the Company's initial product line, a solar heating system for
swimming pools - a low temperature solar application. Since that time, the
Company has focused on increasing its share of the pool heating market by
extending its network of independent distributors, decreasing its manufacturing
costs, and improving its product line.
FAFCO, Inc. was incorporated under the laws of the State of California in 1972.
Its principal executive offices are located at 435 Otterson Drive, Chico,
California. Its telephone number at that address is (530) 332-2100.
SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
factors set forth on page 16 of the Annual Report under the heading "Factors
Affecting Future Results" which is incorporated herein by reference and
elsewhere in this Form 10-K.
MARKETS
Swimming Pool Heating
Low temperature solar applications developed because of the cost effectiveness
of solar systems in heating a large volume of water to produce a small
temperature change. The market for swimming pool heating developed for several
reasons. First, pool owners normally use their pools when solar energy is
abundant (during daylight hours and the summer swimming season). Second, pools
already have two elements needed for low temperature water heating: storage (the
pool water) and circulation (the existing pool pump and associated plumbing).
Third, pool owners are an easily identifiable market.
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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
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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: increased peak demand for power during periods of limited
available capacity (i.e., during business hours). IceStor technology shifts
power consumption to off-peak periods when there is available capacity and lower
demand.
MARKETING AND SALES
Solar Systems
FAFCO markets its solar systems in the United States through independent
distributors who sell directly to end users. Distributors generally have sales,
installation, and service personnel who are supported by extensive FAFCO
marketing and technical materials as well as in-depth factory and field training
programs.
The majority of sales personnel employed by the typical distributor are assigned
to retrofit sales, which are sales to existing pool owners. Retrofit sales are
generated through direct mail, customer referrals, canvassing, and, to a lesser
extent, selected media advertising. The balance of the typical distributor's
sales personnel are generally assigned to contractor accounts and seek referrals
for new construction sales.
FAFCO usually provides direct mail literature and other advertising materials to
distributors and mails or places these materials with local advertisers on the
distributors' behalf and partially at the distributors' expense. In certain
instances, distributors will also engage in direct mailing and advertising. In
addition, the Company recently established a sales office in Florida to serve
the local market.
In the past, the Company has canceled several distributor agreements for reasons
of inadequate performance by the distributor, primarily for failure to provide
adequate sales, installation and service support for the Company's products. In
such instances, the Company has generally been able to find qualified
replacements.
All work relating to the installation of FAFCO solar systems is covered by a
full one-year warranty provided by the distributor. The Company's solar
collectors used to be covered by a ten-year limited warranty, which was changed
to a ten-year full warranty beginning in 1991. Its
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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, sales, support, and
maintenance of IceStor products in those countries.
SALES BY GEOGRAPHIC AREA
The Company's net sales during 2000, 1999, and 1998 were geographically
distributed approximately as follows:
2000 1999 1998
---- ----- ----
California 22% 24% 19%
Florida 38% 33% 31%
Other U.S. 14% 17% 14%
Foreign Countries 26% 26% 36%
---- ---- ----
100% 100% 100%
---- ---- ----
Two of the Company's customers, Ebara Corporation and Florida Solar, accounted
for 19.3% and 10.4% of the Company's fiscal 2000 net sales. Ebara Corporation
accounted for 17.7% of the Company's fiscal 1999 net sales and 23.4% of the
Company's fiscal 1998 net sales. During 1998, 1999 and 2000 Ebara Corporation
was the licensee for the Company's IceStor(TM) products in Japan, and, as such,
purchased IceStor(TM) products and components for assembly into products for
resale to end users in Japan. During 2000, Florida Solar was a distributor of
the Company's pool products and, as such, purchased pool panels and components
for resale to end users in Florida. No other customer accounted for 10% or more
of the Company's net sales in fiscal 1999 or 2000. Any material cancellation,
reduction or rescheduling of orders from a major customer, particularly Ebara
Corporation, 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.
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BACKLOG
Sales to solar products distributors are made against individual purchase orders
rather than through volume purchase arrangements. The Company typically ships
its products within one to five days of receipt of an order; therefore, the
Company's backlog at any date is usually insignificant and is not a meaningful
indicator of future sales. FAFCO distributors tend to order frequently in small
quantities in order to minimize their inventory levels and match inventory
levels with current installation schedules.
Sales of IceStor(TM) products are made against individual purchase orders to
general contractors or Heating, Ventilating, and Air Conditioning (HVAC)
contractors for specific new construction projects or for retrofit in existing
buildings. The Company typically ships these products within six weeks or less
of receipt of an order; therefore, the Company's backlog with respect to IceStor
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.
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MANUFACTURING
FAFCO's manufacturing activities consist primarily of the production of
polyolefin heat exchangers used in solar heating applications and off-peak
cooling applications and associated accessories. A total system approach is
emphasized in order to ensure the effectiveness and reliability of the Company's
products after they have been installed, eliminating the need for distributors
to rely upon materials from other suppliers.
The Company's heat exchangers are produced from polyolefin resins using a
patented extrusion and thermoforming process. Substantially all equipment used
in these processes has been designed and built by the Company's research and
development engineers.
The resins employed by the Company are a petroleum by-product. The market price
of these resins has fluctuated over the years with an increase in 1990 and early
1991 due to tensions in the Middle East, followed by a stabilization after the
completion of Desert Storm. It is expected that the price of the resins will
continue to fluctuate as a result of domestic and international political and
economic conditions.
FAFCO has qualified multiple sources of supply for all of its resins, materials,
and subassemblies. However, certain materials and subassemblies are currently
obtained from single sources. The Company believes these items could be supplied
by the Company's other qualified sources if sufficient lead-time were provided.
The Company attempts to maintain additional inventory of such materials to
mitigate the risk of supply shortages; however, any prolonged inability to
obtain such items would have a material adverse effect on the Company's results
of operations. To date, the Company has not experienced any significant
manufacturing problems or delays due to shortages of materials.
Quality assurance is performed by FAFCO at its manufacturing facility. Test and
inspection procedures are a part of substantially all production and assembly
operations. In addition, the Company uses it own diagnostic equipment and
laboratory to continually test and inspect raw materials, work in process, and
finished goods.
COMPETITION
The Company's solar heating products currently compete directly with solar
heating products offered by other domestic and international manufacturers of
solar heating systems, and indirectly with conventional heating systems.
The Company believes that the principal competitive factors in the markets for
FAFCO solar products are (i) product performance and reliability; (ii) marketing
and technical support from the manufacturer for distribution channels; (iii)
selling, installation, and service capabilities of distribution channels; and
(iv) price. The Company believes that it competes favorably with respect to all
of these factors. However, certain of its competitors may have greater
financial, marketing, and technological resources than those of the Company.
A number of companies in the United States manufacture thermal energy storage
systems of various types similar to the Company's IceStor product. The industry
is in the early stages of development and additional competitors are expected to
enter the market over time.
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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, 2000, 1999, and 1998, the Company's research
and development expenses were $294,500, $327,600, and $194,100, respectively.
The Company currently uses consulting engineers, in addition to staff engineers,
who are responsible for existing product improvement, applications engineering,
and new product research and development. The Company is exploring other
potential revenue-producing uses for its polyolefin extrusions.
PATENTS, TRADEMARKS AND LICENSES
FAFCO currently holds four United States patents and has two patents pending
relating to certain aspects of its products and manufacturing technology. These
patents expire at various times between July 2003 and December 2017. However,
the Company believes that patent protection is secondary to such factors as
ongoing product development and refinement, the knowledge and experience of its
personnel, and their ability to design, manufacture, and successfully market the
Company's products.
From time to time, the Company has registered as trademarks certain product
names and marks in order to preserve its right to those product names and marks.
The Company has granted licenses to assemble and sell IceStor systems in Taiwan,
Korea, Japan, and the Peoples Republic of China to local manufacturers. See
"Marketing and Sales" above.
EMPLOYEES
At December 31, 2000, the Company had a total of 47 regular employees and 16
"temp-to-hire" employees for a total of 63 full-time employees, including seven
in marketing, two in research and development, 45 in manufacturing, and nine in
general management and administration. The Company also uses temporary employees
from agencies to fill seasonal needs. The Company has never had a work stoppage.
To the Company's knowledge, no employees are represented by a labor
organization.
SEASONALITY
Information regarding the seasonality of the Company's business is set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality" on page 16 of the Annual Report, which information is
incorporated herein by reference.
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SEGMENT INFORMATION
The Company believes it has operations in only a single market segment, the
polymer heat exchanger segment.
ENVIRONMENTAL REGULATIONS
The Company is subject to a number of environmental regulations concerning
potential air and water pollution. However, such regulations have not in the
past had, and are not expected to have, any material adverse effect on the
Company's business. However, there can be no assurance that compliance with
existing or future regulations will not require the expenditure of funds or the
modification of the Company's manufacturing process, which could have a material
adverse effect on the Company's business or financial condition.
ITEM 2. Properties
The Company's principal executive offices and manufacturing facilities for its
products are located in a single 57,500 square foot facility that the Company
owns in Chico, California.
The Company believes that its current facilities are adequate to meet its
requirements for space in the near future. Manufacturing space is being fully
utilized at the present time. However, additional demand can be accommodated by
adding additional employee shifts.
ITEM 3. Legal Proceedings
There are presently no material pending legal proceedings to which the Company
is a party or to which any of its property is subject, except for ordinary
routine legal proceedings incidental to the Company's business.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of security holders during the
fourth quarter of its fiscal year ended December 31, 2000.
The executive officers of the Company are set forth below under Item 10. All
officers serve at the pleasure of the Board of Directors.
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PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information regarding the market for and market prices of the Company's Common
Stock, the number of shareholders of record, and information regarding dividends
is set forth under the heading "Common Stock Data" on page 15 of the Annual
Report, which information is incorporated herein by reference.
ITEM 6. Selected Financial Data
Selected financial data for the Company is set forth in the table entitled
"Five-Year Summary of Operations" on page 15 and in the last sentence of the
text under the table entitled "Common Stock Data" on page 15 of the Annual
Report, which information is incorporated herein by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations is set forth under the heading "Management's
Discussion and Analysis," on pages 16 and 17 of the Annual Report, which
information is incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
The following discussion about the Company's market risk exposure involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates, foreign currency exchange rates and
equity security price risk. The Company does not use derivative financial
instruments for any purpose, including hedging interest and foreign exchange
risks.
The Company is exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. The Company attempts to minimize its
currency fluctuation risk by pricing its overseas product sales and license fees
in United States dollars. A 10% change in the foreign currency exchange rates
would not have a material impact on the Company's results of operations.
The Company maintains short-term investments consisting of variable interest
accounts. However, due to the short-term nature of the Company's debt
investments, the impact of interest rate changes would not have a material
impact on the value of such investments.
The Company's interest rate exposure on rate debt obligations is currently
relatively insignificant. As a result, the Company does not actively manage the
risk associated with these obligations. Interest rate changes would not have a
material impact on the Company's results of operations.
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The Company currently holds no marketable equity securities of other issuers
that are subject to market price volatility.
ITEM 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company are set forth on pages 3
through 13 of the Annual Report, which information is incorporated herein by
reference. The supplementary financial information requirements of Regulation
S-K Item 302 do not apply to the Company, because the Company does not meet the
tests set forth therein.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Freeman A. Ford, age 60, 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 59, serves as Executive Vice President and Secretary. Mr. Watt
joined the Company as its Vice President-Finance and Chief Financial Officer in
July 1984, and has served as Secretary since March 1985.
David Harris, age 45, serves as Vice President, Sales. Mr. Harris joined the
Company in August 1981 as a sales representative and has held the positions of
Pool Builder Manager, National Sales Manager-Pool Products, Pacific Northwestern
Region Sales Manager, National Sales Manager-Solar Division, National Sales
Manager, Vice President-Sales and Marketing (from June 1988 until April 1993)
and President-Pool Products Division (from May 1993 until May 1995).
Nancy I. Garvin, age 55, serves as Vice President, Finance. Ms. Garvin joined
the Company in May 1974 as an accounting clerk and has since held the positions
of Accounting Manager and Controller with the Company.
Mr. William A. Berry, age 62, is Senior Vice President and Chief Financial
Officer of the Electric Power Research Institute, an energy industry research
consortium. Mr. Berry has served as a Director of the Board since 1974 and is
also a member of the Audit Committee.
Mr. Robert W. Selig, Jr., age 61, is President of Davis Instruments Corporation,
a manufacturer and distributor of marine and weather equipment. Mr. Selig has
served as a Director of the Board since 1974 and is also a member of the Audit
Committee.
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Mr. William F. Chisholm, age 32, is a Management Consultant at Bain & Company,
an international strategy consulting firm. Mr. Chisholm has served as a Director
of the Board since 1999.
Mr. David F. Ford, age 33, is President of Danger! Books, a book publisher and
distributor. Mr. Ford has served as a Director of the Board since 1999.
David Ford and William Chisholm are the son and son-in-law, respectively, of Mr.
Freeman A. Ford.
Based solely on its review of the copies of Forms 3, 4 and 5 received by the
Company, or written representations from certain reporting persons that no Forms
5 were required for such persons, the Company believes that, during the fiscal
year ended December 31, 2000, all filing requirements under Section 16(a) of the
Securities Exchange Act applicable to its officers, directors and 10%
shareholders were complied with.
ITEM 11. Executive Compensation
The following table sets forth for the three years ended December 31, 2000
certain information as to the compensation paid by the Company to the Chief
Executive Officer and the other executive officers of the Company who received
salary and bonus compensation of $100,000 or more (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
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LONG-TERM
COMPENSATION
OTHER AWARDS
ANNUAL SECURITIES ALL OTHER
NAME AND SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(1) OPTIONS(#) ($)(2)
------------------ ------ ------ ----- ------------ ------------ ------------
Freeman A. Ford 2000 $156,000 $ 0 -- 0 $1,662
Chairman of the Board, 1999 155,793 4,569 -- 25,000 1,662
Chief Executive Officer 1998 147,525 52,569 -- 0 1,662
Alex N. Watt 2000 137,035 0 -- 0 2,218
Executive Vice 1999 131,779 3,865 -- 25,000 2,218
President 1998 122,978 51,771 -- 0 2,218
David K. Harris 2000 143,633 0 -- 0 542
Vice President Sales and 1999 131,779 3,865 -- 25,000 494
Marketing 1998 131,360 43,771 -- 0 414
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(1) Excludes certain perqui sites and other benefits that did not exceed the
lesser of $50,000 or 10% of any officer's total salary and bonus.
(2) Consists of premiums paid by the Company for term life insurance
The Company did not make any grant of stock options to the Named Executive
Officers during the Last Fiscal Year.
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The following table sets forth information regarding the value of all
unexercised stock options and warrants held by the Named Executive Officers as
of the end of the Last Fiscal Year.
AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR-END AND FISCAL YEAR-END
OPTION AND WARRANTY VALUES
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS/ IN-THE-MONEY
WARRANTS AT OPTIONS/WARRANTS
FISCAL YEAR-END AT FISCAL YEAR-END
(#) ($)(1)
--------------- -------------------
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- -------------- --------------- -------------
Freeman A. Ford 0 N/A 314,250/4,000 N/A
Alex N. Watt 0 N/A 84,764/4,000 N/A
David K. Harris 0 N/A 72,085/4,000 N/A
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(1) Based on the last reported sale price for the Company's Common Stock for the
last trading day prior to 2000 fiscal year-end of $0.10, all outstanding
options and warrants were underwater.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of Common Stock
of the Company as of the Record Date by (1) each person known by the Company to
beneficially own more than 5% of the Company's Common Stock, (2) each director
and nominee for director, (3) the named executive officers of the Company, and
(4) all current directors and executive officers as a group:
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
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NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES(1) TOTAL(2)
------------ ----------
Freeman A. Ford.................................... 2,076,096(3) 52.7%
c/o FAFCO, Inc.
435 Otterson Drive
Chico, California 95928
Alex N. Watt....................................... 108,950(4) 2.8%
David K. Harris.................................... 90,334(5) 2.3%
Robert W. Selig, Jr................................ 48,528(6) 1.3%
William A. Berry................................... 22,500(7) *
William F. Chisholm................................ 22,750(8) *
David F. Ford...................................... 36,812(9) *
All current directors and executive officers as a
group (8 persons)............................... 2,446,937(10) 58.7%
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* Less than 1%.
(1) Except as otherwise indicated in the footnotes to this table or as
otherwise provided by community property laws, the beneficial owner has
sole voting and investment power with respect to all shares.
(2) Based on shares of Common Stock outstanding as of the Record Date.
(3) Includes (i) 298,000 shares held of record by trusts for the benefit of
Freeman Ford's children, for which he and his spouse serve as trustees
and as to which shares he disclaims beneficial ownership, (ii) 449,344
shares jointly owned by Freeman Ford and his spouse, and (iii) 82,250
shares issuable upon exercise of options held by Freeman Ford
exercisable within 60 days of the Record Date.
(4) Includes (i) 88,764 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date held by Mr. Watt and (ii)
1,000 shares held by Mr. Watt and Sandra S. Watt as joint tenants.
(5) Includes 76,085 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date held by Mr. Harris.
(6) Includes (i) 15,000 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date held by Mr. Selig, and
(ii) 5,700 shares held by trusts for the benefit of Mr. Selig's
children, as to which he disclaims beneficial ownership.
(7) Includes 15,000 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date held by Mr. Berry.
(8) Includes (i) 4,000 shares issuable upon exercise of outstanding options
exercisable within 60 days of the Record Date by Mr. Chisholm and (ii)
18,750 shares jointly owned by Mr. Chisholm and his wife.
(9) Includes 4,000 shares issuable upon exercise of outstanding options held
by David Ford exercisable within 60 days of the Record Date.
(10) Includes (i) 275,959 shares issuable upon exercise of outstanding
options exercisable within 60 days of the Record Date held by four
executive officers (one of whom is also a director), and (ii) 38,000
shares issuable upon exercise of outstanding options exercisable within
60 days of the Record Date held by four outside directors.
ITEM 13. Certain relationships and related transactions.
By virtue of his position as Chairman of the Board, President and Chief
Executive Office of the Company and his beneficial ownership of approximately
52.7% of the Company's Common Stock as of the Record Date, Freeman A. Ford may
be deemed to be a "parent" and/or "control person" of the Company within the
meaning of the rules and regulations promulgated under the Securities Act of
1933, as amended. Freeman A. Ford can elect a majority of the Board of Directors
and controls any shareholder vote that does not require a supermajority with
respect to which his shares are eligible to be voted. In addition, Freeman A.
Ford, his son (David F. Ford) and his son-in-law (William Chisholm) comprise
three out of five directors of the Company.
During 2000, Freeman A. Ford, David F. Ford (Freeman A. Ford's son) and
Kimberley Ford Chisholm (Freeman A. Ford's daughter and William Chisholm's
spouse) exercised options to purchase, at a purchase price of $0.125 per share,
240,000, 18,750 and 18,750 shares of FAFCO Common Stock, respectively.
15
16
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, 2000 and
1999, the Consolidated Statement of Operations, of Shareholders' Equity and
Cash Flows for each of the three years in the period ended December 31,
2000, 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, 2000, 1999, and 1998
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
20).
Schedule II - Valuation and Qualifying Accounts and Reserves (see page 21).
Schedules not included in these financial statement schedules have been
omitted because they are not applicable or the required information is shown
in the financial statements or notes thereto.
3. Index to Exhibits
The following exhibits are filed as part of or incorporated by reference, to
the extent indicated herein, in this Annual Report on Form 10-K.
16
17
EXHIBIT NO. DESCRIPTION (FOOTNOTES APPEAR AT THE END OF THE EXHIBIT LIST)
3.1(1) Articles of Incorporation, as amended.
3.2(3) Bylaws, as amended.
3.2(a) Certificate of Amendment of Bylaws.
4.1(1) Stock Purchase Agreement dated April 14, 1977, between Registrant and certain investors.
4.2(10) Common Stock Warrant issued January 19, 1994 to B. Severns.
4.3 Reference Exhibits 3.1 and 3.2.
10.1 Reference Exhibit 4.1.
10.2(7)* 1981 Incentive Stock Option Plan.
10.3(7)* Form of 1981 Incentive Stock Option Agreement.
10.4(1) Standard Form of Distributor Agreement.
10.5(6) Licensing Agreement between the Registrant, as Licensor, and Enercon Engineering, as Licensee, dated May 20, 1988.
10.6(6)* Form of Director's Warrant issued February 1988 to directors Berry and Selig.
10.7(11)* 1991 Stock Option Plan, as amended.
10.7(a)(8)* Form of Stock Option Agreement used under the 1991 Stock Option Plan.
10.8(8)* 1991 Directors' Stock Option Plan.
10.8(a)(8)* Form of Nonstatutory Stock Option Agreement used under 1991 Director's Stock Option Plan.
10.9(8)* Employee Stock Purchase Plan.
10.9(a)(8)* Form of Subscription Agreement used under Employee Stock Purchase Plan.
10.10(9) Licensing Agreement and Addendum between the Registrant, as Licensor, and Jang-Han Systems
Engineering, as Licensee, dated January 1, 1993.
10.11(10) Export - Import and Technical License Agreement between the Registrant, as Licensor, and Ebara Corporation,
as Licensee, dated October 22, 1993.
10.12 Construction Trust Deed between Registrant as Trustor and Butte Community Bank as Lender,
dated April 13, 2000.
10.12(a) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender dated
April 13, 2000.
10.12(b) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender
dated October 16, 2000.
10.12(c) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender
dated December 15, 2000.
10.12(d) Business Loan Agreement between Registrant as Borrower and Butte Community Bank as Lender,
dated May 15, 2000.
10.12(e) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender
dated May 9, 2001.
10.12(f) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender, dated May
15, 2000.
10.12(g) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender dated
January 26, 2001.
10.13(11) Agency/Distributorship Agreement between Registrant as Manufacturer and Jabria Establishment,
as Agent/Distributorship, dated December 10, 1994.
11.1 Computation of Earnings Per Share (see Note 11 of Notes to Consolidated Financial Statements
on Registrant's 2000 Annual Report).
13.1 Registrant's 2000 Annual Report to Shareholders.
18.1(12) Letter re change in Accounting Principle from Burr, Pilger & Mayer dated November 5, 1997.
21.1(13) Subsidiaries of Registrant.
23.1 Consent of Independent Accountants
24.1 Power of Attorney (see page 21).
17
18
* Denotes a management contract or compensatory plan or arrangement.
(1) Incorporated by reference to exhibit filed with Registrant's
Registration Statement on Form S-1 (File No. 2-72297) filed May 14,
1981.
(2) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
(3) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1983.
(4) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1986.
(5) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987.
(6) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988.
(7) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990.
(8) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991.
(9) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
(10) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(11) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(12) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10K for the fiscal year ended December 31, 1998.
(13) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10K for the fiscal year ended December 31, 1999.
- ---------------------------------
(b) Reports on Form 8-K: No Reports on Form 8-K were filed by the Company
during the fourth quarter of 2000.
(c) Exhibits: See subsection (a) (3) above.
(d) Financial Statement Schedules: See subsection (a) (2) above.
18
19
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 16, 2001 appearing on page 14 of the 2000 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 16, 2001
19
20
FAFCO, INC.
SCHEDULE
II
Valuation and Qualifying Accounts and Reserves
Balance at Additions Charged
Beginning of to Costs and Balance at End of
Description Period Expenses Deductions Period
- ----------------------------------------------------------------------------------------------------------------
2000:
Allowance for doubtful accounts
current accounts receivable $ 317,800 $ 89,000 $6,800(1) $ 400,000
short-term receivable 27,600 27,100(1)
long-term receivable 31,700 37,100(1)
Warranty reserve 282,700 156,700 151,700(2) 287,700
Deferred tax asset valuation
allowance 29,600 18,100 11,500
- ----------------------------------------------------------------------------------------------------------------
1999:
Allowance for doubtful
accounts
current accounts receivable $ 536,300 $ 91,200 $309,700(1) $ 317,800
short-term receivable 27,600 27,600
long-term receivable 29,300 2,400 31,700
Warranty reserve 232,200 177,000 126,500(2) 282,700
Deferred tax asset valuation
allowance 173,200 143,600 29,600
- ----------------------------------------------------------------------------------------------------------------
1998:
Allowance for doubtful accounts
current accounts receivable $ 540,100 $ 53,900 $57,700(1) $ 536,300
short-term receivable 126,400 126,400(1)
long-term receivable 29,300 29,300
Warranty reserve 211,000 190,600 169,400(2) 232,200
Deferred tax asset valuation
allowance 708,000 534,800 173,200
(1) Write-off of uncollectible accounts.
(2) Cost of warranty claims processed.
20
21
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: May 25, 2001 FAFCO, Inc.
/s/ Freeman A. Ford
-------------------
Freeman A. Ford,
Chairman of Board, President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Freeman A.
Ford and Nancy I. Garvin, or either of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign any
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
- ------------------------------------------------------------------------------------------------------------
/s/ Freeman A. Ford Chairman of the Board, President and May 25, 2001
- ------------------------ Chief Executive Officer (Principal
Freeman A. Ford Executive Officer) and Director
/s/ Nancy I. Garvin Vice President, Finance and May 25, 2001
- ------------------------ Chief Financial Officer (Principal
Nancy I. Garvin Financial and Accounting Officer)
/s/ William A. Berry Director May 25, 2001
- ------------------------
William A. Berry
/s/Robert W. Selig, Jr. Director May 25, 2001
- ------------------------
Robert W. Selig, Jr.
/s/ William Chisholm Director May 25, 2001
- ------------------------
William Chisholm
/s/David Ford Director May 25, 2001
- ------------------------
David Ford
21
22
Exhibit Index
EXHIBIT NO. DESCRIPTION
3.1(1) Articles of Incorporation, as amended.
3.2(3) Bylaws, as amended.
3.2(a) Certificate of Amendment of Bylaws.
4.1(1) Stock Purchase Agreement dated April 14, 1977, between Registrant and certain investors.
4.2(10) Common Stock Warrant issued January 19, 1994 to B. Severns.
4.3 Reference Exhibits 3.1 and 3.2.
10.1 Reference Exhibit 4.1.
10.2(7)* 1981 Incentive Stock Option Plan.
10.3(7)* Form of 1981 Incentive Stock Option Agreement.
10.4(1) Standard Form of Distributor Agreement.
10.5(6) Licensing Agreement between the Registrant, as Licensor, and
Enercon Engineering, as Licensee, dated May 20, 1988.
10.6(6)* Form of Director's Warrant issued February 1988 to directors Berry and Selig.
10.7(11)* 1991 Stock Option Plan, as amended.
10.7(a)(8)* Form of Stock Option Agreement used under the 1991 Stock Option Plan.
10.8(8)* 1991 Directors' Stock Option Plan.
10.8(a)(8)* Form of Nonstatutory Stock Option Agreement used under 1991 Director's Stock Option Plan.
10.9(8)* Employee Stock Purchase Plan.
10.9(a)(8)* Form of Subscription Agreement used under Employee Stock Purchase Plan.
10.10(9) Licensing Agreement and Addendum between the Registrant, as Licensor, and Jang-Han Systems
Engineering, as Licensee, dated January 1, 1993.
10.11(10) Export - Import and Technical License Agreement between the
Registrant, as Licensor, and Ebara Corporation, as Licensee,
dated October 22, 1993.
10.12 Construction Trust Deed between Registrant as Trustor and Butte Community Bank as Lender,
dated April 13, 2000.
10.12(a) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender dated
April 13, 2000.
10.12(b) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender
dated October 16, 2000.
10.12(c) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender
dated December 15, 2000.
10.12(d) Business Loan Agreement between Registrant as Borrower and Butte Community Bank as Lender,
dated May 15, 2000.
10.12(e) Change in Terms Agreement between Registrant as Borrower and Butte Community Bank as Lender
dated May 9, 2001.
10.12(f) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender, dated May
15, 2000.
10.12(g) Promissory Note between Registrant as Borrower and Butte Community Bank as Lender dated
January 26, 2001.
10.13(11) Agency/Distributorship Agreement between Registrant as
Manufacturer and Jabria Establishment, as Agent/Distributorship,
dated December 10, 1994.
11.1 Computation of Earnings Per Share (see Note 11 of Notes to Consolidated Financial Statements
on Registrant's 2000 Annual Report).
13.1 Registrant's 2000 Annual Report to Shareholders.
18.1(12) Letter re change in Accounting Principle from Burr, Pilger & Mayer dated November 5, 1997.
21.1(13) Subsidiaries of Registrant.
23.1 Consent of Independent Accountants (see page 22)
24.1 Power of Attorney (see page 21).
23
* Denotes a management contract or compensatory plan or arrangement.
(1) Incorporated by reference to exhibit filed with Registrant's
Registration Statement on Form S-1 (File No. 2-72297) filed May 14,
1981.
(2) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989.
(3) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1983.
(4) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1986.
(5) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987.
(6) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1988.
(7) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990.
(8) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991.
(9) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
(10) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1993.
(11) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994
(12) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10K for the fiscal year ended December 31, 1998.
(13) Incorporated by reference to exhibit filed with Registrant's Annual
Report on Form 10K for the fiscal year ended December 31, 1999.