EXHIBIT 13.1
--------------------------------------------------------------------------------
THE COMPANY
--------------------------------------------------------------------------------
[GRAPHIC OF THE COMPANY FACILITY]
FAFCO was formed in 1969, incorporated in 1972, and has produced over 1.3
million polymer heat exchangers, primarily for the solar heating and thermal
energy storage markets. FAFCO is the leading U.S. manufacturer of solar heating
panels, with nearly twice the installed base of solar systems of its nearest
competitor. In addition, FAFCO is a leading producer of polymer heat exchangers
for thermal energy storage applications. FAFCO's IceStor(TM) product line of
thermal energy storage equipment significantly increases the effective capacity
of electric utilities without the burden of adding new capacity. FAFCO has
nearly thirty issued or pending patents.
PAGE 1
PRESIDENT'S LETTER
[GRAPHIC -- PRESIDENT'S PICTURE]
FAFCO was founded in 1969 and incorporated in 1972 to manufacture polymer heat
exchangers currently used in the solar and thermal energy storage (TES) markets
worldwide. FAFCO is also one of the oldest and largest producers of solar pool
heating panels in the United States.
Net sales increased by 5.4% to $12,100,300 in 2001, primarily due to increased
solar product sales. Net income was $91,500 compared with a net loss of $60,200
in 2000.
On August 31, 2000, FAFCO moved from leased facilities in Redwood City, to a new
57,500 square foot plant on 6 acres that is owned by the Company in Chico,
California. Our new Chico location provides access to undergraduate and graduate
college students, eases the financial burden of new home ownership for our
employees, and is supportive of commercial enterprise. The monthly debt service
on FAFCO's ultramodern plant is significantly less than the monthly lease
payments at our former location.
2001 was a year of building a new team in Chico and completing our plant and its
associated equipment. Since our arrival in Chico we have hired approximately 85
new employees, installed automatic resin/additive mixing equipment, brought on
line our patented continuous molding process and completed development of our
dedicated Thermal Energy Storage system (TES). In addition, we have prototyped
an all-polymer solar hot water heating system and have patented and put into
production an automated process for making TES heat exchangers.
Solar product sales were up significantly in 2001. This increase came primarily
from higher in-ground pool solar sales in California and increased sales of our
above-ground pool solar heaters. Sales in California and the above-ground pool
market nationwide were driven in a large part by the California energy crisis
and an increase in natural gas prices.
Our U.S. thermal energy storage business was down in 2001. However, we believe
that the industry as a whole made a turn-around in 2001 and that there are a
number of new emerging market areas that will afford an opportunity for
significant growth in 2002.
Our foreign TES business declined somewhat due to the Japanese economic
recession. We expect a modest recovery in 2002.
In summary, FAFCO has invested over five million dollars in new plant and new
processing equipment which will serve the company for decades. Our more than ten
million dollars of physical assets are complemented by energetic, highly
productive and dedicated employees. Our new physical assets combined with our
new team make FAFCO stronger than it has been for many years.
Sincerely,
Xxxxxxx X. Xxxx
President
PAGE 2
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001 2000
----------- ----------
Assets
Current assets:
Cash and cash equivalents $ 121,200 $ 10,100
Accounts receivable, less allowance for doubtful
accounts of $479,600 in 2001 and $400,000 in 2000 1,620,500 1,969,400
Inventories 1,171,800 1,225,900
Prepaid expenses and other current assets 174,200 211,500
Other accounts receivable, net of allowance 35,500 21,600
Deferred tax asset, net of allowance 249,600 215,700
----------- ----------
Total current assets 3,372,800 3,654,200
----------- ----------
Property, plant and equipment, at cost 8,190,400 7,104,000
Less accumulated depreciation and amortization (2,079,500) (1,760,000)
----------- ----------
6,110,900 5,344,000
----------- ----------
Other assets (net) 7,200 9,300
Deferred tax asset, net of allowance 565,200 648,600
----------- ----------
Total assets $10,056,100 $9,656,100
----------- ----------
Liabilities and shareholders' equity
Current liabilities:
Bank line of credit $ 768,700 $ 450,500
Notes Payable to bank -- current portion 282,600 143,000
Accounts payable and other accrued expenses 1,357,700 1,744,700
Accrued compensation and benefits 355,200 267,800
Accrued warranty expense 252,000 287,700
Other current liabilities 3,100 5,100
----------- ----------
Total current liabilities 3,019,300 2,898,800
----------- ----------
Mortgage 3,340,000 3,366,500
Notes payable to bank -- less current portion 432,200 224,000
Other non-current liabilities 35,400 34,200
----------- ----------
Total liabilities $6,826,900 $6,523,500
----------- ----------
Commitments and contingent liabilities
Shareholders' equity:
Preferred Stock-authorized 1,000,000 shares of $1.00
par value, none of which has been issued
Common Stock-authorized 10,000,000 shares of $0.125
par value; 3,855,591 and 3,834,791 issued and
outstanding at December 31, 2001 and 2000 respectively $ 481,900 $ 479,300
Capital in excess of par value 5,108,500 5,106,000
Notes receivable secured by Common Stock (75,100) (75,100)
Accumulated deficit (2,286,100) (2,377,600)
----------- ----------
Total shareholders' equity $3,229,200 $3,132,600
Commitments and contingent liabilities
----------- ----------
Total liabilities and shareholders' equity $10,056,100 $9,656,100
----------- ----------
The accompanying notes are an integral part of this statement
PAGE 3
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 2000 1999
------------ ------------ ------------
Net Sales $ 12,100,300 $ 11,481,500 $ 10,621,700
Other income (net) 32,800 (7,400) 17,100
------------ ------------ ------------
Total revenues 12,133,100 11,474,100 10,638,800
------------ ------------ ------------
Cost of goods sold 7,146,300 7,380,500 6,436,400
Marketing and selling expense 2,371,900 2,162,200 1,854,300
General and administrative expense 1,782,000 1,786,500 1,752,600
Research and development expense 239,400 294,500 327,600
Net interest expense 438,600 93,200 71,700
Relocation costs (net) (202,100)
------------ ------------ ------------
Total costs and expense 11,978,200 11,514,800 10,442,600
------------ ------------ ------------
Income (loss) before income taxes 154,900 (40,700) 196,200
Provision for (benefit from) income taxes 63,400 19,500 (44,800)
------------ ------------ ------------
Net income (loss) $ 91,500 $ (60,200) $ 241,000
------------ ------------ ------------
Basic net income (loss) per share $ 0.02 $ (0.02) $ 0.07
------------ ------------ ------------
Diluted net income (loss) per share $ 0.02 $ (0.02) $ 0.06
------------ ------------ ------------
The accompanying notes are an integral part of this statement
PAGE 4
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
NOTES
RECEIVABLE
NUMBER CAPITAL IN SECURED BY RETAINED TOTAL
OF COMMON EXCESS OF COMMON EARNINGS SHAREHOLDERS
SHARES STOCK PAR VALUE STOCK DEFICIT EQUITY
--------- -------- ---------- ---------- ----------- ------------
BALANCE AT DECEMBER 31, 1998 3,303,311 $412,800 $5,107,100 $(75,100) $(2,558,400) $2,886,400
Net income for the year 241,000 241,000
--------- -------- ---------- -------- ----------- ----------
BALANCE AT DECEMBER 31, 1999 3,303,311 $412,800 $5,107,100 $(75,100) $(2,317,400) $3,127,400
Net loss for the year (60,200) (60,200)
Issuance of shares upon
exercise of stock warrants 540,000 67,500 67,500
Purchase of stock (8,520) (1,000) (1,100) (2,100)
--------- -------- ---------- -------- ----------- ----------
BALANCE AT DECEMBER 31, 2000 3,834,791 $479,300 $5,106,000 $(75,100) $(2,377,600) $3,132,600
Net income for the year 91,500 91,500
Issuance of shares upon
exercise of stock warrants 20,800 2,600 2,500 5,100
--------- -------- ---------- -------- ----------- ----------
BALANCE AT DECEMBER 31, 2001 3,855,591 $481,900 $5,108,500 $(75,100) $(2,286,100) $3,229,200
PAGE 5
CONSOLIDATED STATEMENT OF CASH FLOW
YEAR ENDED DECEMBER 31, 2001 2000 1999
----------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 91,500 $ (60,200) $ 241,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 485,500 289,000 184,400
Write offs and allowance for doubtful accounts 79,600 89,100 165,500
(Gain) loss on disposition of fixed assets 4,600 (2,400)
Change in assets and liabilities:
Accounts receivable 255,400 (300,400) 13,100
Inventories 54,100 (184,300) 223,800
Prepaid expenses and other assets 37,300 42,700 (70,700)
Deferred tax assets 49,500 28,500 (55,300)
Other assets (net) 2,100 22,000 40,100
Accounts payable, accrued expenses and other
current liabilities (303,800) 924,000 (152,400)
Other non-current liabilities 1,200 17,600 (15,300)
----------- ----------- -----------
Net cash provided by operations $ 752,400 $ 872,600 $ 571,800
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,252,400) (4,715,200) (523,400)
Proceeds from disposition of fixed assets 2,400
----------- ----------- -----------
Net cash used in investing activities $(1,252,400) $(4,715,200) $ (521,000)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants 67,500
Proceeds from exercise of stock options 5,100
Repurchase of common stock (2,100)
Repayment of subordinated debt (925,000)
Proceeds from bank line of credit 2,747,700
Repayment of bank line of credit (2,429,500) (11,000)
Proceeds from notes payable to bank 499,900 3,733,500 461,500
Repayment of notes payable to bank (190,000)
Repayment of mortgage (22,100)
----------- ----------- -----------
Net cash provided by (used in) financing activities 611,100 3,787,900 (463,500)
----------- ----------- -----------
Net increase (decrease) in cash & cash equivalents 111,100 (54,700) (412,700)
Cash and cash equivalents, beginning of period 10,100 64,800 477,500
----------- ----------- -----------
Cash and cash equivalents, end of period $ 121,200 $ 10,100 $ 64.800
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 434,900 $ 76,275 $ 109,400
Income taxes $ 69,800
----------- ----------- -----------
The accompanying notes are an integral part of this statement
PAGE 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company designs, develops, manufactures, and markets polymer heat exchangers
for use in solar heating systems for swimming pools and thermal energy storage
systems for commercial and industrial cooling. The heat exchangers for solar
heating systems are sold to wholesalers and distributors primarily in California
and Florida and in other locations throughout the United States and overseas.
The heat exchangers for thermal energy storage systems are marketed through
manufacturers' representatives throughout the United States and internationally.
A summary of significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. All significant
inter-company balances and transactions have been eliminated in consolidation.
The subsidiary currently has no ongoing business activities.
REVENUE RECOGNITION: Revenues on sales of products or services are recognized at
the time of shipment of goods or performance of services.
USE OF ESTIMATES: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
materially from those estimates.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
equivalents include highly liquid investments with maturity of three months or
less.
INVENTORIES: Inventories are stated at the lower of cost or market determined
using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated based on
historical cost adjusted for accumulated depreciation. Depreciation and
amortization of plant and equipment, excluding the building, vehicles and
leasehold improvements, are determined using accelerated methods. For the
building, vehicles and leasehold improvements, the straight-line method is used.
The estimated useful lives of the assets, with the exception of the building,
and leasehold improvements range between three and ten years. The estimated
useful life of the building and leasehold improvements is 39.5 years. Minor
replacements, improvements, maintenance, and repairs are expensed as incurred.
Major replacements and improvements are capitalized and depreciated over the
remaining useful life of the related asset. Gains and losses on sales and
retirement of plant and equipment are credited or charged to income.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF: Long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairments are recorded
when indications of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
value.
INCOME TAXES: Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial reporting and tax
basis of assets and liabilities.
EARNINGS PER COMMON SHARE: Basic earnings (loss) per common share are computed
using the weighted average number of shares outstanding. Diluted earnings (loss)
per common share are computed using the weighted average number of shares
outstanding adjusted for potentially dilutive incremental shares attributed to
outstanding options and warrants to purchase common stock and shares issuable
upon conversion of certain convertible securities.
WARRANTIES: In the normal course of business, the Company makes certain
warranties as to workmanship and materials. Product warranty periods range from
two to fifteen years for full coverage. The estimated future expense of these
warranties is accrued at the time of sale. The estimates inherent in accounting
for such warranties are reviewed and revisions to previous estimates are made as
required reflecting the most current information available.
ACCOUNTING FOR STOCK-BASED COMPENSATION: The Company has elected to account for
stock-based compensation under the intrinsic value method in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation. Under this method, no compensation
expense is recorded for stock options granted when the exercise price of the
option granted is equal to or exceeds the fair market value of the Company's
common stock. The Company makes the pro forma disclosures of stock-based
compensation required by SFAS No. 123.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Current Assets and Current Liabilities: The carrying value of cash equivalents,
accounts receivable, notes receivable, short-term borrowings, accounts payable,
and accrued expenses approximate fair value because of their short maturity.
Long-Term Debt: The fair value of the Company's long-term debt is estimated
based on the borrowing rates currently
PAGE 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
available to the Company for loans with similar terms. At December 31, 2001, the
carrying amount approximated estimated fair value of long-term debt.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 141, Accounting for Business
Combinations. This statement requires the purchase method of accounting be used
for all business combinations initiated after June 30, 2001, and establishes
specific criteria for the recognition of intangible assets separately from
goodwill.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and intangible assets with indefinite life
are not amortized. Instead of amortizing goodwill and intangible assets deemed
to have an indefinite life, the statement requires a test for impairment to be
performed annually, or immediately if conditions indicate that such an
impairment could exist. The amortization period of intangible assets with finite
lives will no longer be limited to forty years. This statement is effective for
fiscal years beginning after December 15, 2001, and permits early adoption for
fiscal years beginning after March 15, 2001.
In August 2001, the FASB issued SFAS no. 144, "Accounting for the Impairment or
Disposal of Long Lived Assets" which addresses financial accounting and
reporting for the impairment and disposal of long-lived assets with adoption
required no later than fiscal year 2003.
The Company does not believe that any of these recent accounting pronouncements
will have a material impact on their financial position or results of
operations.
2) INVENTORIES:
Inventories consist of the following:
DECEMBER 31, 2001 2000
---------- ----------
Raw materials $515,700 $606,500
Work in progress 230,200 269,900
Finished goods 425,900 349,500
---------- ----------
$1,171,800 $1,225,900
========== ==========
3) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
DECEMBER 31, 2001 2000
---------- ----------
Building $3,679,100 $3,441,400
Land 550,400 550,400
Machinery and Equipment 2,590,900 2,332,500
Office and computer Equipment 474,900 510,800
Leasehold Improvements 585,200
Vehicles 309,900 268,900
---------- ----------
$8,190,400 $7,104,000
========== ==========
Less accumulated depreciation
and amortization (2,079,500) (1,760,000)
---------- ----------
$6,110,900 $5,344,000
========== ==========
As of December 31, 2001, construction costs for the Company's new office and
manufacturing facility in Chico are complete at $3,679,100. Interest was
capitalized in connection with construction costs. The capitalized interest was
recorded as part of the asset to which it relates and is amortized over the
asset's useful life. No interest was capitalized in 2001. In 2000 $89,300 in
interest cost was capitalized.
As of December 31, 2001 and 2000, the Company had $226,800 and $448,700,
respectively, of construction in progress that is included in the above asset
balances by category. These assets are expected to be placed in service during
the year ending December 31, 2002.
As of December 31, 2001 and 2000, the Company had written off $166,100 and
$936,700, respectively, in fully depreciated assets. These assets were scrapped
or abandoned as a result of the Company's relocation to Chico, California.
4) SUBORDINATED NOTES AND WARRANTS
During January 2002, the Company issued $500,000 in principal amount of
subordinated notes, accompanied by warrants to purchase up to 200,000 shares of
the common stock of the company. The warrants have an exercise price of $0.125
per share. The three-year notes bear interest, payable quarterly, at an initial
annual rate of 10%, and 12% for all periods after the first anniversary of the
date of the notes. The notes are subordinated to bank borrowings and other
secured indebtedness for money borrowed. The Company may at its option call the
notes for redemption at any time with ten (10) days notice. Holders of the notes
are entitled to certain rights with respect to registration of the common stock
issuable upon exercise of the warrants.
PAGE 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5) BANK BORROWING
The Company has a bank line of credit secured by substantially all the assets of
the Company other than real estate. The line of credit allows the Company to
borrow the lesser of $1,000,000 or an amount determined by a formula applied to
net accounts receivable, inventories, and net plant and equipment. Amounts
borrowed bear interest at the bank's prime rate plus 1.5%. The line of credit
agreement contains certain covenants relating to working capital, current ratio,
and tangible net worth, prohibits the payment of cash dividends, and expires on
August 10, 2002. At December 31, 2001 and 2000, the Company had complied with or
obtained waivers of compliance with the loan covenants.
As of December 31, 2001 and 2000, the Company had utilized $768,700 and
$450,500, respectively, of this facility.
In addition to the line of credit, the Company has a 36-month term loan in the
amount of $445,000 bearing interest at prime plus 1.5%. At December 31, 2001,
the Company had an outstanding balance of $223,300 on this loan facility. The
Company also has a 60-month term loan available in the amount of $500,000
bearing interest at prime plus 1.5%. At December 31, 2001, the Company had
outstanding balance of $453,700 on this loan facility. The Company also has a
$3,400,000 mortgage loan with a maturity date of June 10, 2030. Principal and
interest at 9.05% are amortized over a 29 1/2 year term from January 10, 2001.
The pricing is fixed for five-year increments. The interest rate will be changed
on June 10th of those five-year periods to accrue at Prime plus .05%. The
balance on this mortgage at December 31, 2001 was $3,377,800.
As of December 31, 2001 the aggregate amount of principal maturities on bank
borrowings over each of the succeeding years is as follows:
YEAR ENDING
DECEMBER 31,
------------
2002 $1,051,300
2003 191,000
2004 135,500
2005 147,700
2006 89,100
Thereafter 3,208,900
---------- ----------
TOTAL $4,823,500
========== ==========
6) SHAREHOLDERS' EQUITY
The Board of Directors, without shareholder approval, may determine the rights,
preferences, privileges, and restrictions of the Company's unissued Preferred
Stock. Such shares may be issued in one or more series. In 1980, the Company
issued 202,300 shares of Common Stock at a price of $2.43 per share in exchange
for non-interest bearing promissory notes, which have a balance due of $75,100
at December 31, 2001 and 2000.
The notes are due and payable and the Company intends to pursue collection of
these notes. In the event that any of the notes are non-collectible, the Company
will demand surrender of the related shares issued and will cancel and write off
the related notes receivable balance.
The Company has a 1991 Incentive Stock Option Plan under which 500,000 shares of
Common Stock have been reserved for issuance to employees and consultants.
During 1999, the Company granted options to purchase 136,000 shares, exercisable
at $0.50 per share, the fair market value on the date of grant. During 2000 and
2001, no options were granted and options to purchase 800 and 20,000 shares were
exercised in 2000 and 2001 respectively. No new grants may be made under this
plan.
The Company has a 1991 Director's Stock Option Plan under which 50,000 shares of
Common Stock are reserved for issuance. During 1999, the Company granted options
to purchase 20,000 shares, exercisable at $0.50 per share, the fair market value
on the date of grant. No new grants may be made under this plan.
Options granted under these plans become exercisable at a rate of 20% per year
for five years from date of grant and expire six years or ten years from date of
grant.
The following is a summary of activity under the 1981 and 1991 Incentive Stock
Option Plans:
SHARES SUBJECT EXERCISE PRICE
TO OPTION PER SHARE
-------------- --------------
OUTSTANDING AT DECEMBER 31, 1998 369,450 $0.125-0.500
Granted 136,000 $0.500-0.550
Canceled (117,500) $0.500
OUTSTANDING AT DECEMBER 31, 1999 387,950 $0.125-0.550
Canceled (52,200) $0.125-0.550
Exercised (800) $0.125
OUTSTANDING AT DECEMBER 31, 2000 334,950 $0.125-0.550
Canceled (12,500) $0.125-0.550
Exercised (20,000) $0.25
OUTSTANDING AT DECEMBER 31, 2001 302,450 $0.125-0.550
======= ============
PAGE 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company applies the intrinsic value method of accounting for its stock
option plans. Accordingly, no compensation cost has been recognized for the plan
in 2001, 2000, or 1999. Had compensation cost been determined on the basis of
fair value pursuant to FASB Statement No. 123, net income and earnings per share
would have been reduced as follows:
2001 2000 1999
------- -------- --------
Net income (loss)
As reported $91,500 $(60,200) $241,000
Pro forma $91,500 $(60,200) $232,700
Basic earnings per share
As reported $ 0.02 $ (0.02) $ 0.07
Pro forma $ 0.02 $ (0.02) $ 0.07
Diluted earnings per share
As reported $ 0.02 $ (0.02) $ 0.06
Pro forma $ 0.02 $ (0.02) $ 0.06
The fair value of each option granted was estimated on the grant date using the
Black-Scholes model.
The following assumptions were made in estimating fair value:
ASSUMPTION 2001 2000 1999
---- ---- --------
Dividend yield 0% 0% 0%
Risk-free interest rate N/A N/A 6.5%
Expected life N/A N/A 10 years
Volatility N/A N/A 134.4%
The following is a summary of the status of the plans during 2001, 2000, and
1999.
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Options exercisable at December 31, 2001 299,150 $0.266
Weighted average fair value of options
granted during 2001 N/A
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Options exercisable at December 31, 2000 308,550 $0.291
Weighted average fair value of options
granted during 2000 N/A
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Options exercisable at December 31, 1999 321,250 $0.298
Weighted average fair value of options
granted during 1999 $ 0.2427
PAGE 10
'
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Following is a summary of the status of options outstanding at December 31,
2001:
OUTSTANDING EXERCISABLE
----------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Number Life Price Number Price
-------- ------- ----------- -------- ------- ---------
$0.125 191,950 1 $0.125 190,150 $0.125
$0.500 85,500 8 $0.500 84,000 $0.500
$0.550 25,000 8 $0.550 25,000 $0.500
------- -------
302,450 299,150
======= =======
7) INCOME TAXES
The provisions for income taxes consist of the following:
YEARS ENDED
DECEMBER 31, 2001 2000 1999
------- ------- --------
Taxes on income:
U.S. Federal
Current $ 4,000 $ 4,000 $ 4,000
Deferred 48,000 27,100 (56,200)
------- ------- --------
52,000 31,100 (52,200)
------- ------- --------
State
Current 8,000 3,200 6,000
Deferred 3,400 (14,800) 1,400
------- ------- --------
11,400 (11,600) 7,400
------- ------- --------
Net income tax
provision
(benefit) $63,400 $19,500 $(44,800)
======= ======= ========
A reconciliation of the statutory federal income tax rate with the effective tax
rate reported in the financial statements follows:
YEAR ENDED
DECEMBER 31, 2001 2000 1999
------ ------ ------
Statutory federal
Income tax rate 34.0% 34.0% 34.0%
Effect on tax rate
Resulting from
State and foreign
income taxes,
net of federal
tax benefit 7.4% (17.0%) (0.4%)
Tax effect of
change
in valuation
allowance (7.4%) (26.5%) (71.9%)
Expiration of
tax credits 6.1% 22.0% 8.2%
Other 0.8% 16.0% 7.3%
---- ----- -----
Effective tax rate 40.9% 28.5% (22.8%)
==== ===== =====
The Company records its deferred taxes on a tax jurisdiction basis and
classifies those net amounts as current or noncurrent based on the balance sheet
classifications.
Deferred tax assets are comprised of the following:
DECEMBER 31, 2001 2000 1999
-------- -------- --------
Allowance for
doubtful accounts $188,600 $157,400 $148,800
Accrued expenses 133,400 135,500 121,400
Loss carry forwards 503,800 549,300 595,700
Tax credits 11,500 29,600
Other (11,000) 22,100 26,900
-------- -------- --------
814,800 875,800 922,400
Deferred tax asset
valuation
allowance (11,500) (29,600)
-------- -------- --------
Total deferred
taxes, net $814,800 $864,300 $892,800
======== ======== ========
PAGE 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2001, the Company had unused federal net operating loss carry
forwards of approximately $1,470,000 and Florida loss carry forwards of
approximately $109,300. The net operating losses expire in varying amounts until
2010. The Company believes that the "total deferred taxes, net" in the amount of
$814,800 are more likely than not to be realized.
8) TRANSACTIONS WITH RELATED PARTIES
At December 31, 1998, $600,000 in principal amount of the Company's subordinated
notes was held by Xx. Xxxxxxx X. Xxxx, an officer, director, and major
shareholder of the Company, and his immediate family members. These notes were
paid off in September 1999.
During January 2002, Xx. Xxxx and his wife, Xxxxxx X. Xxxx, acquired $150,000 in
principal amount of the Company's subordinated notes (see Note 4).
9) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) retirement savings plan for all eligible employees who
have completed one year of service. Eligible employees have the option to
contribute up to 15% of their eligible salary. The Company contributes an amount
equal to 50% of the employee contribution, up to a maximum of $750 per employee
per year.
10) LEASE COMMITMENTS
Rental expense, relating primarily to a lease for the Company's former office
and manufacturing facility, amounted to $51,600 in 2001, $275,700 in 2000, and
$417,100 in 1999. At December 31, 2001, minimum annual lease commitments under
non-cancelable leases, primarily for the Company's facility in Tampa, Florida,
were as follows:
2002 69,700
2003 66,500
2004 53,000
2005 50,900
----- --------
Total $240,100
===== ========
The Company terminated its lease for its Redwood City office and manufacturing
facility as of August 31, 2000. Total credits realized as a result of lease
termination agreements amounted to $1,040,000.
11) NET INCOME PER SHARE
Basic earnings per share were calculated as follows:
YEARS ENDED DECEMBER 31, 2001 2000 1999
---------- ---------- ----------
Net income (loss) $ 91,500 $ (60,200) $ 241,000
Average common shares outstanding 3,851,845 3,711,566 3,303,311
---------- ---------- ----------
Earnings per share $0.02 $(0.02) $0.07
========== ========== ==========
Diluted earnings per share are calculated by dividing net income by the weighted
average number of shares issued and outstanding.
Diluted earnings per share were calculated as follows:
YEAR ENDED DECEMBER 31, 2001 2000 1999
---------- ---------- ----------
Adjusted net
income (loss) $ 91,500 $ (60,200) $ 241,000
Average
common shares
outstanding 3,851,845 3,711,566 3,303,311
Add: Exercise
of options reduced
by the number of
shares purchased
with proceeds 123,397 N/A 271,523
Add: Exercise of
warrants reduced
by the number
of shares
purchased
with proceeds 57,455 N/A 87,039
Add: Expense of
warrants attached
to debt reduced
by the number of
shares purchased
with proceeds N/A N/A 438,158
Adjusted weighted
average shares
outstanding 4,032,697 3,711,566 4,100,032
Earnings per
common share
assuming full
dilution 0.02 (0.02) 0.06
PAGE 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12) LITIGATION
The Company is involved in certain litigation matters. Management believes
resolution of these disputes will not have a material adverse effect on the
Company's financial condition and results of operation.
13) BUSINESS SEGMENT AND CONCENTRATION OF CREDIT RISK
BUSINESS SEGMENT: The Company operates in one business segment, the development,
production and marketing of polymer heat exchangers for the solar and thermal
energy storage markets worldwide.
PRODUCT LINE 2001 2000 1999
----------- ----------- -----------
Net Sales
Pool Products $9,071,200 $7,580,600 $ 6,370,000
Thermal Energy 3,029,100 3,900,900 4,251,700
Storage ----------- ----------- -----------
$12,100,300 $11,481,500 $10,621,700
=========== =========== ===========
Geographic information for revenues and long-lived assets for the year ended
December 31, 2001, 2000, and 1999 are as follows:
2001 2000 1999
---------- ---------- ----------
Net Sales
Domestic $9,862,700 $8,416,500 $7,841,500
Foreign
Japan 1,128,300 2,218,500 1,876,600
Other 1,109,300 846,500 903,600
----------- ----------- -----------
$12,100,300 $11,481,500 $10,621,700
=========== =========== ===========
Long-lived assets
Domestic $6,110,900 $5,344,000 $922,400
=========== =========== ===========
For fiscal 2001, the Company had no single customer who accounted for 10% or
more of sales. For fiscal 2000, the Company had two major customers who
individually accounted for 19.3% and 10.4% of sales, respectively. For fiscal
1999, the Company had one major customer who individually accounted for 17.7% of
sales.
CONCENTRATION OF CREDIT RISK: Most of the Company's business activity is with
customers located in California, Florida, and foreign countries. As of December
31, 2001, unsecured trade accounts receivable from customers in California,
Florida, and foreign countries were $540,400, $1,177,300 and $203,200
respectively.
For fiscal year 2001, the Company had two major customers who individually
accounted for 10% or more of Accounts Receivable totaling $230,400 and $276,400.
The Company had a bank balance in excess of the $100,000 federally insured limit
in the amount of $92,800 at December 31, 2001.
PAGE 13
REPORT OF INDEPENDENT AUDITORS
[BPM LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of FAFCO, Inc.
We have audited the accompanying consolidated balance sheets of FAFCO, Inc. (a
California corporation) and its subsidiary as of December 31, 2001 and 2000,
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material reinstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FAFCO, Inc. and its
subsidiary as of December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2001 in conformity with accounting principles generally accepted
in the United States of America.
/s/ XXXX, PILGER & XXXXX, LLP
----------------------------------------
San Francisco, California
March 8, 2002
PAGE 14
FIVE-YEAR SUMMARY OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Net sales $ 12,100 $ 11,482 $ 10,622 $ 11,236 $ 10,552
Income (loss) before
income taxes $ 155 $ (41) $ 196 $ 734 $ 889
Provision for (benefit
from) income taxes $ 63 $ 19 $ (45) $ (107) $ 23
Net income (loss) $ 92 $ (60) $ 241 $ 841 $ 866
Basic net income (loss)
per share $ 0.02 $ (0.02) $ 0.07 $ 0.25 $ 0.26
Diluted net income
(loss) per share $ 0.02 $ (0.02) $ 0.06 $ 0.20 $ 0.22
AT DECEMBER 31, 2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Working capital $ 354 $ 756 $ 1,487 $ 2,637 $ 2,007
Total assets 10,056 9,656 4,987 5,377 4,437
Long-term obligations 3,808 3,625 17 957 980
Shareholders' equity 3,229 3,133 3,127 2,886 2,042
COMMON STOCK DATA
FAFCO, Inc. Common Stock is traded on the over-the-counter market but is not
listed on an exchange or quoted on any automated quotation system. The high and
low closing bid quotations for each quarter during 2001 and 2000 were as
follows:
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
2000 High $0.25 $0.25 $0.25 $0.35
2000 Low $0.25 $0.25 $0.25 $0.25
2001 High $0.25 $0.50 $0.70 $0.55
2001 Low $0.05 $0.05 $0.35 $0.30
The National Quotation Bureau provided the quotations above. All quotations
reflect inter-dealer prices, without retail xxxx-up, markdown or commission and
may not necessarily represent actual transactions. At February 20, 2002, the
Company had 660 shareholders of record. The Company has never paid dividends on
its Common Stock, has no plans to do so in the foreseeable future and is
prohibited from so doing under it's bank credit line covenants.
PAGE 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Annual Report to Shareholders contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
factors set forth below under the heading "Factors Affecting Future Results" and
elsewhere in this Annual Report to Shareholders.
2001 COMPARED WITH 2000
Net sales for 2001 increased by 5.4% to $12,100,300 from $11,481,500 in 2000 due
mainly to increased unit sales of pool products partially offset by decreased
sales of the Company's IceStor products.
Net sales of the Company's pool products were 19.7% higher in 2001 than in 2000
due mainly to increased unit sales. IceStor product sales were 22.3% lower in
2001 than in 2000 due to softness in the domestic market along with a decrease
in international sales to Japan and Taiwan offset in part by increased sales to
Korea. Pool product sales amounted to 75% of net sales in 2001 compared to 66%
of net sales in 2000. IceStor sales amounted to 25% of net sales in 2001
compared to 34% in 2000.
Cost of goods sold decreased to $7,146,300 (59.1% of net sales) in 2001 from
$7,380,500 (64.3% of net sales) in 2000. This decrease was due primarily to
increased sales of the Company's higher margin pool products along with
decreased sales of the lower margin IceStor products, combined with increased
efficiencies realized as a result of the Company's relocation from Redwood City
to Chico, California.
Marketing and selling expenses increased to $2,371,900 (19.6% of net sales) in
2001 from $2,162,200 (18.8% of net sales) in 2000. These increases were due
primarily to increased costs associated with the Company's office in Tampa,
Florida combined with increased personnel costs.
General and administrative expenses were stable at $1,782,000 (14.7% of net
sales) in 2001 and $1,786,500 (15.6% of net sales) in 2000.
Research and development expenses decreased from $239,400 (2.0% of net sales) in
2001 from $294,500 (2.6% of net sales) in 2000.
Net interest expense increased to $438,200 (3.6% of net sales) in 2001 from
$93,200 (0.8% of net sales) in 2000. This increase was due to increased bank
borrowing (primarily attributable to the Company's mortgage) during 2001, offset
slightly by decreased borrowing costs.
Other income (net) includes $102,500 in grant income from the California Energy
Commission related to an energy efficiency program in which the Company
participated.
SEASONALITY
Historically, the Company has experienced lower solar sales during the first
quarter than during other quarters of each year. In addition, sales typically
have increased significantly during the second quarter, declined slightly, and
then remained relatively constant during the third and fourth quarters. Net
income is affected by the seasonality of sales as well as by significant
marketing and selling expenses typically incurred during the first quarter of
each year. These expenses are incurred to develop programs and materials for use
throughout the remainder of the year.
In 2000 and 2001, sales and net income experienced their typical seasonality.
2000 COMPARED WITH 1999
Net sales for 2000 increased by 8.1% to $11,481,500 from $10,621,700 in 1999.
This increase was due mainly to increased pool product sales partially offset by
decreased sales of the Company's IceStor products.
Net sales of the Company's pool products were 19.0% higher in 2000 than in 1999
due mainly to increased unit sales. IceStor(TM) product sales were 8.3% lower in
2000 than in 1999 due to softness in the domestic energy storage market. Pool
product sales amounted to 66% of net sales in 2000 compared to 60% of net sales
in 1999. IceStor sales amounted to 34% of net sales in 2000 compared to 40% in
1999.
Cost of goods sold increased to $7,380,500 (64.3% of net sales) in 2000 from
$6,436,400 (60.6% of net sales) in 1999. This increase was primarily due to
inefficiencies in the production process experienced during the Company's
relocation from Redwood City to Chico, California.
Marketing and selling expense increased to $2,162,200 (18.8% of net sales) in
2000 from $1,854,300 (17.5% of net sales) in 1999 and general and administrative
expense increased to $1,786,500 (15.6% of sales) in 2000 from $1,752,600 (16.5%
of net sales) in 1999. These increases were due to costs associated with
expanding the operations of the Company's office in Tampa, Florida.
Research and development expense decreased to $294,500 (2.6% of net sales) in
2000 from $327,600 (3.1% of net sales) in 1999.
Net interest expense increased to $93,200 (0.8% of net sales) in 2000 from
$71,700 (0.7% of net sales) in 1999.
The Company's relocation expense for the year 2000 amounted to $832,900 (7.2% of
net sales). This expense was offset by lease termination credits in the amount
of $1,040,000, resulting in a net gain of $202,100.
PAGE 16
MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position increased from $10,100 at 2000 fiscal year end to
$121,200 at 2001 fiscal year end, principally due to increased cash receipts
during late December.
At December 31, 2001, the Company's net accounts receivable had decreased to
$1,620,500 from $1,969,400 at December 31, 2000. This decrease was due primarily
to increased collections, partially offset by increased sales.
At December 31, 2001, the Company's accounts payable and other accrued expenses
had decreased to $1,357,700 from $1,744,700 at December 31, 2000. This decrease
was due primarily to a decrease in accrued liabilities, primarily construction
costs, utilities and in-transit inventory, offset in part by an increase to
accounts payable.
At December 31, 2001 the Company's inventories remained constant at $1,171,800
relative to $1,225,900 at December 31, 2000.
At December 31, 2001, net property, plant and equipment had increased to
$6,110,900 from $5,344,000 at December 31, 2000. This increase was due primarily
to completion of the Company's new office and manufacturing facility along with
construction of new production equipment developed to improve processes and
products.
The Company had a deferred tax asset, net of valuation allowance, at year-end of
$814,800 in 2001 and $864,300 in 2000. The Company believes that it is more
likely than not that this asset will be fully realized. This belief is based
upon the Company's history of profitable operations with the exception of fiscal
year 2000. However, there can be no assurance that the Company will continue
profitability or, if it does, that profits will be sufficient to utilize the net
deferred asset.
At December 31, 2001, the Company's current ratio was 1.12 compared with 1.26 at
December 31, 2000 and working capital decreased over the same period to $353,500
from $755,500. Total assets exceeded total liabilities by $3,229,200 at December
31, 2001 compared with $3,132,600 at December 31, 2000.
The Company believes that its cash flow from operations, together with bank
borrowings and the issuance of $500,000 in convertible subordinated notes as
discussed in Note 4, will be sufficient to support operations during the next
twelve months. The foregoing statement of how long the Company's capital
resources are expected to last is a forward-looking statement involving risks
and uncertainties, including the amount of the Company's sales and the ability
of the Company to control its operating expenses. If sales decline from current
levels additional debt or equity financing may be required. There can be no
assurance that financing, if required, would be available on favorable terms or
at all or that such financing would not significantly dilute the ownership
interests and rights of existing shareholders. The Company has a line of credit,
of which $768,700 had been utilized and $231,300 remained available under the
formula applied to net accounts receivable at December 31, 2001. This line of
credit expires on August 10, 2002.
In addition to the line of credit, the Company has a 36-month term loan facility
in the amount of $445,000, bearing interest at prime plus 1.5%. At December 31,
2001, the Company had an outstanding balance of $223,300 on this loan facility.
The Company also has a 60-month term loan facility available in the amount of
$500,000 bearing interest at prime plus 1.5%. At December 31, 2001, the Company
had outstanding balance of $453,700 on this loan facility.
PAGE 17
MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED)
The Company has outstanding promissory notes with an aggregate principal amount
of $500,000 ("the Notes"). The principal amount of the Notes is due and payable
in January 2005. Interest is payable quarterly at a rate of 10% per annum,
increasing to 12% per annum starting in January 2003. In addition, at December
31, 2001, the Company owed an aggregate of $4,823,500 under various bank credit
facilities. Payments due under these credit facilities are as follows:
TOTAL
AMOUNTS
COMMITTED AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
--------- ---------------------------------------------------------
Less than year 1-3 years Over 4 years Over 5 years
-------------- --------- ------------ ------------
Line of credit $768,700 $768,700
Bank term loans 677,000 244,800 $380,300 $51,900
Mortgage 3,377,800 37,800 93,900 78,000 3,168,100
---------- ---------- -------- ------- ----------
Total $4,823,500 $1,051,300 $474,200 $129,900 $3,168,100
========== ========== ======== ======== ==========
The bank may accelerate payment of the amount owed if we fail to meet financial
and other covenants set forth in the loan agreements.
FACTORS AFFECTING FUTURE RESULTS
U.S. Economics Conditions: A protracted U.S. recession would adversely impact
new housing and commercial construction in our largest market, which in turn
would cause us to miss our revenue growth goals.
Asian Economic Conditions: Sales in these Asian countries account for virtually
all our international sales, and contribute a significant portion of our overall
revenues. In the event that these economics experience declining growth or
accelerated contraction in 2002, our sales in this region will be adversely
impacted.
Growth of U.S. Thermal Energy Storage (TES) Market: Our ability to increase
sales of our thermal energy storage products is dependent on growth in the
overall market because opportunities for market share growth are limited. An
extended recession in the general economy, a general decline in construction of
commercial properties or a decline in energy prices would all adversely affect
demand for thermal energy storage systems.
Growth of California TES Market: California is our single largest domestic
market and the single largest potential source of increased revenues in 2002. A
substantial abatement of the energy crisis in California or a further worsening
of economic conditions in California would adversely impact projected demand for
our products.
Destabilizing Incidents: Additional destabilizing events such as terrorist
attacks or overseas conflicts, if they occur, could disrupt our supply chain,
increase our materials costs, reduce demand for our products, and otherwise
negatively impact our operating results.
Materials Prices: Raw materials including resins account for a major portion of
our cost of sales. Any increase in these prices because of supply shortages or
otherwise would reduce our operating margins and adversely impact our
profitability.
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.
PAGE 18
NOTES
PAGE 19
CORPORATE DIRECTORY AND INFORMATION
BOARD OF DIRECTORS
Xxxxxxx X. Xxxx
Chairman of the Board, President, and
Chief Executive Officer
FAFCO, Inc.
Xxxxxxx X. Xxxxx*
Senior Vice President and
Chief Financial Officer
Electric Power Research Institute
a private, nonprofit, research organization
doing collaborative research for the
electricity industry
Xxxxxxx X. Xxxxxxxx
Partner
Symphony Technology Group
a venture capital firm
Xxxxx X. Xxxx
President
Danger! Books
a publishing and sales company
Xxxxxx X. Xxxxx, Xx.*
President
Xxxxx Instruments Corporation
a manufacturer of marine and weather
equipment
----------------------
*Audit Committee Member
EXECUTIVE OFFICERS
Xxxxxxx X. Xxxx
Chairman of the Board, President, and
Chief Executive Officer
Xxxx X. Xxxx
Executive Vice President and Secretary
Xxxxx X. Xxxxxx
Vice President, Sales
Xxxxx X. Xxxxxx
Vice President, Finance
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company
0 Xxxxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Telephone: (000) 000-0000
Web Site: xxxx://xxx.xxxxxxxxxxxxxxxx.xxx
LEGAL COUNSEL
Wilson, Sonsini, Xxxxxxxx & Xxxxxx
A Professional Corporation
000 Xxxx Xxxx Xxxx
Xxxx Xxxx, Xxxxxxxxxx 00000
INDEPENDENT ACCOUNTANTS
Xxxx, Pilger & Xxxxx
A Professional Corporation
000 Xxxxxxxx Xxxxxx
Xxxx Xxxx, Xxxxxxxxxx 00000
FORM 10-K
A copy of the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission, including financial statement schedules but
excluding exhibits, is available without charge upon written request to:
FAFCO, Inc.
000 Xxxxxxxx Xxxxx
Xxxxx, Xxxxxxxxxx 00000
ANNUAL SHAREHOLDERS' MEETING
The Annual Shareholders' Meeting will be held on June 7, 2002 at:
FAFCO, Inc.
000 Xxxxxxxx Xxxxx
Xxxxx, Xxxxxxxxxx 00000
Telephone: (000) 000-0000
PAGE 20
