1
Exhibit 13.1
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THE COMPANY
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FAFCO was formed in 1969, was incorporated in 1972, and has produced over one
million polymer heat exchangers, primarily for the solar heating and thermal
energy storage markets. FAFCO is the leading U.S. manufacturer of solar heating
panels, with nearly twice the installed base of solar panel systems of its
nearest competitor. In addition, FAFCO is the leading producer of polymer heat
exchangers for thermal energy storage applications. FAFCO's IceStor(TM) product
line of thermal energy storage equipment significantly increases the effective
capacity of electric utilities without the burden of adding new capacity. FAFCO
has been issued more than 20 patents.
FAFCO page 2
2
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PRESIDENT'S LETTER
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[GRAPHIC]
FAFCO was founded in 1969 and incorporated in 1972 to manufacture polymer heat
OMITTED][GRAPHIC OMITTED] exchangers currently used in the solar and thermal
energy storage (TES) markets worldwide. FAFCO is the oldest and largest producer
of solar pool heating panels in the United States.
Net sales increased by 8.1% to $11,481,500 in 2000, primarily due to increased
solar product sales. Net loss was $60,200 compared with a net profit of $241,000
in 1999.
On August 31, 2000, FAFCO moved from leased facilities in Redwood City, to a new
57,500 square foot plant on 6 acres that is owned by the Company in Chico,
California. Our new Chico location allows access to undergraduate and graduate
college students, eases the financial burden of new home ownership for our
employees, and is supportive of commercial enterprise. The monthly debt service
on FAFCO's ultramodern plant is significantly less than its former monthly lease
payments.
Solar product sales were up significantly over the prior year. In addition to
solar product sales increasing overall, FAFCO's company office in Tampa is fully
operational and doing extremely well. FAFCO is also promoting other
miscellaneous pool products through its direct sales channel, pool retail and
pool wholesale channels of distribution. Significant increases in natural gas
prices and energy shortages in California also bode well for demand in the solar
energy products market.
Our thermal energy storage (TES) products use FAFCO's unique polymer heat
exchangers to shift peak electrical loads to off-peak times. This reduces the
necessity to add new generation capacity to meet peak loads. FAFCO's TES
products are sold primarily in the United States and Asian markets.
TES offers business a way to mitigate the current California electrical shortage
by shifting from peak to off peak for a fraction of the cost of new capacity. We
believe an increase in the California TES market could significantly increase
demand for our TES products.
FAFCO has applied for several patents on new manufacturing processes, which
substantially enhance its products while lowering the cost of manufacturing.
FAFCO'S move to Chico has afforded it an opportunity to reenergize the company
with approximately 50 new employees. The dedication and experience of FAFCO's
original staff when combined with the new energy and enthusiasm of its Chico
employees, promises a new chapter in FAFCO's long history. A combination of new
markets, new products, and new manufacturing process opportunities gives all of
us at FAFCO optimism for the success of our new location.
Sincerely,
Xxxxxxx X. Xxxx
President
FAFCO page 3
3
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CONSOLIDATED BALANCE SHEET
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DECEMBER 31, 2000 1999
---------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 10,100 $ 64,800
Accounts receivable, less allowance for doubtful
accounts of $400,000 in 2000 and $317,800 in 1999 1,969,400 1,752,000
Inventories 1,225,900 1,041,600
Prepaid expenses and other current assets 211,500 254,200
Other accounts receivable, net of allowance 21,600 27,700
Deferred tax asset, net of allowance 215,700 189,500
----------- -----------
Total current assets 3,654,200 3,329,800
----------- -----------
Property, plant and equipment, at cost 7,104,000 3,330,100
Less accumulated depreciation and amortization (1,760,000) (2,407,700)
----------- -----------
5,344,000 922,400
----------- -----------
Notes receivable and other assets (net) 9,300 31,300
Deferred tax asset, net of allowance 648,600 703,300
----------- -----------
Total assets $ 9,656,100 $ 4,986,800
----------- -----------
Liabilities and shareholders' equity
Current liabilities:
Bank line of credit $ 450,500 $ 461,500
Notes Payable to bank - current portion 143,000
Accounts payable and other accrued expenses 1,744,700 802,500
Accrued compensation and benefits 267,800 281,100
Accrued warranty expense 287,700 282,700
Other current liabilities 5,100 15,000
----------- -----------
Total current liabilities $ 2,898,800 1,842,800
----------- -----------
Mortgage 3,366,500
Notes payable to bank - less current portion 224,000
Other non-current liabilities 34,200 16,600
----------- -----------
Total liabilities $ 6,523,500 $ 1,859,400
----------- -----------
Commitments and contingent liabilities
Shareholders' equity:
Preferred Stock-authorized 1,000,000 shares of $1.00
par value, none of which has been issued
Common Stock-authorized 10,000,000 shares of
$0.125 par value; 3,834,791 and 3,303,311 issued and
outstanding at December 31, 2000 and 1999 respectively 479,300 412,800
Capital in excess of par value 5,106,000 5,107,100
Notes receivable secured by Common Stock (75,100) (75,100)
Accumulated deficit (2,377,600) (2,317,400)
----------- -----------
Total shareholders' equity $ 3,132,600 $ 3,127,400
Commitments and contingent liabilities
----------- -----------
Total liabilities and shareholders' equity $ 9,656,100 $ 4,986,800
----------- -----------
The accompanying notes are an integral part of this statement
FAFCO page 4
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CONSOLIDATED STATEMENT OF OPERATIONS
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YEAR ENDED DECEMBER 31, 2000 1999 1998
Net Sales $ 11,481,500 $ 10,621,70 $ 11,235,800
Other income (net) (7,400) 17,100 30,600
------------ ------------ ------------
Total revenues 11,474,100 10,638,800 11,266,400
------------ ------------ ------------
Cost of goods sold 7,380,500 6,436,400 6,801,700
Marketing & selling expense 2,162,200 1,854,300 1,942,800
General & administrative expense 1,786,500 1,752,600 1,480,200
Research & development expense 294,500 327,600 194,100
Net interest expense 93,200 71,700 113,400
Relocation costs (net) (202,100)
------------ ------------ ------------
Total costs & expense 11,514,800 10,442,600 10,532,200
------------ ------------ ------------
(Loss): income before income taxes (40,700) 196,200 734,200
Provision for (benefit from) income taxes 19,500 (44,800) (107,400)
------------ ------------ ------------
Net (loss) income $ (60,200) $ 241,000 $ 841,600
------------ ------------ ------------
Basic net (loss) income per share $ (0.02) $ 0.07 $ 0.25
------------ ------------ ------------
Diluted net (loss) income per share $ (0.02) $ 0.06 $ 0.20
------------ ------------ ------------
The accompanying notes are an integral part of this statement
FAFCO page 5
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
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NOTES
RECEIVABLE
NUMBER CAPITAL IN SECURED BY RETAINED TOTAL
OF COMMON EXCESS OF COMMON EARNINGS SHAREHOLDERS
SHARES STOCK PAR VALUE STOCK DEFICIT EQUITY
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BALANCE AT DECEMBER 31, 1997 $3,298,311 $412,200 $5,105,200 $(75,100) $(3,400,000) $2,042,300
Net income for the year 841,600 841,600
Issuance of shares upon exercise
of a stock option 5,000 600 1,900 2,500
---------- -------- ---------- -------- ----------- ----------
BALANCE AT DECEMBER 31, 1998 $3,303,311 $412,800 $5,107,100 $(75,100) $(2,558,400) $2,886,400
Net income for the year 241,000 241,000
---------- -------- ---------- -------- ----------- ----------
BALANCE AT DECEMBER 31, 1999 $3,303,311 $412,800 $5,107,100 $(75,100) $(2,317,400) $3,127,400
Net loss for the year (60,200) (60,200)
Issuance of shares upon exercise
of stock warrants 540,000 67,500 67,500
Purchase of stock (8,520) (1,000) (1,100) (2,100)
---------- -------- ---------- -------- ----------- ----------
BALANCE AT DECEMBER 31, 2000 $3,834,791 $479,300 $5,106,000 $(75,100) $(2,377,600) $3,132,600
FAFCO page 6
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CONSOLIDATED STATEMENT OF CASH
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YEAR ENDED DECEMBER 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $ (60,200) $ 241,000 $ 841,600
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 289,000 184,400 137,600
Write offs and allowance for doubtful accounts 89,100 165,500 53,900
(Gain) loss on disposition of fixed assets 4,600 (2,400) (19,000)
Change in assets and liabilities:
Accounts receivable (300,400) 13,100 (92,200)
Inventories (184,300) 223,800 (182,500)
Prepaid expenses and other assets 42,700 (70,700) (9,500)
Deferred tax assets 28,500 (55,300) (168,400)
Notes receivable and other assets 22,000 40,100 94,200
Accounts payable, accrued expenses and other current liabilities 924,000 (152,400) 119,600
Other non-current liabilities 17,600 (15,300) (23,200)
----------- ----------- -----------
Net cash provided by operations 872,600 571,800 752,100
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of fixed assets (4,715,200) (523,400) (342,400)
Proceeds from disposition of fixed assets 2,400 19,000
----------- ----------- -----------
Net cash used in investing activities (4,715,200) (521,000) (323,400)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of warrants 67,500 2,500
Repurchase of common stock (2,100)
Repayment of subordinated debt (925,000)
Repayment of bank line of credit (11,000)
Borrowings from bank 3,733,500 461,500
----------- ----------- -----------
Net cash provided by (used in) financing activities 3,787,900 (463,500) 2,500
----------- ----------- -----------
Net (decrease) increase in cash & cash equivalents (54,700) (412,700) 431,200
Cash and cash equivalents, beginning of period 64,800 477,500 46,300
----------- ----------- -----------
Cash and cash equivalents, end of period $ 10,100 $ 64,800 $ 477,500
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized ($89,300) $ 76,275 $ 109,400 $ 123,100
Income taxes $ 69,800 $ 63,000
----------- ----------- -----------
The accompanying notes are an integral part of this statement
FAFCO page 7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENT
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1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company designs, develops, manufactures, and markets polymer heat exchangers
for use in solar heating systems for swimming pools and thermal energy storage
systems for commercial and industrial cooling. The heat exchangers for solar
heating systems are sold to wholesalers and distributors primarily in California
and Florida and in other locations in the United States and overseas. The heat
exchangers for thermal energy storage systems are marketed through
manufacturers' representatives throughout the United States and internationally.
A summary of significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All significant
inter-company balances and transactions have been eliminated in consolidation.
The subsidiary currently has no ongoing business activities.
REVENUE RECOGNITION: Revenues on sales of products are recognized at the time of
shipment of goods or performance of service.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
equivalents include highly liquid investments with a maturity of three months or
less.
INVENTORIES: Inventories are stated at the lower of cost or market determined
using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated based on
historical cost adjusted for accumulated depreciation. Depreciation and
amortization of plant and equipment, excluding vehicles and leasehold
improvements, are determined using accelerated methods. For the building,
vehicles and leasehold improvements, the straight-line method is used. The
estimated useful lives of the assets, with the exception of the building, range
between three and ten years. The estimated useful life of the building is 39.5
years. Minor replacements, improvements, maintenance, and repairs are expensed
as incurred. Major replacements and improvements are capitalized and depreciated
over the remaining useful life of the related asset. Gains and losses on sales
and retirement of plant and equipment are credited or charged to income.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF: Long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Impairments are recorded
when indications of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
value.
INCOME TAXES: Deferred tax assets and liabilities are recognized for the tax
consequences of temporary differences between the financial reporting and tax
basis of assets and liabilities.
EARNINGS PER COMMON SHARE: Basic (loss) earnings per common share is computed
using the weighted average number of shares outstanding. Diluted (loss) earnings
per common share is computed using the weighted average number of shares
outstanding adjusted for potentially dilutive incremental shares attributed to
outstanding options and warrants to purchase common stock and shares issuable
upon conversion of certain convertible securities.
WARRANTIES: In the normal course of business, the Company makes certain
warranties as to workmanship and materials. Product warranty periods range from
two to fifteen years for full coverage. The estimated future expense of these
warranties is accrued at the time of sale. The estimates inherent in accounting
for such warranties are reviewed and revisions to previous estimates are made as
required to reflect the most current information available.
ACCOUNTING FOR STOCK-BASED COMPENSATION: The Company has elected to account for
stock-based compensation under the intrinsic value method in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation. Under this method, no compensation
expense is recorded for stock options granted when the exercise price of the
option granted is equal to or exceeds the fair market value of the Company's
common stock. The Company makes the pro forma disclosures of stock-based
compensation required by SFAS No. 123.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Current Assets and Current Liabilities: The carrying value of cash equivalents,
accounts receivable, notes receivable, short-term borrowings, accounts payable,
and accrued expenses approximate fair value because of their short maturity.
Long-Term Debt: The fair value of the Company's long-term debt is estimated
based on the borrowing rates currently
FAFCO page 8
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NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
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available to the Company for loans with similar terms. At December 31, 2000, the
carrying amount approximated estimated fair value of long-term debt.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards
Board (FASB) has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This standard establishes a new model for accounting for
derivatives and hedging activities. Since there is no derivative and hedging
activity within the Company, application of this standard, required in the first
quarter of 2001 as a result of the Issuance of SFAS No. 137, is not expected to
have an impact on the results and financial position of the Company.
2) INVENTORIES CONSIST OF THE FOLLOWING:
DECEMBER 31, 2000 1999
------------------------------------------------
Raw materials $ 606,500 $ 499,400
Work in progress 269,900 220,000
Finished goods 349,500 322,200
---------- ----------
$1,225,900 $1,041,600
========== ==========
3) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
DECEMBER 31, 2000 1999
------------------------------------------------------
Building $ 3,441,400
Land 550,400
Machinery and
equipment 2,332,500 $ 2,445,000
Office and computer
equipment 510,800 578,300
Leasehold
improvements 88,600
Vehicles 268,900 218,200
----------- -----------
$ 7,104,000 $ 3,330,100
=========== ===========
Less accumulated
deprecation and
amortization (1,760,000) (2,407,700)
----------- -----------
$ 5,344,000 $ 922,400
=========== ===========
As of December 31, 2000, construction costs for the Company's new office and
manufacturing facility in Chico are substantially complete at $3,441,400.
Additional costs will continue to be incurred over the next few months; however,
these costs are not expected to exceed 10% of the already incurred costs.
Interest is capitalized in connection with construction costs. The capitalized
interest is recorded as part of the asset to which it relates and is amortized
over the asset's useful life. In 2000 $89,300 in interest cost was capitalized.
No interest was capitalized in 1999 and 1998.
As of December 31, 2000 and 1999, the Company had $448,700 and $375,000,
respectively, of construction in progress that is included in the above asset
balances by category. These assets are expected to be placed in service during
the year ending December 31, 2001.
As of December 31, 2000, the Company had written off $936,700 in fully
depreciated assets. These assets were scrapped or abandoned as a result of the
Company's relocation to Chico, California.
4) SUBORDINATED NOTES AND WARRANTS
At December 31, 1998, subordinated notes consisted of $925,000 of notes bearing
interest at 11% per annum payable quarterly with warrants attached to purchase
Common Stock. The Company paid off the notes and accrued interest in September
1999. Warrants for 540,000 shares at $0.125 per share were exercised during the
first quarter of 2000, and the unexercised warrants expired March 27, 2000.
5) BANK BORROWING
The Company has a bank line of credit secured by substantially all the assets of
the Company other than real estate. The line of credit allows the Company to
borrow the lesser of $1,000,000 or an amount determined by a formula applied to
net accounts receivable, inventories, and net plant and equipment. Amounts
borrowed bear interest at the bank's prime rate plus 1.5%. The line of credit
agreement contains certain covenants relating to working capital, current ratio,
and tangible net worth, prohibits the payment of cash dividends, and expires on
August 10, 2001. At December 31, 2000 and 1999, the Company had complied with or
obtained waivers for compliance with the loan covenants.
As of December 31, 2000 and 1999, the Company had utilized $450,500 and
$461,500, respectively, of this facility.
In addition to the line of credit, the Company has a 36-month term loan in the
amount of $445,000 bearing interest at prime plus 1.5%. At December 31, 2000,
the Company had an outstanding balance of $367,000 on this loan facility. The
Company also has a 60-month term loan available in the amount of $500,000
bearing interest at prime plus 1.5%. At December 31, 2000, the Company had no
outstanding balance on this facility. The Company also has a 29-1/2 year
mortgage in the amount of $3,400,000 bearing interest at 9.05% per year fixed
for five years. The balance on this mortgage at December 31, 2000 was
$3,400,000.
6) SHAREHOLDERS' EQUITY
The Board of Directors, without shareholder approval, may determine the rights,
preferences, privileges, and restrictions of the Company's unissued Preferred
Stock. Such shares may be issued in one or more series. In 1980, the Company
issued 202,300 shares of Common Stock at a price of $2.43 per share
FAFCO page 9
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NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
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in exchange for non-interest bearing promissory notes, which have a balance due
of $75,100 at December 31, 2000 and 1999. The notes are due and payable and the
Company intends to pursue collection of these notes. In the event that any of
the notes are uncollectible, the Company will demand surrender of the related
shares issued and will cancel and write off the related notes receivable
balance.
Under the Company's Employee Stock Purchase Plan, 150,000 shares of Common Stock
have been reserved for issuance at 85% of fair market value as of specified
dates. The Plan was suspended in 1991 and no shares have been issued thereunder
since 1991.
The Company has a 1991 Incentive Stock Option Plan under which 500,000 shares of
Common Stock have been reserved for issuance to employees and consultants.
During 1999, the Company granted options to purchase 136,000 shares, exercisable
at $0.50 per share, the fair market value on the date of grant.
The Company has a 1991 Director's Stock Option Plan under which 50,000 shares of
Common Stock are reserved for issuance. No options were granted or exercised
during 1998. During 1999, the Company granted options to purchase 20,000 shares,
exercisable at $0.50 per share, the fair market value on the date of grant.
During 2000 no options were granted and options to purchase 800 shares were
exercised.
Options granted under these plans become exercisable at a rate of 20% per year
for five years from date of grant and expire six years or ten years from date of
grant.
A summary of activity under the 1981 and 1991 Incentive Stock Option Plans as
follows:
SHARES SUBJECT EXERCISE PRICE
TO OPTION PER SHARE
----------------------------------------------------------
OUTSTANDING AT
DECEMBER 31, 1997 374,950 $0.125-0.625
Granted 0 0.125
Canceled (5,500) $0.125-0.625
OUTSTANDING AT
DECEMBER 31, 1998 369,450 $0.125-0.500
Granted 136,000 $0.500-0.550
Canceled (117,500) $0.500
OUTSTANDING AT
DECEMBER 31, 1999 387,950 $0.125-0.550
Canceled (52,200) $0.125-0.550
Exercised (800) $0.125
======= ============
OUTSTANDING AT
DECEMBER 31, 2000 334,950 $0.125-0.550
======= ============
The Company applies the intrinsic value method of accounting for its stock
option plans. Accordingly, no compensation cost has been recognized for the plan
in 2000, 1999, or 1998. Had compensation cost been determined on the basis of
fair value pursuant to FASB Statement No. 123, net income and earnings per share
would have been reduced as follows:
2000 1999 1998
------------------------------------------------------------------
Net (loss) income
As reported $(60,200) $241,000 $841,600
Pro forma (60,200) 232,700 832,200
Basic earnings
per share
As reported (0.02) 0.07 0.25
Pro forma (0.02) 0.07 0.25
Diluted earnings
per share
As reported (0.02) 0.06 0.20
Pro forma (0.02) 0.06 0.19
The fair value of each option granted was estimated on the grant date using the
Black-Scholes model.
The following assumptions were made in estimating fair value:
ASSUMPTION 2000 1999 1998
-----------------------------------------------------
Dividend yield 0% 0% 0%
Risk-free interest rate 6.5% 5.0%
Expected life 10 years 10 years
Expected volatility 134.4% 121.9%
======= ======= =======
Following is a summary of the status of the plans during 2000, 1999, and 1998.
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------------------------------------------------------
Options exercisable
at December 31, 2000 308,550 0.291
Weighted average
fair value of options
granted during 2000 N/A
======= =====
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------------------------------------------------------
Options exercisable at
December 31, 1999 321,250 0.298
Weighted average
fair value of options
granted during 1999 $0.2427
======= =====
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------------------------------------------------------
Options exercisable at
December 31, 1998 283,250 0.299
Weighted average
fair value of options
granted during 1998 N/A
======= =====
FAFCO page 10
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NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
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Following is a summary of the status of options outstanding at December 31,
2000:
OUTSTANDING EXERCISABLE
-----------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Number Life Price Number Price
-----------------------------------------------------------
$0.250 20,000 1 $0.250 20,000 $0.250
$0.125 201,950 2 $0.125 178,350 $0.125
$0.500 88,000 9 $0.500 85,200 $0.500
$0.550 25,000 9 $0.550 25,000 $0.500
------ ------- --- ------ ------- ------
334,950 308,550
====== ======= === ====== ======= ======
7) INCOME TAXES
The provisions for income taxes consist of the following:
YEARS ENDED
DECEMBER 31, 2000 1999 1998
---------------------------------------------------------
Taxes on income:
U.S. Federal
Current 4,000 $ 4,000 $ 9,000
Deferred 27,100 (56,200) (183,400)
-------- --------- ---------
$ 31,100 $ (52,200) $(174,400)
-------- --------- ---------
State
Current 3,200 6,000 52,000
Deferred (14,800) 1,400 15,000
-------- --------- ---------
(11,600) $ 7,400 67,000
-------- --------- ---------
Net income tax
(benefit)
provision 19,500 $ (44,800) (107,400)
-------- --------- ---------
A reconciliation of the statutory federal income tax rate with the effective tax
rate reported in the financial statements follows:
YEAR ENDED
DECEMBER 31, 2000 1999 1998
--------------------------------------------------
Statutory federal
Income tax rate 34.0% 34.0% 34.0%
Effect on tax rate
Resulting from
State and foreign
income taxes,
net of federal
tax benefit (17.0%) (0.4%) 8.2%
Tax effect of
change in
valuation allowance (26.5%) (71.9%) (65.2%)
Expiration of
tax credits 22.0% 8.2% 2.5%
Other 16.0% 7.3% 5.9%
---- ----- -----
Effective tax rate 28.5% (22.8%) (14.6%)
==== ===== =====
The Company records its deferred taxes on a tax jurisdiction basis and
classifies those net amounts as current or noncurrent based on the balance sheet
classifications. Deferred tax assets are comprised of the following:
DECEMBER 31, 2000 1999 1998
-------------------------------------------------------------------
Allowance for
doubtful accounts 157,400 148,800 222,600
Accrued expenses 135,500 121,400 97,300
Loss carry forwards 549,300 595,700 598,500
Tax credits 11,500 29,600 48,800
Other 22,100 26,900 43,500
--------- -------- ----------
875,800 922,400 1,010,700
Deferred tax asset
valuation allowance (11,500) (29,600) (173,200)
--------- -------- ----------
Total deferred
taxes, net $ 864,300 $892,800 $ 837,500
========= ======== ==========
FAFCO page 11
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NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
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At December 31, 2000, the Company had unused federal net operating loss carry
forwards of approximately $1,600,700, Florida loss carry forwards of
approximately $139,800, and investment and other federal tax credits of
approximately $11,500 available to offset future tax liabilities. The net
operating losses and credits expire in varying amounts until 2010. The use of
the tax credits has been limited by the provisions of the Tax Reform Act of 1986
to reflect the benefit associated with an overall reduction in the corporate tax
rate. The Company believes that the "total deferred taxes, net" in the amount of
$864,300 are more likely than not to be realized.
8) TRANSACTIONS WITH RELATED PARTIES
At December 31, 1998, $600,000 in principal amount of the Company's subordinated
notes (see Note 4) were held by 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.
9) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) retirement savings plan for all eligible employees who
have completed one year of service. Eligible employees have the option to
contribute up to 15% of their eligible salary. The Company contributes an amount
equal to 25% of the employee contribution, up to a maximum of $400 per employee
per year.
10) LEASE COMMITMENTS
The former rental expense, relating primarily to a lease for its former office
and manufacturing facility, amounted to $275,700 in 2000, $417,100 in 1999, and
$384,300 in 1998. At December 31, 2000, minimum annual lease commitments under
non-cancelable leases, primarily for office equipment, were as follows:
2001 25,800
2002 16,800
2003 12,200
2004 700
-------
Total $55,500
=======
The Company terminated its lease for its Redwood City office and manufacturing
facility as of August 31, 2000. Total revenues realized as a result of lease
termination agreements amounted to $1,040,000.
11) NET INCOME PER SHARE
Basic earnings per share were calculated as follows:
YEARS ENDED
DECEMBER 31, 2000 1999 1998
------------------------------------------------------
Net (loss) income $ (60,200) $ 241,000 $ 841,600
Average
common
shares
outstanding 3,711,566 3,303,311 3,303,311
---------- ---------- ---------
Earnings
per share $ (0.02) $ 0.07 $ 0.25
========== ========== =========
Basic earnings per share are calculated by dividing net income by the weighted
average number of shares issued and outstanding.
YEAR ENDED
DECEMBER 31, 2000 1999 1998
Adjusted net
(loss) Income $ (60,200) $ 241,000 $ 841,600
Average com-
mon shares
outstanding 3,711,566 3,303,311 3,303,311
Add: Exercise
of options reduced
by the number of
shares purchased
with proceeds N/A 271,523 325,849
Add: Exercise of
warrants re-
duced by the
number of shares
purchased with
proceeds N/A 87,039 102,361
Add: Expense of
warrants attached
to debt reduced
by the number of
shares purchased
with proceeds N/A 438,158 472,778
Adjusted weighted
average shares
outstanding 3,711,566 4,100,032 4,204,299
Earnings per
common share
assuming full
dilution (0.02) 0.06 0.20
FAFCO page 12
12
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
--------------------------------------------------------------------------------
12) LITIGATION
The Company is involved in certain litigation matters. Management believes
resolution of these disputes will not have a material adverse effect on the
Company's financial condition and results of operation.
13) BUSINESS SEGMENT AND CONCENTRATION OF CREDIT RISK
BUSINESS SEGMENT: The Company operates in one business segment, the development,
production and marketing of polymer heat exchangers for the solar and thermal
energy storage markets worldwide.
PRODUCT LINE 2000 1999 1998
----------- ----------- -----------
Net Sales
Pool Products $ 7,580,600 $ 6,370,000 5,899,500
----------- ----------- -----------
Thermal Energy
Storage 3,900,900 4,251,700 5,336,300
----------- ----------- -----------
$11,481,500 $10,621,700 $11,235,800
=========== =========== ===========
Geographic information for revenues and long-lived assets for the year ended
December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
----------- ----------- -----------
Net Sales
Domestic $ 8,416,500 $ 7,841,500 $ 7,235,900
Foreign
Japan 2,218,500 1,876,600 2,634,100
Other 846,500 903,600 1,365,800
----------- ----------- -----------
$11,481,500 $10,621,700 $11,235,800
=========== =========== ===========
Long-lived assets
Domestic $ 5,344,000 $ 922,400 $ 583,400
----------- ----------- -----------
$ 5,344,000 $ 922,400 $ 583,400
=========== =========== ===========
For fiscal 2000, the Company had two major customers who individually accounted
for 10% or more of sales totaling $2,218,500 and $1,193,500. For fiscal 1999 and
1998, the Company had one major customer who individually accounted for 10% or
more of sales totaling $1,876,600 and $2,634,100.
CONCENTRATION OF CREDIT RISK: Most of the Company's business activity is with
customers located in California, Florida, and foreign countries. As of December
31, 2000, unsecured trade accounts receivable from customers in California,
Florida, and foreign countries were $462,600, $1,204,800 and $522,300
respectively.
FAFCO page 13
13
--------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
--------------------------------------------------------------------------------
BPM
XXXX, PILGER & XXXXX LLP
Accounts and Consultants
000 Xxxxxxxxxx Xxxxxx, Xxxxx 0000
Xxx Xxxxxxxxx, XX 00000
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of FAFCO, Inc.
We have audited the accompanying consolidated balance sheets of FAFCO, Inc. (a
California corporation) and its subsidiary as of December 31, 2000 and 1999, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FAFCO, Inc. and its subsidiary
as of December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.
San Francisco, California
March 16, 2001
FAFCO page 14
14
--------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
--------------------------------------------------------------------------------
FIVE-YEAR SUMMARY OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------
Net sales $11,482 $10,622 $11,236 $10,552 $8,869
------- ------- ------- ------- ------
(Loss) income before income taxes $ (41) $ 196 $ 734 $ 889 $ 274
------- ------- ------- ------- ------
Provision for (benefit from) income taxes $ 19 $ (45) $ (107) $ 23 $ (37)
------- ------- ------- ------- ------
Net (loss) income $ (60) $ 241 $ 841 $ 866 $ 311
------- ------- ------- ------- ------
Basic net (loss) income per share $ (0.02) $ 0.07 $ 0.25 $ 0.26 $ 0.10
------- ------- ------- ------- ------
Diluted net (loss) income per share $ (0.02) $ 0.06 $ 0.20 $ 0.22 $ 0.10
------- ------- ------- ------- ------
AT DECEMBER 31, 2000 1999 1998 1997 1997
--------------------------------------------------------------------------------------------------
Working capital $ 756 $ 1,487 $ 2,637 $ 2,007 $1,285
------- ------- ------- ------- ------
Total assets 9,656 4,987 5,377 4,437 4,345
Long-term obligations 3,625 17 957 980 951
Shareholders' equity 3,133 3,127 2,886 2,042 1,176
COMMON STOCK DATA
FAFCO, Inc. Common Stock is traded on the over-the-counter market but is not
listed on an exchange or quoted on any automated quotation system. The high and
low closing bid quotations for each quarter during 2000 and 1999 were as
follows:
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------------------------------------------------------------------------------
2000 High $0.25 $0.25 $0.25 $0.35
2000 Low $0.25 $0.25 $0.25 $0.25
1999 High $1.00 $1.00 $1.00 $0.75
1999 Low $0.94 $1.00 $0.75 $0.25
===== ===== ===== =====
The quotations above were provided by the National Quotation Bureau. All
quotations reflect inter-dealer prices, without retail xxxx-up, xxxx-down or
commission and may not necessarily represent actual transaction. At March 14,
2001, the Company had 698 shareholders of record. The Company has never paid
dividends on its Common Stock, has no plans to do so in the foreseeable future
and is prohibited from so doing (see Note 6).
FAFCO page 15
15
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
This Annual Report to Shareholders contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
factors set forth below under the heading "Factors Affecting Future Results" and
elsewhere in this Annual Report to Shareholders.
2000 COMPARED WITH 1999
Net sales for 2000 increased by 8.1% to $11,481,500 from $10,621,700 in 1999.
This increase was due mainly to increased pool product sales partially offset by
decreased sales of the Company's IceStor products.
Net sales of the Company's pool products were 19.0% higher in 2000 than in 1999
due mainly to increased unit sales. IceStor(TM) product sales were 8.3% lower in
2000 than in 1999 due to softness in the domestic energy storage market. Pool
product sales amounted to 66% of net sales in 2000 compared to 60% of net sales
in 1999. IceStor sales amounted to 34% of net sales in 2000 compared to 40% in
1999.
Cost of goods sold increased to $7,380,500 (64.3% of net sales) in 2000 from
$6,436,400 (60.6% of net sales) in 1999. This increase was primarily due to
inefficiencies in the production process experienced during the Company's
relocation from Redwood City to Chico, California.
Marketing and selling expense increased to $2,162,200 (18.8% of net sales) in
2000 from $1,854,300 (17.5% of net sales) in 1999 and general and administrative
expense increased to $1,786,500 (15.6% of sales) in 2000 from $1,752,600 (16.5%
of net sales) in 1999. These increases were due to costs associated with
expanding the operations of the Company's office in Tampa, Florida.
Research and development expense decreased to $294,500 (2.6% of net sales) in
2000 from $327,600 (3.1% of net sales) in 1999.
Net interest expense increased to $93,200 (0.8% of net sales) in 2000 from
$71,700 (0.7% of net sales) in 1999.
The Company's relocation expense for the year 2000 amounted to $832,900 (7.2% of
net sales). This expense was offset by lease termination revenues in the amount
of $1,040,000, resulting in a net gain of $202,100.
1999 COMPARED WITH 1998
Net sales for 1999 decreased by 5.5% from $11,235,800 in 1998 to $10,621,700 in
1999. This decrease was due to decreased sales of the Company's IceStor(TM)
products partially offset by increased unit sales of the Company's pool
products.
Net sales of the Company's IceStor(TM) products were 20.3% lower in 1999 than in
1998 due to decreased foreign sales. Pool product sales were 8% higher in 1999
than in 1998 due to increased unit sales. Pool product sales amounted to 60% of
net sales in 1999 compared to 53% of net sales in 1998. IceStor(TM) sales
amounted to 40% of net sales in 1999 compared to 47% of net sales in 1998.
Cost of goods sold decreased in absolute dollars from $6,801,700 in 1998 to
$6,436,400 in 1999 while remaining stable as a percentage of net sales (60.5% in
1998 compared to 60.6% in 1999).
Marketing and selling expenses decreased in absolute dollars from $1,942,800 in
1998 (17.3% of net sales) to $1,854,300 (17.5% of net sales) in 1999. These
decreases were due to small decreases in a variety of expense categories, no one
of which is by itself significant.
General and administrative expenses increased from $1,480,200 (13.2% of net
sales) in 1998 to $1,752,600 (16.5% of net sales) in 1999. These increases were
due to a bad debt write-off as the result of terminating the Company's business
relationship with the Tampa distributor of its pool products. This business
termination also resulted in general and administrative start-up costs to open a
Company sales office in Tampa.
Research and development expenses increased from $194,100 (1.7% of net sales) in
1998 to $327,600 (3.1% of net sales) in 1999. These increases were due mainly to
an increased personnel and projects.
Net interest expense decreased from $113,400 (1.0% of net sales) in 1998 to
$71,700 (0.7% of net sales) in 1999. This decrease was due primarily to paying
off the Company's subordinated debt in September 1999.
SEASONALITY
Historically, the Company has experienced lower solar sales during the first
quarter than during other quarters of each year. In addition, sales typically
have increased significantly during the second quarter, declined slightly, and
then remained relatively constant during the third and fourth quarters. As the
Company's product mix shifts to include a larger proportion of other products,
such as the thermal energy storage products, the traditional seasonality is
being mitigated. Net income is affected by the seasonality of sales as well as
by significant marketing and selling expenses typically incurred during the
first quarter of each year. These expenses are incurred to develop programs and
materials for use throughout the remainder of the year.
In 1999 and 2000, sales and net income experienced their typical seasonality.
FAFCO page 16
16
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position decreased from $64,800 at 1999 fiscal year end to
$10,100 at 2000 fiscal year end, principally due to cash flow from investing
activities (purchase of fixed assets) and from operating activities (increase in
payables, accrued expenses and other current liabilities) offset by bank
borrowings and increased accounts receivable and inventories.
At December 31, 2000, the Company's net accounts receivable had increased to
$1,969,400 from $1,752,000 at December 31, 1999. This increase was due primarily
to increased sales during the fourth quarter of 2000.
At December 31, 2000, the Company's accounts payable and other accrued expenses
had increased to $1,744,700 from $802,500 at December 31, 1999. This increase
was due primarily to purchases of fixed assets along with increased inventories,
partially offset by an increase in bank borrowings
At December 31, 2000 the Company's inventories had increased to $1,225,900 from
$1,041,600 at December 31, 1999. This increase was due to accommodate an
increase in orders received for delivery during January 2001.
At December 31, 2000, net property, plant and equipment had increased to
$5,344,000 from $922,400 at December 31, 1999. The main reason for this increase
was the construction of the Company's new office and manufacturing facility
along with land acquisition and construction of new production equipment
developed to improve processes and products.
The Company had a deferred tax asset, net of valuation allowance, at year-end of
$864,300 in 2000 and $892,800 in 1999. The Company believes that it is more
likely than not that this asset will be fully realized. This belief is based
upon the Company's history of profitable operations prior to the 2000 fiscal
year. However, there can be no assurance that the Company will continue
profitability or, if it does, that profits will be sufficient to utilize the net
deferred asset.
At December 31, 2000, the Company's current ratio was 1.26 to 1 compared with
1.81 at December 31, 1999 and working capital decreased over the same period to
$755,500 from $1,487,000. Total assets exceeded total liabilities by $3,132,700
at December 31, 2000 compared with $3,127,400 at December 31, 1999.
The Company believes that its cash flow from operations, together with bank
borrowings, will be sufficient to support operations during the next twelve
months. The foregoing statement of how long the Company's capital resources are
expected to last is a forward-looking statement involving risks and
uncertainties, including the amount of the Company's sales and the ability of
the Company to control its operating expenses. However, if sales decline from
current levels additional debt or equity financing may be required. There can be
no assurance that financing, if required, would be available on favorable terms
or at all or that such financing will not significantly dilute the ownership
interests and rights of existing shareholders. The Company has a line of credit,
of which $450,500 had been utilized and $549,500 remained available under the
formula applied to net accounts receivable at December 31,2000. This line of
credit expires on August 10, 2001.
In addition to the line of credit, the Company has a 36 month term loan facility
in the amount of $445,000, bearing interest at prime plus 1.5%. At December 31,
2000, the Company had an outstanding balance of $367,000 on this loan facility.
The Company also has a 60-month term loan facility available in the amount of
$500,000 bearing interest at prime plus 1.5%. At December 31, 2000, the Company
had no outstanding balance on this loan facility.
FACTORS AFFECTING FUTURE RESULTS
Export sales are subject to certain controls and restrictions, including tariffs
and import duties and are subject to certain risks, including changing
regulatory requirements of foreign jurisdictions and transportation delays and
interruptions; however, the Company has not experienced any material
difficulties in the past relating to such limitations.
FAFCO page 17
17
--------------------------------------------------------------------------------
NOTES
--------------------------------------------------------------------------------
BOARD OF DIRECTORS
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
Manager
Xxxx & Company
a management consultant 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 28, 2001 at:
FAFCO, Inc.
000 Xxxxxxxx Xxxxx
Xxxxx, Xxxxxxxxxx 00000
Telephone: (000) 000-0000
FAFCO page 18
