<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1995 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ___________
Commission file number 0-10120
FAFCO, Inc.
(Exact name of registrant as specified in its charter)
California 94-2159547
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2690 Middlefield Road, Redwood City, California 94063
(Address of principal executive offices) (zip code)
(415) 363-2690
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
At November 10, 1995 3,097,887 shares of the Registrant's Common Stock were
issued and outstanding.
FAFCO, Inc.
Page 1 of 12
<PAGE> 2
Part I - Financial Information
Item 1 - Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET (UNAUDITED) SEPTEMBER DECEMBER
30, 1995 31, 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 81,800 $ 338,000
Accounts receivable, less allowance for doubtful accounts
of $458,300 in 1995 and $469,100 in 1994 1,361,100 2,551,200
Current portion of long-term notes receivable 72,300 14,500
Inventories 867,600 843,200
Prepaid expenses and other current assets 157,300 116,900
Other accounts receivable 14,600 15,000
Deferred tax asset, net of allowance 140,600 140,600
- --------------------------------------------------------------------------------------------------------
Total current assets 2,695,300 4,019,400
- --------------------------------------------------------------------------------------------------------
Plant and equipment, at cost 2,339,000 2,286,500
Less accumulated depreciation and amortization (2,036,000) (1,907,200)
- --------------------------------------------------------------------------------------------------------
303,000 379,300
- --------------------------------------------------------------------------------------------------------
Notes receivable and other assets (net) 349,600 33,900
Deferred tax asset, net of allowance 470,400 470,400
- --------------------------------------------------------------------------------------------------------
Total assets $ 3,818,300 $ 4,903,000
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 887,800 $ 1,165,100
Accrued compensation and benefits 281,400 161,900
Accrued warranty expense 213,600 247,000
Accrued marketing expenses 8,800 28,000
Income taxes payable 45,800
Notes payable to bank 701,300
- --------------------------------------------------------------------------------------------------------
Total current liabilities 2,092,900 1,647,800
- --------------------------------------------------------------------------------------------------------
Convertible subordinated notes ($425,000 owed to related parties
in 1995 and 1994) 600,000 600,000
Other non-current liabilities 64,800 125,100
- --------------------------------------------------------------------------------------------------------
Total liabilities 2,757,700 2,372,900
- --------------------------------------------------------------------------------------------------------
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; 3,097,887 issued and outstanding in 1995 and 387,200 387,600
3,100,887 in 1994
Capital in excess of par value 5,030,000 5,034,100
Notes receivable secured by Common Stock (75,100) (75,100)
Deficit (4,281,500) (2,816,500)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,060,600 2,530,100
- --------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $3,818,300 $ 4,903,000
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
Page 2 of 12 FAFCO, Inc.
<PAGE> 3
Part I - FINANCIAL INFORMATION - Item 1 (continued)
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
Sept. 30, Sept. 30,
-------------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,707,500 $ 2,544,700 $ 6,509,300 $ 7,794,700
Other income (expense), net 7,600 (22,600) 34,400 114,100
----------- ----------- ----------- -----------
Total revenues 1,715,100 2,522,100 6,543,700 7,908,800
----------- ----------- ----------- -----------
Cost of goods sold 1,432,100 1,662,900 4,659,700 4,801,900
Marketing & selling expense 532,000 377,300 1,700,500 1,381,700
General & administrative expense 436,200 305,000 1,201,100 964,800
Research & development expense 109,900 95,800 388,100 363,500
Net interest expense 25,700 23,800 59,300 65,300
----------- ----------- ----------- -----------
Total costs and expenses 2,535,900 2,464,800 8,008,700 7,577,200
----------- ----------- ----------- -----------
Income (loss) before income taxes $ (820,800) $ 57,300 $(1,465,000) $ 331,600
Provision for income taxes (4,200) (30,600)
Net income (loss) $ (820,800) $ 53,100 $(1,465,000) $ 301,000
=========== =========== =========== ===========
Primary net income (loss) per share $ (0.24) $ 0.02 $ (0.43) $ 0.09
Fully diluted net income (loss) per
share $ (0.24) $ 0.02 $ (0.43) $ 0.09
</TABLE>
The accompanying notes are an integral part of this statement.
Page 3 of 12 FAFCO, Inc.
<PAGE> 4
Part I - FINANCIAL INFORMATION - Item 1 (continued)
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $(1,465,000) $ 301,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 128,800 127,100
Allowance for doubtful accounts 28,300 26,600
Provision for inventory reserve 45,000
Loss on disposition of fixed assets 16,100
Change in assets and liabilities:
Decrease in accounts receivable 1,201,300 23,700
Increase in inventories (69,400) (359,600)
Change in prepaid expenses (40,400) 51,200
Change in other assets (412,700) 7,500
Decrease in payables and accrued expenses (295,500) (120,100)
Decrease in other non-current liabilities (4,800) (4,800)
----------- -----------
Net cash provided by (used in) operating activities (868,300) 52,600
----------- -----------
Cash flow from investing activities:
Purchase of fixed assets (68,600) (94,600)
----------- -----------
Net cash used in investing activities (68,600) (94,600)
----------- -----------
Cash flow from financing activities:
Proceeds from borrowing 701,300
Proceeds from sale of Common Stock 37,900
Repayment of borrowing (16,100) (19,600)
Repurchase of common stock (4,500)
----------- -----------
Net cash provided by financing activities 680,700 18,300
----------- -----------
Net decrease in cash and cash equivalents (256,200) (23,700)
Cash and cash equivalents, beginning of period 338,000 76,000
----------- -----------
Cash and cash equivalents, end of period $ 81,800 $ 52,300
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 55,900 $ 65,100
Cash paid during the period for income taxes $ 49,000 $
</TABLE>
The accompanying notes are an integral part of this statement.
Page 4 of 12 FAFCO, Inc.
<PAGE> 5
Part I - FINANCIAL INFORMATION - Item 1 (continued)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. This information is unaudited; however, in the opinion of the Registrant's
management, all adjustments necessary for a fair statement of results for
the periods presented have been included. The results for the period ended
September 30, 1995 are not necessarily indicative of results to be expected
for the entire year. These financial statements, notes and analyses should
be read in conjunction with the Registrant's audited annual financial
statements for the year ended December 31, 1994, included in its 1994
Annual Report to Shareholders.
2. Inventories are valued at the lower of cost or market, determined on a last
in, first out (LIFO) basis, and consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Raw materials $ 480,000 $ 464,000
Work in process 162,200 211,300
Finished goods 225,400 167,900
------------ ------------
$ 867,600 $ 843,200
============ ============
</TABLE>
3. In March 1995, the Registrant entered into a line of credit agreement with
Silicon Valley Bank, which line of credit allows the registrant to borrow the
lesser of $1,500,000 or an amount determined by a formula applied to accounts
receivable. Unused borrowing capacity was $246,000 at September 30, 1995.
Amounts borrowed bear interest at prime rate plus 0.5% per annum and are
secured by the Registrant's assets along with The Gregory Company's assets.
This line of credit expires on June 5, 1996.
Page 5 of 12 FAFCO, Inc.
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Part I - FINANCIAL INFORMATION - Item 1 (continued)
4. Deferred tax assets are comprised of the following at:
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1,
1995 1994
----------- -----------
<S> <C> <C>
Allowance for doubtful accounts $ 199,400 $ 178,500
Accrued expenses 140,000 178,800
Loss carryforwards 625,000 858,700
Tax credits 193,600 282,200
Other 53,900 7,400
----------- -----------
1,211,900 1,505,600
Deferred tax asset valuation allowance (600,900) (893,900)
----------- -----------
Total deferred taxes, net $ 611,000 $ 611,700
=========== ===========
</TABLE>
5. Net Income per Share
Net income (loss) per share is calculated using the weighted average number
of common and common equivalent shares outstanding during the periods
presented.
Primary earnings per share were calculated as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1995 1994 1995 1994
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ (820,800) $ 53,100 $(1,465,000) $ 301,000
----------- ----------- ----------- ----------
Average common shares outstanding 3,097,887 3,127,605 3,097,887 3,127,605
Add: Exercise of options reduced by
the number of shares purchased with 223,635 258,607 194,823 217,030
proceeds
Add: Exercise of warrants reduced
by the number of shares purchased 111,458 142,634 111,458 132,187
with proceeds
Adjusted weighted average shares
outstanding 3,432,980 3,528,846 $ 3,404,168 3,476,822
----------- ----------- ----------- ----------
Earnings (loss) per share $ (0.24) $ 0.02 $ (0.43) $ 0.09
=========== =========== =========== ==========
</TABLE>
Primary earnings per share are calculated by dividing (x) net income by (y)
the sum of the weighted average number of shares issued and outstanding
plus the shares issuable upon exercise of dilutive stock options and
warrants during each year. For the periods ended September 30, 1995,
primary earnings per share is repeated as fully diluted earnings per share
as the calculation of fully diluted earnings per share was anti-dilutive.
Page 6 of 12 FAFCO, Inc.
<PAGE> 7
Part I - FINANCIAL INFORMATION - Item 1 (continued)
Fully diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Adjusted net income $ (820,800) $ 61,200 $(1,465,500) $ 325,300
----------- ----------- ----------- -----------
Average common shares outstanding 3,097,887 3,127,605 3,097,887 3,127,605
Add: Exercise of options reduced
by the number of shares purchased
with proceeds 223,635 258,607 194,823 217,030
Add: Exercise of warrants
reduced by the number of shares
purchased with proceeds 111,458 142,634 111,458 132,187
Add: Conversion of convertible
debt into shares N/A 270,000 N/A 270,000
Adjusted weighted average shares
outstanding 3,432,980 3,798,846 3,404,168 3,746,822
----------- ----------- ----------- -----------
Earnings (loss) per common share
assuming full dilution $ (0.24) $ 0.02 $ (0.43) $ 0.09
=========== =========== =========== ===========
</TABLE>
Fully diluted earnings per share are calculated by dividing net income,
adjusted for the after-tax effect of the interest expense associated with
the convertible debt, by the sum of the weighted average number of shares
issued and outstanding plus shares issuable upon exercise of dilutive stock
options and warrants and upon conversion of convertible debt during each
year.
Page 7 of 12 FAFCO, Inc.
<PAGE> 8
Part I - FINANCIAL INFORMATION
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Results of Operations
Net sales for the quarter ended September 30 decreased by 32.9% from
$2,544,700 in 1994 to $1,707,500 in 1995. Net sales for the nine months ended
September 30 decreased by 16.5% from $7,794,700 in 1994 to $6,509,300 in 1995.
These decreases were primarily due to decreased Commercial Products unit
sales, along with decreased Pool Products unit sales from the
comparable periods in 1994. The decreases in Commercial Products unit sales
are due mainly to expectations of lower energy prices when deregulation takes
place in the electric utilities in the United States.
Cost of goods sold decreased from $1,662,900 in the quarter ended September
30, 1994 to $1,432,100 in the corresponding quarter in 1995, and from
$4,801,900 for the nine-month period ended September 30, 1994 to $4,659,700
for the corresponding period in 1995, while increasing as a percentage of net
sales from 65.3% to 83.9% for the quarter and from 61.6% to 71.6% for the
nine-month period. The increase as a percent of sales was due mainly to the
fixed costs being allocated over significantly lower sales, along with
expenses associated with a 31% reduction in the work force.
Marketing and selling expenses increased from $377,300 (14.8% of net sales) in
the quarter ended September 30, 1994 to $532,000 (31.2% of net sales) in the
same quarter in 1995 and increased from $1,381,700 (17.7% of net sales) in the
nine-month period ended September 30, 1994 to $1,700,500 (26.7% of net sales)
for the corresponding period in 1995. These increases were due mainly to
one-time expenses for market research projects during the third quarter along
with the addition of sales personnel and increased promotional expenses for
pool products earlier in the year.
General and administrative expenses increased from $305,000 (12.0% of net
sales) in the quarter ended September 30, 1994 to $436,200 (25.5% of net
sales) in the same quarter in 1995 and from $964,800 (12.4% of net sales) in
the nine-month period ended September 30, 1994 to $1,201,100 (18.5% of net
sales) for the corresponding period in 1995. These increases were primarily
due to increased personnel costs during the first half of the year, along
with severance expenses and increased legal expenses.
Research and development expenses increased slightly from $95,800 (3.8% of net
sales) for the quarter ended September 30, 1994 to $109,900 (6.4% of net
sales) for the quarter ended September 30, 1995 and increased from $363,500
(4.7% of net sales) in the nine-month period ended September 30, 1994 to
$388,100 (6.0% of net sales) for the corresponding period in 1995. These
increases were primarily a result of increased expenses related to the
development of solar heating products for above ground pools which were
introduced at the National Spa & Pool Institute Conference in October.
Page 8 of 12 FAFCO, Inc.
<PAGE> 9
Part I - FINANCIAL INFORMATION - Item 2 (continued)
Net interest expense increased from $23,800 (0.9% of net sales) in the quarter
ended September 30, 1994 to $25,700 (1.5% of net sales) for the same quarter in
1995 and decreased from $65,300 (0.9% of net sales) in the nine-month period
ended September 30, 1994 to $59,300 (0.9% of net sales) for the corresponding
period in 1995. The increase for the quarter was due primarily to higher average
daily borrowing in the third quarter of 1995 than in the third quarter of 1994
with higher interest rates. The decrease in dollar amount for the nine-month
period was due to lower average daily borrowing in the first nine-months of 1995
than in 1994, partially offset by higher interest rates.
Other income (expense), net, included $24,000 in refunds of prior year's
insurance premiums in the second quarter of 1995 and during the first nine
months of 1995, compared with $29,200 in the second quarter and $38,400 in the
first nine months of 1994. Other income (expense), net, for the nine-month
period ended September 30, 1994 also included $85,100 of proceeds, net of
related costs, pertaining to a legal settlement resolved during the second
quarter of 1994.
Liquidity and Capital Resources
The Company's cash position decreased from $338,000 at 1994 fiscal year end to
$81,800 at September 30, 1995, principally due to the operating losses partially
offset by a decrease in accounts receivable and bank borrowing. At September 30,
1995 the Registrant's inventories had increased slightly to $867,600 from
$843,200 at December 31, 1994.
At September 30, 1995, the Registrant's accounts receivable had decreased to
$1,361,100 from $2,551,200 at December 31, 1994, reflecting an improvement in
promptness of payments particularly from the Registrant's IceStor(TM) customers,
the conversion of two customers' accounts receivable into a note receivable
secured by real property, and lower sales.
At September 30, 1995, the Registrant's accounts payable and other accrued
expenses had decreased to $887,800 from $1,165,100 at December 31, 1994. This
decrease is primarily due to payments of expenses resulting from collection of
receivables noted above.
At September 30, 1995, the Registrant's current ratio was 1.29 to 1 compared
with 2.47 to 1 at December 31, 1994, as working capital decreased over the same
period to $602,500 from $2,142,500. Total assets exceeded total liabilities by
$1,060,600 at September 30, 1995 compared with $2,530,100 at December 31, 1994.
During the third quarter of 1995, and continuing into the fourth quarter of
1995, the Company has begun and is continuing an aggressive cost reduction
campaign, including the reduction of personnel from 74 employees to 51
employees. The Registrant believes that, as a result of the cost-cutting
measures, its cash flow from operations, together with bank borrowings, will be
sufficient to support operations during the next twelve months. However, if
sales remain slow or decline from current levels, additional debt or equity
financing may be required. The Company believes that the reduced rate of sales
in IceStor(TM), which had an adverse impact on net revenues during the quarters
ended June 30, 1995 and September 30, 1995, will continue during the remainder
of 1995 which will have a negative effect on results of operations for the
remainder of 1995. The Registrant has a line of credit of which $701,300 had
been utilized and $246,000 remained available under the formula applied to net
accounts receivable. This line expires on June 5, 1996.
Page 9 of 12 FAFCO, Inc.
<PAGE> 10
PART I - FINANCIAL INFORMATION - Item 2 (continued)
Significant Accounting Policies - Income Taxes
Effective as of the beginning of 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), on a prospective basis. The new standard requires an asset and liability
approach for financial accounting and reporting for income taxes. Under this
approach, 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. See Note 5 of Notes to Interim Consolidated
Financial Statements.
For periods prior to 1993, the Company followed the deferred method prescribed
by Accounting Principles Board Opinion No. 11.
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended September 30,
1995.
Page 10 of 12 FAFCO, Inc.
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAFCO, Inc. (Registrant)
DATE: November 13, 1995 BY: /s/ Alex N. Watt
-----------------------------
Alex N. Watt, Vice President
Finance and Administration
(Chief Financial Officer)
Page 11 of 12 FAFCO, Inc.
<PAGE> 12
EXHIBIT INDEX
EX. 27.1 FINANCIAL DATA SCHEDULE
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS IN THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 81,800
<SECURITIES> 0
<RECEIVABLES> 2,244,100
<ALLOWANCES> 497,300
<INVENTORY> 867,600
<CURRENT-ASSETS> 2,695,300
<PP&E> 2,339,000
<DEPRECIATION> 2,036,000
<TOTAL-ASSETS> 3,818,300
<CURRENT-LIABILITIES> 2,092,900
<BONDS> 600,000
<COMMON> 387,200
0
0
<OTHER-SE> 673,400
<TOTAL-LIABILITY-AND-EQUITY> 3,818,300
<SALES> 6,509,300
<TOTAL-REVENUES> 6,545,100
<CGS> 4,659,700
<TOTAL-COSTS> 4,659,700
<OTHER-EXPENSES> 389,500
<LOSS-PROVISION> 32,400
<INTEREST-EXPENSE> 60,300
<INCOME-PRETAX> (1,465,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,465,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,465,000)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
