<PAGE> 1
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, 1996 or
[ ]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____________ to ________________
Commission file number 0-10120
FAFCO, Inc.
(Exact name of Registrant as specified in its charter)
California 94-2159547
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2690 Middlefield Road, Redwood City, California 94063
(Address, including zip code, of Registrant's principal executive offices)
(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 1, 1996, 3,298,311 shares of the Registrant's Common Stock, $.125
par value were issued and outstanding.
Page 1 of 10
<PAGE> 2
Part 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
FAFCO, Inc.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
(UNAUDITED)
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 121,500 $ 126,200
Accounts receivable, less allowance for doubtful accounts of
$497,000 in 1996 and $463,900 in 1995 1,770,000 1,149,600
Current portion of long-term notes receivable (net) 232,600 64,000
Inventories 712,900 717,200
Prepaid expenses and other current assets 139,500 145,500
Other accounts receivable 8,400
Deferred tax asset, net of allowance 125,200 125,200
----------- -----------
Total current assets 3,110,100 2,327,700
----------- -----------
Plant and equipment, at cost 2,456,600 2,345,100
Less accumulated depreciation and amortization (2,113,000) (2,085,900)
----------- -----------
343,600 259,200
----------- -----------
Notes receivable and other assets (net) 103,200 327,700
Deferred tax asset, net of allowance 485,800 485,800
----------- -----------
Total assets $ 4,042,700 $ 3,400,400
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank $ 712,600 $ 751,300
Accounts payable and other accrued expenses 1,009,900 949,100
Accrued compensation and benefits 275,900 188,900
Accrued warranty expanse 225,400 216,000
Income taxes payable 18,800
----------- -----------
Total current liabilities 2,242,600 2,105,300
----------- -----------
Convertible subordinated notes ($550,000 and $425,000 was owed
to related parties in 1996 and 1995 respectively) 925,000 600,000
Other non-current liabilities 29,300 80,400
----------- -----------
Total liabilities 3,196,900 2,785,700
----------- -----------
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; 3,298,311 issued and outstanding in 1996 and
3,112,687 was outstanding in 1995 412,200 389,000
Capital in excess of par value 5,105,100 5,035,600
Notes receivable secured by Common Stock (75,100) (75,100)
Deficit (4,596,400) (4,734,800)
----------- -----------
Total shareholders' equity 845,800 614,700
----------- -----------
Commitments and contingent liabilities
----------- -----------
Total liabilities and shareholders' equity $ 4,042,700 $ 3,400,400
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
Page 2 of 10
<PAGE> 3
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,757,900 $ 1,707,500 $ 6,817,800 $ 6,509,300
Other income (net) (3,400) 7,600 33,000 34,400
----------- ----------- ----------- -----------
Total revenues 1,754,500 1,715,100 6,850,800 6,543,700
----------- ----------- ----------- -----------
Cost of goods sold 1,239,300 1,432,100 4,146,700 4,659,700
Marketing & selling expense 381,600 532,000 1,309,700 1,700,500
General & administrative expense 330,600 436,200 1,013,300 1,201,100
Research & development expense 28,200 109,900 86,200 388,100
Net interest expense 42,600 25,700 123,700 59,300
----------- ----------- ----------- -----------
Total costs and expenses 2,022,300 2,535,900 6,679,600 8,008,700
----------- ----------- ----------- -----------
Income (loss) before income taxes (267,800) (820,800) 171,200 (1,465,000)
Provision for income taxes 32,800
----------- ----------- ----------- -----------
Net income (loss) ($ 267,800) ($ 820,800) $ 138,400 ($1,465,000)
=========== =========== =========== ===========
Primary net income (loss) per share $ (0.08) $ (0.24) $ 0.04 $ (0.43)
----------- ----------- ----------- -----------
Fully diluted net income per share $ (0.08) $ (0.24) $ 0.04 $ (0.43)
</TABLE>
The accompanying notes are an integral part of this statement.
Page 3 of 10
<PAGE> 4
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1995
--------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 138,400 ($1,465,000)
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation 88,300 128,800
Allowance for doubtful accounts 33,100 28,300
(Gain) loss on sale of fixed assets (6,100) 16,100
Provision for inventory reserve 45,000
Change in assets and liabilities:
Change in accounts receivable (869,500) 1,201,300
Change in inventories 4,300 (69,400)
Change in prepaid expenses 6,000 (40,400)
Change in other assets 263,500 (412,700)
Change in payables and accrued expenses 187,300 (295,500)
Decrease in other non-current liabilities (63,300) (4,800)
--------- -----------
Net cash used in operating activities (218,000) (868,300)
--------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of fixed assets (172,700) (68,600)
Proceeds from sale of property & equipment 6,100
--------- -----------
Net cash used in investing activities (166,600) (68,600)
--------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings under subordinated debt agreements ($175,000
from related parties) 325,000
Proceeds from sale of common stock 92,800
Net borrowings (repayments) under bank revolving line of credit (38,700) 701,300
Net increase (reduction) in capital lease obligations 800 (16,100)
Repurchase of common stock (4,500)
--------- -----------
Net cash provided by financing activities 379,900 680,700
--------- -----------
Net decrease in cash and cash equivalents (4,700) (256,200)
Cash & cash equivalents, beginning of period 126,200 338,000
========= ===========
Cash and cash equivalents, end of period $ 121,500 $ 81,800
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 73,200 $ 55,900
Cash paid during the period for income taxes $ 7,500 $ 49,000
</TABLE>
The accompanying notes are an integral part of this statement.
Page 4 of 10
<PAGE> 5
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
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, 1996 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, 1995, included in its 1995 Annual Report to
Shareholders.
2. Net income (loss) per share is calculated using the weighted average number
of common and common equivalent shares outstanding during the periods presented.
(See Note 6)
3. 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, 1996 DECEMBER 31, 1995
------------------------ --------------------------
<S> <C> <C>
Raw materials $319,300 $395,200
Work in process 194,300 118,500
Finished goods 199,300 203,500
======== ========
712,900 $717,200
======== ========
</TABLE>
4. In February 1996, 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 $1,000,000 or an amount determined by a formula applied to accounts
receivable. Unused borrowing capacity was $287,400 at September 30, 1996.
Amounts borrowed bear interest at prime rate plus 2-1/2% 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, 1997.
Page 5 of 10
<PAGE> 6
Part I - FINANCIAL INFORMATION (continued)
Deferred tax assets are comprised of the following at:
<TABLE>
<CAPTION>
JANUARY 1, 1996 JANUARY 1, 1995
--------------- ---------------
<S> <C> <C>
Allowance for doubtful accounts $ 197,000 $ 199,400
Accrued expenses 142,300 140,000
Loss carryforwards 1,360,500 625,000
Tax credits 178,600 193,600
Other 116,400 53,900
----------- -----------
1,994,800 1,211,900
Deferred tax asset valuation allowance (1,383,800) (600,900)
----------- -----------
Total deferred taxes, net $ 611,000 $ 611,000
=========== ===========
</TABLE>
6. Net Income (Loss) Per Share
Primary earnings per share were calculated as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) ($ 267,800) ($ 820,800) $ 138,400 ($1,465,000)
----------- ----------- ---------- -----------
Average common shares outstanding 3,298,311 3,097,887 3,209,579 3,097,887
Add: Exercise of options reduced by the
number of shares purchased with proceeds N/A 223,635 N/A 194,823
Add: Exercise of warrants reduced by the
number of shares purchased with proceeds N/A 111,458 N/A 111,458
Adjusted weighted average shares
outstanding 3,298,311 3,432,980 3,209,579 3,404,168
----------- ----------- ---------- -----------
Earnings net (loss) per share ($ 0.08) ($ 0.24) $ 0.04 ($ .43)
=========== =========== ========== ===========
</TABLE>
Primary earnings (loss) per share are calculated by dividing net income (loss)
by the weighted average number of shares issued and outstanding and shares
issuable upon exercise of dilutive stock options and warrants during each year.
Page 6 of 10
<PAGE> 7
Part I - FINANCIAL INFORMATION (continued)
Fully diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30,
1996 1995 1996 1995
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Adjusted net (increase) ($ 267,800) ($ 820,800) $ 138,400 ($1,465,500)
----------- ----------- ---------- -----------
Average common shares outstanding 3,298,311 3,097,887 3,209,579 3,097,887
Add: Exercise of options reduced by the
number of shares purchased with proceeds N/A 223,635 N/A 194,823
Add: Exercise of warrants reduced by
the number of shares purchased with
proceeds N/A 111,458 N/A 111,458
Add: conversion of convertible debt
into shares N/A N/A N/A N/A
----------- ----------- ---------- -----------
Adjusted weighted average shares
outstanding 3,298,311 3,432,980 3,209,579 3,404,168
----------- ----------- ---------- -----------
Net (loss) per common share assuming
full dilution ($ 0.08) ($ 0.24) $ 0.04 ($ .43)
=========== =========== ========== ===========
</TABLE>
Fully diluted earnings (loss) per share are calculated by dividing net income
(loss), adjusted for the dilutive 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 and shares issuable upon exercise of dilutive
stock options and warrants, and upon conversion of convertible debt during each
year.
Page 7 of 10
<PAGE> 8
Part - FINANCIAL INFORMATION (continued)
Item 2
FAFCO, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Results of Operations
Net sales for the quarter ended September 30, 1996 increased by 3.0% from
$1,707,500 in 1995 to $1,757,900 in 1996. Net sales for the nine months ended
September 30, 1996 increased by 4.7% from $6,509,300 in 1995 to $6,817,800 in
1996. These increases were primarily due to increased IceStor(TM) and pool panel
product sales partially offset by decreased unit sales of the Company's
automated swimming pool controls.
Cost of goods sold decreased from $1,432,100 (83.9% of net sales) in the quarter
ended September 30, 1995 to $1,239,300 (70.5% of net sales) in the corresponding
quarter in 1996, and decreased from $4,659,700 (71.6% of net sales) for the nine
month period ended September 30, 1995 to $4,146,700 (60.8% of net sales) for the
corresponding period in 1996. These decreases in cost of goods sold were due
primarily to the spreading of reduced overhead costs over slightly higher net
sales.
Marketing and selling expenses decreased from $532,000 (31.2% of net sales) in
the quarter ended September 30 1995 to $381,600 (21.7% of net sales) in the same
quarter of 1996 and decreased from $1,700,500 (26.1% of net sales) in the nine
month period ended September 30, 1995 to $1,309,700 (19.2% of net sales) for the
corresponding period in 1996. These decreases were due mainly to the decrease of
in-house sales support personnel.
General and administrative expenses decreased from $436,200 (25.5% of net sales)
in the quarter ended September 30, 1995 to $330,600 (18.8% of net sales) in the
same quarter in 1996 and from $1,201,100 (18.5% of net sales) in the nine month
period ended September 30, 1995 to $1,013,300 (14.9% of net sales) for the
corresponding period in 1996. These decrease were due mainly to a reduction of
cost associated with decreases in personnel throughout the company.
Research and development expensed decreased from $109,900 (6.4% of net sales)
for the quarter ended September 30, 1995 to $28,200 (1.6% of net sales) for the
quarter ended September 30, 1996 and decreased from $388,100 (6.0% of net sales)
in the nine month period ended September 30, 1995 to $86,200 (1.3% of net sales)
for the corresponding period in 1996. These decreases were primarily a result of
a decrease in personnel in the research and development area.
Net interest expense increased from $25,700 (1.5% of net sales) in the quarter
ended September 30, 1995 to $42,600 (2.4% of net sales) for the quarter ended
September 30, 1996 and increased from $59,300 (0.9% of net sales) in the nine
month period ended September 30, 1995 to $123,700 (1.8% of net sales) for the
corresponding period in 1996. These increases were mainly due to higher average
daily borrowing in 1996 along with higher interest rates in 1996.
Other income (net) included $30,000 in refunds of prior year's insurance
premiums during the first nine months of 1996 compared with $24,000 during the
first nine months of 1995.
Liquidity and Capital Resources
At September 30, 1996, the Registrant's inventories were stable at $712,900
compared with $717,200 at December 31, 1995.
Part I - FINANCIAL INFORMATION (continued)
Page 8 of 10
<PAGE> 9
At September 30, 1996, the Registrant's accounts payable and other accrued
expenses had increased to $1,009,900 from $949,100 at December 31, 1995. This
increase is primarily due to slightly increased sales levels experienced during
the year.
At September 30, 1996, the Registrant's accounts receivable had increased to
$1,770,000 from $1,149,600 at December 31, 1995 due mainly to the increase in
sales of IceStor(TM) products during the period along with new customer sales of
Above Ground Pool panels.
At September 30, 1996, the Registrant's accrued compensation and benefits had
increased to $275,900 from $188,900 at December 31, 1995, due mainly to the fact
that the December 1995 level was abnormally low due to heavy use of vacation
while the Company was closed in the latter half of December.
At September 30, 1996, the Registrant's current ratio was 1.39 to 1 compared
with 1.11 to 1 at December 31, 1995. The Registrant had working capital of
$867,500 at September 30, 1996 compared with $222,400 at December 31, 1995.
Total assets exceeded total liabilities by $845,800 at September 30, 1996
compared with $614,700 at December 31, 1995.
The Registrant believes that its cash flow from operations along with its
available line of credit will be sufficient to support operations during the
next twelve months.
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits:
27 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
Page 9 of 10
<PAGE> 10
SIGNATURE
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 1, 1996 BY:/s/Alex N. Watt
-------------------- ---------------
Alex N. Watt, Vice President -
Finance and Administration and
Chief Financial Officer (Principal
Financial and Accounting Officer
Page 10 of 10
<PAGE> 11
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 121,500
<SECURITIES> 0
<RECEIVABLES> 2,621,700
<ALLOWANCES> 536,100
<INVENTORY> 712,900
<CURRENT-ASSETS> 3,110,100
<PP&E> 2,456,600
<DEPRECIATION> (2,113,000)
<TOTAL-ASSETS> 4,042,700
<CURRENT-LIABILITIES> 2,242,600
<BONDS> 954,300
0
0
<COMMON> 412,200
<OTHER-SE> 433,600
<TOTAL-LIABILITY-AND-EQUITY> 4,042,700
<SALES> 6,817,800
<TOTAL-REVENUES> 6,850,800
<CGS> 4,146,700
<TOTAL-COSTS> 4,146,700
<OTHER-EXPENSES> 86,200
<LOSS-PROVISION> 34,900
<INTEREST-EXPENSE> 123,700
<INCOME-PRETAX> 171,200
<INCOME-TAX> 32,800
<INCOME-CONTINUING> 138,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 138,400
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
