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, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-10120
FAFCO, Inc.
(Exact name of Registrant as specified in its charter)
California 94-2159547
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2690 Middlefield Road, Redwood City, California 94063
(Address, including zip code, of Registrant's principal executive
offices)
(650) 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 6, 1997, 3,298,311 shares of the Registrant's
Common Stock, $.125 par value were issued and outstanding.
Part 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
FAFCO, Inc.
CONSOLIDATED BALANCE SHEET
<TABLE>
<S> <C> <C>
September 30, 1997 December 31, 1996*
(unaudited)
Assets
Current assets:
Cash and cash equivalents $679,20 $88,200
Accounts receivable, less allowance
for doubtful accounts of $541,400
in 1997and $512,600 in 1996 1,504,800 1,890,700
Current portion of long-term
notes receivable (net) 175,100 229,100
Inventories 723,500 917,400
Prepaid expenses and other current assets 183,200 150,800
Other accounts receivable,net of allowance 1,100 4,500
Deferred tax asset, net of allowance 221,500 221,500
Total current assets 3,488,400 3,502,200
Plant and equipment, at cost 2,577,000 2,465,800
Less accumulated depreciation and
amortization (2,200,400) (2,116,200)
376,600 349,600
Notes receivable and other assets (net) 182,100 65,500
Deferred tax asset, net of allowance 427,900 427,900
Total assets $ 4,475,000 $ 4,345,200
Liabilities and shareholders'equity
Current Liabilities:
Bank line of credit $ 758,600
Accounts payable and other
accrued expenses $ 949,100 1,037,800
Accrued compensation and benefits 408,200 187,000
Accrued warranty expense 272,700 234,100
Total current liabilities 1,630,000 2,217,500
Convertible subordinated notes
($600,000 was owed to related
parties in 1997 and 1996) 925,000 925,000
Other non-current liabilities 60,900 26,400
Total liabilities 2,615,900 3,168,900
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; 3,298,311 issued and
outstanding in 1997 and 1996. 412,200 412,200
Capital in excess of par value 5,105,200 5,105,200
Notes receivable secured by
common stock (75,100) (75,100)
Deficit (3,583,200) (4,266,000)
Total shareholders' equity 1,859,100 1,176,300
Commitments and contingent liabilities
Total liabilities and
shareholders' equity $ 4,475,000 $4,345,200
</TABLE>
The accompanying notes are an integral part of this statement.
* Restated for change in accounting principle (See Note 3)
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Quarter Ended Nine Months Ended
September 30, September 30,
<TABLE>
<S> <C> <C> <C> <C>
1997 1996 1997 1996
Net sales $2,065,200 $1,757,900 $8,252,500 $6,817,800
Other income (net) (3,500) (3,400) 111,700 33,000
Total revenues 2,061,700 1,754,500 8,364,200 6,850,800
Cost of goods sold 1,378,800 1,239,300 4,795,000 4,146,700
Marketing & selling
expense 432,400 381,600 1,394,600 1,309,700
General &
administrative
expense 317,700 330,600 1,180,900 1,013,300
Research &
development expense 41,400 28,200 151,600 86,200
Net interest expense 25,400 42,600 105,400 123,700
Total costs and
expenses 2,195,700 2,022,300 7,627,500 6,679,600
Income before income
taxes $ (134,000) $ (267,800) $ 736,700 $ 171,200
Provision for income
taxes 54,000 32,800
Net income $ (134,000) $ (267,800) $ 682,700 $ 138,400
Primary net income
per share $ (0.04) $ (0.08) $ 0.19 $ 0.04
Fully diluted net
income per share $ (0.04) $ (0.08) $ 0.17 $ 0.04
</TABLE>
The accompanying notes are an integral part of this statement
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
<TABLE>
<S> <C> <C>
1997 1996*
Cash flow from operating
activities:
Net income $ 682,700 $ 138,400
Adjustments to reconcile net
income to net cash provided by (used
in) operating activities:
Depreciation 94,900 88,300
Allowance for doubtful accounts 28,800 33,100
Gain on sale of fixed assets (6,100)
Change in assets and liabilities:
Change in accounts receivable 360,500 (661,900)
Change in inventories 193,900 4,300
Change in prepaid expenses (32,400) 6,000
Change in other assets (62,600) 55,900
Change in payables and accrued
expenses 171,100 176,000
Change in other non-current
liabilities 34,500 (51,100)
Net cash provided by (used in)
operating activities 1,471,400 (217,100)
Cash flow from investing activities:
Purchase of fixed assets (121,800) (172,700)
Proceeds from sale of equipment 6,100
Net cash used in investing
activities (121,800) (166,600)
Cash flow from financing activities:
Borrowings under subordinated debt
agreements 325,000
Proceeds from sale of common stock 92,700
Payments on line of credit (1,493,900) (940,000)
Borrowings on line of credit 735,300 901,300
Net cash (used in)provided by
financing activities (758,600) 379,000
Net increase (decrease) in cash and
cash equivalents 591,000 (4,700)
Cash & cash equivalents, beginning of
period 88,200 126,200
Cash and cash equivalents, end of
period $ 679,200 $ 121,500
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interes $ 114,200 $ 73,200
Cash paid during the period for
income taxes $ 7,500
</TABLE>
*Reclassified for comparative purposes
The accompanying notes are an integral part of this statement
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, 1997
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, 1996
included in its 1996 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. Effective in 1997 the Company changed its method of accounting
for inventories from last in, first out (LIFO) to first in, first
out (FIFO) a change in accounting principle. The reason for this
change is that LIFO is administratively difficult and costly for
the Company, the amounts have been minimal and the effect on the
Consolidated Statement of Operations has not been material over
the past several years due to relatively low rates of inflation
in the economy as a whole. The cumulative effect on
Shareholders' Equity at December 31, 1996 was to increase
Shareholders' Equity by $82,000. Inventories are valued at the
lower of cost or market and consist of the following.
<TABLE>
<S> <C> <C>
September 30, 1997 December 31, 1996*
Raw materials $ 419,700 $ 413,800
Work in process 157,900 111,900
Finished goods 145,900 391,700
$ 723,500 $ 917,400
</TABLE>
4. The Registrant has 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
$847,200 at September 30, 1997. Amounts borrowed bear interest
at prime rate plus 2 % per annum and are secured by the
Registrant's assets along with The Gregory Company's assets.
This line of credit expires on March 31, 1998.
5. Effective as of the beginning of 1993, the Company changed its
method of accounting for income taxes by adopting SFAS 109. The
cumulative effect of this change on years prior to 1993 increased
net income for 1993 by $1,434,800 offset by a valuation allowance
of $717,400. The cumulative effect resulted primarily from the
recognition of the tax effects of state and federal net operating
loss carryforwards and net deductible temporary differences.
Financial statements presented for fiscal years prior to 1993
reflect accounting for income taxes under prior deferred method.
* Restated for change in accounting principle (See Note 3)
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Deferred tax assets are comprised of the following at:
<TABLE>
<S> <C> <C>
January 1, 1997 January 1, 1996
Allowance for doubtful
accounts $ 215,600 $ 197,000
Accrued expenses 184,300 142,300
Loss carryforwards 1,157,800 1,360,500
Tax credits 175,700 178,600
Other 107,800 116,400
1,841,200 1,994,800
Deferred tax asset
valuation allowance (1,191,800) (1,383,800)
Total deferred taxes,
net $ 649,400 $ 611,000
</TABLE>
6. Net Income (Loss) Per Share
Primary earnings per share were calculated as follows:
Quarter ended September30, NineMonthsEnded
September 30,
<TABLE>
<S> <C> <C> <C> <C>
1997 1996 1997 1996
Net income (loss) $(134,000) $(267,800) $ 682,700 $ 138,400
Average common shares
outstanding 3,298,311 3,298,311 3,298,311 3,209,579
Add: Exercise of
options reduced by the
number of shares
purchased with
proceeds N/A N/A 243,093 N/A
Add: Exercise of
warrants reduced by the
number of shares
purchased with
proceeds N/A N/A 80,956 N/A
Adjusted weighted
average shares
outstanding 3,298,311 3,298,311 3,622,360 3,209,579
Earnings net (loss) per
share $ (0.04) $ (0.08) $ 0.19 $ 0.04
</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
Part I - FINANCIAL INFORMATION (continued)
Fully diluted earnings per share were calculated as follows:
<TABLE>
Quarter Ended Nine Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
Net Income (loss) $ (134,000) $ (267,800) $ 707,600 $ 138,400
Average common shares
outstanding 3,298,311 3,298,311 3,298,311 3,209,579
Add: Exercise of
options reduced by the
number of shares
purchased with
proceeds N/A N/A 243,093 N/A
Add: Exercise of
warrants reduced by
the number of shares
purchased with
proceeds N/A N/A 80,956 N/A
Add: conversion of
convertible debt into
shares N/A N/A 555,000 N/A
Adjusted weighted
average shares
outstanding 3,298,311 3,298,311 4,177,360 3,209,579
Net (loss) per common
share assuming full
dilution $ (0.04) $ (0.08) $ 0.17 $ 0.04
</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
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, 1997 increased by
17.5% from $1,757,900 in 1996 to $2,065,200 in 1997. Net sales
for the nine months ended September 30, 1997 increased by 21.0%
from $6,817,800 in 1996 to $8,252,500 in 1997. These increases
were primarily due to increased sales of the Company's pool panel
products, along with increased unit sales of the Company's
IceStorT products partially offset by the effect of
discontinuance of the Company's automated swimming pool controls.
Cost of goods sold increased in absolute terms from $1,239,300 in
the quarter ended September 30, 1996 to $1,378,800 in the
corresponding quarter in 1997, and from $4,146,700 for the nine
month period ended September 30, 1996 to $4,795,000 for the
corresponding period in 1997. However, cost of goods sold
decreased as a percent of net sales from 70.5% to 66.8% for the
quarter and from 60.8% to 58.1% for the nine-month period.
These decreases in cost of goods sold as a percent of net sales
were due primarily to the spreading of fixed overhead costs over
higher net sales.
Marketing and selling expenses increased from $381,600 in the
quarter ended September 30 1996 to $432,400 in the same quarter
of 1997 and increased from $1,309,700 in the nine month period
ended September 30, 1996 to $1,394,600 for the corresponding
period in 1997. However marketing and selling expenses decreased
as a percent of net sales from 21.7% to 20.9% for the quarter and
from 19.2% to 16.9% for the nine-month period. These decreases
as a percent of net sales were due mainly to the increased level
of sales experienced in 1997 compared with 1996.
General and administrative expenses decreased from $330,600 in
the quarter ended September 30 1996 to $317,700 in the same
quarter of 1997 and increased from $1,013,300 in the nine month
period ended September 30, 1996 to $1,180,900 for the
corresponding period in 1997. However general and administrative
expenses decreased as a percent of net sales from 18.8% to 15.4%
for the quarter and from 14.9% to 14.3% for the nine-month
period. These decreases as a percent of net sales were due
mainly to the increased level of sales experienced in 1997
compared with 1996.
Research and development expensed increased from $28,200 (1.6% of
net sales) for the quarter ended September 30, 1996 to $41,400
(2.0% of net sales) for the quarter ended September 30, 1997 and
increased from $86,200 (1.3% of net sales) in the nine month
period ended September 30, 1996 to $151,600 (1.8% of net sales)
for the corresponding period in 1997. These increases were
primarily a result of increased personnel and consulting costs in
the research and development area.
Net interest expense decreased from $42,600 (2.4% of net sales)
in the quarter ended September 30, 1996 to $25,400 (1.2% of net
sales) for the quarter ended September 30, 1997 and decreased
from $123,700 (1.8% of net sales) in the nine month period ended
September 30, 1996 to $105,400 (1.3% of net sales) for the
corresponding period in 1997. These decreases were mainly due to
lower average daily borrowing in 1997 along with lower interest
rates in 1997.
Other income (net) included $15,800 in refunds of prior year's
insurance premiums during the first nine months of 1997 compared
with $30,000 during the first nine months of 1996.
Liquidity and Capital Resources
At September 30, 1997, the Registrant's inventories had decreased
to $723,500 compared with $917,400 at December 31, 1996. This
decrease was due mainly to aggressive management of inventories
resulting from increased planning accuracy and purchasing
strategy.
Part I - FINANCIAL INFORMATION (continued)
At September 30, 1997, the Registrant's accounts payable and
other accrued expenses had decreased to $949,100 from $1,037,800
at December 31, 1996. This decrease is primarily due to slightly
faster payment of payables made possible by improved
profitability and cash flows experienced during the year.
At September 30, 1997, the Registrant's accounts receivable had
decreased to $1,504,800 from $1,890,700 at December 31, 1996 due
mainly to somewhat faster payment from the Company's IceStorT
customers.
At September 30, 1997, the Registrant's accrued compensation and
benefits had increased to $408,200 from $188,900 at December 31,
1996, due mainly to accruals for employee profit sharing bonuses
along with the fact that the December 1996 level was abnormally
low due to the heavy use of vacation while the Company was closed
in the latter half of December.
At September 30, 1997, the Registrant's current ratio was 2.14 to
1 compared with 1.58 to 1 at December 31, 1996. The Registrant
had working capital of $1,858,400 at September 30, 1997 compared
with $1,284,700 at December 31, 1996. Total assets exceeded
total liabilities by $1,859,100 at September 30, 1997 compared
with $1,176,300 at December 31, 1996.
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. The following exhibit is filed as part, to the extent
indicated herein, in the Form 10-Q.
Exhibit No. Description
18 Letter re Change in Accounting Principle from Burr,
Pilger and Mayer dated November 5, 1997
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended September 30, 1997.
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 12, 1997 BY:/s/Alex N. Watt
Alex N. Watt, Vice President -
Finance and Administration and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Sequentially
ITEMS Numbered Pages
Exhibit No. Description
18 Letter re Change in Accounting Principle from Burr,
Pilger and Mayer dated November 5, 1997 Page 12
BPMr
BURR, PILGER & MAYER
To the Board of Directors of FAFCO, Inc.
Redwood City, California
We are providing this letter to you for inclusion as an exhibit
to your Form 10-Q filing pursuant to Item 601 of Regulation S-K.
We have read management's justification for the change in
accounting from the LIFO inventory costing method to the FIFO
inventory costing method contained in the Company's Form 10-Q
for the quarter ended September 30, 1997. Based on our reading
of the data and discussions with Company officials about the
business judgment and business planning factors relating to the
change, we believe management's justification to be reasonable.
Accordingly, we concur that the newly adopted accounting
principle described above is preferable in the Company's
circumstances to the method previously applied.
We have not audited any financial statements of FAFCO, Inc. as
of any date or for any period subsequent to December 31, 1996,
nor have we audited the application of the change in accounting
principle disclosed in Form 10-Q of FAFCO, Inc. for the three
months ended September 30, 1997; accordingly, our comments are
subject to revision on completion of an audit of the financial
statements that include the accounting change.
/s/Burr, Pilger & Mayer
Burr, Pilger & Mayer
November 5, 1997
Certified Public Accountant, 0 A Professional Corporation *
26 1 Hamilton Avenue *
Palo Alto, CA 94301
Tel 415-329-0720 0
Fax 415-329-8161
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<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000352956
<NAME> FAFCO, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 679,200
<SECURITIES> 0
<RECEIVABLES> 2,437,500
<ALLOWANCES> 604,200
<INVENTORY> 723,500
<CURRENT-ASSETS> 3,488,400
<PP&E> 2,577,000
<DEPRECIATION> 2,200,400
<TOTAL-ASSETS> 4,475,000
<CURRENT-LIABILITIES> 1,630,000
<BONDS> 985,900
0
0
<COMMON> 412,200
<OTHER-SE> 1,446,900
<TOTAL-LIABILITY-AND-EQUITY> 4,475,000
<SALES> 8,252,500
<TOTAL-REVENUES> 8,364,200
<CGS> 4,795,000
<TOTAL-COSTS> 4,795,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 28,800
<INTEREST-EXPENSE> 107,500
<INCOME-PRETAX> 736,700
<INCOME-TAX> 54,000
<INCOME-CONTINUING> 682,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 82,000
<NET-INCOME> 682,700
<EPS-PRIMARY> .19
<EPS-DILUTED> .17
</TABLE>