UNITED STATES
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 June 30, 1998 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
(Company'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 July 31, 1998, 3,303,311 shares of the Company's Common Stock,
$.125 par value were issued and outstanding.
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FAFCO, Inc.
CONSOLIDATED BALANCE SHEET
<TABLE>
June 30, 1998 December 31, 1997
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 39,500 $ 46,300
Accounts receivable, less
allowance for doubtful accounts
of $548,600 in 1998 and
$532,400 in 1997 2 ,867,000 1,833,400
Current portion of long-term notes
receivable (net) 88,800 88,800
Inventories 934,800 1,082,900
Prepaid expenses and other current
assets 176,900 174,000
Other accounts receivable, net of
allowance- 1,900 12,200
Deferred tax asset, net of allowance 183,300 183,300
Total current assets 4,292,200 3,420,900
Plant and equipment, at cost 2,685,800 2,614,900
Less accumulated depreciation and
amortization (2,296,100) (2,236,300)
389,700 378,600
Notes receivable and other assets
(net) 108,900 151,200
Deferred tax asset, net of
allowance 485,800 485,800
Total assets $ 5,276,600 $ 4,436,500
Liabilities and shareholders'
equity
Current Liabilities:
Accounts payable and other accrued
expenses $ 1,094,600 $ 850,900
Accrued compensation and benefits 284,600 331,600
Accrued warranty expense 250,200 211,000
Income taxes payable 66,500 20,600
Total current liabilities 1,695,900 1,414,100
Convertible subordinated notes
($600,000 was owed to related
parties in 1998 and 1997) 925,000 925,000
Other non-current liabilities 43,300 55,100
Total liabilities $ 2,664,200 $ 2,394,200
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; 3,303,311 issued and
outstanding in 1998 and
3,298,311 issued and
outstanding in 1997. 412,800 412,200
Capital in excess of par value 5,107,100 5,105,200
Notes receivable secured by
common stock (75,100) (75,100)
Accumulated deficit (2,832,400) (3,400,000)
Total shareholders' equity $ 2,612,400 $ 2,042,300
Commitments and contingent
liabilities
Total liabilities and
shareholders' equity $ 5,276,600 $ 4,436,500
The accompanying notes are an
integral part of this statement.
</TABLE>
Part I - FINANCIAL INFORMATION - Item 1 (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
Quarter Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $ 3,810,700 $3,291,400 $ 6,510,200 $6,187,300
Other income (net) 4,000 100,500 1,100 115,200
Total revenues 3,814,700 3,391,900 6,511,300 6,302,500
Cost of goods sold 2,222,100 1,771,600 3,985,500 3,416,200
Marketing & selling expense 466,900 492,400 972,500 962,200
General &
administrative expense 408,600 522,400 753,400 863,200
Research & development
expense 50,900 55,200 96,400 110,200
Net interest expense 34,300 37,100 69,400 80,000
Total costs and expenses 3,182,800 2,878,700 5,877,200 5,431,800
Income before income taxes 631,900 513,200 634,100 870,700
Provision for income taxes 66,500 40,000 66,500 54,000
$ 565,400 $ 473,200 $ 567,600 $ 816,700
Primary net income per
share $ 0.17 $ 0.14 $ 0.17 $ 0.25
Fully diluted net
income per share $ 0.14 $ 0.12 $ 0.15 $ 0.20
</TABLE>
The accompanying notes are an integral part of this statement
Part I - FINANCIAL INFORMATION - Item 1 (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
Six Months Ended
June 30
1998 1997*
<S> <C> <C>
Cash flow from operating activities:
Net income $ 567,600 $ 816,700
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation 59,800 59,900
Allowance for doubtful accounts (117,800) 19,800
Provision for inventory reserve (5,600) (58,500)
Change in assets and liabilities:
Change in accounts receivable (1,031,900) (473,500)
Change in inventories 153,700 165,000
Change in prepaid expenses (2,900) (6,400)
Change in other assets 168,700 (90,100)
Change in payables and accrued
expenses 281,800 504,100
Change in other non-current
liabilities (11,800) 40,100
Net cash provided by operating
activities 61,600 977,100
Cash flow from investing activities:
Purchase of fixed assets (70,900) (87,000)
Net cash used in investing activities (70,900) (87,000)
Cash flow from financing activities:
Proceeds from sale of common stock 2,500
Payments on line of credit (1,305,000) (1,493,900)
Borrowings on line of credit 1,305,000 735,300
Net cash provided (used in) by
financing activities 2,500 (758,600)
Net increase (decrease) in cash and
cash equivalents (6,800) 131,500
Cash and cash equivalents, beginning of
period 46,300 88,200
Cash and cash equivalents, end of
period $ 39,500 $ 219,700
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest $ 69,300 $ 86,700
Cash paid during the period for
income taxes $ 32,000
</TABLE>
*Reclassified for comparative purposes.
The accompanying notes are an integral part of this statement
Part I - FINANCIAL INFORMATION - Item 1 (continued)
FAFCO, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. This information is unaudited; however, in the opinion of the
Company's management, all adjustments necessary for a fair
statement of results for the periods presented have been
included. The results for the period ended June 30, 1998 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 Company's audited annual financial
statements for the year ended December 31, 1997, included in its
1997 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>
June 30, 1998 December 31, 1997
<S> <C> <C>
Raw materials $ 539,200 $ 462,800
Work in process 181,700 114,000
Finished goods 213,900 506,100
$ 934,800 $1,082,900
</TABLE>
4. The Company has a line of credit agreement with Silicon Valley
Bank, which line of credit allows the Company to borrow the
lesser of $1,000,000 or an amount determined by a formula applied
to accounts receivable. Unused borrowing capacity was $1,000,000
at June 30, 1998. Amounts borrowed bear interest at prime rate
plus 1.5% per annum and are secured by substantially all the
assets of the Company. This line of credit expires on March 31,
1998.
5. The company records its deferred taxes on a tax jurisdiction
basis and, with the adoption of FAS No. 109 in 1993, classified
those net amounts as current or non-current based on the balance
sheet classifications.
Deferred tax assets are comprised of the following at:
<TABLE>
January 1, 1998 January 1, 1997
<S> <C> <C>
Allowance for doubtful accounts $ 227,700 $ 215,600
Accrued expenses 132,500 184,300
Loss carryforwards 837,400 1,157,800
Tax credits 71,200 175,700
Other 108,300 107,800
1,377,100 1,841,200
Deferred tax asset valuation
allowance (708,000) (1,191,800)
Total deferred taxes,net $ 669,100 $ 649,400
</TABLE>
Part I - FINANCIAL INFORMATION - Item 1 (continued)
6. Net Income Per Share
Basic earnings per share were calculated as follows:
<TABLE>
Quarter Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 565,400 $ 473,200 $ 567,600 $ 816,700
Average common shares
outstanding 3,303,311 3,298,311 3,303,311 3,298,311
Adjusted weighted average
shares outstanding 3,303,311 3,298,311 3,303,311 3,298,311
Earnings per share $ 0.17 $ 0.14 $ 0.17 $ 0.25
</TABLE>
Basic earnings (loss) per share are calculated by dividing net
income (loss) by the weighted average number of shares issued and
outstanding during each year.
Part I - FINANCIAL INFORMATION - Item 1 (continued)
Diluted earnings per share were calculated as follows:
<TABLE>
Quarter Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 579,200 $ 473,200 $ 595,100 $ 816,700
Average common shares
outstanding 3,303,311 3,298,311 3,303,311 3,298,311
Add: Exercise of options
reduced by the number of
shares purchased with
proceeds 256,357 208,734 163,820 79,833
Add: Exercise of warrants
reduced by the number of
shares purchased with
proceeds 96,033 68,571 77,344 63,173
Add: Conversion of
convertible debt into shares 555,000 555,000 555,000 555,000
Adjusted weighted average
shares outstanding 4,210,720 4,130,616 4,099,475 3,996,317
Earnings per common share
assuming full dilution $ 0.14 $ 0.12 $ 0.15 $ 0.20
</TABLE>
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 I - 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 June 30, 1997 increased by 15.8 %
from $3,291,400 in 1997 to $3,810,700 in 1998. Net sales
increased by 5.2 % from $6,187,300 in the first half of 1997 to
$6,510,200 in the corresponding period in 1998. These increases
were due mainly to increased unit sales of the Company's
IceStorT and aboveground pool heating products.
Cost of goods sold increased from $1,771,600 (53.8% of net sales)
in the quarter ended June 30, 1997 to $2,222,100 (58.3% of net
sales) in the corresponding period in 1998. For the six months
ended June 30 cost of sales increased from $3,416,200 (55.2% of
net sales) in 1997 to $3,985,500 (61.2% of net sales)
in 1998. These increases in cost of goods sold were due primarily
to lower sales of the higher margin pool panel products along
with higher sales of the lower margin IceStorT products.
Marketing and selling expenses remained relatively stable at
$492,400 and $962,200 for the quarter and six month period ended
June 30, 1997, respectively, compared to $466,900 and $972,500 in
the same periods in 1998.
Marketing and selling expenses declined as a percentage of net
sales from 15.0% for the quarter ended June 30, 1997 and 15.6% for
the six months ended June 30, 1997 to 12.3 % and 14.9 % of net sales
for the corresponding periods in 1998.
General and administrative expenses for the quarter ended June 30
decreased from $522,400 (15.9% of net sales) in 1997 to $408,600
(10.7% of net sales) in 1998 and for the six month period ended
June 30 decreased from $863,200 (14.0% of net sales) in 1997 to
$753,400 (11.6 % of net sales) in 1998. These decreases were due
mainly to decreased personnel costs.
Research and development expenses for the quarter ended June 30
decreased from $55,200 (1.7% of net sales) in 1997 to $50,900
(1.3 % of net sales) in 1998 and for the six month period ended
June 30 decreased from $110,200 (1.8% of net sales) in 1997 to
$96,400 (1.5 % of net sales) in 1998. These decreases were due
mainly to a decrease in engineering project costs.
Net interest expense was relatively stable in absolute dollars at
$37,100 and $34,300 in the quarter ended June 30, 1997 and 1998,
respectively, while decreasing as a percentage of net sales from
1.1% in 1997 to 1998. Net interest expense for the six month period
ended June 30 decreased from at $80,000 (1.3% of net sales) in 1997
to $69,400 (1.1% of net sales) in 1998 due primarily to lower
average daily borrowing in 1998 at lower interest rates than
1997.
Other income (net) included $5,700 in refunds of prior year's
insurance premiums in the first half of 1998 compared with
$15,800 during the first half of 1997. Other income (net) also
included $100,000 in license fees during the first half of 1997;
there were no such fees during the corresponding period in 1998.
Liquidity and Capital Resources
At June 30, 1998, the Registrant's inventories had decreased to
$934,800 from $1,082,900 at December 31,1997. This decrease was
due mainly to the fact that the December,1997 level was
abnormally high due to the buildup of inventories for a specific
order that shipped in 1998.
At June 30, 1997, the Registrant's accounts payable and other
accrued expenses had increased to $1,094,600 from $850,900 at
December 31, 1997. This increase is primarily due to the
increased volume of business during the first half of 1998 and
especially during the quarter ended June 30, 1998.
Part I - FINANCIAL INFORMATION - Item 2 (continued)
At June 30, 1998, the Company's accounts receivable had increased
to $2,867,000 from $1,833,400 at December 31, 1997 due mainly to
the effect of increased sales levels of all of the Company's
products along with a large overdue foreign receivable which has
since been collected.
At June 30, 1998, the Company's current ratio was 2.53 to 1
compared with 2.42 to 1 at December 31, 1997. The Registrant had
working capital of $2,596,300 at June 30, 1998 compared with
$2,006,800 at December 31, 1997. Total assets
exceeded total liabilities by $2,612,400 at June 30, 1998
compared with $ 2,042,300 at December 31, 1997.
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.
Significant Accounting Policies - 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. See Note 5 of
Notes to Interim Consolidated Financial Statements.
Part II - OTHER INFORMATION
Item 5 - Other Information
The following table summarizes the outstanding securities during
the quarter ended June 30, 1998.
Shares
Common Stock: authorized 10,000,000
shares of $.125 par value; issued and
outstanding at March 31, 1998, as
reported in the Company's report on Form
10-Q filed for the period ended March 31, 1997. 3,303,311
Issued during the quarter 0
3,303,311
Outstanding at June 30, 1998
Item 6 - Exhibits and Reports on Form 8-K
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
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: BY
Alex N. Watt,
Vice President - Finance and Administration
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
X:\Administration\FinancialReporting\10Q_2ndQtr98.doc Page 1 of 11 Revised:
8/4/98
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000352956
<NAME> FAFCO, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 39,500
<SECURITIES> 0
<RECEIVABLES> 3,609,700
<ALLOWANCES> 577,900
<INVENTORY> 934,800
<CURRENT-ASSETS> 4,292,200
<PP&E> 2,685,800
<DEPRECIATION> 2,269,100
<TOTAL-ASSETS> 5,276,600
<CURRENT-LIABILITIES> 1,695,900
<BONDS> 968,300
0
0
<COMMON> 412,800
<OTHER-SE> 2,199,600
<TOTAL-LIABILITY-AND-EQUITY> 5,276,600
<SALES> 6,510,200
<TOTAL-REVENUES> 6,519,700
<CGS> 3,985,500
<TOTAL-COSTS> 3,985,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,700
<INTEREST-EXPENSE> 69,400
<INCOME-PRETAX> 634,100
<INCOME-TAX> 66,500
<INCOME-CONTINUING> 567,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 567,600
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.15
</TABLE>