<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, 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)
<TABLE>
<S> <C>
California 94-2159547
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
2690 Middlefield Road, Redwood City, California 94063
(Address, including zip code, of Registrants 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 11, 1998, 3,303,311 shares of the Registrant's Common Stock, $.125
par value were issued and outstanding.
<PAGE> 2
Part 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
FAFCO, Inc.
CONSOLIDATED BALANCE SHEET
<TABLE>
September 30, December 31,
1998 1997
(unaudited) (unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 401,800 $ 46,300
Accounts receivable, less
allowance for doubtful accounts
of $557,700 in 1998 and $540,100
in 1997 2,310,300 1,833,400
Current portion of long-term
notes receivable (net) 88,800 88,800
Inventories 959,900 1,082,900
Prepaid expenses and other
current assets 157,900 174,000
Other accounts receivable,
net of allowance 12,200
Deferred tax asset, net of
allowance 183,300 183,300
Total current assets 4,102,000 3,420,900
Plant and equipment, at cost 2,795,300 2,614,900
Less accumulated depreciation and
amortization (2,275,300) (2,236,300)
520,000 378,600
Notes receivable and other assets
(net) 86,900 151,200
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Deferred tax asset, net of
allowance 485,800 485,800
Total assets $ 5,194,700 $4,436,500
Liabilities and shareholders'
equity
Current Liabilities:
Accounts payable and other
accrued expenses $ 1,007,500 $ 850,900
Accrued compensation and benefits 289,600 331,600
Accrued warranty expense 259,000 211,000
Income taxes payable 34,200 20,600
Total current liabilities $ 1,590,300 $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 37,200 55,100
Total liabilities 2,552,500 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 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)
Deficit (2,802,600) (3,400,000)
Total shareholders' equity 2,642,200 2,042,300
Commitments and contingent
liabilities
Total liabilities and
shareholders' equity $5,194,700 $4,436,500
The accompanying notes are an
integral part of this statement.
</TABLE>
<PAGE> 4
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales $2,426,100 $2,065,200 $8,936,300 $ 8,252,500
Other income (net) 14,700 (3,500) 15,800 111,700
Total revenues 2,440,800 2,061,700 8,952,100 8,364,200
Cost of goods sold 1,520,500 1,378,800 5,506,000 4,795,000
Marketing & selling
expense 473,900 432,400 1,446,400 1,394,600
General &
administrative expense 342,600 317,700 1,096,000 1,180,900
Research &
development expense 50,700 41,400 147,100 151,600
Net interest expense 23,300 25,400 92,700 105,400
Total costs and expenses 2,411,000 2,195,700 8,288,200 7,627,500
Income before income taxes $ 29,800 $ (134,000) $ 663,900 $ 736,700
Provision for income
taxes 66,500 54,000
Net income $ 29,800 $ (134,000) $ 597,400 $ 682,700
Basic Earnings (Loss)
per share $ 0.01 $ (0.04) $ 0.18 $ 0.21
Diluted Earnings (Loss)
per share $ 0.01 $ (0.04) $ 0.15 $ 0.17
</TABLE>
The accompanying notes are an integral part of this statement
<PAGE> 5
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
<TABLE>
1998 1997*
<S> <C> <C>
Cash flow from operating activities:
Net income $ 597,400 $ 682,700
Adjustments to reconcile net
income to net cash provided by (used
in) operating activities:
Depreciation 94,300 94,900
Allowance for doubtful accounts (108,800) 28,800
Provision for inventory reserve (17,900) (54,500)
Gain on sale of fixed assets (19,000)
Change in assets and liabilities:
Change in accounts receivable (482,300) 360,500
Change in inventories 140,900 248,400
Change in prepaid expenses 16,100 (32,400)
Change in other assets 190,800 (62,600)
Change in payables and accrued
expenses 176,200 171,100
Change in other non-current
liabilities (17,900) 34,500
Net cash provided by operating
activities 569,800 1,471,400
Cash flow from investing activities:
Purchase of fixed assets (235,800) (121,800)
Proceeds from sale of equipment 19,000 -
Net cash used in investing
activities (216,800) (121,800)
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 by (used in)
financing activities 2,500 (758,600)
Net increase in cash and cash
equivalents 355,500 591,000
Cash & cash equivalents, beginning of
period 46,300 88,200
Cash and cash equivalents, end of
period $ 401,800 $ 679,200
Supplemental disclosures of cash flow information:
Cash paid during the period for
interest $ 96,400 $ 114,200
Cash paid during the period for
income taxes $ 52,900
</TABLE>
*Reclassified for comparative purposes
The accompanying notes are an integral part of this statement
<PAGE> 6
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 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 September
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 Registrant'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>
September 30, 1998 December 31, 1997
<S> <C> <C>
Raw materials $ 499,000 $ 462,800
Work in process 191,900 114,000
Finished goods 269,000 506,100
$ 959,900 $ 1,082,900
</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 $1,000,000 at September 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 30, 1999.
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>
<PAGE> 7
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Net Income Per Share
Basic earnings (loss) per share were calculated as follows:
<TABLE>
Quarter Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 29,800 $ (134,000) $ 597,400 $ 682,700
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 (loss) per share $ 0.01 $ (0.04) $ 0.18 $ 0.21
</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.
Diluted earnings (loss) per share were calculated as follows:
<TABLE>
Quarter Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 43,563 $ (134,000) $ 638,689 $ 707,600
Average common shares
outstanding 3,303,311 3,298,311 3,303,311 3,298,311
</TABLE>
<PAGE> 8
<TABLE>
<S> <C> <C> <C> <C>
Add: Exercise of options
reduced by the number of
shares purchased with
proceeds 344,074 N/A 235,697 243,093
Add: Exercise of
warrants
reduced by the number of
shares purchased with
proceeds 106,000 N/A 77,344 80,956
Add: Conversion of
convertible debt into shares
555,000 N/A 555,000 555,000
Adjusted weighted average
shares outstanding 4,308,385 N/A 4,171,352 4,177,360
Earnings (loss) per common share
assuming dilution $ 0.01 $ (0.04) $ 0.15 $ 0.17
</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
Management's Discussion and Analysis
Results of Operations
Net sales for the quarter ended September 30, 1998 increased by 17.5% from
$2,065,200 in 1997 to $2,426,100 in 1998. Net sales for the nine months ended
September 30, 1998 increased by 8.3% from $8,252,500 in 1997 to $8,936,300 in
1998. These increases were due mainly to increased unit sales of the Companys
IceStor and aboveground pool heating products.
Cost of goods sold increased in absolute terms from $1,378,800 in the quarter
ended September 30, 1997 to $1,520,500 in the corresponding quarter in 1998 but
decreased as a percent of net sales from 66.8% to 62.7% for the quarter due
primarily to fixed overhead expenses being allocated over higher sales along
with some increases in manufacturing efficiency partially offset by increased
sales of lower margin IceStor products. For the nine months ended September 30
cost of sales increased from $4,795,000 (58.1% of net sales) in 1997 to
$5,506,000 (61.6% 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 IceStor products.
Marketing and selling expenses increased from $432,400 in the quarter ended
September 30, 1997 to $473,900 in the same quarter of 1998 and increased from
$1,394,600 in the nine month period
<PAGE> 9
ended September 30, 1997 to $1,446,400 for the corresponding period in 1998.
However marketing and selling expenses decreased as a percent of net sales from
20.9% to 19.5% for the quarter and from 16.9% to 16.2% for the nine-month period
General and administrative expenses for the quarter ended September 30 increased
from $317,700 (15.4% of net sales) in 1997 to $342,600 (14.1% of net sales) in
1998 and decreased from $1,180,900 (14.3% of net sales) in the nine-month period
ended September 30, 1997 to $1,096,000 (12.3% of net sales) for the
corresponding period in 1998. These decreases were due mainly to decreased
personnel costs.
Research and development expenses remained relatively stable at $41,400 (2.0% of
net sales) and $151,600 (1.8% of net sales) for the quarter and nine month
period ended September 30, 1997, respectively, compared to $50,700 (2.1% of net
sales) and $147,100 (1.6% of net sales) in the same periods in 1998.
Net interest expense was relatively stable in absolute dollars at $25,400 (1.2%
of net sales) and $23,300 (1.0% of net sales) in the quarter ended September 30,
1997 and 1998, respectively. Net interest expense for the nine month period
ended September 30 decreased from $105,400 (1.3% of net sales) in 1997 to
$92,700 (1.0% 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 years insurance premiums
during the first nine months of 1998 compared with $15,800 during the first nine
months of 1997. Other income (net) also included $100,000 in license fees during
the first nine months of 1997; there were no such fees during the corresponding
period in 1998.
Liquidity and Capital Resources
At September 30, 1998, the Company's cash position had increased to $401,800
from $46,300 at December 31, 1997. This increase was due primarily to the
increased sales during the period along with decreased inventories and increased
accounts payable partly offset by increased accounts receivable.
At September 30, 1998, the Company's net accounts receivable had increased to
$2,310,300 from $1,833,400 at December 31, 1997, primarily as a result of
increased sales levels of the Company's IceStor products.
At September 30, 1998, the Company's accounts payable and other accrued expenses
had increased to $1,007,500 from $850,900 at December 31, 1997. This increase is
primarily due to the increased volume of business during 1998.
<PAGE> 10
At September 30, 1998, the Company's inventories had decreased to $959,900 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 September 30, 1998, the Company's current ratio was 2.58 to 1 compared with
2.42 to 1 at December 31, 1997. The Company had working capital of $2,511,700 at
September 30, 1998 compared with $2,006,800 at December 31, 1997. Total assets
exceeded total liabilities by $2,642,200 at September 30, 1998 compared with
$2,042,300 at December 31, 1997.
The Company 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.
The Company has reviewed its internal computer systems for year 2000 compliance
and is satisfied that all of its internal computer systems are either already
year-2000 compliant or can be made year-2000 compliant through simple upgrades.
The Company does not expect the costs of achieving full year-2000 compliance to
be material for the internal systems. However, there can be no assurance that
coding errors or other defects will not be discovered in the future. In
addition, since the Company is very small in relation to many of its customers
and suppliers, the Company has been unable to ascertain if its suppliers and
customers are year-2000 compliant. Therefore, there can be no assurances that
the Company's cash flow and materials from suppliers will not be interrupted,
which could result in severe disruptions in the Company's operations.
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.
<PAGE> 11
Part II - OTHER INFORMATION
Item 5 - Other Information
The following table summarizes the outstanding securities during the quarter
ended September 30, 1998.
<TABLE>
<CAPTION>
Shares
----------------------
<S> <C>
Common Stock: authorized 10,000,000 shares of $.125 par value; issued
and outstanding at June 30, 1998, as reported in the
Company's report on Form 10-Q filed for the period ended June 30,
1998. 3,303,311
Issued during the quarter 0
----------------------
3,303,311
Outstanding at September 30, 1998
</TABLE>
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 September 30,
1998.
<PAGE> 12
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, 1998 BY:/s/Alex N. Watt
------------------ ----------------------------------------
Alex N. Watt,
Vice President - Finance and Administration
and Chief Financial Officer
(Principal Financial and Accounting Officer)
- --------------------------------------------------------------------------------
<PAGE> 13
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
---------- ---------------------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 401,800
<SECURITIES> 0
<RECEIVABLES> 3,139,900
<ALLOWANCES> 586,900
<INVENTORY> 959,900
<CURRENT-ASSETS> 4,102,000
<PP&E> 2,795,300
<DEPRECIATION> 2,275,300
<TOTAL-ASSETS> 5,194,700
<CURRENT-LIABILITIES> 1,590,300
<BONDS> 962,200
0
0
<COMMON> 412,800
<OTHER-SE> 2,229,400
<TOTAL-LIABILITY-AND-EQUITY> 5,149,700
<SALES> 8,936,300
<TOTAL-REVENUES> 8,963,100
<CGS> 5,506,000
<TOTAL-COSTS> 5,506,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 27,300
<INTEREST-EXPENSE> 96,400
<INCOME-PRETAX> 663,900
<INCOME-TAX> 66,500
<INCOME-CONTINUING> 597,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 597,400
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.15
</TABLE>
