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 March 31, 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 Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
At May 8, 1998, 3,303,311 shares of the Company's Common Stock, $.125 par value
were issued and outstanding.
Part 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
FAFCO, Inc.
CONSOLIDATED BALANCE SHEET
<TABLE>
March 31, 1998 December 31, 1997
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 9,100 $ 46,300
Accounts receivable, less allowance
for doubtful accounts of
$538,900 in 1998 and $540,100 in
1997 2,599,300 1,833,400
Current portion of long-term notes
receivable (net) 88,800 88,800
Inventories 1,125,000 1,082,900
Prepaid expenses and other current
assets 289,200 174,000
Other accounts receivable, net of
allowance 20,100 12,200
Deferred tax asset, net of allowance 183,300 183,300
Total current assets 4,314,800 3,420,900
Plant and equipment, at cost 2,673,400 2,614,900
Less accumulated depreciation and
amortization (2,264,400) (2,236,300)
409,000 378,600
Notes receivable and other assets
(net) 132,100 151,200
Deferred tax asset, net of allowance 485,800 485,800
Total assets $ 5,341,700 $ 4,436,500
Liabilities and shareholders' equity
Current Liabilities:
Bank line of credit $ 576,000
Accounts payable and other accrued
expenses 1,268,000 $ 850,900
Accrued compensation and benefits 241,300 331,600
Accrued warranty expense 235,100 211,000
Income Taxes payable 20,600
Total current liabilities 2,320,400 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 49,300 55,100
Total liabilities $ 3,294,700 $ 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 (3,397,800) (3,400,000)
Total shareholders' equity $ 2,047,000 $ 2,042,300
Commitments and contingent
liabilities
Total liabilities and shareholders'
equity $ 5,341,700 $ 4,436,500
The accompanying notes are an
integral part of this statement.
</TABLE>
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Net sales $2,699,500 $2,895,900
Other income (net) (2,900) 14,700
Total revenues 2,696,600 2,910,600
Cost of goods sold 1,763,400 1,644,600
Marketing & selling expense 505,600 469,800
General & administrative
expense 344,800 340,800
Research & development
expense 45,500 55,000
Net interest expense 35,100 42,900
Total costs and expenses 2,694,400 2,553,100
Income before income taxes 2,200 357,500
Provision for income taxes 0 14,000
Net income $ 2,200 $343,500
Basic earnings net income per share $ 0.00 $ 0.10
Diluted net income per share $ 0.00 $ 0.10
</TABLE>
The accompanying notes are an integral part of this statement
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
Three Months Ended
1998 1997*
<S> <C> <C>
Cash flow from operating activities:
Net income $ 2,200 $ 343,500
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 28,100 27,400
Allowance for doubtful accounts (127,500) 2,800
Provision for inventory reserve (2,200) (2,200)
Change in assets and liabilities:
Change in accounts receivable (772,600) (457,200)
Change in inventories (39,900) 130,100
Change in prepaid expenses (115,200) (148,800)
Change in other assets 145,500 (107,900)
Change in payables and accrued expenses 330,300 317,800
Change in other non-current liabilities (5,900) 45,500
Net cash (used in) provided by operating
activities (557,200) 151,000
Cash flow from investing activities:
Purchase of fixed assets (58,500) (78,900)
Net cash used in investing activities (58,500) (78,900)
Cash flow from financing activities:
Proceeds from sale of common stock 2,500
Payments on line of credit (450,000) (610,000)
Borrowings on line of credit 1,026,000 505,300
Net cash provided by (used in)
financing activities 578,500 (104,700)
Net decrease in cash and cash
equivalents (37,200) (32,600)
Cash and cash equivalents, beginning
of period 46,300 88,200
Cash and cash equivalents, end of
period $ 9,100 $ 55,600
Supplemental disclosures of cash
flow information:
Cash paid during the period for
interest $ 42,400 $ 44,823
Cash paid during the period for income
taxes $ 32,000
*Reclassified for comparative purposes.
</TABLE>
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 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 March
31, 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
first in, first out (FIFO) basis, and consist of the following.
<TABLE>
March 31, 1998 December 31, 1997
<S> <C> <C>
Raw materials $ 273,900 $ 462,800
Work in process 196,200 114,000
Finished goods 654,900 506,100
$1,125,000 $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 $424,000 at March 31, 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>
Part I - FINANCIAL INFORMATION (continued)
6. Net Income Per Share
Basic earnings per share were calculated as follows:
<TABLE>
Quarter ended March 31,
1998 1997
<S> <C> <S>
Net income $2,200 $343,500
Average common shares outstanding 3,303,311 3,298,311
Add: Exercise of options reduced by
the number of shares purchased with
proceeds N/A N/A
Add: Exercise of warrants reduced by
the number of shares purchased with
proceeds N/A N/A
Adjusted weighted average shares
outstanding 3,303,311 3,298,311
Earnings per share $0.00 $0.10
</TABLE>
Basic 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.
Diluted earnings per share were calculated as follows:
<TABLE>
Quarter Ended March 31
1998 1997
<S> <C> <C>
Net income $2,200 $343,500
Average common shares outstanding 3,303,300 3,298,311
Add: Exercise of options reduced by
the number of shares purchased with
proceeds N/A N/A
Add: Exercise of warrants reduced by
the number of shares purchased with
proceeds N/A N/A
Add: conversion of convertible debt into
shares N/A N/A
Adjusted weighted average shares
outstanding 3,303,311 3,298,311
Earnings per common share assuming
dilution $0.00 $0.10
</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
ptions 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 March 31, 1998 decreased by 6.8% from
$2,895,900 in 1997 to $2,699,500 in 1998. These decreases were the result of
decreased unit sales of the Company's pool panel products due to severe
weather conditions in both California and Florida as a consequence of El Nino,
partially offset by increased unit sales of the Company's IceStorT products.
Cost of goods sold increased from $1,644,600 (56.8% of net sales) in the
first quarter of 1997 to $1,763,400 (65.3% of net sales) in the corresponding
quarter of 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 increased from $469,800 (16.2% of net sales)
in the first quarter of 1997 to $505,600 (18.7% of net sales) in the first
quarter of 1998 due mainly to increased advertising expenses.
General and administrative expenses were relatively stable at $340,800
(11.8% of net sales) in the first quarter of 1997 compared with $344,800
(12.8% of net sales) in the same quarter in 1998.
Research and development expenses decreased from $55,000 (1.9% of net sales)
in the first quarter of 1997 to $45,500 (1.7% of net sales) in 1998 due mainly
to a decrease in engineering project expenses.
Net interest expense decreased from $42,900 (1.5% of net sales) in the first
quarter of 1997 to $35,100 (1.3% of net sales) in the first quarter of 1998.
This decrease was due primarily to lower average daily borrowing in 1998 at
lower interest rates than in 1997.
Other income (net) included $15, 900 in refunds of prior year's insurance
premiums in the first quarter of 1997. There were no such refunds for the
corresponding quarter in 1998.
Liquidity and Capital Resources
The Company's cash position decreased from $46,300 at 1997 fiscal year end
to $9,100 at March 31, 1997 principally due to increased accounts receivable
partially offset by increased accounts
payable.
At March 31, 1998, the Company's accounts payable and other accrued expenses
had increased to $1,268,000 from $850,900 at December 31, 1997. This increase
is primarily due to decreased cash flow during the first quarter of 1998 as
a result of the Company's "Early Buy" program from Above Ground Pool systems.
At March 31, 1998, the Company's net accounts receivable had increased to
$2,599,300 from $1,833,400 at December 31, 1997 due mainly to the Company's
"Early Buy" program for Above Ground Pool systems.
At March 31, 1998, the Company's current ratio was 1.86 to 1 compared with
2.42 to 1 at December 31, 1997. The Company had working capital of $1,994,400
at March 31, 1998 compared with $2,006,800 at December 31, 1997. Total assets
exceeded total liabilities by $2,047,000 at March 31, 1998 compared with
$2,042,300 at December 31, 1997.
Part I - FINANCIAL INFORMATION (continued)
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.
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 March 31, 1998.
Shares
Common Stock: authorized 10,000,000 shares of $.125 par
value; issued and outstanding at December 31, 1997, as
reported in the Registrant's Annual report on Form 10-K
filed for the fiscal year ended December 31, 1997. 3,298,311
Issued during the quarter 5,000
Outstanding at March 31, 1998 3,303,311
Item 6 - Exhibits and Reports on Form 8-K
a. The following exhibits are filed as part, to the extent indicated herein,
in the Form 10-Q.
Exhibit No. Description
10.19(j) Amended and Restated Loan and Security Agreement between Registrant
as Borrower and Silicon Valley Bank as Lender dated March 31, 1998.
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 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: May 8, 1998 BY:/s/Alex N. Watt
Alex N. Watt,
Vice President - Finance and
Administration
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Subsequently
ITEMS Numbered Page
Exhibit No. Description
10.19(j) Amended and Restated Loan and Security Agreement between Page 12
Registrant as Borrower and Silicon Valley Bank as Lender dated .
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of April 1, 1998, by and
between FAFCO, Inc. ("Borrower") whose address is 2690 Middlefield Road,
Redwood City, CA 94063, and Silicon Valley Bank ("Bank,") whose address is
3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among
other documents, an Amended and Restated Loan and Security Agreement, dated
June 5, 1996, as may be amended from time to time, (the "Loan Agreement').
The Loan Agreement provided for, among other things, a Committed Line in the
original principal amount of One Million and 00/100 Dollars ($1,000,000.00)
(the "Revolving Facility"). Defined terms used but not otherwise defined
herein shall have the same meanings as in the Loan Agreement
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the
Indebtedness is secured by the Collateral as described in the Loan Agreement
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness
shall be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Loan Agreemen.
1. The defined term "Maturity Date' is hereby amended in its entirety to read
as:
March 30, 1999.
2. The first sentence in section 2.3(c) entitled "Payments" is hereby amended
to read
as follows:
Interest hereunder shall be due and payable on the twenty-fifth calendar
day of each month during the term hereof.
3. Sub-section (a) of the paragraph entitled "Interest Rates, Payments and
Calculations" is hereby amended in its entirely to read as follows:
Except as set forth in Section 2.3(b), any Advances shall bear interest,
on the average Daily Balance, at a rate equal to one and one-half (1.500%)
percentage points above the Prime Rate, effective as of the date hereof.
4. Section 6.9 entitled "Debt-Net Worth Ratio' is hereby amended in its
entirety to read
as follows:
Borrower shall maintain, as of the last day of each calendar month, a
ratio of Total Liabilities less Subordinated Debt to Tangible Net Worth
plus Subordinated Debt of not more than 1.50 to 1.00.
5. Section 6. 10 entitled "Tangible New Worth' is hereby amended in its
entirety to read
as follows:
Borrower shall maintain, as of the last day of each calendar month, a
Tangible Net Worth plus Subordinated Debt of not less than Two Million
Three Hundred Thousand and 00/100 Dollars ($2,300,000.00).
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever
necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount of
Seven Thousand Five Hundred and 00/100 Dollars ($7,500.00) (the "Loan Fee")
plus all out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that it has no defenses against the obligations to pay any
amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing Indebtedness, Bank is
relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement the terms of the Existing Loan Documents
remain unchanged and in full force and effect Bank's agreement to modifications
to the existing Indebtedness pursuant to this Loan Modification Agreement in
no way shall obligate Bank to make any future modifications to the
Indebtedness. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of the Indebtedness.
It is the intention of Bank and Borrower to retain as liable parties all
makers and endorsers of Existing Loan Documents, unless the party is expressly
released by Bank in writing. No maker, endorser, or guarantor will be released
by virtue of this Loan Modification Agreement The terms of this paragraph
apply not only to this Loan Modification Agreement, but also to all subsequent
loan modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon (i) Borrowers payment of the Loan Fee and (ii) Bank's receipt
of Borrower's 1997 fiscal year end audited financial statements and
satisfactory review by Bank as to no material adverse change since the date of
the fiscal year end financial statements prepared by Borrower.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
FAFCO, INC. SILICON VALLEY BANK
By: By:
Name: Name:
Title: Title:
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X:\Administration\FinancialReporting\10Q_1stQtr98.doc Page 17 of 11 Revised:
5/8/98
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000352956
<NAME> FAFCO, INC.
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,100
<SECURITIES> 0
<RECEIVABLES> 3,289,900
<ALLOWANCES> 568,200
<INVENTORY> 1,125,000
<CURRENT-ASSETS> 4,314,800
<PP&E> 2,673,400
<DEPRECIATION> 2,264,400
<TOTAL-ASSETS> 5,341,700
<CURRENT-LIABILITIES> 2,320,400
<BONDS> 974,300
0
0
<COMMON> 412,800
<OTHER-SE> 1,634,200
<TOTAL-LIABILITY-AND-EQUITY> 5,341,700
<SALES> 2,699,500
<TOTAL-REVENUES> 2,699,800
<CGS> 1,763,400
<TOTAL-COSTS> 1,763,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,800
<INTEREST-EXPENSE> 35,100
<INCOME-PRETAX> 2,200
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,200
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
