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, 1999 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, 1999, 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, 1999 December 31, 1998
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 249,900 $ 477,500
Accounts receivable, less
allowance for doubtful accounts
of $550,300 in 1999 and $536,300
in 1998 2,607,500 1,876,600
Current portion of long-term notes
receivable (net) 87,600 87,600
Inventories 1,067,200 1,265,400
Prepaid expenses and other current assets 168,600 183,500
Other accounts receivable, net of
allowance 800 7,300
Deferred tax asset, net of allowance 273,000 273,000
Total current assets 4,454,600 4,170,900
Plant and equipment, at cost 2,925,100 2,901,900
Less accumulated depreciation and
amortization (2,274,000) (2,318,500)
651,100 583,400
Notes receivable and other assets (net) 43,700 58,200
Deferred tax asset, net of allowance 564,500 564,500
Total assets $ 5,713,900 $ 5,377,000
Liabilities and shareholders' equity
Current Liabilities:
Bank line of credit
Accounts payable and other
accrued expenses $ 1,126,000 $ 1,065,600
Accrued compensation and benefits 232,800 217,300
Accrued warranty expense 279,200 232,200
Income Taxes payable 58,600 18,600
Total current liabilities 1,696,600 1,533,700
Convertible subordinated notes
($600,000 was owed to related parties
in 1999 and 1998) 925,000 925,000
Other non-current liabilities 26,200 31,900
Total liabilities $ 2,647,800 $ 2,490,600
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
1999 and in 1998. 412,800 412,800
Capital in excess of par value 5,107,100 5,107,100
Notes receivable secured by Common Stock (75,100) (75,100)
Accumulated deficit (2,378,700) (2,558,400)
Total shareholders' equity $ 3,066,100 $ 2,886,400
Commitments and contingent liabilities
Total liabilities and
shareholders' equity $ 5,713,900 $ 5,377,000
</TABLE>
The accompanying notes are an integral part of this statement.
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Net sales $ 3,039,900 $ 2,699,500
Other income (net) (400) (2,900)
Total revenues 3,039,500 2,696,600
Cost of goods sold 1,772,200 1,763,400
Marketing & selling expense 529,100 505,600
General & administrative expense 368,300 344,800
Research & development expense 101,700 45,500
Net interest expense 24,500 35,100
Total costs and expenses 2,795,800 2,694,400
Income before income taxes 243,700 2,200
Provision for income taxes 64,000 0
Net income $ 179,700 $ 2,200
Basic earnings net income per share $ 0.05 $ 0.00
Diluted net income per share $ 0.04 $ 0.00
</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
March 31,
1999 1998
Cash flow from operating activities:
<S> <C> <C>
Net income $ 179,700 $ 2,200
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 35,500 28,100
Allowance for doubtful accounts 13,900 (127,500)
Provision for inventory reserve (2,200)
Change in assets and liabilities:
Change in accounts receivable (738,400) (772,600)
Change in inventories 198,200 (39,900)
Change in prepaid expenses 14,900 (115,200)
Change in other assets 14,600 145,500
Change in payables and accrued expenses 162,900 330,300
Change in other non-current liabilities (5,700)
Net cash (used in) provided by
operating activities (124,400)
Cash flow from investing activities:
Purchase of fixed assets (103,200) (58,500)
Net cash used in investing activities (103,200) (58,500)
Cash flow from financing activities:
Proceeds from sale of common stock 2,500
Borrowings on line of credit 576,000
Net cash provided by (used in)
financing activities
Net decrease in cash and cash equivalents (227,600)
Cash and cash equivalents, beginning
of period 477,500 46,300
Cash and cash equivalents, end of
period $ 249,900 $ 9,100
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest $ 26,400 $ 42,400
Cash paid during the period for
income taxes $ 24,000 $ 32,000
</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, 1999 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, 1998, included in its 1998 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 5)
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, 1999 December 31, 1998
<S> <C> <C>
Raw materials $664,900 $661,800
Work in process 234,200 211,500
Finished goods 168,100 392,100
$1,067,200 $1,265,400
</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 March 31, 1999. 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, 2000.
5. Net Income Per Share
Basic earnings per share were calculated as follows:
<TABLE>
Quarter Ended March 31,
1999 1998
<S> <C> <C>
Net income $ 179,700 $ 2,200
Average common shares outstanding 3,303,311 3,303,311
Earnings per share $ 0.05 $ 0.00
</TABLE>
Basic earnings per share are calculated by dividing net income by the
weighted average number of shares issued and outstanding.
Part I - FINANCIAL INFORMATION (continued)
Diluted earnings per share were calculated as follows:
<TABLE>
Quarter Ended March 31,
1999 1998
<S> <C> <C>
Adjusted net income $ 179,700 $ 2,200
Average common shares outstanding 3,303,311 3,303,311
Add: Exercise of options reduced by
the number of shares purchased with
proceeds 306,375 N/A
Add: Exercise of warrants reduced by
the number of shares purchased with
proceeds 107,056 N/A
Add: Expense of warrants attached to
debt reduced by the number of
shares purchased with proceeds 485,625 N/A
Adjusted weighted average shares
outstanding 4,202,367 3,303,311
Earnings per common share assuming
dilution $ 0.04 $ 0.00
</TABLE>
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, 1999 increased by 12.6% to
$3,039,900 in 1999 from $2,699,500 in 1998. These increases were primarily
the result of increased unit sales of the Company's pool panel products
along with increased unit sales of the Company's IceStorT products.
Cost of goods sold was relatively stable in absolute dollars at $1,772,200
in the first quarter of 1999 compared with $1,763,400 in the first quarter
of 1998 while decreasing from 65.3% of net sales to 58.3% of net sales from
the first quarter of 1998 to the first quarter of 1999. This decrease in
cost of goods sold as a percentage of net sales were due primarily to
increased efficiencies in the production process which allowed the Company
to produce more product with fewer employees.
Marketing and selling expenses were increased slightly in absolute dollars at
$529,100 in the first quarter of 1999 compared with $505,600 in the first
quarter of 1998 while decreasing from 18.7% of net sales to 17.4% of net
sales in the first quarter of 1999.
General and administrative expenses were relatively stable at $368,300 in the
first quarter of 1999 compared with $344,800 in the same quarter in 1998
while decreasing from 12.8% of net sales in the first quarter of 1998 to
12.1% of net sales in the first quarter of 1999.
Research and development expenses increased to $101,700 (3.3% of net sales)
in 1999 from $45,500 (1.7% of net sales) in the first quarter of 1998 due
mainly to an increase in the number of engineering projects which are
targeted on introducing new and improved products in the next few years.
Net interest expense decreased to $24,500 (0.8% of net sales) in the first
quarter of 1999 from $35,100 (1.3% of net sales) in the first quarter of
1998. This decrease was due primarily to lower average daily borrowing in
1999 than in 1998.
Liquidity and Capital Resources
The Company's cash position decreased from $477,500 at 1998 fiscal year end
to $249,900 at March 31, 1999 principally due to increased accounts
receivable partially offset by decreased inventories and increased accounts
payable.
At March 31, 1999, the Company's accounts payable and other accrued expenses
had increased to $1,126,000 from $1,065,600 at December 31, 1998. This
increase is primarily due to decreased cash flow during the first quarter of
1999 as a result of the Company's "Early Buy" program for Above Ground Pool
systems.
At March 31, 1999, the Company's net accounts receivable had increased to
$2,607,500 from $1,876,600 at December 31, 1998 due mainly to the Company's
"Early Buy" program for Above Ground Pool systems.
At March 31, 1999, the Company's net inventories had decreased to $1,067,200
from $1,265,400 at December 31, 1998 due mainly to sales being higher than
planned during the first quarter of 1999.
Part I - FINANCIAL INFORMATION (continued)
At March 31, 1999 the Company's current ratio was 2.62 to 1 compared with
2.72 to 1 at December 31, 1998. The Company had working capital of
$2,758,000 at March 31, 1999 compared with $2,637,200 at December 31, 1998.
Total assets exceeded total liabilities by $3,066,100 at March 31, 1999
compared with $2,886,400 at December 31, 1998.
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.
Part II - OTHER INFORMATION
Item 5 - Other Information
The following table summarizes the outstanding securities during the quarter
ended March 31, 1999.
<TABLE>
Shares
Common Stock: authorized 10,000,000 shares of
$.125 par value; issued and outstanding at
December 31, 1998, as reported in the
Registrant's Annual report on Form 10-K
<S> <C>
filed for the fiscal year ended December 31, 1998. 3,303,311
Issued during the quarter 0
Outstanding at March 31, 1999 3,303,311
</TABLE>
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
27 Financial Data Schedule
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
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, 1999 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
27 Financial Data Schedule Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000352956
<NAME> FAFCO, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 249,0001999
<SECURITIES> 0
<RECEIVABLES> 3,285,300
<ALLOWANCES> 579,600
<INVENTORY> 1,067200
<CURRENT-ASSETS> 4,454,600
<PP&E> 2,925,100
<DEPRECIATION> (2,274,000)
<TOTAL-ASSETS> 5,713,900
<CURRENT-LIABILITIES> 1,696,600
<BONDS> 951,200
0
0
<COMMON> 412,800
<OTHER-SE> 2,653,300
<TOTAL-LIABILITY-AND-EQUITY> 5,713,900
<SALES> 3,039,900
<TOTAL-REVENUES> 3,040,400
<CGS> 1,772,200
<TOTAL-COSTS> 1,772,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,600
<INTEREST-EXPENSE> 26,700
<INCOME-PRETAX> 243,700
<INCOME-TAX> 64,000
<INCOME-CONTINUING> 179,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 179,700
<EPS-PRIMARY> .05
<EPS-DILUTED> .04
</TABLE>
