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, 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
(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 October 25, 1999, 3,303,311 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
September 30, 1999 December 31, 1998
(unaudited)
<TABLE>
Assets
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 168,600 $ 477,500
Accounts receivable, less
allowance for doubtful
accounts of $578,400 in
1999 and $536,300 in 1998 2,042,900 1,876,600
Current portion of long-term
notes receivable (net) 72,000 87,600
Inventories 1,167,300 1,265,400
Prepaid expenses and other
current assets 183,700 183,500
Other accounts receivable,
net of allowance 20,700 7,300
Deferred tax asset, net of
allowance 273,000 273,000
Total current assets 3,928,200 4,170,900
Plant and equipment, at cost 3,134,300 2,901,900
Less accumulated depreciation and
amortization (2,349,400) (2,318,500)
784,900 583,400
Notes receivable and other assets (net) 31,600 58,200
Deferred tax asset, net of allowance 564,500 564,500
Total assets $ 5,309,200 $ 5,377,000
Liabilities and shareholders'
equity
Current Liabilities:
Bank line of credit $ 258,000 $
Accounts payable and other
accrued expenses 993,100 1,065,600
Accrued compensation and benefits 243,500 217,300
Accrued warranty expense 298,300 232,200
Income taxes payable 134,500 18,600
Total current liabilities $ 1,927,400 $ 1,533,700
Subordinated notes ($600,000 was
owed to related parties
in 1998) 925,000
Other non-current liabilities 19,900 31,900
Total liabilities 1,947,300 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 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)
Deficit (2,082,900) (2,558,400)
Total shareholders' equity 3,361,900 2,886,400
Commitments and contingent
liabilities
Total liabilities and shareholders'
equity $ 5,309,200 $ 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>
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 2,100,300 $ 2,426,100 $ 8,713,700 $ 8,936,300
Other income (net) 1,200 14,700 2,900 15,800
Total revenues 2,101,500 2,440,800 8,716,600 8,952,100
Cost of goods sold 1,264,700 1,520,500 5,108,200 5,506,000
Marketing & selling
expense 436,100 473,900 1,473,600 1,446,400
General & administrative
expense 369,800 342,600 1,164,800 1,096,000
Research & development
expense 70,800 50,700 259,800 147,100
Net interest expense 16,500 23,300 64,200 92,700
Total costs and
expenses 2,157,900 2,411,000 8,070,600 8,288,200
Income (loss) before
income taxes $ (56,400) $ 29,800 $ 646,000 $ 663,900
Provision for income
taxes (14,000) 170,500 66,500
Net income (loss) $ (42,400) $ 29,800 $ 475,500 $ 597,400
Basic earnings net
income per share $ (0.01) $ 0.01 $ 0.14 $ 0.18
Diluted net income
per share $ (0.01) $ 0.01 $ 0.11 $ 0.15
</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>
Nine Months Ended
September 30,
1999 1998
Cash flow from operating activities:
<S> <C> <C>
Net income $ 475,500 $ 597,400
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation 126,100 94,300
Allowance for doubtful accounts 42,000 (108,800)
Provision for inventory reserve (5,600) (17,900)
Gain on sale of fixed assets (19,000)
Change in assets and liabilities:
Change in accounts receivable (221,700) (482,300)
Change in inventories 103,700 140,900
Change in prepaid expenses (200) 16,100
Change in other assets 42,200 190,800
Change in payables and accrued
expenses 135,700 176,200
Change in other non-current
liabilities (12,000) (17,900)
Net cash (used in) provided by
operating activities 685,700 569,800
Cash flow from investing activities:
Purchase of fixed assets (327,600) (235,800)
Proceeds from sale of equipment - 19,000
Cash used in investing activities (327,600) (216,800)
Cash flow from financing activities:
Proceeds from sale of common stock 2,500
Payments on subordinated debt (925,000)
Borrowings on line of credit 258,000
Net cash provided by (used in)
financing activities (667,000) 2,500
Net increase (decrease) in cash and
cash equivalents (308,900) 355,500
Cash & cash equivalents, beginning of
period 477,500 46,300
Cash and cash equivalents, end of
period $ 168,600 $ 401,800
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest $ 99,000 $ 96,400
Cash paid during the period for
income taxes $ 55,800 $ 52,900
</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
September 30, 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 Registrant'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 using
the first in, first out (FIFO) method, and consist of the following.
<TABLE>
September 30, 1999 December 31, 1998
<S> <C> <C>
Raw materi $ 604,900 $ 661,800
Work in process 219,500 211,500
Finished goods 342,900 392,100
$ 1,167,300 $ 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 $742,000 at September 30, 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 (loss) per share were calculated as follows:
<TABLE>
Quarter Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ (42,400) $ 29,800 $ 475,500 $ 597,400
Average common shares
outstanding 3,303,311 3,303,311 3,303,311 3,303,311
Earnings per share $ (0.01 $ 0.0 $ 0.14 $ 0.18
</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 ? Item 1 (continued)
Diluted earnings (loss) per share were calculated as follows:
<TABLE>
Quarter Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ (42,400) $ 29,800 $ 475,500 $ 597,400
Average common shares
outstanding 3,303,311 3,303,311 3,303,311 3,303,311
Add: Exercise of options
reduced by the number of
shares purchased with
proceeds 337,155 344,074 331,960 235,697
Add: Exercise of warrants
reduced by the number of
shares purchased with
proceeds 103,661 106,000 102,361 77,344
Add: Expense of warrants
attached to debt
reduced by the number of
shares purchased with
proceeds 475,714 481,000 472,778 416,250
Adjusted weighted average
shares outstanding 4,219,841 4,234,385 4,210,410 4,032,602
Earnings (loss) per common
share assuming full
dilution $ (0.01) $ 0.01 $ 0.11 $ 0.15
</TABLE>
6. Business Segment and Concentration of Credit Risk
Business Segment. The Company operates in one business segment, the
development, production and marketing of polymer heat exchangers for the
solar and thermal energy storage markets worldwide.
<TABLE>
Quarter Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
Product Line
Net Sales
<S> <C> <C> <C> <C>
Solar $1,225,600 $1,033,500 $5,101,400 $4,822,600
Thermal Energy Storage 874,700 1,392,600 3,612,300 4,113,700
$2,100,300 $2,426,100 $8,713,700 $8,936,300
</TABLE>
Geographic information for revenues and long-lived assets are as
follows:
<TABLE>
Quarter Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
Net Sales
<S> <C> <C> <C> <C>
Domestic $1,658,900 $1,519,800 $6,382,300 $5,758,700
Foreign
Japan 129,700 416,000 1,670,600 1,955,200
Other 311,700 490,300 660,800 1,222,400
$2,100,300 $2,426,100 $8,713,700 $8,936,300
</TABLE>
<TABLE>
<S> <C> <C>
Long-lived assets September 30, 1999 December 31, 1998
Domestic $ 784,900 $ 583,400
</TABLE>
For the nine months ended September 30, 1999 and 1998, the Company had one
major customer who individually accounted for 10% or more of sales totaling
$1,670,600 and $1,955,200, respectively.
Concentration of Credit Risk: Most of the Company's business activity is
with customers located in California, Florida and foreign countries. As of
September 30, 1999, unsecured trade accounts receivable from customers in
California, Florida, and foreign countries were $567,800, $1,335,600 and
$499,400, respectively.
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 September 30, 1999 decreased by 13.4% from
$2,426,100 in 1998 to $2,100,300 in 1999 as a result of a decrease in sales
of the Company's IceStor products combined with a price decrease in the
Company's pool products due to competitive market pressures. Net sales
decreased by 2.5% from $8,936,300 in the first nine months of 1998 to
$8,713,700 in the corresponding period in 1999. This decrease was due to
decreased sales of the Company's IceStor products partially offset by
increased unit sales of the Company's pool products.
Costs of goods sold decreased from $1,520,500 (62.7% of net sales) in the
quarter ended September 30, 1998 to $1,264,700 (60.2% of net sales) in the
corresponding period in 1999. For the nine months ended September 30, cost
of sales decreased from $5,506,000 (61.6% of net sales) in 1998 to $5,108,200
(58.6% of net sales) in 1999. These decreases in cost of goods sold were
due primarily to decreased sales of lower margin IceStor products offset
slightly by increased sales of higher margin pool products.
Marketing and selling expenses remained relatively stable at $436,100
(20.8% of net sales) in the third quarter of 1999 compared to $473,900
(19.5% of sales) in the third quarter of 1998 and $1,473,600 (16.9% of net
sales) for the nine months ended September 30, 1999 compared to $1,446,400
(16.2% of net sales) for the corresponding period in 1998.
General and administrative expenses increased from $342,600 (14.1% of net
sales) in the third quarter of 1998 to $369,800 (17.6% of net sales) in 1999
and from $1,096,000 (12.3% of net sales) for the nine months ended
September 30, 1998 to $1,164,800 (13.4% of net sales) for the corresponding
period in 1999. These increases were due to small increases in a variety of
expense categories, no one of which is by itself significant.
Research and development expenses for the quarter ended September 30
increased from $50,700 (2.1% of net sales) in 1998 to $70,800 (3.4% of net
sales) in 1999. For the nine month period ended September 30 research and
development expenses increased from $147,100 (1.6% of net sales) in 1998 to
$259,800 (3.0% of net sales) in 1999. These increases were due mainly to an
increase in personnel.
Net interest expense decreased to $16,500 (0.8% of net sales) in the third
quarter of 1999 from $23,300 (1.0% of net sales) in the second quarter of
1998. Net interest expense for the nine month period ended September 30
decreased from $92,700 (1.0% of net sales) in 1998 to $64,200 (0.7% of net
sales) in 1999. These decreases were 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 $168,600 at September 30, 1999 principally due to cash flow from financing
(subordinated debt pay off) and investing (purchase of fixed assets)
activities.
At September 30, 1999, the Company's net accounts receivable had increased
to $2,042,900 from $1,876,600 at December 31, 1998 primarily as a result of
an increase in the number of customers combined with increased sales of the
Company's pool products.
At September 30, 1999, the Company's inventories were relatively stable at
$1,167,300 compared with $1,265,400 at December 31, 1998.
At September 30, 1999, the Company's subordinated debt had decreased to $0
from $925,000 at December 31, 1998 due mainly to improved cash flow from
operations and an increase in the amount owed on the bank line of credit.
At September 30, 1999, the Company's accounts payable and other accrued
expenses had decreased to $993,100 from $1,065,600 at December 31, 1998.
This decrease is primarily due to slightly faster payment of payables made
possible by improved cash flows during the year.
At September 30, 1999, the Company's accrued benefits remained relatively
stable at $243,500 as compared to $217,300 at December 31, 1998.
The Company's current ratio was 2.04 to 1 at September 30, 1999 compared to
2.72 to 1 at December 31, 1998. The Company had working capital of
$2,000,800 at September 30, 1999 compared with $2,637,200 at
December 31, 1998. Total assets exceeded total liabilities by $3,361,900
at September 30, 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 September 30, 1998.
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 filed
for the fiscal year ended December 31, 1998. 3,303,311
Issued during the quarter 0
Outstanding at September 30, 1999 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:
<TABLE>
<S> <C>
Exhibit No. Description
27 Financial Data Schedule
</TABLE>
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 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: October 28, 1999 BY: /s/ Nancy I. Garvin
Nancy I. Garvin
Vice President - Finance and
Chief Financial Officer
X:/Admin/Financial Reporting10Q_3rdQtr99 Page 1 of 10 Revised: 10/27/99
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000352956
<NAME> FAFCO, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
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<PERIOD-END> SEP-30-1999
<CASH> 168600
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<RECEIVABLES> 2745600
<ALLOWANCES> 607600
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0
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</TABLE>
