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, 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 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 August 2, 1999, 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, 1999 December 31, 1998
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 784,800 $ 477,500
Accounts receivable, less
allowance for doubtful accounts
of $568,800 in 1999 and
$536,300 in 1998 2,578,000 1,876,600
Current portion of long-term
notes receivable (net) 85,500 87,600
Inventories 960,200 1,265,400
Prepaid expenses and other
current assets 187,500 183,500
Other accounts receivable, net of
allowance 13,900 7,300
Deferred tax asset, net of
allowance 273,000 273,000
Total current assets 4,882,900 4,170,900
Plant and equipment, at cost 2,985,200 2,901,900
Less accumulated depreciation and
amortization (2,317,400) (2,318,500)
667,800 583,400
Notes receivable and other assets
(net) 32,200 58,200
Deferred tax asset, net of allowance 564,500 564,500
Total assets 6,147,400 5,377,000
Liabilities and shareholders' equity
Current Liabilities:
Accounts payable and other accrued
expenses 1,012,500 1,065,600
Accrued compensation and benefits 357,200 217,300
Accrued warranty expense 275,700 232,200
Income taxes payable 149,600 18,600
Total current liabilities 1,795,000 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 23,100 31,900
Total liabilities 2,743,100 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)
Accumulated deficit (2,040,500) (2,558,400)
Total shareholders' equity 3,404,300 2,886,400
Commitments and contingent liabilities
Total liabilities and shareholders'
equity 6,147,400 5,377,000
</TABLE>
The accompanying notes are an integral part of this statement.
Part I - FINANCIAL INFORMATION - Item 1 (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
Quarter Ended Six Month Ended
June 30 June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $3,573,500 $3,810,700 $6,613,400 $6,510,200
Other income (net) 2,100 4,000 1,700 1,100
Total revenues 3,575,600 3,814,700 6,615,100 6,511,300
Cost of goods sold 2,071,300 2,222,100 3,843,500 3,985,500
Marketing & selling expense 508,400 466,900 1,037,500 972,500
General &
administrative expense 426,700 408,600 795,000 753,400
Research & development
expense 87,300 50,900 189,000 96,400
Net interest expense 23,200 34,300 47,700 69,400
Total costs and expenses 3,116,900 3,182,800 5,912,700 5,877,200
Income before income taxes 458,700 631,900 702,400 634,100
Provision for income taxes 120,500 66,500 184,500 66,500
Net income (loss) $ 338,200 $ 565,400 $ 517,900 $ 567,600
Basic earnings net income
per share $ 0.10 $ 0.17 $ 0.16 $ 0.17
Diluted net income per
share $ 0.08 $ 0.14 $ 0.12 $ 0.14
</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
1999 1998
Cash flow from operating activities:
<S> <C> <C>
Net income $ 517,900 $ 567,600
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation 78,900 59,800
Allowance for doubtful accounts 32,400 (117,800)
Provision for inventory reserve (2,400) (5,600)
Change in assets and liabilities:
Change in accounts receivable (740,400) (1,031,900)
Change in inventories 307,600 153,700
Change in prepaid expenses (4,000) (2,900)
Change in other assets 28,100 168,700
Change in payables and accrued
expenses 261,300 281,800
Change in other non-current
liabilities (8,800) (11,800)
Net cash provided by operating
activities 470,600 61,600
Cash flow from investing activities:
Purchase of fixed assets (163,300) (70,900)
Cash used in investing activities (163,300) (70,900)
Cash flow from financing activities:
Proceeds from sale of common stock 2,500
Net cash provided by financing activities 2,500
Net increase (decrease) in cash and
cash equivalents 307,300 (6,800)
Cash and cash equivalents, beginning of
period 477,500 46,300
Cash and cash equivalents, end of
period $ 784,800 $ 39,500
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest $ 53,200 $ 69,300
Cash paid during the period for
income taxes $ 53,500 $ 32,000
</TABLE>
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, 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 last in, first out (LIFO) basis, and consist of
the following.
<TABLE>
June 30, 1999 December 31, 1998
<S> <C> <C>
Raw materials $ 540,200 $ 661,800
Work in process 238,600 211,500
Finished goods 181,400 392,100
$ 960,200 $ 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 June 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 per share were calculated as follows:
<TABLE>
Quarter Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 338,200 $ 565,400 $ 517,900 $ 567,600
Average common shares
outstanding 3,303,311 3,303,311 3,303,311 3,303,311
Earnings per share
$ 0.10 $ 0.17 $ 0.16 $ 0.17
</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 per share were calculated as follows:
<TABLE>
Quarter Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 338,200 $ 565,400 $ 517,900 $ 567,600
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 318,752 256,377 313,633 163,820
Add: Exercise of warrants
reduced by the number of
shares purchased with
proceeds 108,047 96,033 107,056 77,344
Expense of warrants attached
to debt reduced by the number
of shares purchased with
proceeds 485,625 458,478 483,387 416,250
Adjusted weighted average
shares outstanding 4,215,735 4,114,199 4,207,388 3,960,725
Earnings per common share
assuming full dilution $ 0.08 $ 0.14 $ 0.12 $ 0.14
</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 Six Months Ended
June 30 June 30
1999 1998 1999 1998
Product Line
Net Sales
<S> <C> <C> <C> <C>
Solar $2,113,900 $2,306,500 $3,875,800 $3,789,100
Thermal Energy
Storage 1,459,600 1,504,200 2,737,600 2,721,100
$3,573,500 $3,810,700 $6,613,400 $6,510,200
</TABLE>
Geographic information for revenues and long-lived assets are as follows:
<TABLE>
Quarter Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
Net Sales
<S> <C> <C> <C> <C>
Domestic $2,681,300 $2,513,000 $4,723,400 $4,238,900
Foreign
Japan 690,800 1,090,100 1,540,900 1,539,200
Thermal Energy
Storage 201,400 207,600 349,100 732,100
$3,573,500 $3,810,700 $6,613,400 $6,510,200
</TABLE>
<TABLE>
<S> <C> <C>
Long-lived assets June 30, 1999 December 31, 1998
Domestic $667,800 $583,400
</TABLE>
For the six months ended June 30, 1999 and 1998, the Company had
one major customer who individually accounted for 10% or more of
sales totaling $1,540,900 and $1,539,200 respectively.
Concentration of Credit Risk: Most of the Company's business
activity is with customers located in California, Florida and
foreign countries. As of June 30, 1999, unsecured trade
accounts receivable from customers in California, Florida, and
foreign countries were $608,300, $1,467,300 and $377,000,
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 June 30, 1999 decreased by 6.2 %
from $3,810,700 in 1998 to $3,573,500 in 1999 due to a decrease
in unit sales of the Company's pool products combined with a
price decrease due to competitive market pressures.. Net sales
increased by 1.6% from $6,510,200 in the first half of 1998 to
$6,613,400 in the corresponding period in 1999. This increase
was due to increased unit sales of the Company's pool products,
partially offset by the decreased pricing.
Cost of goods sold decreased from $2,222,100 (58.3% of net sales)
in the quarter ended June 30, 1998 to $2,071,300 (58.0% of net
sales) in the corresponding period in 1999. For the six months
ended June 30, cost of sales decreased from $3,985,500 (61.2% of
net sales) in 1998 to $3,843,500 (58.1% of net sales) in 1999.
These decreases in cost of goods sold were due primarily to
increased labor efficiency in manufacturing partially offset by
lower sales of the higher margin pool panel products and with
higher sales of the lower margin Icestor products.
Marketing and selling expenses for the quarter ended June 30
increased from $466,900 (12.3%) of net sales in 1998 to $508,400
(14.2% of net sales) in 1999 and for the six-month period ended
June 30 increased from $972,500 (14.9% of net sales) in 1998 to
$1,037,500 (15.7% of net sales) in 1999. These increases were
due mainly to increased advertising expenses.
General and administrative expenses were relatively stable at
$426,700 in the second quarter of 1999 (11.9% of net sales)
compared with $408,600 (10.7% of net sales) in the second quarter
of 1998 and $795,000 (12.0% of net sales) for the first six
months of 1999 compared to $753,000 (11.6% of net sales) for the
corresponding period in 1998.
Research and development expenses for the quarter ended June 30
increased from $50,900 (1.3% of net sales) in 1998 to $87,300
(2.4 % of net sales) in 1999. For the six-month period ended
June 30 research and development expenses increased from $96,400
(1.5% of net sales) in 1998 to $189,000 (2.9% of net sales) in
1999. These increases were 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 $23,200 (0.6% of net sales) in
the second quarter of 1999 from $34,300 (0.9% of net sales) in
the first quarter of 1998. Net income expense for the six-month
period ended June 30
Part I - FINANCIAL INFORMATION - Item 2 (continued)
Liquidity and Capital Resources
The Company's cash position increased from $477,500 at 1998
fiscal year end to $784,800 at June 30 1999 principally due to
cash flow from operations (primarily net income) during the
period and increased accounts receivable, partially offset by
decreased inventories and increased accounts payable and accrued
benefits and taxes.
At June 30, 1999, the Company's accounts payable and other
accrued expenses had decreased to $1,012,500 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 June 30, 1999, the Company's accrued benefits increased to
$357,200 from $217,300 at December 31, 1998. This increase was
due mainly to accruals for employee profit sharing bonuses along
with the fact that the December 1998 level was low due to the
heavy use of vacation while the Company was closed in the latter
half of December.
The Company's current ratio was 2.72 to 1 at June 30, 1999 and at
December 31, 1998. The Company had working capital of $3,087,900
at June 30,1999 compared with $2,637,200 at December 31, 1998.
Total assets exceeded total liabilities by $3,404,300 at June 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 June 30, 1999.
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 June 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.
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 June 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: BY
Nancy I. Garvin,
Vice President - Finance and Chief
Financial Officer
N:\ELINK\FILING\10Q_2ndQtr99.doc Page 1 of 11 Revised: 8/3/99
<TABLE> <S> <C>
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