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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 September 30, 2000 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
435 Otterson Drive, Chico, California 95928-8207
(Address, including zip code, of Registrant's principal executive offices)
(530) 332-2100
(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 November 13, 2000, 3,843,311 shares of the Company's Common Stock, $.125 par
value were issued and outstanding.
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Page 1 of 12
<PAGE> 2
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
<CAPTION>
FAFCO, Inc.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,600 $ 64,800
Accounts receivable, less allowance for doubtful
accounts of $324,300 in 2000 and $317,800 in 1999 2,021,700 1,752,000
Inventories 946,500 1,041,600
Prepaid expenses and other current assets 240,300 254,200
Other accounts receivable, net of allowance 41,300 27,700
Deferred tax asset, net of allowance 189,500 189,500
-----------------------------------------------------------------------------------------------------------
Total current assets 3,470,900 3,329,800
-----------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost 5,391,500 3,330,100
Less accumulated depreciation and amortization (1,613,800) (2,407,700)
-----------------------------------------------------------------------------------------------------------
3,777,700 922,400
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Notes receivable and other assets (net) 32,200 31,300
Deferred tax asset, net of allowance 703,300 703,300
-----------------------------------------------------------------------------------------------------------
Total assets 7,984,100 4,986,800
-----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 565,400 $ 461,500
Note payable to bank 148,300
Construction loan 2,129,600
Accounts payable and other accrued expenses 1,524,500 802,500
Accrued compensation and benefits 225,900 281,100
Accrued warranty expense 315,700 282,700
Other current liabilities 15,000
===========================================================================================================
Total current liabilities 4,909,400 1,842,800
===========================================================================================================
Note payable to bank 253,800
Other non-current liabilities 42,300 16,600
===========================================================================================================
Total liabilities $5,205,500 $1,859,400
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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; 3,843,311 issued and outstanding in 2000 and
3,303,311 issued and outstanding in 1999. 480,300 412,800
Capital in excess of par value 5,107,100 5,107,100
Notes receivable secured by Common Stock (75,100) (75,100)
Accumulated deficit (2,733,700) (2,317,400)
-----------------------------------------------------------------------------------------------------------
Total shareholders' equity $2,778,600 $3,127,400
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Commitments and contingent liabilities
-----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $7,984,100 $4,986,800
-----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
</TABLE>
Page 2 of 12
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Part I - FINANCIAL INFORMATION - Item 1 (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------- ----------------------------------
2000 1999 2000 1999
-------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Net sales $2,595,800 $2,100,300 $8,904,200 $8,713,700
Other income (net) 5,300 1,200 700 2,900
-------------------------------- ----------------------------------
Total revenues 2,601,100 2,101,500 8,904,900 8,716,600
-------------------------------- ----------------------------------
Cost of goods sold 1,730,500 1,264,700 5,625,100 5,108,200
Marketing & selling expense 503,300 436,100 1,572,800 1,473,600
General & administrative expense 417,100 369,800 1,215,800 1,164,800
Research & development expense 36,900 70,800 242,500 259,800
Net interest expense 48,400 16,500 94,300 64,200
Relocation costs 388,800 570,700
-------------------------------- ----------------------------------
Total costs and expenses 3,125,000 2,157,900 9,321,200 8,070,600
-------------------------------- ----------------------------------
Income (loss) before income taxes (523,900) (56,400) (416,300) 646,000
Provision for income taxes (36,600) (14,000) 170,500
-------------------------------- ----------------------------------
Net income (loss) $ (487,300) $ (42,400) $ (416,300) $ 475,500
================================ ==================================
Basic earnings net income (loss) per share $ (0.13) $ (0.01) $ (0.11) $ 0.14
Diluted net income (loss) per share $ (0.13) $ (0.01) $ (0.11) $ 0.11
-------------------------------- ----------------------------------
</TABLE>
Page 3 of 12
The accompanying notes are an integral part of this statement.
<PAGE> 4
Part I - FINANCIAL INFORMATION - Item 1 (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------------------
2000 1999
---------------- ------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ (416,300) $ 475,500
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 151,000 126,100
Loss on disposition of fixed assets 1,100
Write offs and allowance for doubtful accounts 42,800 42,000
Change in assets and liabilities:
Accounts receivable (326,100) (221,700)
Inventories 95,100 98,100
Prepaid expenses and other assets 13,900 (200)
Notes receivable and other long term assets (900) 42,200
Payables and accrued expenses and other current liabilities 684,800 135,700
Other non-current liabilities 25,700 (12,000)
---------------- ------------------
Net cash provided by operating activities 271,100 685,700
---------------- ------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of fixed assets (3,007,400) (327,600)
---------------- --- ------------------
Net cash used in investing activities (3,007,400) (327,600)
---------------- ------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock warrants 67,500
Repayment of subordinated debt (925,000)
Borrowings on bank line of credit 103,900 258,000
Proceeds from term loan 500,000
Repayment of term loan (97,900)
Proceeds from construction loan 2,129,600
---------------- ------------------
Net cash provided by financing activities 2,703,100 (667,000)
================ ==================
Net increase (decrease) in cash and cash equivalents (33,200) (308,900)
Cash and cash equivalents, beginning of period 64,800 477,500
---------------- ------------------
Cash and cash equivalents, end of period 31,600 168,600
================ ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 84,800 $ 99,000
Cash paid during the period for income taxes $ 55,800
</TABLE>
The accompanying notes are an integral part of this statement.
Page 4 of 12
<PAGE> 5
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 September
30, 2000 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, 1999, included in its 1999 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 consists of the following.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $452,500 499,400
Work in process 248,300 220,000
Finished goods 245,700 322,200
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$946,500 $1,041,600
===============================================================================
</TABLE>
4. Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Building $1,948,800
Land 550,400
Machinery and equipment 2,205,600 $2,445,000
Office and computer equipment 414,800 578,300
Leasehold improvements 88,600
Vehicles 268,900 218,200
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$5,391,500 $3,330,100
Less accumulated deprecation
and amortization (1,613,800) (2,407,700)
--------------------------------------------------------------------------------
$3,777,00 $922,400
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</TABLE>
As of September 30, 2000, construction in process costs for the Company's new
office and manufacturing facility in Chico are $1,948,800. Construction costs
for this facility will be substantially complete by the end of this year.
As of September 30, 2000, the Company had written off $894,600 in fully
depreciated assets. These assets were scrapped or abandoned as a result of their
relocation to Chico, California.
Page 5 of 12
<PAGE> 6
Part I - FINANCIAL INFORMATION - Item 1 (continued)
5. The Company has a line of credit agreement with Butte Community 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 $434,600 at September 30, 2000. 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 May 10, 2001.
In addition to the line of credit, the Company has a 36-month term loan through
Butte Community Bank in the amount of $445,000 bearing interest at prime plus
1.5%. At September 30, 2000, the Company had an outstanding balance of $402,100
on this loan.
The Company also has construction financing through Butte Community Bank in
order to build a 50,000 square foot manufacturing and office facility. The
maximum loan amount is $3,400,000. At September 30, 2000, the Company had
utilized $2,129,600 of this financing arrangement bearing interest at 9.05%. The
Company expects to convert this financing to a 29-1/2 year mortgage bearing
interest at 9.05% per year fixed for five years.
6. Net Income Per Share
Basic earnings (loss) per share were calculated as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------- ------------------------------
2000 1999 2000 1999
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net income $ (487,300) $ (42,400) $ (416,300) $ 475,500
Average common shares outstanding 3,843,311 3,303,311 3,669,880 3,303,311
------------------------------- ------------------------------
Earnings (loss) per share $ (0.13) $ (0.01) $ (0.11) $ 0.14
=============================== ==============================
</TABLE>
Basic earnings (loss) per share were calculated by dividing net income (loss) by
the weighted average number of shares issued and outstanding.
Diluted earnings (loss) per share were calculated as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------- ---------------------------
2000 1999 2000 1999
----------------------------- ---------------------------
<S> <C> <C> <C> <C>
Adjusted net income $ (487,300) $ 42,400 $ (416,300) $ 475,500
Average common shares outstanding 3,843,311 3,303,311 $3,669,880 3,303,311
Add: Exercise of options reduced by the number of
shares purchased with proceeds N/A 337,155 N/A 331,960
Add: Exercise of warrants reduced by the number of
shares purchased with proceeds N/A 103,661 N/A 102,361
Add: Expense of warrants attached to debt reduced by
the number of shares purchased with proceeds N/A 475,714 N/A 472,778
----------------------------------------------------------
Adjusted weighted average shares outstanding $3,843,311 $4,219,841 $3,669,880 4,210,410
----------------------------------------------------------
Earnings (loss) per common share assuming full
dilution $ (0.13) $ (0.01) $ ( 0.11) $ 0.11
==========================================================
</TABLE>
Page 6 of 12
<PAGE> 7
Part I - FINANCIAL INFORMATION - Item 1 (continued)
At September 30, 2000, outstanding options and warrants for the purchase of
619,684 shares of common stock at prices ranging from $0.125 to $0.625 were anti
dilutive and therefore not included in the computation of diluted earnings
(loss) per share.
7. 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>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- -----------------------------
2000 1999 2000 1999
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Product Line
Net Sales
Pool Products $1,606,200 $1,225,600 $6,135,400 $5,101,400
Thermal Energy Products 989,600 874,700 2,768,800 3,612,300
------------- ------------- ------------- -----------
$2,595,800 $2,100,300 $8,904,200 $8,713,700
============= == ============= ============= ===========
</TABLE>
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Geographic information for revenues and long-lived assets are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net Sales
Domestic $1,692,600 $1,658,900 $6,766,700 $6,382,300
Foreign
Japan 569,500 129,700 1,642,100 1,670,600
Other 333,700 311,700 495,400 660,800
------------- -------------- ------------- -------------
$2,595,800 $2,100,300 $8,904,200 $8,713,700
============= ============== ============= =============
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Long-lived assets September 30, 2000 December 31, 1999
------------------ -----------------
Domestic $3,777,700 $922,400
</TABLE>
For the nine months ended September 30, 2000 and 1999, the Company had one
major customer who individually accounted for 10% or more of sales totaling
$1,642,100 and $1,670,600 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, 2000, unsecured trade accounts receivable from customers in
California, Florida, and foreign countries were $574,800, $1,070,500 and
$582,100 respectively.
Page 7 of 12
<PAGE> 8
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 increased by 23.6% to $2,595,800 in
2000 from $2,100,300 in 1999 and increased 2.2% to $8,904,200 in the first 9
months of 2000 from $8,713,700 in the corresponding period in 1999. This
increase was due to increased sales of the Company's pool products partially
offset by decreased sales of the Company's IceStor products.
Cost of goods sold increased from $1,264,700 (60.2% of net sales) in the quarter
ended September 30, 1999 to $1,730,500 (66.7%) of net sales) in the
corresponding period in 2000. For the nine months ended September 30, cost of
goods sold increased from $5,108,200 (58.6% of net sales) in 1999 to $5,625,100
(63.2% of net sales) in 2000. These increases are primarily due to
inefficiencies in the production process experienced during the Company's
relocation from Redwood City to Chico.
Marketing and selling expense increased to $503,300(19.4% of net sales) in the
third quarter of 2000 from $436,100(20.8% of net sales) in the third quarter of
1999. For the nine month period ended September 30, marketing and selling
expense increased to $1,572,800 (17.7% of sales) in 2000 from $1,473,600 (16.9%
of net sales) in 1999.
General and administrative expenses decreased as a percentage of net sales from
17.6% of net sales in the third quarter of 1999 to 16.1% for the corresponding
quarter in 2000 but increased in absolute dollars from $369,800 to $417,100. For
the nine month period ended September 30, general and administrative expenses
were relatively stable at $1,215,800(13.7% of net sales) in 2000 and
$1,164,800(13.4% of net sales) in 1999.
Research and develop expenses decreased to $36,900 (1.4% of net sales) in the
third quarter of 2000 from $70,800 (3.4% of net sales) in the third quarter
1999. For the nine-month period ended September 30, research and development
expenses decreased slightly from $259,800 (3.0% of net sales) in 1999 to
$242,500 (2.7% of net sales) in 2000.
Net interest expense increased to $48,400 (1.9% of net sales) in the third
quarter of 2000 from $16,500 (0.8% of net sales) in the corresponding quarter of
1999 and for the nine-month period ended September 30 increased to $94,300 (1.1%
of net sales) in 2000 from $64,200 (0.7% of net sales) in 1999. This increase is
due to increased borrowing relating to the Company's relocation and construction
of it's new manufacturing facility.
The Company has reported relocation costs in the net amount of $388,800 (15.0%
of net sales) for the quarter and $570,700(6.4% of net sales) for the nine-month
period ended September 30,2000. These expenses consist entirely of costs related
to the Company's relocation to Chico, California, offset in part by lease
termination revenue. It is expected that expenses related to this move will
continue to be incurred for the remainder of the year.
Page 8 of 12
<PAGE> 9
Part I - FINANCIAL INFORMATION - Item 2 (continued)
Liquidity and Capital Resources
The Company's cash position decreased from $64,800 at 1999 fiscal year end to
$31,600 at September 30, 2000, primarily due to cash utilized for the purchase
of fixed assets partially offset by an increase in bank borrowings along with
issuances of stocks and cash provided by operating activities.
At September 30, 2000, the Company's accounts payable and other accrued expenses
had increased to $1,524,500 from $802,500 at December 31,1999. This increase is
primarily due to the addition of relocation-related expenses along with slower
payment of payables due to the disruption in day-to-day operations during the
Company's relocation.
At September 30, 2000, the Company's accrued benefits decreased to $225,900 from
$281,100 at December 31, 1999. This decrease was due mainly to lower accrued
payroll as a result of having fewer regular employees and more temporary
employees.
At September 30, 2000, the Company's net accounts receivable had increased to
$2,021,700 from $1,752,000 at December 31, 1999 due to increased sales.
At September 30, 2000, the Company's net inventories had decreased to $946,500
from $1,041,600 at December 31, 1999, due mainly to consumption of inventory
previously built up to accommodate the Company's relocation.
The Company's current ratio was 0.71 to 1 at September 30, 2000, compared to
1.81 to 1 at December 31, 1999. The Company had working capital of ($1,438,500)
at September 30, 2000, compared with $1,487,000 at December 31, 1999. If the
Company's construction loan were viewed as long-term debt, the current ratio
would be 1.25 to 1 and working capital would be $691,100. Total assets exceeded
total liabilities by $2,778,600 at September 30, 2000, compared with $3,127,400
at December 31, 1999.
At September 30, 2000, total bank debt (line of credit plus term loan plus
construction loan) had increased to $3,097,100 from $461,500 at December 31,
1999, due mainly to borrowing to cover construction costs for the Company's
50,000 square foot headquarters and manufacturing building (see Note 5).
Part II - OTHER INFORMATION
Item 5 - Other Information
The following table summarizes the outstanding securities during the quarter
ended September 30, 2000.
<TABLE>
<CAPTION>
Shares
--------------------
<S> <C>
Common Stock: authorized 10,000,000 shares of $.125 par
value; issued and outstanding at December 31, 1999, as
reported in the Registrant's Annual report on Form 10-K
filed for the fiscal year ended December 31, 1999. 3,303,311
Warrants exercised during the period 540,000
--------------------
Outstanding at September 30, 2000 3,843,311
</TABLE>
Page 9 of 12
<PAGE> 10
Part II - OTHER INFORMATION - (continued)
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>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
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,
2000.
Page 10 of 12
<PAGE> 11
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 December 20, 2000 BY: /s/ Nancy I. Garvin
------------------- ------------------------------------
Nancy I. Garvin,
Vice President - Finance and Chief
Financial Officer
Page 11 of 12
