<PAGE> 1
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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 June 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 of (I.R.S. Employer Identification No.)
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 August 11, 2000, 3,843,311 shares of the Company's Common Stock, $.125 par
value were issued and outstanding.
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Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FAFCO, Inc.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 2000
(UNAUDITED) DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 142,300 $ 64, 800
Accounts receivable, less allowance for doubtful accounts of
$336,000 in 2000 and $317,800 in 1999 2,474,700 1,752,000
Inventories 1,148,100 1,041,600
Prepaid expenses and other current assets 263,100 254,200
Other accounts receivable, net of allowance 9,400 27,700
Deferred tax asset, net of allowance 189,500 189,500
----------- -----------
Total current assets 4,227,100 3,329,800
----------- -----------
Property, plant and equipment, at cost 4,486,900 3,330,100
Less accumulated depreciation and amortization (2,454,700) (2,407,700)
----------- -----------
2,032,200 922,400
----------- -----------
Notes receivable and other assets (net) 34,500 31,300
Deferred tax asset, net of allowance 703,300 703,300
----------- -----------
Total assets 6,997,100 4,986,800
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 461,500
Note payable to bank $ 148,300
Construction loan 903,600
Accounts payable and other accrued expenses 1,688,300 802,500
Accrued compensation and benefits 347,900 281,100
Accrued warranty expense 314,100 282,700
Other current liabilities 15,000
----------- -----------
Total current liabilities 3,402,200 1,842,800
----------- -----------
Note payable to bank 285,600
Other non-current liabilities 43,500 16,600
----------- -----------
Total liabilities $ 3,731,300 $ 1,859,400
----------- -----------
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 (2,246,500) (2,317,400)
----------- -----------
Total shareholders' equity $ 3,265,800 $ 3,127,400
----------- -----------
Commitments and contingent liabilities
----------- -----------
Total liabilities and shareholders' equity $ 6,997,100 $ 4,986,800
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
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<PAGE> 3
Part I - FINANCIAL INFORMATION - Item 1 (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,586,300 $ 3,573,500 $ 6,308,400 $ 6,613,400
Other income (net) (7,100) 2,100 (4,600) 1,700
----------- ----------- ----------- -----------
Total revenues 3,579,200 3,575,600 6,303,800 6,615,100
----------- ----------- ----------- -----------
Cost of goods sold 2,146,300 2,071,300 3,894,600 3,843,500
Marketing & selling expense 531,700 508,400 1,069,500 1,037,500
General & administrative expense 391,900 426,700 798,700 795,000
Research & development expense 87,700 87,300 205,600 189,000
Net interest expense 39,600 23,200 45,900 47,700
Relocation costs 182,000 182,000
----------- ----------- ----------- -----------
Total costs and expenses 3,379,200 3,116,900 6,196,300 5,912,700
----------- ----------- ----------- -----------
Income before income taxes 200,000 458,700 107,500 702,400
Provision for income taxes 68,100 120,500 36,600 184,500
----------- ----------- ----------- -----------
Net income $ 131,900 $ 338,200 $ 70,900 $ 517,900
=========== =========== =========== ===========
Basic earnings net income per share $ 0.03 $ 0.10 $ 0.02 $ 0.16
Diluted net income per share $ 0.03 $ 0.08 $ 0.02 $ 0.12
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
3
<PAGE> 4
Part I - FINANCIAL INFORMATION - Item 1 (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 70,900 $ 517,900
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 98,000 78,900
Write offs and allowance for doubtful accounts 30,800 32,400
Change in assets and liabilities:
Accounts receivable (735,200) (740,400)
Inventories (106,500) 305,200
Prepaid expenses and other assets (8,900) (4,000)
Notes receivable and other long term assets (3,200) 28,100
Payables and accrued expenses and other current liabilities 969,000 261,300
Other non-current liabilities 26,900 (8,800)
----------- -----------
Net cash provided by operating activities 341,800 470,600
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,207,800) (163,300)
----------- -----------
Net cash used in investing activities (1,207,800) (163,300)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 67,500
Repayment of bank line of credit (461,500)
Proceeds from term loan 500,000
Repayment of term loan (66,100)
Proceeds from construction loan 903,600
-----------
Net cash provided by financing activities 943,500
-----------
Net increase in cash and cash equivalents 77,500 307,300
Cash and cash equivalents, beginning of period 64,800 477,500
----------- -----------
Cash and cash equivalents, end of period 142,300 $ 784,800
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 42,000 $ 53,200
Cash paid during the period for income taxes $ 53,500
</TABLE>
The accompanying notes are an integral part of this statement.
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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,
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 consist of the following.
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials $ 620,000 499,400
Work in process 255,300 220,000
Finished goods 272,800 322,200
---------- ----------
$1,148,100 $1,041,600
========== ==========
</TABLE>
4. 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 $1,000,000 at June 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 June 30, 2000, the Company had an outstanding balance of $433,900 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 80% of the actual cost of construction or $2,360,000,
whichever is lower. At June 30, 2000, the Company had utilized $903,600 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.
5. Net Income Per Share
Basic earnings per share were calculated as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 131,900 $ 338,200 $ 70,900 $ 517,900
Average common shares outstanding 3,843,311 3,303,311 3,582,212 3,303,311
---------- ---------- ---------- ----------
Earnings per share $ 0.03 $ 0.10 $ 0.02 $ 0.16
========== ========== ========== ==========
</TABLE>
Basic earnings per share are calculated by dividing net income by the weighted
average number of shares issued and outstanding.
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Part I - FINANCIAL INFORMATION - Item 1 (continued)
Diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Adjusted net income $ 131,900 $ 338,200 $ 70,900 $ 517,900
Average common shares outstanding 3,843,311 3,303,311 3,582,212 3,303,311
Add: Exercise of options reduced by the number of shares
purchased with proceeds 115,975 318,752 115,975 313,633
Add: Exercise of warrants reduced by the number of shares
purchased with proceeds 30,938 108,047 30,938 107,056
Add: Expense of warrants attached to debt reduced by the
number of shares purchased with proceeds 485,625 483,387
---------- ---------- ---------- ----------
Adjusted weighted average shares outstanding 3,990,224 4,215,735 3,729,125 4,207,387
---------- ---------- ---------- ----------
Earnings per common share assuming full dilution $ 0.03 $ 0.08 $ 0.02 $ 0.12
========== ========== ========== ==========
</TABLE>
At June 30, 2000, options and warrants for the purchase of 236,000 shares of
common stock at prices ranging from $0.50 to $0.625 were antidilutive and
therefore not included in the computation of diluted earnings per share.
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>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Product Line
Net Sales
Pool Products $2,440,600 $2,113,900 $4,529,200 $3,875,800
Thermal Energy Products 1,145,700 1,459,600 1,779,200 2,737,600
---------- ---------- ---------- ----------
$3,586,300 $3,573,500 $6,308,400 $6,613,400
========== ========== ========== ==========
</TABLE>
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Geographic information for revenues and long-lived assets are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales
Domestic $2,720,700 $2,681,300 $5,074,100 $4,723,400
Foreign
Japan 781,400 690,800 1,072,600 1,540,900
Other 84,200 201,400 161,700 349,100
---------- ---------- ---------- ----------
$3,586,300 $3,573,500 $6,308,400 $6,613,400
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Long-lived assets June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Domestic $2,032,200 $922,400
</TABLE>
For the six months ended June 30, 2000 and 1999, the Company had one major
customer who individually accounted for 10% or more of sales totaling $1,072,600
and $1,540,900 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,
2000, unsecured trade accounts receivable from customers in California, Florida,
and foreign countries were $669,300, $861,700 and $580,300 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 remained stable at $3,586,300 in 2000
and $3,573,500 in 1999 and decreased by 4.6% to $6,308,400 in the first half of
2000 from $6,613,400 in the corresponding period in 1999. This decrease was due
to decreased unit sales of the Company's IceStor products partially offset by
increased unit sales of the Company's pool products.
Cost of goods increased from $2,071,300 (58.0% of net sales) in the quarter
ended June 30, 1999 to $2,146,300 (59.8% of net sales) in the corresponding
period in 2000. For the six months ended June 30, cost of goods sold remained
relatively stable in absolute dollars at $3,894,600 in 2000 and $3,843,500 in
1999 while increasing from 58.1% of net sales to 61.7% of net sales. This
increase as a percentage of net sales was due primarily to the result of
allocating fixed overhead expenses to a decreased sales number during the first
quarter of 2000, along with increased sales of relatively lower margin pool
products and decreased sales of relatively higher margin pool products.
Inefficiencies due to training production personnel in anticipation of the
Company's move from Redwood City to Chico also contributed to the increased
percentage of net sales.
Marketing and selling expenses remained relatively stable at $531,700 (14.8% of
net sales) in the second quarter of 2000 compared with $508,400 (14.2% of net
sales) in the second quarter of 1999 and $1,069,500 (17.0% of net sales) for the
first six months of 2000 compared to $1,037,500 (15.7% of net sales) for the
corresponding period in 1999.
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General and administrative expenses decreased from $426,700 (11.9% of net sales)
in the second quarter of 1999 to $391,900 (10.9% of net sales) in the second
quarter of 2000. For the six month period ended June 30, general and
administrative expenses were relatively unchanged at $798,700 (12.7% of net
sales) in 2000 and $795,000 (12.0% of net sales) in 1999.
Research and development expenses were relatively unchanged at $87,700 (2.4% of
net sales) for the quarter ended June 30, 2000 and $87,300 (2.4% of net sales)
for the corresponding period in 1999. For the six-month period ended June 30
research and development expenses increased slightly from $189,000 (2.9% of net
sales) in 1999 to $205,600 (3.3% of net sales) in 2000.
Net interest expense increased to $39,600 (1.1% of net sales) in the second
quarter of 2000 from $23,200 (0.6% of net sales) in the corresponding quarter of
1999 and for the six-month period ended June 30 remained relatively unchanged at
$45,900 (0.7% of net sales) in 2000 and $47,700 (0.7%) in 1999.
The Company has reported relocation costs in the amount of $182,000 (5.1% of net
sales for the quarter and 2.9% of net sales for the six-month period ended June
30,2000). These expenses consist of costs related to the Company's relocation to
Chico, California. It is expected that expenses related to this move will
continue to be incurred during the third quarter in amounts equal to or greater
than those incurred in the second quarter.
Part I - FINANCIAL INFORMATION - Item 2 (continued)
Liquidity and Capital Resources
The Company's cash position increased from $64,800 at 1999 fiscal year end to
$142,300 at June 30, 2000, principally due to an increase in bank borrowings
along with issuance of stocks and cash provided by operating activities
partially offset by cash utilized for the purchase of fixed assets.
At June 30, 2000, the Company's accounts payable and other accrued expenses had
increased to $1,688,300 from $802,500 at December 31,1999. This increase is
primarily the result of slower payment of payables due to the disruption in
day-to-day operations during the Company's relocation, along with decreased
borrowings on the Company's line of credit.
At June 30, 2000, the Company's accrued benefits increased to $347,900 from
$281,100 at December 31, 1999. This increase was due mainly to the fact that the
December 1999 accrued vacation level was low due to the heavy use of vacation
while the Company was closed in the latter half of December.
At June 30, 2000, the Company's net accounts receivable had increased to
$2,474,700 from $1,752,000 at December 31, 1999 due mainly to the seasonal
increase in sales during the second quarter of 2000.
At June 30, 2000, the Company's net inventories had increased to $1,148,100 from
$1,041,600 at December 31, 1999, due mainly to a build-up of inventory in
preparation for the Company's relocation.
The Company's current ratio was 1.24 to 1 at June 30, 2000, compared to 1.81 to
1 at December 31, 1999. The Company had working capital of $824,900 at June 30,
2000, compared with $1,487,000 at December 31, 1999. Total assets exceeded total
liabilities by $3,265,800 at June 30, 2000, compared with $3,127,400 at December
31, 1999.
The Company is in the process of relocating and is operating out of temporary
offices in Chico, California while it's new manufacturing facility is under
construction. The Company expects to realize cost savings in the year 2001 and
beyond as a result of this move.
At June 30, 2000, total bank debt (line of credit plus term loan plus
construction loan) had increased to $1,337,500 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 4).
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The Company believes that its cash flow from operations along with its available
line of credit and construction financing 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, 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
Issued during the period 540,000
---------
3,843,311
Outstanding at June 30, 2000
</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.
<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 June 30, 2000.
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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: August 14, 2000 BY: /s/ Nancy I. Garvin
---------------- ----------------------------------
Nancy I. Garvin,
Vice President - Finance and
Chief Financial Officer
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