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, 1997 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 ororganization) (I.R.S. Employer Identification No.)
2690 Middlefield Road, Redwood City, California 94063
(Address, including zip code, of Registrant's principal
executive offices)
(415) 363-2690
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filedall 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 May 8, 1997, 3,298,311 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
March 31,1997 December 31, 1996
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 55,600 $ 88,200
Accounts receivable, less
allowance for doubtful accounts
of $515,400 in 1997 and $512,600
in 1996 2,341,200 1,890,700
Current portion of long-term notes
receivable (net) 214,600 229,100
Inventories 707,500 835,400
Prepaid expenses and other current assets 299,600 150,800
Other accounts receivable, net of
allowance 8,400 4,500
Deferred tax asset, net of allowance 221,500 221,500
Total current assets 3,848,400 3,420,200
Plant and equipment, at cost 2,544,700 2,465,800
Less accumulated depreciation (2,143,600) (2,116,200)
and amortization
401,100 349,600
Notes receivable and other assets(net) 187,900 65,500
Deferred tax asset, net of allowance 427,900 427,900
Total assets $4,865,300 $4,263,200
Liabilities and shareholders' equity
Current Liabilities:
Bank line of credit $653,900 $758,600
Accounts payable and other accrued 1,245,900 1,037,800
expenses
Accrued compensation and benefits 295,800 187,000
Accrued warranty expanse 235,000 234,100
Total current liabilities 2,430,600 2,217,500
Convertible subordinated notes
($600,000 was owed to related
parties in 1997 and 1996) 925,000 925,000
Other non-current liabilities 71,900 26,400
Total liabilities $3,427,500 $3,168,900
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: 3,298,311
issued and outstanding in 1997 and 1996. 412,200 412,200
Capital in excess of par value 5,105,200 5,105,200
Notes receivable secured by Common Stock (75,100) (75,100)
Accumulated deficit (4,004,500) (4,348,000)
Total shareholders' equity $1,437,800 $1,094,300
Commitments and contingent liabilities
Total liabilities and shareholders' $4,865,300 $4,263,200
equity
The accompanying notes are an integral part of this statement.
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
1997 1996
Net sales $2,895,900 $2,284,400
Other income (net) 14,700 16,100
Total revenues 2,910,600 2,300,500
Cost of goods sold 1,644,600 1,323,500
Marketing & selling expense 469,800 469,100
General & administrative expense 340,800 312,000
Research & development expense 55,000 52,600
Net interest expense 42,900 40,400
Total costs and expenses 2,553,100 2,197,600
Income before income taxes 357,500 102,900
Provision for income taxes 14,000 2,300
Net income $343,500 $100,600
Primary net income per share $0.10 $0.03
Fully diluted net income per share $0.10 $0.03
The accompanying notes are an integral part of this statement
Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
1997 1996*
Cash flow from operating activities:
Net income $343,500 $100,600
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 27,400 31,600
Allowance for doubtful accounts 2,800 11,500
Change in assets and liabilities:
Change in accounts receivable (457,200) (736,400)
Change in inventories 127,900 (133,900)
Change in prepaid expenses (148,800) (71,500)
Change in other assets (107,900) 19,600
Change in payables and accrued expenses 317,800 679,500
Change in other non-current liabilities 45,500 (60,200)
Net cash provided by (used in)
operating activities 151,000 (159,200)
Cash flow from investing activities:
Purchase of fixed assets (78,900) (73,100)
Net cash used in investing activities (78,900) (73,100)
Cash flow from financing activities:
Borrowings under subordinated debt agreements 325,000
Proceeds from sale of common stock 92,800
Payments on line of credit (610,000) (300,000)
Borrowings on line of credit 505,300 200,000
Net cash (used in) provided by
financing activities (104,700) 317,800
Net (decrease) increase in cash and
cash equivalents (32,600) 85,500
Cash and cash equivalents, beginning
of period 88,200 126,200
Cash and cash equivalents, end
of period $55,600 $211,700
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $44,832 $36,600
Cash paid during the period for income taxes
*Reclassified for comparative purposes.
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
Registrant'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 31,1997 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, 1996, included in its 1996 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 Note6)
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.
March 31,1997 December 31, 1996
Raw materials $218,300 $370,500
Work in process 111,800 100,800
Finished goods 377,400 364,100
-------- --------
$707,500 $835,400
4. The Registrant has a line of credit agreement with Silicon Valley Bank,
which line of credit allows the Registrant to borrow the lesser of $1,000,000
or an amount determined by a formula applied to accounts receivable. Unused
borrowing capacity was $346,100 at March 31, 1997. Amounts borrowed bear
interest at prime rate plus 2% per annum and are secured by the Registrant's
assets along with The Gregory Company's assets. This line of credit expires
on March 31, 1998.
5. Effective as of the beginning of 1993, the Company changed its method of
accounting for income taxes by adopting SFAS 109. The cumulative effect of
this change on years prior to 1993 increased net income for 1993 by
$1,434,800 offset by a valuation allowance of $717,400. The cumulative
effect resulted primarily from the recognition of the tax effects of state
and federal net operating loss carryforwards and net deductible temporary
differences. Financial statements presented for fiscal years prior to 1993
reflect accounting for income taxes under the prior deferred method.
Part I - FINANCIAL INFORMATION (continued)
Deferred tax assets are comprised of the following at:
January 1, 1997 January 1,1996
Allowance for doubtful accounts $ 215,600 $ 197,000
Accrued expenses 184,300 142,300
Loss carryforwards 1,157,800 1,360,500
Tax credits 175,700 178,600
Other 107,800 116,400
---------- ----------
1,841,200 1,994,800
Deferred tax asset
valuation allowance (1,191,800) (1,383,800)
Total deferred taxes, net $649,400 $611,000
6. Net Income Per Share
Primary earnings per share were calculated as follows:
Quarter ended March 31,
1997 1996
Net income $ 343,500 $ 100,600
Average common shares outstanding 3,298,311 3,298,311
Add: Exercise of options
reduced by the number of shares
purchased with proceeds N/A N/A
Add: Exercise of warrants reduced
by the number of shares purchased
with proceeds N/A N/A
Adjusted weighted average
shares outstanding 3,298,311 3,298,311
Earnings per share $0.10 $0.03
Primary earnings (loss) per share are calculated by dividing net income
(loss) by the weighted average number of shares issued and outstanding
and shares issuable upon exercise of dilutive stock options and warrants
during each year.
Part I - FINANCIAL INFORMATION (continued)
Fully diluted earnings per share were calculated as follows:
Quarter Ended March 31
1997 1996
Net income $ 343,500 $ 100,600
Average common shares outstanding 3,298,311 3,298,311
Add: Exercise of options reduced by the
number of shares purchased with proceeds N/A N/A
Add: Exercise of warrants reduced by the
number of shares purchased with proceeds N/A N/A
Add: conversion of convertible debt into shares N/A N/A
Adjusted weighted average shares outstanding 3,298,311 3,298,311
Earnings per common share assuming full dilution $0.10 $0.03
Fully diluted earnings (loss) per share are calculated by dividing net
income (loss), adjusted for the dilutive after-tax effect of the interest
expense associated with the convertible debt, by the sum of the weighted
average number of shares issued and outstanding and shares issuable upon
exercise of dilutive stock options and warrants, and upon conversion of
convertible debt during each year.
Part - 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, 1997 increased by 26.8% from
$2,284,400 in 1996 to $2,895,900 in 1997. Revenues increased during the
first quarter of 1997 over the corresponding quarter in 1996 due to
increased unit sales of the Company's pool panel products, partially offset
by the effect of discontinuance of the Company's automated swimming pool
controls.
Cost of goods sold decreased from $1,323,500 (57.9% of net sales) in first
the quarter of 1996 to $1,644,600 (56.8% of net sales) in the corresponding
quarter in 1997. These decreases in cost of goods sold were due primarily
to the spreading of reduced overhead costs over higher net sales.
Marketing and selling expenses were relatively stable in absolute dollars at
$469,100 and $469,800 in the first quarter of 1996 and 1997 respectively.
Marketing and selling expenses declined as a percentage of net sales from
20.5% in 1996 to 16.2% in 1997 due entirely to the increased level of sales
experienced in 1997 compared with 1996.
General and administrative expenses increased in absolute dollars from
$312,000 in the first quarter of 1996 to $340,800 in the same quarter in
1997, while decreasing as a percentage of sales from 13.7% in 1996 to 11.8%
in 1997.
Research and development expenses were relatively stable in absolute dollars
at $52,600 and $55,000 in the first quarter of 1996 and 1997 respectively.
Research and development expenses declined as a percentage of net sales from
2.3% in 1996 to 1.9% in 1997 due to the increased sales in the first quarter
of 1997.
Net interest expense was relatively stable in absolute dollars at $40,400
and $42,900 in the first quarter of 1996 and 1997 respectively while
decreasing as a percentage of net sales from 1.8% in 1996 to 1.5% in 1997.
Other income (net) included $15,800 in refunds of prior year's insurance
premiums in the first quarter of 1997 compared with $15,900 in the first
quarter of 1996.
Liquidity and Capital Resources
At March 31, 1997, the Registrant's inventories had decreased to $707,500
from $835,400 at December 31,1996. This decrease was due mainly to
aggressive management of inventories resulting from increased planning
accuracy and purchasing strategy.
At March 31, 1997, the Registrant's accounts payable and other accrued
expenses had increased to $1,245,900 from $1,037,800 at December 31, 1996.
This increase is primarily due to decreased cash flow during the first
quarter of 1997 as a result of the Registrant's "Early Buy" program from
Above Ground Pool systems and increased sales levels experienced during the
quarter.
At March 31, 1997, the Registrant's accounts receivable had increased to
$2,341,200 from $1,890,700 at December 31, 1996 due mainly to the effect
increased sales levels of the Company's pool panel products along with the
Company's "Early Buy" program for Above Ground Pool panel sales which was
introduced in 1996.
Part I - FINANCIAL INFORMATION (continued)
At March 31, 1997, the Registrant's accrued compensation and benefits had
increased to $295,800 from $187,000 at December 31, 1996, due mainly to the
fact that the December 1996 level was abnormally low due to heavy use of
vacation while the Company was closed in the latter half of December.
At March 31, 1997, the Registrant's current ratio was 1.58 to 1 compared with
1.54 to 1 at December 31, 1996. The Registrant had working capital of
$1,417,800 at March 31, 1997 compared with $1,202,700 at December 31, 1996.
Total assets exceeded total liabilities by $1,437,800 at March 31, 1997
compared with $1,094,300 at December 31, 1996.
The Registrant 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.
Significant Accounting Policies - Income Taxes
Effective as of the beginning of 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109), on a prospective basis. The new standard requires an asset and
liability approach for financial accounting and reporting for income taxes.
Under this approach, deferred tax assets and liabilities are recognized for
the tax consequences of temporary differences between the financial reporting
and tax basis of assets and liabilities. See Note 5 of Notes to Interim
Consolidated Financial Statements.
For periods prior to 1993, the Company followed the deferred
method prescribed by Accounting Principles Board Opinion No.
11.
Part II - OTHER INFORMATION
Item 5 - Other Information
The following table summarizes the outstanding securities during the quarter
ended March 31, 1997.
Shares
Common Stock: authorized 10,000,000 shares
of $.125 par value; issued and outstanding
at December 31, 1996, as reported in the
Registrant's Annual report on Form 10-K
filed for the fiscal year ended December 31, 1996. 3,298,311
Issued during the quarter 0
Outstanding at March 31, 1997 3,298,311
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
10.19(j) Amended and Restated Loan and Security Agreement
between Registrant as Borrower and Silicon Valley Bank
as Lender dated March 31, 1997.
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
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, 1997 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
10.19(j) Amended and Restated Loan and Security Agreement between Registrant
as Borrower Page 12and Silicon Valley Bank as Lender dated June 5, 1996.
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