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, 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 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)
(415) 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 July 31, 1997, 3,298,311 shares of the Registrant's Common
Stock, $.125 par value were issued and outstanding.
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FAFCO, Inc.
CONSOLIDATED BALANCE SHEET
June 30, 1997 December 31, 1996
(unaudited)
Assets
Current assets:
Cash and cash equivalents $219,700 $88,200
Accounts receivable, less
allowance for doubtful accounts
of $532,400 in 1997 and $512,600
in 1996 2,338,500 1,890,700
Current portion of long-term notes
receivable (net) 199,600 229,100
Inventories 728,900 835,400
Prepaid expenses and other current
assets 157,200 150,800
Other accounts receivable, net of
allowance 10,400 4,500
Deferred tax asset, net of
allowance 221,500 221,500
Total current assets 3,875,800 3,420,200
Plant and equipment, at cost 2,542,100 2,465,800
Less accumulated depreciation and
amortization (2,165,400) (2,116,200)
376,700 349,600
Notes receivable and other assets
(net) 185,100 65,500
Deferred tax asset, net of
allowance 427,900 427,900
Total assets $4,865,500 $4,263,200
Liabilities and shareholders'equity
Current Liabilities:
Bank line of credit $758,600
Accounts payable and other
accrued expenses $1,257,700 1,037,800
Accrued compensation and benefits 453,000 187,000
Accrued warranty expanse 252,300 234,100
Total current liabilities 1,963,000 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 66,500 26,400
Total liabilities $2,954,500 $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 (3,531,300) (4,348,000)
Total shareholders' equity $1,911,000 $1,094,300
Commitments and contingent
liabilities
Total liabilities and
shareholders' equity $4,865,500 $4,263,200
The accompanying notes are an
integral part of this statement.
Part I - FINANCIAL INFORMATION - Item 1 (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Quarter Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
Net sales $3,291,400 $2,775,500 $6,187,300 $5,059,900
Other income (net) 100,500 20,300 115,200 36,400
Total revenues 3,391,900 2,795,800 6,302,500 5,096,300
Cost of goods sold 1,771,600 1,583,900 3,416,200 2,907,400
Marketing & selling
expense 492,400 459,000 962,200 928,100
General &
administrative expense 522,400 370,700 863,200 682,700
Research & development
expense 55,200 5,400 110,200 58,000
Net interest expense 37,100 40,700 80,000 81,100
Total costs and
expenses 2,878,700 2,459,700 5,431,800 4,657,300
Income before income
taxes 513,200 336,100 870,700 439,000
Provision for income
taxes 40,000 30,500 54,000 32,800
Net income $473,200 $305,600 $816,700 $406,200
Primary net income per
share $0.13 $0.09 $0.24 $0.13
Fully diluted net
income per share $0.12 $0.09 $0.20 $0.13
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)
Six Months Ended
June 30
1997 1996*
Cash flow from operating activities:
Net income $816,700 $406,200
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation 59,900 59,500
Allowance for doubtful accounts 19,800 26,000
Gain on sale of fixed assets (6,000)
Change in assets and liabilities:
Change in accounts receivable (473,500) (818,500)
Change in inventories 106,500 (314,500)
Change in prepaid expenses (6,400) (6,900)
Change in other assets (90,100) 39,200
Change in payables and accrued expenses 504,100 692,800
Change in other non-current liabilities 40,100 (61,800)
Net cash provided by operating
activities 977,100 16,000
Cash flow from investing activities:
Purchase of fixed assets (87,000) (156,500)
Proceeds from sale of property &
equipment 6,000
Net cash used in investing activities (87,000) (150,500)
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 (1,493,900) (695,000)
Borrowings on line of credit 735,300 355,000
Net cash (used in) provided by
financing activities (758,600) 77,800
Net increase (decrease) in cash and
cash equivalents 131,500 (56,700)
Cash and cash equivalents, beginning of
period 88,200 126,200
Cash and cash equivalents, end of
period $219,700 $69,500
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest $86,700 $73,200
Cash paid during the period for
income taxes $7,500
*Reclassified for comparative purposes.
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
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 June 30, 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 Note 6)
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.
June 30, 1997 December 31, 1996
Raw materials $408,100 $370,500
Work in process 169,100 100,800
Finished goods 151,700 364,100
$728,900 $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
$1,000,000 at June 30, 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 - Item 1 (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 Six Months Ended
June 30 June 30
1997 1996 1997 1996
Net income $473,200 $305,600 $816,700 $406,200
Average common shares
outstanding 3,298,311 3,298,311 3,298,311 3,209,579
Add: Exercise of options
reduced by the number of
shares purchased with
proceeds 208,734 N/A 79,833 N/A
Add: Exercise of warrants
reduced by the number of
shares purchased with
proceeds 68,571 N/A 63,173 N/A
Adjusted weighted average
shares outstanding 3,575,616 3,298,311 3,441,317 3,209,579
Earnings per share $0.13 $0.09 $0.24 $0.13
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 - Item 1 (continued)
Fully diluted earnings per share were calculated as follows:
Quarter Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
Net income $473,200 $305,600 $816,700 $406,200
Average common shares
outstanding 3,298,311 3,298,311 3,298,311 3,209,579
Add: Exercise of options
reduced by the number of
shares purchased with
proceeds 208,734 N/A 79,833 N/A
Add: Exercise of warrants
reduced by the number of
shares purchased with
proceeds 68,571 N/A 63,173 N/A
Add: Conversion of
convertible debt into
shares 555,000 N/A 555,000 N/A
Adjusted weighted average
shares outstanding 4,130,616 3,298,311 3,996,317 3,209,579
Earnings per common share
assuming full dilution $0.12 $0.09 $0.20 $0.13
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 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, 1997 increased by 18.6%
from $2,775,500 in 1996 to $3,291,400 in 1997. Net sales
increased by 22.3% from $5,059,900 in the first half of 1996 to
$6,187,300 in the corresponding period in 1997. These increases
were due mainly to increased unit sales of the Company's pool
panel products, along with increased unit sales of the Company's
IceStor products partially offset by the effect of discontinuance
of the Company's automated swimming pool controls.
Cost of goods sold increased from $1,583,900 in the quarter ended
June 30, 1996 to $1,771,600 in the corresponding period in 1997,
while decreasing as a percentage of net sales from 57.1% in 1996
to 53.8% in 1997. For the six months ended June 30 cost of sales
increased from $2,907,400 in 1996 to $3,416,200 in 1997 while
decreasing as a percentage of sales from 57.5% in 1996 to 55.2%
in 1997. These decreases as a percent of net sales were due
mainly to the spreading of decreased overhead costs over higher
net sales.
Marketing and selling expenses increased slightly in absolute
terms from $459,000 and $928,100 for the quarter and six month
period ended June 30, 1996 respectively to $492,400 and $962,200
in the same periods in 1997. Marketing and selling expenses
declined as a percentage of net sales from 16.5% for the quarter
ended June 30, 1996 and 18.3% for the six months ended June 30,
1996 to 15.0% and 15.6% of net sales for the corresponding
periods in 1997 due entirely to the increased level of sales
experienced in 1997 compared with 1996.
General and administrative expenses for the quarter ended June 30
increased from $370,700 (13.4% of net sales) in 1996 to $522,400
(15.9% of net sales) in 1997 and for the six month period ended
June 30 increased from $682,700 (13.5% of net sales) in 1996 to
$863,200 (14.0% of net sales) in 1997. These increases were due
mainly to increased personnel costs.
Research and development expenses for the quarter ended June 30
increased from $5,400 (0.2% of net sales) in 1996 to $55,200
(1.7% of net sales) in 1997 and for the six month period ended
June 30 increased from $58,000 (1.2% of net sales) in 1996 to
$110,200 (1.8% of net sales) in 1997. These increases were due
mainly to increased personnel and consulting costs.
Net interest expense was relatively stable in absolute dollars at
$40,700 and $37,100 in the quarter ended June 30, 1996 and 1997
respectively while decreasing as a percentage of net sales from
1.5% in 1996 to 1.1% in 1997. Net interest expense was also
relatively stable in absolute dollars at $81,100 and $80,000 in
the six month period ended June 30, 1996 and 1997 respectively
while decreasing as a percentage of net sales from 1.6% in 1996
to 1.3% in 1997.
Other income (net) included $15,800 in refunds of prior year's
insurance premiums in the first half of 1997 compared with
$14,000 in the second quarter and $30,000 during the first half
of 1996. Other income (net) also included $100,000 in license
fees.
Liquidity and Capital Resources
At June 30, 1997, the Registrant's inventories had decreased to
$728,900 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 June 30, 1997, the Registrant's accounts payable and other
accrued expenses had increased to $1,257,700 from $1,037,800 at
December 31, 1996. This increase is primarily due to the
increased volume of business during the first half of 1997 and
especially during the quarter ended June 30, 1997.
Part I - FINANCIAL INFORMATION - Item 2 (continued)
At June 30, 1997, the Registrant's accounts receivable had
increased to $2,338,500 from $1,890,700 at December 31, 1996 due
mainly to the effect of increased sales levels of all of the
Company's products.
At June 30, 1997, the Registrant's accrued compensation and
benefits had increased to $453,000 from $187,000 at December 31,
1996, due mainly to accruals for employee profit sharing bonuses
along with 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. Another factor was increased accrual
for employee vacation during the first half of 1997 as a result
of the volume of business combined with lean staffing making it
difficult for employees to take time off during this period.
At June 30, 1997, the Registrant's current ratio was 1.97 to 1
compared with 1.54 to 1 at December 31, 1996. The Registrant had
working capital of $1,912,800 at June 30, 1997 compared with
$1,202,700 at December 31, 1996. Total assets exceeded total
liabilities by $1,911,000 at June 30, 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 4 - Submission of Matters to a Vote of Security Holders
a. The Annual Meeting of Shareholders was held on April 24,
1997. Certain business was conducted at that time,
including the voting on items (1) and (2) set forth under
subsection (c.) below.
b. The following directors were elected at the meeting:
Freeman A. Ford
William A. Berry
Robert W. Selig, Jr.
c. The matters voted upon at the meeting and results of the
vote with respect to those matters were as follows:
(1) Election of Directors For Withheld Result
Freeman A. Ford 2,457,782 82,125 Elected
William A. Berry 2,458,782 81,125 Elected
Robert W. Selig, Jr. 2,458,782 81,125 Elected
(2) Election of Burr, Pilger For Against Abstained
& Mayer LLP as the
Company's independent 2,461,932 2,075 75,900
auditors for the fiscal
year 1997
Part II - OTHER INFORMATION (continued)
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 June 30, 1997 3,298,311
Item 6 - Exhibits and Reports on Form 8-K
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 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: July 25, 1997 BY:/s/Alex N. Watt
Alex N. Watt,
Vice President - Finance and
Administration
and Chief Financial Officer
(Principal Financial and
Accounting Officer)