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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, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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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.)
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, 2001, 3,854,791 shares of the Company's Common Stock, $.125 par
value were issued and outstanding.
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Page 1 of 10
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FAFCO, Inc.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, DECEMBER 31,
2001 2000
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 39,400 $ 10,100
Accounts receivable, less allowance for
doubtful accounts of $444,800 in 2001 and
$400,000 in 2000 1,745,000 1,969,400
Inventories 1,178,800 1,225,900
Prepaid expenses and other current assets 260,600 211,500
Other accounts receivable, net of allowance 196,900 21,600
Deferred tax asset, net of allowance 215,700 215,700
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Total current assets 3,636,400 3,654,200
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Property, plant and equipment, at cost 8,224,100 7,104,000
Less accumulated depreciation and amortization (2,082,300) (1,760,000)
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6,141,800 5,344,000
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Notes receivable and other assets (net) 13,600 9,300
Deferred tax asset, net of allowance 648,600 648,600
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Total assets 10,440,400 9,656,100
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank line of credit $ 640,000 $ 450,500
Notes payable to bank 265,400 143,000
Accounts payable and other accrued expenses 1,633,200 1,744,700
Accrued compensation and benefits 290,900 267,800
Accrued warranty expense 310,600 287,700
Other current liabilities 2,900 5,100
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Total current liabilities 3,143,400 2,898,800
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Mortgage 3,353,600 3,366,500
Note payable to bank 503,900 224,000
Other non-current liabilities 44,400 34,200
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Total liabilities $ 7,044,900 $ 6,523,500
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Commitments and contingent liabilities
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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; 3,854,791 shares issued and
outstanding in 2001 and 3,834,791 issued and
outstanding in 2000. 481,800 479,300
Capital in excess of par value 5,108,500 5,106,000
Notes receivable secured by Common Stock (75,100) (75,100)
Accumulated deficit (2,119,700) (2,377,600)
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Total shareholders' equity $ 3,395,500 $ 3,132,600
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Commitments and contingent liabilities
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Total liabilities and shareholders' equity $ 10,440,400 $ 9,656,100
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The accompanying notes are an integral part of this statement.
Page 2 of 10
Part I - FINANCIAL INFORMATION - Item 1 (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2001 2000 2001 2000
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Net sales $ 2,653,100 $ 2,595,800 $ 9,541,900 $ 8,904,200
Other income (net) 53,400 5,300 51,200 700
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Total revenues 2,706,500 2,601,100 9,593,100 8,904,900
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Cost of goods sold 1,668,600 1,730,500 5,580,000 5,625,100
Marketing & selling expense 624,900 503,300 1,864,600 1,572,800
General & administrative expense 435,500 417,100 1,322,300 1,215,800
Research & development expense 95,100 36,900 178,900 242,500
Net interest expense 107,500 48,400 334,000 94,300
Relocation costs 388,800 570,700
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Total costs and expenses 2,931,600 3,125,000 9,279,800 9,321,200
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(Loss) income before income taxes (225,100) (523,900) 313,300 (416,300)
Provision for income taxes (86,100) (36,600) 55,400
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Net (loss) income $ (139,000) $ (487,300) $ 257,900 $ (416,300)
=========== =========== =========== ===========
Basic earnings net (loss) income
per share $ (0.04) $ (0.13) $ 0.07 $ (0.11)
Diluted net (loss) income per share $ (0.04) $ (0.13) $ 0.06 $ (0.11)
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The accompanying notes are an integral part of this statement.
Page 3 of 10
Part I - FINANCIAL INFORMATION - Item 1 (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
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2001 2000
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CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 257,900 $ (416,300)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 322,300 151,000
Loss on disposition of fixed assets 1,100
Write offs and allowance for doubtful accounts 44,800 42,800
Change in assets and liabilities:
Accounts receivable 4,300 (326,100)
Inventories 47,100 95,100
Prepaid expenses and other assets (53,400) 13,900
Notes receivable and other long term assets (900)
Payables and accrued expenses and other current
liabilities (67,700) 684,800
Other non-current liabilities 10,200 25,700
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Net cash provided by operating activities 565,500 271,100
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,120,100) (3,007,400)
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Net cash used in investing activities (1,120,100) (3,007,400)
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CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from exercise of options 5,000
Proceeds from exercise of common stock warrants 67,500
Repayment of bank line of credit 189,500 103,900
Proceeds from term loan 389,400 500,000
Repayment of term loan (97,900)
Proceeds from construction loan 2,129,600
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Net cash provided by financing activities 583,900 2,703,100
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Net increase in cash and cash equivalents 29,300 (33,200)
Cash and cash equivalents, beginning of period 10,100 64,800
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Cash and cash equivalents, end of period $ 39,400 $ 31,600
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 331,000 $ 84,800
Cash paid during the period for income taxes
The accompanying notes are an integral part of this statement.
Page 4 of 10
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, 2001 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, 2000, included in its 2000 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.
SEPTEMBER 30, 2001 DECEMBER 31, 2000
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Raw materials $ 636,100 $ 606,500
Work in process 238,200 269,900
Finished goods 304,500 349,500
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$1,178,800 $1,225,900
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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 $360,000 at September 30, 2001. Amounts borrowed bear interest at
prime rate plus 1.5% per annum (7.5% at September 30, 2001) and are secured by
substantially all the assets of the Company. This line of credit expires on
August 10, 2002. At September 30, 2001, the Company had complied with or
obtained waivers for compliance with the loan covenants.
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% (7.5% at September 30, 2001). At September 30, 2001, the Company had an
outstanding balance of $256,200 on this loan. The company also has a 58-month
term loan in the amount of $500,000 bearing interest at prime plus 1.5% (7.5% at
September 30, 2001). At September 30, 2001, the company had an outstanding
balance of $479,600 on this loan. The Company also has a 29-1/2 year mortgage in
the amount of $3,400,000 bearing interest at 9.05% per year fixed for 5 years.
The balance on this mortgage at September 30, 2001 was $3,387,100.
5. Net Income Per Share
Basic (loss) earnings per share were calculated as follows:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2001 2000 2001 2000
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Net (loss) income $ (139,000) $ (487,300) $ 257,900 $ (416,300)
Average common shares outstanding 3,854,791 3,843,311 3,850,673 3,669,880
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(Loss) earnings per share $ (0.04) $ (0.13) $ 0.07 $ (0.11)
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Basic (loss) earnings per share are calculated by dividing net (loss) income by
the weighted average number of shares issued and outstanding.
Page 5 of 10
Part I - FINANCIAL INFORMATION - Item 1 (continued)
Diluted (loss) earnings per share were calculated as follows:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2001 2000 2001 2000
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Adjusted net (loss) income $ (139,000) $ (487,300) $ 257,900 $ (416,300)
Average common shares outstanding 3,854,791 3,843,311 3,850,673 3,669,880
Add: Exercise of options reduced by the
number of shares purchased with proceeds N/A N/A 156,566 N/A
Add: Exercise of warrants reduced by the
number of shares purchased with proceeds N/A N/A 64,969 N/A
Adjusted weighted average shares outstanding 3,854,791 3,843,311 4,072,208 3,669,880
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(Loss) earnings per common share assuming
full dilution $ (0.04) $ (0.13) $ 0.06 $ (0.11)
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At September 30, 2001, options and warrants for the purchase of 355,700 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.
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2001 2000 2001 2000
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Product Line
Net Sales
Pool Products $ 1,981,900 $ 1,606,200 $ 7,654,000 $ 6,135,400
Thermal Energy Products 671,200 989,600 1,887,900 2,768,800
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$ 2,653,100 $ 2,595,800 $ 9,541,900 $ 8,904,200
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Page 6 of 10
Part I - FINANCIAL INFORMATION - Item 1 (continued)
Geographic information for revenues and long-lived assets are as follows:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2001 2000 2001 2000
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Net Sales
Domestic $ 2,163,000 $ 1,692,600 $ 7,996,300 $ 6,766,700
Foreign
Japan 219,700 569,500 598,100 1,642,100
Other 270,400 333,700 947,500 495,400
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$ 2,653,100 $ 2,595,800 $ 9,541,900 $ 8,904,200
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Long-lived assets SEPTEMBER 30, 2001 DECEMBER 31, 2000
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Domestic $6,141,800 $5,344,000
For the nine months ended September 30, 2001, the Company had no single customer
who accounted for 10% or more of sales. At September 30, 2000, the Company had
one major customer who individually accounted for 10% or more of the sales
totaling $1,642,100.
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, 2001, unsecured trade accounts receivable from customers in California,
Florida, and foreign countries were $580,300, $1,292,400 and $198,600
respectively.
7. Property, Plant and Equipment
Property, plant and equipment consist of the following:
SEPTEMBER 31, 2001 DECEMBER 31, 2000
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Building $ 3,679,100 $ 3,441,400
Land 550,400 550,400
Machinery and equipment 3,149,400 2,332,500
Office and computer equipment 535,300 510,800
Vehicles 309,900 268,900
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$ 8,224,100 $ 7,104,000
Less accumulated depreciation
and amortization (2,082,300) (1,760,000)
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$ 6,141,800 $ 5,344,000
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Page 7 of 10
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 2.2% to $2,653,100 in
2001 from $2,595,800 in 2000 and increased by 7.2% to $9,541,900 in the first
nine months of 2001 from $8,904,200 in the corresponding period in 2000. This
increase was due to increased unit sales of the Company's pool products
partially offset by decreased unit sales of the Company's IceStor products.
Cost of goods sold decreased to $1,668,600 (62.9% of net sales) in the quarter
ended September 2001 compared with $1,730,500 (66.7% of net sales) in the
corresponding quarter of 2000. For nine months ended September 30, cost of goods
sold decreased to $5,580,000 (58.5% of net sales) in 2001 from $5,625,100 (63.2%
of net sales) in 2000. These decreases were due primarily to increased sales of
the Company's higher margin pool products along with decreased sales of the
lower margin IceStor products.
Marketing and selling expenses increased to $624,900 (23.6% of net sales) in the
third quarter of 2001 compared with $503,300 (19.4% of net sales) in the third
quarter of 2000 and to $1,864,600 (19.5% of net sales) for the first nine months
of 2001 compared with $1,572,800 (17.7% of net sales) for the corresponding
period in 2000. These increases were due to increased advertising, freight
costs, travel and costs related to operating the Company's retail office in
Florida.
General and administrative expenses were relatively stable at $435,500 (16.4% of
net sales) in the third quarter of 2001 compared with $417,100 (16.1% of net
sales) in the third quarter of 2000. For the nine-month period ending September
30, general and administrative expenses increased to $1,322,300 (13.9% of net
sales) in 2001 from $1,215,800 (13.7% of net sales) in the corresponding period
in 2000. These increases in absolute dollars were due to a variety of expenses
including business insurance; legal fees related to patent filings; equipment
rental and costs related to operating the Company's retail office in Florida
Research and development expenses increased to $95,100 (3.6% of net sales) in
the third quarter of 2001 from $36,900 (1.4% of net sales) into the third
quarter of 2000 but decreased for the nine-month period ending September 30,2001
to $178,900 (1.9% of net sales) compared with $242,500 (2.7% of net sales for
the corresponding period of 2000. These fluctuations represent the change in
engineering related costs between capital and expensed projects.
Net interest expense increased to $107,500 (4.1% of net sales) in the third
quarter of 2001 compared with $48,400 (1.9% of net sales) in the third quarter
of 2000 and to $334,000 (3.5% of net sales for the nine month period ending
September 30, 2001 compared with $94,300 (1.1% of net sales) for the
corresponding period in 2000. This increase was due to increased bank borrowing
(primarily the Company's mortgage) during 2001, offset slightly by decreased
borrowing costs
Other income (net) includes $102,500 in grant income from the California Energy
Commission related to an energy efficiency program in which the Company
participated.
Page 8 of 10
Liquidity and Capital Resources
The Company's cash position increased slightly from $10,100 at 2000 fiscal year
end to $39,400 at September 30, 2001.
At September 30, 2001, the Company's accounts payable and other accrued expenses
had decreased to $1,633,200 from $1,744,700 at December 31,2000. This decrease
is due to a decrease in accrued liabilities, primarily utilities, offset in part
by an increase to accounts payable.
At September 30, 2001, the Company's net accounts receivable had decreased to
$1,745,000 from $1,969,400 at December 31,2000 due to the seasonal decrease in
sales.
At September 30, 2001, the Company's net inventories had decreased slightly to
$1,178,800 from $1,225,900 at December 31, 2000.
At September 30, 2001, the Company's current ratio was 1.16 to 1 compared to
1.26 to 1 at December 31, 2000. The Company had working capital of $493,400 at
September 30, 2001 compared with $755,400 at December 31, 2000. total assets
exceeded total liabilities by $3,395,500 at September 30,2001 compared with
$3,132,600 at December 31, 2000.
At September 30, 2001, total bank debt (line of credit plus term loan plus
mortgage) had increased to $4,729,400 from $4,184,000 at December 31, 2000, due
mainly to borrowings to cover costs related to the acquisition of new production
equipment.
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 September 30, 2001.
Shares
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Common Stock: authorized 10,000,000 shares of $.125 par
value; issued and outstanding at December 31, 2000, as
reported in the Registrant's Annual report on Form 10-K
filed for the fiscal year ended December 31, 2000 3,834,791
Issued during the period 20,000
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Outstanding at September 30, 2001 3,854,791
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits: none
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 30,
2001.
Page 9 of 10
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: November 13, 2001 BY: /s/ Nancy I. Garvin
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Nancy I. Garvin,
Vice President - Finance and
Chief Financial Officer
Page 10 of 10