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SECURITIES AND EXCHANGE COMISSION
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, 1996 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
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At August 14, 1996, 3,298,311 shares of the Registrant's Common Stock, $.125 par
value were issued and outstanding.
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Page 1 of 10
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Part 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
FAFCO, Inc.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996 DECEMBER 31, 1995
(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents $69,500 $126,200
Accounts receivable, less allowance for doubtful accounts of
$489,900 in 1996 and $463,900 in 1995 1,940,000 1,149,600
Current portion of long-term notes receivable (net) 247,600 64,000
Inventories 1,031,600 717,200
Prepaid expenses and other current assets 152,300 145,500
Other accounts receivable 2,100
Deferred tax asset, net of allowance 125,200 125,200
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Total current assets 3,568,300 2,327,700
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Plant and equipment, at cost 2,450,000 2,345,100
Less accumulated depreciation and amortization (2,093,800) (2,085,900)
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356,200 259,200
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Notes receivable and other assets (net) 104,900 327,700
Deferred tax asset, net of allowance 485,800 485,800
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Total assets $4,515,200 $3,400,400
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank $411,300 $751,300
Accounts payable and other accrued expenses 1,531,600 949,100
Accrued compensation and benefits 256,000 188,900
Accrued warranty expanse 240,300 216,000
Income taxes payable 18,800
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Total current liabilities 2,458,000 2,105,300
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Convertible subordinated notes $550,000 and $425,000 was owed
to related parties in 1996 and 1995 respectively 925,000 600,000
Other non-current liabilities 18,600 80,400
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Total liabilities 3,401,600 2,785,700
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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; 3,298,311 issued and outstanding in 1996 and
3,112,687 was outstanding in 1995. 412,200 389,000
Capital in excess of par value 5,105,100 5,035,600
Notes receivable secured by Common Stock (75,100) (75,100)
Deficit (4,328,600) (4,734,800)
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Total shareholders' equity 1,113,600 614,700
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Commitments and contingent liabilities
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Total liabilities and shareholders' equity $4,515,200 $3,400,400
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The accompanying notes are an integral part of this statement.
Page 2 of 10
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Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1996 1995 1996 1995
---------------------------- ----------------------------
Net sales $ 2,775,500 $ 2,712,500 $ 5,059,900 $ 4,801,800
Other income (net) 20,300 26,000 36,400 26,800
----------- ----------- ----------- -----------
Total revenues 2,795,800 2,738,500 5,096,300 4,828,600
----------- ----------- ----------- -----------
Cost of goods sold 1,583,900 1,843,400 2,907,400 3,227,600
Marketing & selling expense 459,000 602,400 928,100 1,168,500
General & administrative expense 370,700 403,900 682,700 764,900
Research & development expense 5,400 150,500 58,000 278,200
Net interest expense 40,700 17,800 81,100 33,600
----------- ----------- ----------- -----------
Total costs and expenses 2,459,700 3,018,000 4,657,300 5,472,800
----------- ----------- ----------- -----------
Income (loss) before income taxes 336,100 (279,500) 439,000 (644,200)
Provision for income taxes 30,500 32,800
----------- ----------- ----------- -----------
Net income (loss) $ 305,600 ($ 279,500) $ 406,200 ($ 644,200)
=========== =========== =========== ===========
Primary net income (loss) per share $ 0.09 $ (0.08) $ 0.13 $ (0.19)
----------- ----------- ----------- -----------
Fully diluted net income per share $ 0.09 $ (0.08) $ 0.13 $ (0.19)
The accompanying notes are an integral part of this statement.
Page 3 of 10
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Part I - FINANCIAL INFORMATION (continued)
FAFCO, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1996 1995
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CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 406,200 $ (644,200)
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation 59,500 84,600
Allowance for doubtful accounts 26,000 22,600
Gain on sale of fixed assets (6,000)
Change in assets and liabilities:
Change in accounts receivable (1,041,000) 407,900
Increase in inventories (314,500) (245,100)
Increase in prepaid expenses (6,900) (19,600)
Decrease in other assets 261,900 5,200
Increase in payables and accrued expenses 702,100 87,600
Decrease in other non-current liabilities (61,700) (3,200)
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Net cash provided by (used in) operating activities 25,600 (304,200)
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of fixed assets (156,500) (54,000)
Proceeds from sale of property & equipment 6,000
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Net cash used in investing activities (150,500) (54,000)
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CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from borrowing 325,000 115,000
Proceeds from sale of common stock 92,800
Repayment of borrowings (349,600) (52,700)
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Net cash provided by financing activities 68,200 62,300
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Net increase (decrease) in cash and cash equivalents (56,700) (295,900)
Cash and cash equivalents, beginning of period 126,200 338,000
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Cash and cash equivalents, end of period $ 69,500 $ 42,100
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 73,200 $ 33,900
Cash paid during the period for income taxes $ 7,500 $ 49,000
The accompanying notes are an integral part of this statement.
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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 June 30,
1996 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, 1995, included in its 1995 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, 1996 DECEMBER 31, 1995
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Raw materials $534,900 $395,200
Work in process 233,900 118,500
Finished goods 262,800 203,500
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$1,031,600 $717,200
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4. In February 1996, the Registrant entered into 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 $588,700 at June 30, 1996. Amounts
borrowed bear interest at prime rate plus 2 -1/2% per annum and are secured by
the Registrant's assets along with The Gregory Company's assets. This line of
credit expires on June 5, 1997.
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Part I - FINANCIAL INFORMATION (continued)
Deferred tax assets are comprised of the following at:
JANUARY 1, 1996 JANUARY 1, 1995
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Allowance for doubtful accounts $ 197,000 $ 199,400
Accrued expenses 142,300 140,000
Loss carryforwards 1,360,500 625,000
Tax credits 178,600 193,600
Other 116,400 53,900
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1,994,800 1,211,900
Deferred tax asset valuation allowance (1,383,800) (600,900)
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Total deferred taxes, net $ 611,000 $ 611,000
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6. Net Income (Loss) Per Share
Primary earnings per share were calculated as follows:
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
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Net income (loss) $ 305,600 $ (279,500) $ 406,200 $ (644,200)
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Average common shares outstanding 3,298,311 3,100,887 3,209,579 3,100,887
Add: Exercise of options reduced by the
number of shares purchased with proceeds
N/A 280,835 N/A 259,226
Add: Exercise of warrants reduced by the
number of shares purchased with proceeds
N/A 118,261 N/A 118,261
Adjusted weighted average shares
outstanding 3,298,311 3,500,003 3,209,579 3,478,394
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Net loss per share $ 0.09 $ (0.08) $ 0.13 $ (0.19)
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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.
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Part I - FINANCIAL INFORMATION (continued)
Fully diluted earnings per share were calculated as follows:
QUARTER ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
Net income (loss) $ 305,600 $ (279,500) $ 406,200 $ (644,200)
---------- ---------- ---------- ----------
Average common shares outstanding 3,298,311 3,100,887 3,209,579 3,100,887
Add: Exercise of options reduced by the
number of shares purchased with proceeds
N/A 280,835 N/A 259,226
Add: Exercise of warrants reduced by the
number of shares purchased with proceeds
N/A 118,261 N/A 118,281
Add: conversion of convertible debt into
shares N/A N/A N/A N/A
---------- ---------- ---------- ----------
Adjusted weighted average shares
outstanding 3,298,311 3,500,003 3,209,579 3,478,394
---------- ---------- ---------- ----------
Net loss per common share assuming full
dilution $ 0.09 $ (0.08) $ 0.13 $ (0.19)
========== ========== ========== ==========
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.
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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 June 30, 1996 increased by 2.3% from $2,712,500
from 1995 to $2,775,500 in 1996. Net sale for the six months ended June 30, 1996
increased by 5.4% from $4,801,800 in 1995 to $5,059,900 in 1996. These increases
were primarily due to increased IceStor(TM) and pool panel product sales
partially offset by decreased unit sales of the Company's automated swimming
pool controls.
Cost of goods sold decreased from $1,843,400 (68.0% of net sales) in the quarter
ended June 30, 1995 to $1,583,900 (57.1% of net sales) in the corresponding
quarter in 1996, and decreased from $3,227,600 (67.2% of net sales) for the six
month period ended June 30, 1995 to $2,907,400 (57.5% of net sales) for the
corresponding period in 1996. These decreases in cost of goods sold were due
primarily to the spreading of reduced overhead costs over slightly higher net
sales.
Marketing and selling expenses decreased from $602,400 (22.2% of net sales) in
the quarter ended June 30 1995 to $459,000 (16.5% of net sales) in the same
quarter of 1996 and a decrease from $1,168,500 (24.3% of net sales) in the six
month period ended June 30, 1995 to $928,100 ( 18.3% of net sales) for the
corresponding period in 1996. These increases were due mainly to the decrease of
in-house sales support personnel.
General and administrative expenses decreased from $403,900 (14.9% of net sales)
in the quarter ended June 30, 1995 to $370,700 (13.4% of net sales) in the same
quarter in 1996 and from $764,900 (15.9% of net sales) in the six month period
ended June 30, 1995 to $682,700 (13.5% of net sales) for the corresponding
period in 1996. These decrease were due mainly to a reduction of cost associated
with decreases in personnel throughout the company.
Research and development expensed decreased from $150,500 (5.6% of net sales)
for the quarter ended June 30 1995 to $5,400 (0.2% of net sales) for the quarter
ended June 30, 1996 and it decreased from $278,200 (5.8% of net sales) in the
six month period ended June 30, 1995 to $58,000 (1.1% of net sales) for the
corresponding period in 1996. These decreases were primarily a result of
decrease in personnel in the research and development area.
Net interest expense increased from $17,800 (0.7% of net sales) in the quarter
ended June 30, 1995 to $40,700 (1.5% of net sales) for the quarter ended June
30, 1996 and increased from $33,600 (0.7% of net sales) in the six month period
ended June 30, 1995 to $81,100 (1.6% of net sales) for the corresponding period
in 1996. These increases were mainly due to higher average daily borrowing in
1996 along with higher interest rates in 1996.
Other income (net) included $14,100 in refunds of prior year's insurance
premiums in the second quarter and $30,000 during the first six months of 1996
compared with $24,400 in the second quarter and the first six months of 1995.
Liquidity and Capital Resources
At June 30, 1996, the Registrant's inventories had increased to $1,031,600 from
$717,200 at December 31,1995. This increase was due mainly to acquisition of
inventories required to support the increased sales levels experienced during
the first half of 1996.
Page 8 of 10
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Part I - FINANCIAL INFORMATION (continued)
At June 30, 1996, the Registrant's accounts payable and other accrued expenses
had increased to $1,531,600 from $949,100 at December 31, 1995. This increase is
primarily due to decreased cash flow during the first half of 1996 as a result
of the Registrant's "Early Buy" program from Above Ground Pool systems and
increased sales levels experienced during the quarter.
At June 30, 1996, the Registrant's accounts receivable had increased to
$1,940,000 from $1,149,600 at December 31, 1995 due mainly to the effect of the
Company's "Early Buy" program for Above Ground Pool panel sales which was
introduced in 1996 along with increased sales levels experienced during the
first half of 1996.
At June 30, 1996, the Registrant's accrued compensation and benefits had
increased to $256,000 from $188,900 at December 31, 1995, due mainly to the fact
that the December 1995 level was abnormally low due to heavy use of vacation
while the Company was closed in the latter half of December.
At June 30, 1996, the Registrant's current ratio was 1.45 to 1 compared with
1.11 to 1 at December 31, 1995. The Registrant had working capital of $1,110,300
at June 30, 1996 compared with $222,400 at December 31, 1995. Total assets
exceeded total liabilities by $1,113,600 at June 30, 1996 compared with $614,700
at December 31, 1995.
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 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
4.6 Form of Subordinated Note and Warrant Purchase Agreement dated
as of March 27, 1996 between Registrant and certain investors.
10.19(g) Amended and Restated Loan and Security Agreement between
Registrant as Borrower and Silicon Valley Bank as Lender dated
June 5, 1996.
b. Reports on Form 8-K
A report on Form 8-K was filed on March 28, 1996 reporting the extension of
the Registrant's bank line of credit.
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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, 1996 BY:/s/Alex N. Watt
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Alex N. Watt, Vice President -
Finance and Administration and
Chief Financial Officer (Principal
Financial and Accounting Officer
Page 10 of 10
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Subsequently
ITEMS Numbered Pages
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EXHIBIT NO. DESCRIPTION
4.6 Form of Subordinated Note and Warrant Purchase Agreement dated as of March 27, Page 12
1996 between Registrant and certain investors.
10.19(g) Amended and Restated Loan and Security Agreement between Registrant as Borrower Page 45
and Silicon Valley Bank as Lender dated June 5, 1996.
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