-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SsdV6ciY/sZDrMt3YyB5K9OXz5y7O05uATJjQI978NgZ3DDCgD+C5U9DFD8M1Ugl jzYN9HnzIaHCjOpVQ0G/gg== 0000352956-97-000009.txt : 19970512 0000352956-97-000009.hdr.sgml : 19970512 ACCESSION NUMBER: 0000352956-97-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970509 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAFCO INC CENTRAL INDEX KEY: 0000352956 STANDARD INDUSTRIAL CLASSIFICATION: HEATING EQUIPMENT, EXCEPT ELECTRIC & WARM AIR FURNACES [3433] IRS NUMBER: 942159547 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10120 FILM NUMBER: 97599347 BUSINESS ADDRESS: STREET 1: 2690 MIDDLEFIELD RD CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 4153632690 MAIL ADDRESS: STREET 1: 2690 MIDDLEFIELD ROAD CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-Q 1 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. G:\ADMINISTRATION\FinancialReporting\10Q_1Qtr97E.txt Page 1 of 11 Revised: 5/8/97 EX-1 2 EXHIBIT 10.19(j) LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of March 31, 1997, by and between FAFCO, Inc. ("Borrower") whose address is 2690 Middlefield Road, Redwood City, CA 94063, and Silicon Valley Bank ("Bank") whose address is 3003 Tasman Drive, Santa Clara, CA 95054. 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, an Amended and Restated Loan and Security Agreement, dated June 5, 1996, as may be amended from time to time, (the "Loan Agreement".) The Loan Agreement provided for, among other things, a Committed Line in the original principal amount of One Million and 00/100 Dollars ($1,000,000.00) (The "Revolving Facility".) Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. Hereinafter, all indebtedness owing by Borrower to Bank shall be referenced to as the "Indebtedness." 2. DESCRIPTION OF COLLATERAL AND GUARANTIES: Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement. Hereinafter, the above-described security documents and quarantines, together with all other documents securing repayment of the Indebtedness shall be referred to as the "Security Documents." Hereinafter, the Security Documents, together with all other documents evidencing or securing the Indebtedness shall be referred to as the "Existing Loan Documents." 3. DESCRIPTION OF CHANGE IN TERMS: A. Modification(s) to Loan Agreement. 1. The defined term "Maturity Date" is hereby amended in its entirety to read as: April 1, 1998. 2. The first sentence in section 2.3 (c) entitled "Payments" is hereby amended to read as follows: Interest hereunder shall be due and payable on the thirteenth calendar day of each month during the term hereof. 3. Item "(a)" contained in the paragraph entitled "Eligible Accounts" is hereby amended in its entirety to read as follows: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date provided that, from December 1 to August 1, accounts under the Borrower's advanced buy program shall be ineligible after 150 days from date of invoice and shall not exceed an aggregate amount of $350,000.00. 4. The paragraph entitled "Eligible Foreign Accounts" is hereby amended in its entirety to read as follows: EXHIBIT 10.19(j) page two "Eligible Foreign Accounts" means Accounts with respect to which the account debtor does not have its principal place of business in the United States and that are: (1) covered by credit insurance in form and amount, and by insurer satisfactory to Bank less the amount of any deductibles(s) which may be or become owing thereon; or (2) supported by one or more letters of credit in favor of Bank as beneficiary, in an amount and of a tenor, and issued by a financial institution, acceptable to Bank; or (3) those certain accounts from Ebara Corp. and Jang Han Systems Engineers to an aggregate maximum of $500,000.00; or (4) that Bank approves on a case-by-case basis. 5. Section 6.8 entitled "Quick Ratio" is hereby amended in its entirety to read as follows: Borrower shall maintain, as of the last day of each calendar month, a ratio of total liabilities less subordinated debt to tangible net worth plus subordinated debt of not more than 2.00 to 1.00. 6. Section 6.9 entitled "Debt-Net Worth Ratio" is hereby amended in its entirety to read as follows: Borrower shall maintain. as of the last day of each calendar month, a ratio of Total Liabilities less subordinated debt to Tangible Net Worth plus Subordinated Debt of not more than 2.00 to 1.00. 7. Section 6.10 entitled "Tangible New Worth" is hereby amended in its entirety to read as follows: Borrower shall maintain, as of the last day of each calendar month, a Tangible Net Worth plus Subordinated Debt of not less than One Million Six Hundred Fifty and 00/100 Dollars ($1,650,000.00). 8. Section 6.11 entitled "Profitability" is hereby amended in its entirety to read as follows: As of the last day of each of Borrower's fiscal quarters, Borrower shall have a minimum net profit, measured on a fiscal year to date basis, of not less than One Dollar ($1.00). 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount of Seven Thousand Five Hundred and 00/100 Dollars ($7,500.00) (the "Loan Fee") plus all out-of-pocket expenses. 6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing below) agrees that, as of this date, it has no defenses against the obligations to pay any amounts under the Indebtedness. 7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below) understands and agrees that in modifying the existing Indebtedness, Bank is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the EXHIBIT 10.19(j) page three Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modifications to modifications to the existing Indebtedness pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Indebtedness. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Indebtedness. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this Paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. 8. CONDITIONS. The effectiveness of this Loan Modification Agreement is conditioned upon Borrower's payment of the Loan Fee. This Loan Modification Agreement is executed as of the date first written above. BORROWER: LENDER: FAFCO, INC. SILICON VALLEY BANK By: \s\Alex N. Watt By: \s\Julie Schneider --------------- ------------------ Name: Alex N. Watt Name: Julie Schneider Title: Title: V.P. Finance & Administration Assistant Vice President EX-27 3
5 0000352956 FAFCO, INC. 3-MOS DEC-31-1997 JAN-01-1997 MAR-01-1997 55,600 0 3,300,500 578,200 707,500 3,848,400 2,544,700 (2,143,600) 4,865,300 2,430,600 996,900 0 0 412,200 1,025,600 4,895,900 2,895,900 2,910,600 1,644,600 1,644,600 0 2,800 42,900 357,500 14,000 343,500 0 0 0 343,500 .10 .10
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