-----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, RkJXHeJswgCw0zaYNhnl5vtY96iiIfjgnnMk3NpEd7CHpNOvhrYwblItoqxlQk3b 6ZoEhApHC9+wPhjVA9JQEQ== 0000352956-97-000013.txt : 19971113 0000352956-97-000013.hdr.sgml : 19971113 ACCESSION NUMBER: 0000352956-97-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 000-10120 FILM NUMBER: 97715086 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 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, 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) (650) 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 November 6, 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 September 30, 1997 December 31, 1996* (unaudited) Assets Current assets: Cash and cash equivalents $679,20 $88,200 Accounts receivable, less allowance for doubtful accounts of $541,400 in 1997and $512,600 in 1996 1,504,800 1,890,700 Current portion of long-term notes receivable (net) 175,100 229,100 Inventories 723,500 917,400 Prepaid expenses and other current assets 183,200 150,800 Other accounts receivable,net of allowance 1,100 4,500 Deferred tax asset, net of allowance 221,500 221,500 Total current assets 3,488,400 3,502,200 Plant and equipment, at cost 2,577,000 2,465,800 Less accumulated depreciation and amortization (2,200,400) (2,116,200) 376,600 349,600 Notes receivable and other assets (net) 182,100 65,500 Deferred tax asset, net of allowance 427,900 427,900 Total assets $ 4,475,000 $ 4,345,200 Liabilities and shareholders'equity Current Liabilities: Bank line of credit $ 758,600 Accounts payable and other accrued expenses $ 949,100 1,037,800 Accrued compensation and benefits 408,200 187,000 Accrued warranty expense 272,700 234,100 Total current liabilities 1,630,000 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 60,900 26,400 Total liabilities 2,615,900 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) Deficit (3,583,200) (4,266,000) Total shareholders' equity 1,859,100 1,176,300 Commitments and contingent liabilities Total liabilities and shareholders' equity $ 4,475,000 $4,345,200
The accompanying notes are an integral part of this statement. * Restated for change in accounting principle (See Note 3) Part I - FINANCIAL INFORMATION (continued) FAFCO, Inc. CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) Quarter Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Net sales $2,065,200 $1,757,900 $8,252,500 $6,817,800 Other income (net) (3,500) (3,400) 111,700 33,000 Total revenues 2,061,700 1,754,500 8,364,200 6,850,800 Cost of goods sold 1,378,800 1,239,300 4,795,000 4,146,700 Marketing & selling expense 432,400 381,600 1,394,600 1,309,700 General & administrative expense 317,700 330,600 1,180,900 1,013,300 Research & development expense 41,400 28,200 151,600 86,200 Net interest expense 25,400 42,600 105,400 123,700 Total costs and expenses 2,195,700 2,022,300 7,627,500 6,679,600 Income before income taxes $ (134,000) $ (267,800) $ 736,700 $ 171,200 Provision for income taxes 54,000 32,800 Net income $ (134,000) $ (267,800) $ 682,700 $ 138,400 Primary net income per share $ (0.04) $ (0.08) $ 0.19 $ 0.04 Fully diluted net income per share $ (0.04) $ (0.08) $ 0.17 $ 0.04
The accompanying notes are an integral part of this statement Part I - FINANCIAL INFORMATION (continued) FAFCO, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine Months Ended September 30, 1997 1996* Cash flow from operating activities: Net income $ 682,700 $ 138,400 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 94,900 88,300 Allowance for doubtful accounts 28,800 33,100 Gain on sale of fixed assets (6,100) Change in assets and liabilities: Change in accounts receivable 360,500 (661,900) Change in inventories 193,900 4,300 Change in prepaid expenses (32,400) 6,000 Change in other assets (62,600) 55,900 Change in payables and accrued expenses 171,100 176,000 Change in other non-current liabilities 34,500 (51,100) Net cash provided by (used in) operating activities 1,471,400 (217,100) Cash flow from investing activities: Purchase of fixed assets (121,800) (172,700) Proceeds from sale of equipment 6,100 Net cash used in investing activities (121,800) (166,600) Cash flow from financing activities: Borrowings under subordinated debt agreements 325,000 Proceeds from sale of common stock 92,700 Payments on line of credit (1,493,900) (940,000) Borrowings on line of credit 735,300 901,300 Net cash (used in)provided by financing activities (758,600) 379,000 Net increase (decrease) in cash and cash equivalents 591,000 (4,700) Cash & cash equivalents, beginning of period 88,200 126,200 Cash and cash equivalents, end of period $ 679,200 $ 121,500 Supplemental disclosures of cash flow information: Cash paid during the period for interes $ 114,200 $ 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 (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 September 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. Effective in 1997 the Company changed its method of accounting for inventories from last in, first out (LIFO) to first in, first out (FIFO) a change in accounting principle. The reason for this change is that LIFO is administratively difficult and costly for the Company, the amounts have been minimal and the effect on the Consolidated Statement of Operations has not been material over the past several years due to relatively low rates of inflation in the economy as a whole. The cumulative effect on Shareholders' Equity at December 31, 1996 was to increase Shareholders' Equity by $82,000. Inventories are valued at the lower of cost or market and consist of the following. September 30, 1997 December 31, 1996* Raw materials $ 419,700 $ 413,800 Work in process 157,900 111,900 Finished goods 145,900 391,700 $ 723,500 $ 917,400
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 $847,200 at September 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 prior deferred method. * Restated for change in accounting principle (See Note 3) Part I - FINANCIAL INFORMATION (continued) FAFCO, Inc. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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 (Loss) Per Share Primary earnings per share were calculated as follows: Quarter ended September30, NineMonthsEnded September 30, 1997 1996 1997 1996 Net income (loss) $(134,000) $(267,800) $ 682,700 $ 138,400 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 N/A N/A 243,093 N/A Add: Exercise of warrants reduced by the number of shares purchased with proceeds N/A N/A 80,956 N/A Adjusted weighted average shares outstanding 3,298,311 3,298,311 3,622,360 3,209,579 Earnings net (loss) per share $ (0.04) $ (0.08) $ 0.19 $ 0.04
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 Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Net Income (loss) $ (134,000) $ (267,800) $ 707,600 $ 138,400 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 N/A N/A 243,093 N/A Add: Exercise of warrants reduced by the number of shares purchased with proceeds N/A N/A 80,956 N/A Add: conversion of convertible debt into shares N/A N/A 555,000 N/A Adjusted weighted average shares outstanding 3,298,311 3,298,311 4,177,360 3,209,579 Net (loss) per common share assuming full dilution $ (0.04) $ (0.08) $ 0.17 $ 0.04
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 September 30, 1997 increased by 17.5% from $1,757,900 in 1996 to $2,065,200 in 1997. Net sales for the nine months ended September 30, 1997 increased by 21.0% from $6,817,800 in 1996 to $8,252,500 in 1997. These increases were primarily due to increased sales of the Company's pool panel products, along with increased unit sales of the Company's IceStorT products partially offset by the effect of discontinuance of the Company's automated swimming pool controls. Cost of goods sold increased in absolute terms from $1,239,300 in the quarter ended September 30, 1996 to $1,378,800 in the corresponding quarter in 1997, and from $4,146,700 for the nine month period ended September 30, 1996 to $4,795,000 for the corresponding period in 1997. However, cost of goods sold decreased as a percent of net sales from 70.5% to 66.8% for the quarter and from 60.8% to 58.1% for the nine-month period. These decreases in cost of goods sold as a percent of net sales were due primarily to the spreading of fixed overhead costs over higher net sales. Marketing and selling expenses increased from $381,600 in the quarter ended September 30 1996 to $432,400 in the same quarter of 1997 and increased from $1,309,700 in the nine month period ended September 30, 1996 to $1,394,600 for the corresponding period in 1997. However marketing and selling expenses decreased as a percent of net sales from 21.7% to 20.9% for the quarter and from 19.2% to 16.9% for the nine-month period. These decreases as a percent of net sales were due mainly to the increased level of sales experienced in 1997 compared with 1996. General and administrative expenses decreased from $330,600 in the quarter ended September 30 1996 to $317,700 in the same quarter of 1997 and increased from $1,013,300 in the nine month period ended September 30, 1996 to $1,180,900 for the corresponding period in 1997. However general and administrative expenses decreased as a percent of net sales from 18.8% to 15.4% for the quarter and from 14.9% to 14.3% for the nine-month period. These decreases as a percent of net sales were due mainly to the increased level of sales experienced in 1997 compared with 1996. Research and development expensed increased from $28,200 (1.6% of net sales) for the quarter ended September 30, 1996 to $41,400 (2.0% of net sales) for the quarter ended September 30, 1997 and increased from $86,200 (1.3% of net sales) in the nine month period ended September 30, 1996 to $151,600 (1.8% of net sales) for the corresponding period in 1997. These increases were primarily a result of increased personnel and consulting costs in the research and development area. Net interest expense decreased from $42,600 (2.4% of net sales) in the quarter ended September 30, 1996 to $25,400 (1.2% of net sales) for the quarter ended September 30, 1997 and decreased from $123,700 (1.8% of net sales) in the nine month period ended September 30, 1996 to $105,400 (1.3% of net sales) for the corresponding period in 1997. These decreases were mainly due to lower average daily borrowing in 1997 along with lower interest rates in 1997. Other income (net) included $15,800 in refunds of prior year's insurance premiums during the first nine months of 1997 compared with $30,000 during the first nine months of 1996. Liquidity and Capital Resources At September 30, 1997, the Registrant's inventories had decreased to $723,500 compared with $917,400 at December 31, 1996. This decrease was due mainly to aggressive management of inventories resulting from increased planning accuracy and purchasing strategy. Part I - FINANCIAL INFORMATION (continued) At September 30, 1997, the Registrant's accounts payable and other accrued expenses had decreased to $949,100 from $1,037,800 at December 31, 1996. This decrease is primarily due to slightly faster payment of payables made possible by improved profitability and cash flows experienced during the year. At September 30, 1997, the Registrant's accounts receivable had decreased to $1,504,800 from $1,890,700 at December 31, 1996 due mainly to somewhat faster payment from the Company's IceStorT customers. At September 30, 1997, the Registrant's accrued compensation and benefits had increased to $408,200 from $188,900 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 the heavy use of vacation while the Company was closed in the latter half of December. At September 30, 1997, the Registrant's current ratio was 2.14 to 1 compared with 1.58 to 1 at December 31, 1996. The Registrant had working capital of $1,858,400 at September 30, 1997 compared with $1,284,700 at December 31, 1996. Total assets exceeded total liabilities by $1,859,100 at September 30, 1997 compared with $1,176,300 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. Part II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K a. The following exhibit is filed as part, to the extent indicated herein, in the Form 10-Q. Exhibit No. Description 18 Letter re Change in Accounting Principle from Burr, Pilger and Mayer dated November 5, 1997 b. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 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: November 12, 1997 BY:/s/Alex N. Watt Alex N. Watt, Vice President - Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) Sequentially ITEMS Numbered Pages Exhibit No. Description 18 Letter re Change in Accounting Principle from Burr, Pilger and Mayer dated November 5, 1997 Page 12 BPMr BURR, PILGER & MAYER To the Board of Directors of FAFCO, Inc. Redwood City, California We are providing this letter to you for inclusion as an exhibit to your Form 10-Q filing pursuant to Item 601 of Regulation S-K. We have read management's justification for the change in accounting from the LIFO inventory costing method to the FIFO inventory costing method contained in the Company's Form 10-Q for the quarter ended September 30, 1997. Based on our reading of the data and discussions with Company officials about the business judgment and business planning factors relating to the change, we believe management's justification to be reasonable. Accordingly, we concur that the newly adopted accounting principle described above is preferable in the Company's circumstances to the method previously applied. We have not audited any financial statements of FAFCO, Inc. as of any date or for any period subsequent to December 31, 1996, nor have we audited the application of the change in accounting principle disclosed in Form 10-Q of FAFCO, Inc. for the three months ended September 30, 1997; accordingly, our comments are subject to revision on completion of an audit of the financial statements that include the accounting change. /s/Burr, Pilger & Mayer Burr, Pilger & Mayer November 5, 1997 Certified Public Accountant, 0 A Professional Corporation * 26 1 Hamilton Avenue * Palo Alto, CA 94301 Tel 415-329-0720 0 Fax 415-329-8161 \\Nt_server_1\dept_prv\ADMINISTRATION\FinancialReporting\10Q_3rdQtr97 Courier.doc Page 1 of 12 EX-27 2
5 0000352956 FAFCO, INC. 9-MOS DEC-31-1997 SEP-30-1997 679,200 0 2,437,500 604,200 723,500 3,488,400 2,577,000 2,200,400 4,475,000 1,630,000 985,900 0 0 412,200 1,446,900 4,475,000 8,252,500 8,364,200 4,795,000 4,795,000 0 28,800 107,500 736,700 54,000 682,700 0 0 82,000 682,700 .19 .17
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