-----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, IIFY4I39x/YfeuxazO0Dhv1YnsMsjB4KlsxIDF2b9yPDFJRVnWDbtdXIIf1RbsyW HOp1qBjACgYelRsFv0XnTw== 0000352956-98-000008.txt : 19980513 0000352956-98-000008.hdr.sgml : 19980513 ACCESSION NUMBER: 0000352956-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980512 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: 98617153 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, 1998 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 (Company's telephone number, including area code) Indicate by check mark whether the Company (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 Company 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, 1998, 3,303,311 shares of the Company'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, 1998 December 31, 1997 (unaudited) Assets Current assets: Cash and cash equivalents $ 9,100 $ 46,300 Accounts receivable, less allowance for doubtful accounts of $538,900 in 1998 and $540,100 in 1997 2,599,300 1,833,400 Current portion of long-term notes receivable (net) 88,800 88,800 Inventories 1,125,000 1,082,900 Prepaid expenses and other current assets 289,200 174,000 Other accounts receivable, net of allowance 20,100 12,200 Deferred tax asset, net of allowance 183,300 183,300 Total current assets 4,314,800 3,420,900 Plant and equipment, at cost 2,673,400 2,614,900 Less accumulated depreciation and amortization (2,264,400) (2,236,300) 409,000 378,600 Notes receivable and other assets (net) 132,100 151,200 Deferred tax asset, net of allowance 485,800 485,800 Total assets $ 5,341,700 $ 4,436,500 Liabilities and shareholders' equity Current Liabilities: Bank line of credit $ 576,000 Accounts payable and other accrued expenses 1,268,000 $ 850,900 Accrued compensation and benefits 241,300 331,600 Accrued warranty expense 235,100 211,000 Income Taxes payable 20,600 Total current liabilities 2,320,400 1,414,100 Convertible subordinated notes ($600,000 was owed to related parties in 1998 and 1997) 925,000 925,000 Other non-current liabilities 49,300 55,100 Total liabilities $ 3,294,700 $ 2,394,200 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: 3,303,311 issued and outstanding in 1998 and 3,298,311 issued and outstanding in 1997. 412,800 412,200 Capital in excess of par value 5,107,100 5,105,200 Notes receivable secured by Common Stock (75,100) (75,100) Accumulated deficit (3,397,800) (3,400,000) Total shareholders' equity $ 2,047,000 $ 2,042,300 Commitments and contingent liabilities Total liabilities and shareholders' equity $ 5,341,700 $ 4,436,500 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, 1998 1997 Net sales $2,699,500 $2,895,900 Other income (net) (2,900) 14,700 Total revenues 2,696,600 2,910,600 Cost of goods sold 1,763,400 1,644,600 Marketing & selling expense 505,600 469,800 General & administrative expense 344,800 340,800 Research & development expense 45,500 55,000 Net interest expense 35,100 42,900 Total costs and expenses 2,694,400 2,553,100 Income before income taxes 2,200 357,500 Provision for income taxes 0 14,000 Net income $ 2,200 $343,500 Basic earnings net income per share $ 0.00 $ 0.10 Diluted net income per share $ 0.00 $ 0.10
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 1998 1997* Cash flow from operating activities: Net income $ 2,200 $ 343,500 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 28,100 27,400 Allowance for doubtful accounts (127,500) 2,800 Provision for inventory reserve (2,200) (2,200) Change in assets and liabilities: Change in accounts receivable (772,600) (457,200) Change in inventories (39,900) 130,100 Change in prepaid expenses (115,200) (148,800) Change in other assets 145,500 (107,900) Change in payables and accrued expenses 330,300 317,800 Change in other non-current liabilities (5,900) 45,500 Net cash (used in) provided by operating activities (557,200) 151,000 Cash flow from investing activities: Purchase of fixed assets (58,500) (78,900) Net cash used in investing activities (58,500) (78,900) Cash flow from financing activities: Proceeds from sale of common stock 2,500 Payments on line of credit (450,000) (610,000) Borrowings on line of credit 1,026,000 505,300 Net cash provided by (used in) financing activities 578,500 (104,700) Net decrease in cash and cash equivalents (37,200) (32,600) Cash and cash equivalents, beginning of period 46,300 88,200 Cash and cash equivalents, end of period $ 9,100 $ 55,600 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 42,400 $ 44,823 Cash paid during the period for income taxes $ 32,000 *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 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 March 31, 1998 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, 1997, included in its 1997 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 first in, first out (FIFO) basis, and consist of the following. March 31, 1998 December 31, 1997 Raw materials $ 273,900 $ 462,800 Work in process 196,200 114,000 Finished goods 654,900 506,100 $1,125,000 $1,082,900
4. The Company has a line of credit agreement with Silicon Valley 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 $424,000 at March 31, 1998. Amounts borrowed bear interest at prime rate plus 1.5% per annum and are secured by substantially all the assets of the Company. This line of credit expires on March 30, 1999. 5. The company records its deferred taxes on a tax jurisdiction basis and, with the adoption of FAS No. 109 in 1993, classified those net amounts as current or non-current based on the balance sheet classifications. Deferred tax assets are comprised of the following at: January 1, 1998 January 1, 1997 Allowance for doubtful accounts $227,700 $215,600 Accrued expenses 132,500 184,300 Loss carryforwards 837,400 1,157,800 Tax credits 71,200 175,700 Other 108,300 107,800 1,377,100 1,841,200 Deferred tax asset valuation allowance (708,000) (1,191,800) Total deferred taxes, net $669,100 $649,400
Part I - FINANCIAL INFORMATION (continued) 6. Net Income Per Share Basic earnings per share were calculated as follows: Quarter ended March 31, 1998 1997 Net income $2,200 $343,500 Average common shares outstanding 3,303,311 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 3,303,311 3,298,311 Earnings per share $0.00 $0.10
Basic 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. Diluted earnings per share were calculated as follows: Quarter Ended March 31 1998 1997 Net income $2,200 $343,500 Average common shares outstanding 3,303,300 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 3,303,311 3,298,311 Earnings per common share assuming dilution $0.00 $0.10
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 ptions 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 March 31, 1998 decreased by 6.8% from $2,895,900 in 1997 to $2,699,500 in 1998. These decreases were the result of decreased unit sales of the Company's pool panel products due to severe weather conditions in both California and Florida as a consequence of El Nino, partially offset by increased unit sales of the Company's IceStorT products. Cost of goods sold increased from $1,644,600 (56.8% of net sales) in the first quarter of 1997 to $1,763,400 (65.3% of net sales) in the corresponding quarter of 1998. These increases in cost of goods sold were due primarily to lower sales of the higher margin pool panel products along with higher sales of the lower margin IceStorT products. Marketing and selling expenses increased from $469,800 (16.2% of net sales) in the first quarter of 1997 to $505,600 (18.7% of net sales) in the first quarter of 1998 due mainly to increased advertising expenses. General and administrative expenses were relatively stable at $340,800 (11.8% of net sales) in the first quarter of 1997 compared with $344,800 (12.8% of net sales) in the same quarter in 1998. Research and development expenses decreased from $55,000 (1.9% of net sales) in the first quarter of 1997 to $45,500 (1.7% of net sales) in 1998 due mainly to a decrease in engineering project expenses. Net interest expense decreased from $42,900 (1.5% of net sales) in the first quarter of 1997 to $35,100 (1.3% of net sales) in the first quarter of 1998. This decrease was due primarily to lower average daily borrowing in 1998 at lower interest rates than in 1997. Other income (net) included $15, 900 in refunds of prior year's insurance premiums in the first quarter of 1997. There were no such refunds for the corresponding quarter in 1998. Liquidity and Capital Resources The Company's cash position decreased from $46,300 at 1997 fiscal year end to $9,100 at March 31, 1997 principally due to increased accounts receivable partially offset by increased accounts payable. At March 31, 1998, the Company's accounts payable and other accrued expenses had increased to $1,268,000 from $850,900 at December 31, 1997. This increase is primarily due to decreased cash flow during the first quarter of 1998 as a result of the Company's "Early Buy" program from Above Ground Pool systems. At March 31, 1998, the Company's net accounts receivable had increased to $2,599,300 from $1,833,400 at December 31, 1997 due mainly to the Company's "Early Buy" program for Above Ground Pool systems. At March 31, 1998, the Company's current ratio was 1.86 to 1 compared with 2.42 to 1 at December 31, 1997. The Company had working capital of $1,994,400 at March 31, 1998 compared with $2,006,800 at December 31, 1997. Total assets exceeded total liabilities by $2,047,000 at March 31, 1998 compared with $2,042,300 at December 31, 1997. Part I - FINANCIAL INFORMATION (continued) The Company 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 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. Part II - OTHER INFORMATION Item 5 - Other Information The following table summarizes the outstanding securities during the quarter ended March 31, 1998. Shares Common Stock: authorized 10,000,000 shares of $.125 par value; issued and outstanding at December 31, 1997, as reported in the Registrant's Annual report on Form 10-K filed for the fiscal year ended December 31, 1997. 3,298,311 Issued during the quarter 5,000 Outstanding at March 31, 1998 3,303,311 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, 1998. b. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 1998. 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, 1998 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 Page 12 Registrant as Borrower and Silicon Valley Bank as Lender dated . LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of April 1, 1998, 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 referred 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 guaranties, 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 Agreemen. 1. The defined term "Maturity Date' is hereby amended in its entirety to read as: March 30, 1999. 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 twenty-fifth calendar day of each month during the term hereof. 3. Sub-section (a) of the paragraph entitled "Interest Rates, Payments and Calculations" is hereby amended in its entirely to read as follows: Except as set forth in Section 2.3(b), any Advances shall bear interest, on the average Daily Balance, at a rate equal to one and one-half (1.500%) percentage points above the Prime Rate, effective as of the date hereof. 4. 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 1.50 to 1.00. 5. 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 Two Million Three Hundred Thousand and 00/100 Dollars ($2,300,000.00). 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 Lender 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 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 Existing Loan Documents remain unchanged and in full force and effect Bank's agreement 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 (i) Borrowers payment of the Loan Fee and (ii) Bank's receipt of Borrower's 1997 fiscal year end audited financial statements and satisfactory review by Bank as to no material adverse change since the date of the fiscal year end financial statements prepared by Borrower. This Loan Modification Agreement is executed as of the date first written above. BORROWER: BANK: FAFCO, INC. SILICON VALLEY BANK By: By: Name: Name: Title: Title: X:\Administration\FinancialReporting\10Q_1stQtr98.doc Page 1 of 1 X:\Administration\FinancialReporting\10Q_1stQtr98.doc Page 17 of 11 Revised: 5/8/98 EX-27 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 0000352956 FAFCO, INC. U.S. DOLLARS 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 9,100 0 3,289,900 568,200 1,125,000 4,314,800 2,673,400 2,264,400 5,341,700 2,320,400 974,300 0 0 412,800 1,634,200 5,341,700 2,699,500 2,699,800 1,763,400 1,763,400 0 2,800 35,100 2,200 0 2,200 0 0 0 2,200 0.00 0.00
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