10-Q 1 f75177e10-q.txt FORM 10-Q QUARTER ENDED JUNE 30, 2001 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 June 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 _____________________ 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 August 11, 2001, 3,854,791 shares of the Company's Common Stock, $.125 par value were issued and outstanding. ================================================================================ Page 1 of 10 2 Part I - FINANCIAL INFORMATION Item 1 - Financial Statements FAFCO, Inc. CONSOLIDATED BALANCE SHEET

The accompanying notes are an integral part of this statement. Page 2 of 10 3 Part I - FINANCIAL INFORMATION - Item 1 (continued) FAFCO, Inc. CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)

The accompanying notes are an integral part of this statement. Page 3 of 10 4 Part I - FINANCIAL INFORMATION -- Item 1 (continued) FAFCO, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

The accompanying notes are an integral part of this statement. Page 4 of 10 5 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 June 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 consist of the following.

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 $807,400 at June 30, 2001. 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 August 10, 2002. At June 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%. At June 30, 2001, the Company had an outstanding balance of $297,100 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%. At June 30, 2001, the company had an outstanding balance of $494,700 on this loan. 5. Net Income Per Share Basic earnings per share were calculated as follows:

Basic earnings per share are calculated by dividing net income by the weighted average number of shares issued and outstanding. Page 5 of 10 6 Part I - FINANCIAL INFORMATION -- Item 1 (continued) Diluted earnings per share were calculated as follows:

At June 30, 2001, options and warrants for the purchase of 236,000 shares of common stock at prices ranging from $0.125 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.

Page 6 of 10 7 Part I - FINANCIAL INFORMATION -- Item 1 (continued) Geographic information for revenues and long-lived assets are as follows:

For the six months ended June 30, 2001, the Company had no single customer who accounted for 10% or more of sales. At June 30, 2000, the Company had one major customer who individually accounted for 10% or more of the sales totaling $1,072,600. Concentration of Credit Risk: Most of the Company's business activity is with customers located in California, Florida and foreign countries. As of June 30, 2001, unsecured trade accounts receivable from customers in California, Florida, and foreign countries were $816,800, $1,156,000 and $52,200 respectively. 7. Property, Plant and Equipment Property, plant and equipment consist of the following:

Page 7 of 10 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) Results of Operations Net sales for the quarter ended June 30 increased by 12.3% to $4,026,200 in 2001 from $3,586,300 in 2000 and increased by 9.25% $6,888,800 in the first half of 2001 from $6,308,400 in 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 increased in absolute dollars from $2,146,300 in the quarter ended June 30, 2000 to $2,247,600 in the corresponding period in 2001 decreased as a percent of sales from 59.8% in 2000 to 55.8% in 2001. For the first half of 2001 cost of goods increased in absolute dollars from $3,894,600 in 2000 to $3,911,400 in 2001 while decreasing from 61.7% of net sales to 56.8% of net sales. These increases in absolute dollars are attributable to increased sales levels of the Company's pool products; the decreases as a percentage of sales are due primarily to the inefficiencies experienced by the Company in 2000 during preparation for it's relocation from Redwood City to Chico. Marketing and selling expenses increased to $654.900 (16.3% of net sales) in the second quarter of 2001 compared with $531,700 (14.8% of net sale) in the second quarter of 2000 and to $1,239,700 (18.0% of net sales) for the first six months of 2001 compared with $1,069,500 (17.0% of net sales) for the corresponding period in 2000. These increases were due to increased personnel and increased expenses for advertising and promotion. General and administrative expenses increased to $480,300 (11.9% of net sales) in the second quarter of 2001 compared with $391,900 (10.9% of net sales) in the second quarter of 2000 and to $886,800 (12.9% of net sales) for the first six months of 2001 compared with $798,700 (12.7% of net sales) for the corresponding period in 2000. These increases are due to a variety of expenses including business insurance, legal fees related to patent filings, and equipment rent. Research and development expenses decreased to $29,300 (0.7% of net sales) in the second quarter of 2001 compared with $87,700 (2.4% of net sales) in the second quarter of 2000 and to $83,800 (1.2% of net sales) for the first six months of 2001 compared with $205,600 (3.3% of net sales) for the corresponding period in 2000. These decreases were due to the fact that the engineering projects for 2001 are capital equipment projects whereas in 2000 they were expensed projects. Net interest expense increased to $140,900 (3.5% of net sales) in the second quarter of 2001 compared with $39,600 (1.1% of net sales) in the second quarter of 2000 and to $226,500 (3.3% of net sales) for the first six months of 2001 compared with $45,900 (0.7% of net sales) for the corresponding period in 2000. These increases are due to increased bank borrowing, primarily related to the Company's mortgage. Liquidity and Capital Resources The Company's cash position decreased from $10,100 at 2000 fiscal year end to $6,400 at June 30, 2001. At June 30, 2001, the Company's accounts payable and other accrued expenses had increased to $1,933,600 from $1,744,700 at December 31, 2000. This increase is primarily due to the higher volume of purchases resulting from the increase in sales. At June 30, 2001, the Company's accrued benefits increased to $404,600 from $267,800 at December 31, 2000 due to the build-up in the vacation and commission accrual accounts along with an accrual for profit sharing that was paid out in July. Page 8 of 10 9 Liquidity and Capital Resources -- (continued) At June 30, 2001, the Company's net accounts receivable had increased to $2,347,300 from $1,969,400 at December 31, 2000 due to the seasonal increase in sales during the second quarter combined with a general increase in sales for the year. At June 30, 2001, the Company's net inventories had decreased to $1,004,900 from $1,225,900 at December 31, 2000, due mainly to the increase in sales combined with the seasonal inventory decrease. The Company's current ratio was 1.27 to 1 compared to 1.26 to 1 at December 31, 2000. The Company had working capital of $828,000 compared with $775,400 at December 31, 2000. Total assets exceeded total liabilities by, $3,534,500 at June 30, 2001 compared with $3,132,600 at December 31,2000. At June 30, 2001, total bank debt (line of credit plus term loan plus mortgage) had increased to $4,344,100 from $4,184,000 at December 31, 2000, due mainly to borrowing to cover costs related to the acquisition of new machinery and equipment, offset in part by payments against the line of credit. 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 June 30, 2001.

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 June 30, 2001. Page 9 of 10 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: August 14, 2001 BY :/s/ Nancy I. Garvin -------------------- Nancy I. Garvin, Vice President - Finance and Chief Financial Officer Page 10 of 10

FAFCO INC 10-Q