|                 - 1-         - 1 - |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

UNITED STATES

SECURITIES AND EXCHANGECOMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

[Amendment No. 1]

 

 

(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, 2003

 

[  ]  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.)

 

435 Otterson Drive, Chico,  California 95928

(Address, including zip code, of Registrant’s principalexecutive offices)

 

(530) 332-2100

(Company’s telephone number, including area code)

 

 

Indicate by check mark whether the Company (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period thatthe Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   X   No         

 

Indicate by check mark whether the registrant is on accelerated filer (as definedin Rule 12b-2 of the Exchange Act).

 

 

Yes       No   X__         

 

 

At May 8, 2003, 3,855,591 shares of the Company’s Common Stock, $.125 par value were issued andoutstanding.

 
|   |   |
|--------|--------|

Part I - FINANCIAL INFORMATION

 

Item 1 - Financial Statements

 

FAFCO, Inc.

CONSOLIDATED BALANCE SHEET

 
|                                                                                                                                       | **March 31, 2003**

**(unaudited)** | **December 31, 2002**                             |
|--------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|---------------------------------------------------|
| Assets                                                                                                                                     |                                |                                              |   |   |   |   |
| Current assets:                                                                                                                            |                                |                                              |   |   |   |   |
| Cash and cash equivalents                                                                                                                  | $                                   | 75,100                                            |   | $ | 100,400 |   |
| Accounts receivable, less allowance for doubtful accounts of$301,800 in 2003 and $292,000 in 2002                                          |                                | 2,531,600                                         |   |   | 1,974,200 |   |
| Current portion of long term notes receivable                                                                                              |                                | 11,400                                            |   |   | 11,400 |   |
| Inventories                                                                                                                                |                                | 1,284,400                                         |   |   | 1,331,900 |   |
| Prepaid expenses and other current assets                                                                                                  |                                | 352,100                                           |   |   | 264,200 |   |
| Other accounts receivable, net of allowance                                                                                                |                                | 20,400                                            |   |   | 9,600 |   |
| Deferred tax asset                                                                                                                         |                                | 206,200                                           |   |   | 206,200 |   |
| Total current assets                                                                                                                       | $                                   | 4,481,200                                         |   |   | 3,897,900 |   |
| Property, plant and equipment, at cost                                                                                                     |                                | 8,356,100                                         |   |   | 8,290,200 |   |
| Less accumulated depreciation and amortization                                                                                             |                                | (   2,611,200                           | ) |   | (   2,490,800 | ) |
|                                                                                                                                       |                                | 5,744,900                                         |   |   | 5,799,400 |   |
| Notes receivable less current portion and other assets (net)                                                                               |                                | 69,600                                            |   |   | 72,000 |   |
| Deferred tax asset, net of allowance                                                                                                       |                                | 172,000                                           |   |   | 272,400 |   |
| Total assets                                                                                                                               | $                                   | 10,467,700                                        |   | $ | 10,041,700 |   |
| Liabilities and shareholders’ equity                                                                                                 |                                |                                              |   |   |   |   |
| Current Liabilities:                                                                                                                       |                                |                                              |   |   |   |   |
| Bank line of credit                                                                                                                        | $                                   | 324,200                                           |   | $ |   |   |
| Notes payable to bank – current portion                                                                                              |                                | 188,600                                           |   |   | 229,300 |   |
| Accounts payable and other accrued expenses                                                                                                |                                | 1,369,200                                         |   |   | 1,292,300 |   |
| Accrued compensation and benefits                                                                                                          |                                | 324,800                                           |   |   | 338,400 |   |
| Accrued warranty expense                                                                                                                   |                                | 292,500                                           |   |   | 291,700 |   |
| Total current liabilities                                                                                                                  |                                | 2,499,300                                         |   |   | 2,151,700 |   |
| Mortgage                                                                                                                                   |                                | 3,267,400                                         |   |   | 3,284,600 |   |
| Notes payable to bank – less current portion                                                                                         |                                | 223,500                                           |   |   | 250,900 |   |
| Subordinated debt                                                                                                                          |                                | 500,000                                           |   |   | 500,000 |   |
| Other non-current liabilities                                                                                                              |                                | 19,800                                            |   |   | 26,400 |   |
| Total liabilities                                                                                                                          | $                                   | 6,510,000                                         |   | $ | 6,213,600 |   |
| Commitments and contingent liabilities                                                                                                     |                                |                                              |   |   |   |   |
| 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;3,855,591 issued and outstanding as of March 31, 2003 and December 31, 2002. |  

 

$                   |  

 

481,900                           |  

 

  |  

 

$ |  

 

481,900 |  

 

  |
| Capital in excess of par value                                                                                                             |                                | 5,137,300                                         |   |   | 5,137,300 |   |
| Notes receivable secured by common stock                                                                                                   |                                | (       75,100 | ) |   | (       75,100 | ) |
| Accumulated deficit                                                                                                                        |                                | (   1,586,400                           | ) |   | (   1,716,000 | ) |
| Total shareholders’ equity                                                                                                           | $                                   | 3,957,700                                         |   | $ | 3,828,100 |   |
| Total liabilities and shareholders’ equity                                                                                           | $                                   | 10,467,700                                        |   | $ | 10,041,700 |   |
| *The accompanyingnotes are an integral part of this statement.*                                                                            |                                |                                              |   |   |   |

 

Part I - FINANCIAL INFORMATION (continued)

 

FAFCO, Inc.

CONSOLIDATED STATEMENT OF OPERATIONS

(unaudited)

 

 
|                                 |   | **Three Months Ended**

**March 31,** |
|--------------------------------------|--------|---------------------------------------|
|                                 |   | **2003**                              |   | **2002** |
|                                 |   |                                  |   |   |
| Net sales                            | $      | 3,786,600                             | $ | 3,752,600 |
| Other income (net)                   |   | (10,100)                              |   | (17,100) |
|                                 |   |                                  |   |   |
| Total revenues                       |   | 3,776,500                             |   | 3,735,500 |
|                                 |   |                                  |   |   |
| Cost of goods sold                   |   | 2,106,000                             |   | 2,237,900 |
| Marketing & selling expense      |   | 778,600                               |   | 702,400 |
| General & administrative expense |   | 489,200                               |   | 408,000 |
| Research & development expense   |   | 80,300                                |   | 69,200 |
| Net interest expense                 |   | 85,400                                |   | 115,200 |
|                                 |   |                                  |   |   |
| Total costs and expenses             |   | 3,539,500                             |   | 3,532,700 |
|                                 |   |                                  |   |   |
| Income before income taxes           |   | 237,000                               |   | 202,800 |
| Provision for income taxes           |   | 107,400                               |   | 53,300 |
|                                 |   |                                  |   |   |
| Net income                           | $      | 129,600                               | $ | 149,500 |

* *
| Basic earnings net income per share | $          0.03 | $           0.04 |   |
|-------------------------------------|--------------------------------------------------------------|--------------------------------------------------------------------|--------|
| Diluted net income per share        | $          0.03 | $           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)

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **Three Months Ended**

**March 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **2003**                              |   | **2002** |
| **Cash flow from operating activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                  |   |   |
| Net income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | $      | 129,600                               | $      | 149,500

  |
| Adjustments to reconcile net income to net cash provided by

(used

 

 

 

 

 

 

 

 

 in operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                  |   |   |
| (used in) operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                                  |   |   |
| Depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 120,400                               |   | 130,000 |
| Write offs and allowance for doubtful accounts

Provision for inventory reserve                                                                                                                                                                                                            |   | 9,900                                 |   | 24,100 |
| Change in assets and liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                  |   |   |
| Accounts receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | (578,100)                             |   | (1,005,300) |
| Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 47,500                                |   | 2,700 |
| Prepaid expenses and other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | (87,900)                              |   | (83,400) |
| Deferred tax assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | 100,400                               |   | --- |
| Other assets (net)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 2,400                                 |   | --- |
| Payables, accrued expenses and other current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 64,100                                |   | 552,000 |
| Other non-current liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | (6,600)                               |   | 8,200 |
| Net cash used in operating activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | (198,300)                             |   | (222,200) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                  |   |   |
| **Cash flow from investing activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                  |   |  

  |
| Purchase of fixed assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | (65,900)                              |   | (189,300) |
| Net cash used in investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | (65,900)                              |   | (189,300) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                  |   |   |
| **Cash flow from financing activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                  |   |   |
| Proceeds of subordinated debt issuance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | ---                                   |   | 500,000 |
| Proceeds from bank line of credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 499,200                               |   | 834,400 |
| Repayment of bank line of credit

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | (175,000)                             |   | (955,000) |
| Repayment of notes payable to bank                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | (68,100)                              |   | (59,800) |
| Repayment of mortgage                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | (17,200)

                       |   | (8,000) |
| Net cash provided by financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 238,900                               |   | 311,600 |
| Net decrease in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | (25,300)                              |   | (99,900) |
| Cash and cash equivalents, beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 100,400                               |   | 121,200 |
| Cash and cash equivalents, end of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | $      | 75,100                                | $      | 21,300 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                  |   |   |
| **Supplemental disclosures of cash flow information:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                  |   |   |
| Cash paid during the period for interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | $      | 89,700                                | $      | 103,000 |
| Cash paid during the period for income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | $      | 4,000                                 | $      | 300 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                  |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |        |                                       |        |  |  |  |

* *

Non-Cash Financing Activity

     In January 2002, the Company recorded $28,800, the deemed fair value of the warrantsto purchase

     common shares with the issuance of the subordinated notes.  See Note 4.

* *

*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.      The accompanying financial statements of FAFCO, Inc. (the “Company”) havebeen prepared in accordance with accounting principals generally accepted in the United States for interim financial informationand with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally accepted in the United States for complete financialstatements.  However, in the opinion of the Company’s management, all adjustments necessary for a fair statement ofresults for the periods presented have been included.  The results for the period ended March 31, 2003 are not necessarilyindicative of results to be expected for the entire year.  These financial statements, notes, and analyses should be read inconjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.”  SFAS No. 146 addresses the timing and amount of costs recognized as aresult of restructuring and similar activities.  The Company will apply SFAS No. 146 to activities initiated after December31, 2002.  The adoption of SFAS No. 146 is not expected to have a material impact on the Company’s consolidatedstatements of income or financial position.

 

We apply the intrinsic value method or variable accounting treatment to our stock awards, depending on thenature of the award.  The following table summarizes relevant information as if the fair value recognition provisions of SFASNo. 123, “Accounting for Stock Based Compensation,” had been applied to all stock-based awards (in thousands, exceptper share data):

 
|                                                               |   | **Three Months Ended** |   |
|--------------------------------------------------------------------|--------|------------------------|--------|
|                                                               |   | **March 31,**          |   |
|                                                               |   | **2003**               |   | **2002** |
|                                                               |   |                   |   |   |
| Net income, as reported                                            | $      | 129,600                | $      | 149,500 |
|      Add: Stock-based compensation, asreported |   | N/A                    |   | N/A |
| Deduct: Total stock-based compensation determined under fair       |   |                   |   |   |
| value based method for all awards                                  |   | N/A                    |   | N/A |
|                                                               |   |                   |   |   |
| Adjusted net loss, fair value method for all stock-basedawards     | $      | 129,600                | $      | 149,500 |
|                                                               |   |                   |   |   |
| Basic and diluted income per share – as reported             | $      | 0.03                   | $      | 0.04 |
| Basic and diluted income per share – SFAS No. 123 adjusted   | $      | 0.03                   | $      | 0.04 |
|                                                                    |        |                        |        |  |  |  |

 

 

2.   Basic and diluted net income per share is calculated using the weighted average number ofcommon and common equivalent shares outstanding during the periods presented. [See Note 5]Part I - FINANCIAL INFORMATION – Item 1 (continued)

 

3.      Inventories are valued at the lower of cost, determined on a first in, first out(FIFO) basis, or market, and consist of the following.

 
|            |   | **March 31, 2003** |   | **December 31, 2002** |
|-----------------|--------|--------------------|--------|-----------------------|
| Raw materials   | $      | 603,500            | $      | 636,600               |
| Work in process |   | 305,200            |   | 329,900               |
| Finished goods  |   | 375,700            |   | 365,400               |
|            | $      | 1,284,400          | $      | 1,331,900             |

 

4.      The Company has a line of credit agreement with Butte Community Bank, which allowsthe Company to borrow the lesser of $1,000,000 or an amount determined by a formula applied to accounts receivable.  Unusedborrowing capacity was $675,800 at March 31, 2003.  Amounts borrowed bear interest at prime rate plus 1.5% (5.75% at March 31,2003) per annum and are secured by substantially all the assets of the Company.  This line of credit expires on August 10,2003.  At March 31, 2003, 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 facility in the amount of $445,000bearing interest at prime plus 1.5% (5.75% at March 31, 2003).  At March 31, 2003, the Company had an outstanding balance of$16,200 on this loan facility.  The Company also has a 60-month term loan available in the amount of $500,000 bearing interestat prime plus 1.5% (5.75% at March 31, 2003).  At March 31, 2003, the Company had an outstanding balance of $330,400 on thisloan facility.

The Company also has a $3,400,000 mortgage loan with a maturity date of June 10, 2030.  Principal isamortized over a 29 1⁄2 year term from January 10, 2001.   The initial interest rate on this mortgage loan was9.05%.  In November 2002, the interest rate was renegotiated and adjusted to 8%.  In March 2003, the interest rate wasagain renegotiated downward and is currently fixed at 6.75%.  The interest rate will be changed on April 10th ofeach fifth year to the then current prime rate plus .35%.  The balance on this mortgage at March 31, 2003, was $3,332,900.

 

In January 2002, the Company issued $500,000 in principal amount of subordinatednotes, accompanied by warrants to purchase up to 200,000 shares of the common stock of the Company.  The warrants have anexercise price of $0.125 per share.  The Company recorded $28,800 as a discount and additional paid in capital for the deemedfair value of the warrants.  The discount is being amortized over the term of the notes.  The three-year notes bearinterest, payable quarterly, at an initial annual rate of 10%, increasing to 12% for all periods after the first anniversary of thedate of the notes.  The notes are subordinated to bank borrowings and other secured indebtedness for money borrowed.  TheCompany may at its option call the notes for redemption at any time with ten (10) days notice.  Holders of the notes areentitled to certain rights with respect to registration of the common stock issuable upon exercise of the warrants.  TheChairman and Chief Executive Officer of the Company and his spouse purchased notes with a principal amount of $150,000 in thisoffering, and received warrants to purchase 30,000 shares of common stock.

 

5.      Net Income Per Share

 

Basic earnings per share were calculated as follows:
|                              |   | ** **

**Quarter Ended March 31** |   |
|-----------------------------------|--------|----------------------------------------|--------|
|                              |   | **2003**                               |   | **2002** |
|                              |   |                                   |   |   |
| Net income                        | $      | 129,600

3,855,591                     | $      | 149,500

3,855,591 |
| Average common shares outstanding |   |                                   |
| Basic earnings per share          | $      | 0.03                                   | $      | 0.04 |
|                                   |        |                                        |        |  |  |  |

 

Part I - FINANCIAL INFORMATION (continued)

 

 

Diluted earnings per share are calculated by dividing net income by the weighted average number of sharesissued and outstanding.

 

Diluted earnings per share were calculated as follows:
|                                                                                                                         |   | ** **

**Quarter Ended March 31** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                                         |   | **2003**                               |   | **2002** |
|                                                                                                                         |   |                                   |   |   |
| Adjusted net income                                                                                                          | $      | 129,600                                | $      | 149,500 |
| Average common shares outstanding                                                                                            |   | 3,855,591                              |   | 3,855,591 |
| Add:  Exercise of options reduced by the number of shares

    purchased with proceeds                   |   | 53,538                                 |   | 131,966 |
| Add:  Exercise of warrants reduced by the number of shares

    purchased with proceeds                  |   | 52,356                                 |   | 65,742 |
| Add:  Exercise of warrants attached to debt reduced by the

    number of shares purchased with proceeds |   | 123,077                                |   | 68,750 |
| Adjusted weighted average shares outstanding                                                                                 |   | 4,084,562                              |   | 4,122,049 |
| Earnings per common share assuming dilution                                                                                  | $      | 0.03                                   | $      | 0.04 |
|                                                                                                                              |        |                                        |        |  |  |  |

 

At March 31, 2003, options and warrants for the purchase of 125,500 shares of common stock at prices rangingfrom $0.50 to $0.56 were antidilutive and therefore not included in the computation of diluted earnings per share.  At March31, 2002, options and warrants for the purchase of 236,000 shares of common stock at prices ranging from $0.50 to $0.625 wereantidilutive and therefore not included in the computations 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 andmarketing of polymer heat exchangers for the solar and thermal energy storage markets worldwide.

 

|                            |   | **Quarter Ended March 31** |
|---------------------------------|--------|----------------------------|
|                            |   | **2003**                   |   | **2002** |   |
| Product Line                    |   |                       |   |   |   |
| Net Sales                       |   |                       |   |   |   |
| Pool Products                   | $      | 2,675,900                  |   | 2,895,600 |   |
| Thermal Energy Storage Products |   | 1,110,700                  |   | 857,000 |   |
|                            | $      | 3,786,600                  |   | 3,752,600 |   |
|                                 |        |                            |  |  |  |  |  |

 

Geographic information for revenues and long-lived assets are as follows:

 

|      |   | **Quarter Ended March 31** |
|-----------|--------|----------------------------|
|      |   | **2003**                   |   | **2002** |   |
| Net Sales |   |                       |   |   |   |
| Domestic  | $      | 2,922,100                  | $ | 3,226,900 |   |
| Foreign   |   |                       |   |   |   |
| Japan     |   | 736,500                    |   | 309,200 |   |
| Other     |   | 128,000                    |   | 216,500 |   |
|      | $      | 3,786,600                  | $ | 3,752,600 |   |
|           |        |                            |  |  |  |  |  |

 

Part I - FINANCIAL INFORMATION (continued)

 
| Long-lived assets |   | March 31, 2003 |   | December 31, 2002 |
|-------------------|--------|----------------|--------|-------------------|
| Domestic          | $      | 5,744,900      | $      | 5,799,400         |

 

For the three months ended March 31, 2003, the Company had one major customer who accounted for 10% or more ofsales totaling $736,500.

 

For the three months ended March 31, 2002, the Company had no major customers who accounted for 10% or more ofsales.

 

Concentration of Credit Risk:  Most of the Company’s business activity is with customers located inCalifornia, Florida and foreign countries.  As of March 31, 2003, unsecured trade accounts receivable for customers inCalifornia, Florida, and foreign countries were $514,000, $1,192,400, and $323,500.

 

7.     Property, Plant and Equipment

 

Property, plant and equipment consist of the following:

 
|                                                               |   | **March 31, 2003**  |   | **December 31, 2002** |
|--------------------------------------------------------------------|--------|---------------------|--------|-----------------------|
| Building                                                           | $      | 3,679,100           | $      | 3,679,100             |
| Land                                                               |   | 550,400             |   | 550,400               |
| Machinery and equipment                                            |   | 2,685,000           |   | 2,649,500             |
| Office and computer equipment                                      |   | 508,200             |   | 477,800               |
| Leasehold improvements                                             |   | 599,800             |   | 599,800               |
| Vehicles                                                           |   | 333,600             |   | 333,600               |
|                                                               | $      | 8,356,100           | $      | 8,290,200             |
| Less accumulated depreciation

    and amortization |   |  

(2,611,200) |   |  

(2,490,800)   |
|                                                               | $      | 5,744,900           | $      | 5,799,400             |
|                                                               |   |                |   |                  |

 

 

# Item 2

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

#  

 

# *This Management’s Discussion and Analysis of Financial Condition and Results ofOperations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E ofthe Securities Exchange Act of 1934.  The forward-looking statements involve risks and uncertainties, including, among otherthings, the uncertainties associated with forecasting future revenues, costs and expenses.  Our actual results may differmaterially from the results discussed in the forward-looking statements.  You are cautioned not to place undue reliance on theforward-looking statements, which speak only as of the date of this report.  Factors that might cause such a differenceinclude, but are not limited to, those discussed below and under “Factors Affecting Future Results”.  We assume noobligation to update such forward-looking statements or to update the reasons why actual results could differ materially from thoseanticipated in such forward-looking statements.*

 

*You should read the following discussion in conjunction with the interim condensed consolidated financialstatements and notes included elsewhere in this report and in other reports and documents filed from time to time with theSecurities and Exchange Commission.*

 

Results of Operations

 

Net sales for the quarter ended March 31 experienced a slight overall increase to $3,786,600 in 2003 from$3,752,600 in 2002.  This increase was due to increased unit sales of the Company's IceStor products offset in part bydecreased unit sales of the Company's pool products.

 

Net sales of the Company's IceStor products were 29.6% higher in the first quarter of 2003 than in thecorresponding quarter in 2002 due to increased sales to the Company's licensee in Japan.  The Company does not expect thistrend to continue throughout the year.  The Company's pool product sales decreased by 7.6% primarily due to decreased sales ofits Above Ground Pool Systems.  The Company attributes this decrease to winter-like conditions in the primary market area andexpects sales to increase later in the season.

 

Cost of goods sold decreased to $2,106,000 (55.6% of net sales) in the first quarter of 2003 compared with$2,237,900 (59.6% of net sales) in the first quarter of 2002.  This 5.9% decrease in absolute dollars was due to increasedproduction efficiencies, while the decrease as a percent of sales was due to higher sales of the Company's higher marginproducts.

 

Marketing and selling expenses increased to $778,600 (20.6% of net sales) in the first quarter of 2003compared with $702,400 (18.7% of net sales) in the first quarter of 2002. This 10.8% increase was due mainly to costs associatedwith market research projects and trade shows, along with increased lead generation and personnel related costs pertaining to theCompany's retail office in Tampa, Florida.

 

General and administrative expenses increased to $489,200 (12.9% of net sales) in the first quarter of 2003compared with $408,000 (10.9% of net sales) in the first quarter of 2002.  This 19.9% increase was due to a variety ofbusiness expenses such as insurance, credit card processing fees, and small equipment purchases along with personnel related costspertaining to the Company's retail office in Tampa, Florida.

 

Research and development expenses increased to $80,300 (2.1% of net sales) in the first quarter of 2003compared with $69,200 (1.8% of net sales ) in the first quarter of 2002.

 

Net interest expense decreased to $85,400 (2.3% of net sales) in the first quarter of 2003 compared with$115,200 (3.1% of net sales) in the first quarter of 2002.  This decrease was primarily the result of a reduction in theinterest rate on the Company's mortgage on it's facility in Chico, California along with decreased borrowings against the Company'sline of credit.

 

Total costs and expenses increased slightly to $3,539,500 in the first quarter of 2003 compared to $3,532,700for the same period of 2002.

 

Operating profit for the first quarter of 2003 increased 16.9% from $202,800 for the quarter ended March 31,2002 to $237,000 for the first quarter of 2003.  Net income for the quarter ended March 31, 2003 declined to $129,600 from$149,500 in 2002.  This 13.3% decrease was due to a doubling of income taxes accrued in the first quarter of 2003 compared to2002.

 

# Liquidity and Capital Resources

 

The Company's cash position decreased to $75,100 at March 31, 2003 from $100,400 at December 31, 2002.

 

At March 31, 2003, the Company's accounts payable and other accrued expenses had increased to $1,369,200 from$1,292,300 at December 31, 2002.  This increase was primarily due to increased purchases to support the increase in sales.

 

At March 31, 2003, the Company's inventories had decreased to $1,284,400 from $1,331,900 at December 31,2002.

 

At March 31, 2003, the Company's current ratio was 1.79:1.00 compared to 1.81:1.00 at December 31, 2002. The Company had working capital of $1,981,900 at March 31, 2003 compared with $1,746,200 at December 31, 2002.  Total assetsexceeded total liabilities by $3,957,700 at March 31, 2003 compared with $3,828,100 at December 31, 2002.

 

Part I - FINANCIAL INFORMATION – Item 2  (continued)

 

The Company believes that its cash flow from operations, together with bank borrowing and availability underits bank revolving line of credit, will be sufficient to support operations during the next twelve months.  The foregoingstatement of how long the Company's capital resources are expected to last is a forward-looking statement involving risks anduncertainties, including the amount of the variability of demand for the Company's products and uncertainty regarding the abilityof the Company to control its operating expenses.  If sales decline from current levels additional debt or equity financingmay be required.  There can be no assurance that such additional financing, if required, would be available on favorable termsor at all or that such financing would not significantly dilute the ownership interests and rights of existing shareholders.

 

The Company has a line of credit, of which $324,200 had been utilized, and $675,800 remained available atMarch 31, 2003.  This line of credit expires on August 10, 2003.

 

In addition to the line of credit, the Company has a 36-month term loan facility in the amount of $445,000bearing interest at prime plus 1.5%.  At March 31, 2003, the Company had an outstanding balance of $16,200 on this loanfacility.

 

The Company also has a 60-month term loan facility available in the amount of $500,000 bearing interest atprime plus 1.5%.  At March 31, 2003, the Company had an outstanding balance of $330,400 on this loan facility.

 

The Company has outstanding promissory notes with an aggregate principle amount of $500,000 ("the Notes"). Theprinciple amount of the Notes is due and payable in January 2005.  Interest is payable quarterly at an initial rate of 10% perannum, increasing to 12% starting January 2003.

 

**At March 31, 2003, the Company owed an aggregate of $4,003,700 under various bank credit facilities and$500,000 of subordinated notes.  Payments due under these credit facilities are as follows:**

** **

|            | **Total amounts committed** | **Amount of commitment expiration per period** |              |
|-----------------|-----------------------------|------------------------------------------------|-------------------|
|            |                        | Less than year                                 |  

1-3 years |  

4-5 years |  

Over 5 years |
| Line of credit  | $ 324,200                   | $ 324,200                                      |              |   |   |
| Bank term loans | 346,600                     | 123,000                                        | $ 223,600         |   |   |
| Mortgage        | 3,332,900                   | 65,600                                         | 156,100           | $ 59,400 | $ 3,051,800 |
| Notes           | 500,000                     |                                           | 500,000           |   |   |
| Total           | $ 4,503,700                 | $ 512,800                                      | $ 879,700         | $ 59,400 | $ 3,051,800 |
|                 |                             |                                                |                   |  |  |  |

** **

**The bank may accelerate payment of the amount owed if the Company fails to meet financial and othercovenants set forth in the loan agreements.  The Company is currently in compliance with, or has obtained waivers forcompliance with the loan covenants.**

** **

**The Company must maintain various loan covenants including a maximum debt to net worth ratio; minimumcurrent, quick, and cash flow ratios; minimum net worth and working capital.  Failure to meet these covenants could result inthe Company’s loans being called or restricted by its bank.**

 

# Factors Affecting Future Results

 

*U.S. Economic Conditions:*  A protracted U.S. recession could adversely impact new housing andcommercial construction in our largest market, which in turn could cause us to miss our revenue growth goals.

 

*Asian Economic Conditions:*  Sales in Japan and other Asian countries account for virtually all ourinternational sales, and contribute a significant portion of our overall revenues.  In the event that these economiesexperience declining growth or contraction, our sales in these areas could be adversely impacted.

 

Part I - FINANCIAL INFORMATION – Item 2  (continued)

 

*Growth of U.S. Thermal Energy Storage (TES) Market:*  The Company’s ability to increase salesof its thermal energy storage products is dependent on growth in the overall market because opportunities for market share growthare limited.  An extended recession in the general economy, a general decline in construction of commercial properties or adecline in energy prices could all adversely affect demand for thermal energy storage systems.

 

*Destabilizing Incidents:*  Additional destabilizing events such as terrorist attacks or overseasconflicts, if they occur, could disrupt our supply chain, increase our materials costs, reduce demand for our products, andotherwise negatively impact our operating results.

 

*Materials Prices:*  Raw materials including polyolefin resins account for a major portion of theCompany’s cost of sales.  Any increase in these prices because of supply shortages or otherwise would reduce itsoperating margins and adversely impact its profitability.

 

*Export sales* are subject to certain controls and restrictions, including tariffs and import duties andare subject to certain risks, including changing regulatory requirements of foreign jurisdictions and transportation delays andinterruptions.  However, the Company has not experienced any material difficulties in the past relating to suchlimitations.

 

# Item 3 - Quantitative and Qualitative Disclosures About Market Risk

* *

*Interest Rate Risk:*  The Company typically maintains only minimal investments in interest bearingsecurities and accounts.  As of March 31, 2003, the Company’s cash and cash equivalents and other interest bearingassets were $75,100.  Accordingly, a change in market interest rates would not have significant impact on the value of theCompany’s assets or on interest income.

 

The Company is subject to fluctuating interest rates for variable rate bank borrowings.  Thesefluctuations may impact, adversely or otherwise, results of operations or cash flows.

 

As of March 31, 2003, the Company has a mortgage in the amount of $3,332,900 with a maturity date of June 10,2030.  The interest rate at March 31, 2003 was 8.00%, decreasing to 6.75% on April 10, 2003.  The current interest rateis fixed through April 10, 2008; the interest rate will be changed on April 10th of each fifth year to the then currentprime rate plus .35%.

 

The Company also has a 36-month term loan with a principal balance of $16,200 and a maturity date of May 10,2003.  The Company also has a 60-month term loan with a principal balance of $330,400 and a maturity date of May 10,2006.  The interest rate on these loan facilities is prime plus 1.5%.

 

*Foreign Exchange Risk: * The Company operates primarily in the United States, and all domesticsales to date have been made in U.S. dollars.  Although significant portions of the Company’s revenues are contributedby overseas sales, these sales are always denominated in U.S. dollars.  Accordingly, there has not been any material exposureto foreign currency rate fluctuations.

 

*Equity Market Risk: * FAFCO did not hold any equity securities of other companies as of March 31,2003.  Accordingly, it has not had any material exposure to equity market fluctuations.

 

# Item 4 - Controls and Procedures

* *

* * (a) Evaluation of disclosure controls and procedures.

 

The Company’s chief executive officer and chief financial officer, after evaluating the Company’s“disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the “Exchange Act”)Rules 13a-14c and 15-d as of a date (the “Evaluation Date”) within 90 days before the filing date of this QuarterlyReport on Form 10Q have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures areeffective to ensure that information it is required to disclose in reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission  rulesand forms.

 

(b) Changes in internal controls.

 

Subsequent to the Evaluation Date, there were no significant changes in the Company’s internal controlsor in other factors that could significantly affect its disclosure controls and procedures, nor were there any significantdeficiencies or material weaknesses identified in its internal controls.  As a result, no corrective actions were required orundertaken. 

 

 

PART II – OTHER INFORMATION

 

Item 5 – Other Information

 

The Company has a $3,400,000 mortgage loan with Butte Community Bank with a maturity date of June 10,2030.  Principal is amortized over a 29 1⁄2 year term from January 10, 2001; interest on this loan facility is fixed forfive year increments.  In March, 2003, the mortgage financing was renegotiated, resulting in a reduction of interest from 8%to 6.75% and a change in the initial interest adjustment date from June 10, 2005 to April 10, 2008, at which time the interest ratewill be adjusted to the then current prime rate plus .35%.

 

 

Item 6 - Exhibits and Reports on Form 8-K

 

a.     Exhibits

 

10.11(k)                 Change in Terms Agreementsbetween Registrant as Borrower and Butte Community Bank as lender dated March 24, 2003.

 

99.1                        Management Certifications pursuant to 18U.S.C.1350.

 

 

b.     Reports on Form 8-K

 

No reports on Form 8-K were filed during the quarter ended March 31, 2003.

** **

SIGNATURE

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

                                                                                   FAFCO, Inc. (Registrant)

 

 

 

DATE: May 10, 2003                                             BY: /s/ Freeman A.Ford                                

                                                                                   Chairman of the Board, President a

                                                                                   and Chief Executive Officer

                                                                                   (Principal Executive Officer)

                                               

 

DATE:   May 10 2003                                           BY: /s/ Nancy I.Garvin                                                  

                                                                                           Nancy I. Garvin,

                                                                                           Vice President - Finance

                                                                                           (Principal Financial and Accounting Officer)

 

 

 

 

CERTIFICATION

 

I, Freeman A. Ford, certify that:

 

1.        I have reviewedthis quarterly report on Form 10-Q of FAFCO, Inc. (The “Registrant”)

 
    - Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact of omitto state a material fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterly report;

 
    - Based on my knowledge, the financial statements, and other financial information included in this quarterlyreport, fairly present in all material respects the financial condition results of operations and cash flows of the Registrant asof, and for, the periods presented in this quarterly report;

 
    - The Registrant’s other certifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

 

      - designed such disclosure controls and procedures to ensure that material information relating to theRegistrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this quarterly report is being prepared;

 

      - evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

      - presented in this quarterly report our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.nbsp;       TheRegistrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’sauditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):

 

      - all significant deficiencies in the design or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’sauditors any material weaknesses in internal controls; and

 

      - any fraud, whether or not material, that involves management of other employees who have a significant rolein the Registrant’s internal controls; and

 
    - The Registrant’s other certifying officers and I have indicated in the quarterly report whether or notthere were significant changes in internal controls or in other factors that could significantly Page 14 of 15affect internalcontrols subsequent to the date of our most recent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

Date:       May 10,2003                        

By:          /s/Freeman A.Ford                            

Name:     Freeman A.Ford                                

Title:       Chairman of the Board, President, and

Chief Executive Officer (Principal Executive Officer)

CERTIFICATION

 

I, Nancy I. Garvin, certify that:

 

1      I have reviewed this quarterly reporton Form 10-Q of FAFCO, Inc. (The “Registrant”)

 

2         Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact of omit to state a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading with respect to the period covered by this quarterlyreport;

 

3         Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in all material respects the financial condition results ofoperations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

 

4         The Registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the Registrant and we have:

 

a.        designed such disclosure controls and procedures to ensure that materialinformation relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this quarterly report is being prepared;

 

b.       evaluated the effectiveness of the Registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”);and

 

c.        presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5         TheRegistrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’sauditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a.        all significant deficiencies in the design or operation of internalcontrols which could adversely affect the Registrant’s ability to record, process, summarize and report financial data andhave identified for the Registrant’s auditors any material weaknesses in internal controls; and

 

b.       any fraud, whether or not material, that involves management of other employeeswho have a significant role in the Registrant’s internal controls; and

 

6         The Registrant’s other certifying officers and I haveindicated in the quarterly report whether or not there were significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 

Date:       May 10,2003                        

By:          /s/Nancy I.Garvin                              

Name:     Nancy I. Garvin                                  

Title:       Vice President of Finance and

                Chief FinancialOfficer (Principal Financial Officer)