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

 

 

UNITED STATES>

SECURITIES AND EXCHANGECOMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

[X] Quarterly reportpursuant 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 or15(d) of the Securities Exchange Act of 1934

 

For the transition period from to

 

Commission file number 0-10120

 

FAFCO, Inc.

(Exact name ofRegistrant as specified in its charter)

 

California 94-2159547

(State or otherjurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

 

435 Otterson Drive,Chico,California 95928

(Address, includingzip code, of Registrants principal executive offices)

 

(530) 332-2100

(Companys telephonenumber, including area code)

 

 

Indicate by check mark whetherthe Company (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Company was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 

YesXNo

 

Indicate by check mark whetherthe registrant is on accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

 

YesNoX

 

 

At May 8, 2003, 3,855,591 shares of the Companys CommonStock, $.125 par value were issued and outstanding.

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

Part I - FINANCIALINFORMATION

 

Item 1 - FinancialStatements

 

FAFCO,Inc.

CONSOLIDATEDBALANCE 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 accompanying notes are an integral part of this statement.*                                                                              |                                |                    |   |   |   |

 

Part I - FINANCIAL INFORMATION (continued)

 

FAFCO, Inc.

CONSOLIDATEDSTATEMENT 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 notesare an integral part of this statement.*Part I - FINANCIAL INFORMATION (continued)

 

FAFCO,Inc.

CONSOLIDATEDSTATEMENTS 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 warrants to purchase 

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

* *

*The accompanying notesare an integral part of this statement.*
**
Part I - FINANCIAL INFORMATION (continued)

 

FAFCO, Inc.

NOTES TO INTERIMCONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.      Theaccompanying financial statements of FAFCO, Inc. (the Company) have beenprepared in accordance with accounting principals generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statements.However,in the opinion of the Companys management, all adjustments necessary for afair statement of results for the periods presented have been included. The results for the period ended March 31,2003 are not necessarily indicative of results to be expected for the entireyear.These financial statements, notes,and analyses should be read in conjunction with the Companys Annual Report onForm 10-K for the year ended December 31, 2002.

 

In June 2002, the Financial Accounting Standards Boardissued SFAS No. 146, Accounting for Costs Associated with Exit or DisposalActivities. SFAS No. 146 addresses thetiming and amount of costs recognized as a result of restructuring and similaractivities.The Company will apply SFASNo.146 to activities initiated after December 31, 2002.The adoption of SFAS No.146 is not expectedto have a material impact on the Companys consolidated statements of income orfinancial position.

 

We apply the intrinsic value method or variable accountingtreatment to our stock awards, depending on the nature of the award.The following table summarizes relevantinformation as if the fair value recognition provisions of SFAS No. 123,Accounting for Stock Based Compensation, had been applied to all stock-basedawards (in thousands, except per share data):

 

 

 

**Three Months Ended**

 
 

 

**March 31,**

 
 

**2003**

 

**2002**

 

 

 

 

 

Net income, as reported

$

129,600

$

149,500

Add: Stock-based compensation, as  reported

 

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-based awards

$

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

 

 

Part I - FINANCIAL INFORMATION Item 1 (continued)

 

3.      Inventoriesare 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 ButteCommunity Bank, which allows the Company to borrow the lesser of $1,000,000 oran amount determined by a formula applied to accounts receivable.Unused borrowing capacity was $675,800 atMarch 31,2003.Amounts borrowed bearinterest at prime rate plus 1.5% (5.75% at March 31, 2003) per annum and aresecured by substantially all the assets of the Company.This line of credit expires on August 10,2003.At March 31,2003,the Companyhad complied with or obtained waivers for compliance with the loan covenants.

 

In addition to the line of credit, the Company has a36-month term loan facility in the amount of $445,000 bearing interest at primeplus 1.5% (5.75% at March 31, 2003). AtMarch 31, 2003, the Company had an outstanding balance of $16,200 on this loanfacility.The Company also has a60-month term loan available in the amount of $500,000 bearing interest atprime plus 1.5% (5.75% at March 31, 2003).At March 31, 2003, the Company had an outstanding balance of $330,400 onthis loan facility.

The Company also has a $3,400,000 mortgage loan with amaturity date of June 10, 2030.Principal is amortized over a 29 year term from January 10, 2001. The initial interest rate on this mortgageloan was 9.05%.In November 2002, theinterest rate was renegotiated and adjusted to 8%.In March 2003,the interest rate was again renegotiated downwardand is currently fixed at 6.75%.Theinterest rate will be changed on April 10thof each fifth year tothe then current prime rate plus .35%.The balance on this mortgage at March 31, 2003, was $3,332,900.

 

In January 2002, the Companyissued $500,000 in principal amount of subordinated notes, accompanied bywarrants to purchase up to 200,000 shares of the common stock of theCompany.The warrants have an exerciseprice of $0.125 per share.The Companyrecorded $28,800 as a discount and additional paid in capital for the deemedfair value of the warrants.Thediscount is being amortized over the term of the notes.The three-year notes bear interest, payablequarterly, at an initial annual rate of 10%, increasing to 12% for all periodsafter the first anniversary of the date of the notes.The notes are subordinated to bank borrowings and other securedindebtedness for money borrowed.TheCompany may at its option call the notes for redemption at any time with ten(10) days notice.Holders of the notesare entitled to certain rights with respect to registration of the common stockissuable upon exercise of the warrants.The Chairman and Chief Executive Officer of the Company and his spousepurchased notes with a principal amount of $150,000 in this offering, andreceived warrants to purchase 30,000 shares of common stock.

 

5.      NetIncome 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 netincome by the weighted average number of shares issued 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 of125,500 shares of common stock at prices ranging from $0.50 to $0.56 wereantidilutive and therefore not included in the computation of diluted earningsper share.At March 31,2002,optionsand warrants for the purchase of 236,000 shares of common stock at pricesranging from $0.50 to $0.625 were antidilutive and therefore not included inthe computations of diluted earnings per share.

 

6.BusinessSegment and Concentration of Credit Risk

 

Business Segment.The Company operates in one business segment, the development,production and marketing of polymer heat exchangers for the solar and thermalenergy 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 assetsare 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 hadone major customer who accounted for 10% or more of sales totaling $736,500.

 

For the three months ended March 31, 2002, the Company hadno major customers who accounted for 10% or more of sales.

 

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

 

7.Property,Plant and Equipment

 

Property, plant and equipmentconsist 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
 

 

MANAGEMENTSDISCUSSION AND ANALYSIS OF

FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

(Unaudited)
 
 
*This Managements Discussion and Analysis ofFinancial Condition and Results of Operations contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934.The forward-looking statements involve risks and uncertainties,including, among other things, the uncertainties associated with forecastingfuture revenues, costs and expenses.Our actual results may differ materially from the results discussed inthe forward-looking statements. You arecautioned not to place undue reliance on the forward-looking statements, whichspeak only as of the date of this report.Factors that might cause such a difference include, but are not limitedto, those discussed below and under Factors Affecting Future Results.We assume no obligation to update suchforward-looking statements or to update the reasons why actual results coulddiffer materially from those anticipated in such forward-looking statements.*
 

*You should read the following discussion in conjunctionwith the interim condensed consolidated financial statements and notes includedelsewhere in this report and in other reports and documents filed from time totime with the Securities and Exchange Commission.*

 

Results of Operations

 

Net sales for the quarter ended March 31 experienced aslight overall increase to $3,786,600 in 2003 from $3,752,600 in 2002. This increase was due to increased unitsales of the Company's IceStor products offset in part by decreased unit salesof 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 the corresponding quarter in 2002due to increased sales to the Company's licensee in Japan.The Company does not expect this trend tocontinue throughout the year.TheCompany's pool product sales decreased by 7.6% primarily due to decreased salesof its Above Ground Pool Systems. TheCompany attributes this decrease to winter-like conditions in the primarymarket area and expects sales to increase later in the season.

 

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

 

Marketing and selling expenses increased to $778,600 (20.6%of net sales) in the first quarter of 2003 compared with $702,400 (18.7% of netsales) in the first quarter of 2002. This 10.8% increase was due mainly tocosts associated with market research projects and trade shows, along withincreased 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 2003 compared with $408,000 (10.9%of net sales) in the first quarter of 2002.This 19.9% increase was due to a variety of business expenses such asinsurance, credit card processing fees, and small equipment purchases alongwith personnel related costs pertaining to the Company's retail office inTampa, Florida.

 

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

 

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

 

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

 

Operating profit for the first quarter of 2003 increased16.9% from $202,800 for the quarter ended March 31, 2002 to $237,000 for thefirst quarter of 2003.Net income forthe quarter ended March 31, 2003 declined to $129,600 from $149,500 in2002. This 13.3% decrease was due to adoubling of income taxes accrued in the first quarter of 2003 compared to 2002.

 
Liquidity and Capital Resources
 

The Company's cash position decreased to $75,100 at March31, 2003 from $100,400 at December 31, 2002.

 

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

 

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

 

At March 31, 2003, the Company's current ratio was 1.79:1.00compared to 1.81:1.00 at December 31,2002.The Company had working capital of $1,981,900 at March 31, 2003 comparedwith $1,746,200 at December 31,2002.Total assets exceeded total liabilities by $3,957,700 at March 31, 2003compared 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 under its bank revolving line ofcredit, will be sufficient to support operations during the next twelvemonths.The foregoing statement of howlong the Company's capital resources are expected to last is a forward-lookingstatement involving risks and uncertainties, including the amount of thevariability of demand for the Company's products and uncertainty regarding theability of the Company to control its operating expenses.If sales decline from current levelsadditional debt or equity financing may be required.There can be no assurance that such additional financing, ifrequired, would be available on favorable terms or at all or that suchfinancing would not significantly dilute the ownership interests and rights ofexisting shareholders.

 

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

 

In addition to the line of credit, the Company has a36-month term loan facility in the amount of $445,000 bearing interest at primeplus 1.5%.At March 31,2003, theCompany had an outstanding balance of $16,200 on this loan facility.

 

The Company also has a 60-month term loan facility availablein the amount of $500,000 bearing interest at prime plus 1.5%.At March 31, 2003, the Company had anoutstanding balance of $330,400 on this loan facility.

 

The Company has outstanding promissory notes with anaggregate principle amount of $500,000 ("the Notes"). The principleamount of the Notes is due and payable in January 2005.Interest is payable quarterly at an initialrate of 10% per annum, 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 subordinatednotes.Payments due under these creditfacilities 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 theCompany fails to meet financial and other covenants set forth in the loanagreements.The Company is currently incompliance with, or has obtained waivers for compliance with the loancovenants.**

** **

**The Company must maintain various loan covenantsincluding a maximum debt to net worth ratio; minimum current, quick, and cashflow ratios; minimum net worth and working capital.Failure to meet these covenants could result in the Companysloans being called or restricted by its bank.**

 
Factors AffectingFuture Results
 

*U.S.Economic Conditions:*A protracted U.S. recession could adverselyimpact new housing and commercial construction in our largest market, which inturn could cause us to miss our revenue growth goals.

 

*AsianEconomic Conditions:*Sales in Japan and other Asian countriesaccount for virtually all our international sales, and contribute a significantportion of our overall revenues.In theevent that these economies experience declining growth or contraction, oursales in these areas could be adversely impacted.

 
**
PartI-FINANCIAL INFORMATION Item 2(continued)

 

*Growthof U.S. Thermal Energy Storage (TES) Market:*The Companysability to increase sales of its thermal energy storage products is dependenton growth in the overall market because opportunities for market share growthare limited.An extended recession inthe general economy, a general decline in construction of commercial propertiesor a decline in energy prices could all adversely affect demand for thermalenergy storage systems.

 

*DestabilizingIncidents:*Additional destabilizing events such asterrorist attacks or overseas conflicts, if they occur, could disrupt oursupply chain, increase our materials costs, reduce demand for our products, andotherwise negatively impact our operating results.

 

*MaterialsPrices:*Raw materials including polyolefin resinsaccount for a major portion of the Companys cost of sales.Any increase in these prices because ofsupply shortages or otherwise would reduce its operating margins and adverselyimpact its profitability.

 

*Exportsales* aresubject to certain controls and restrictions, including tariffs and importduties and are subject to certain risks, including changing regulatoryrequirements of foreign jurisdictions and transportation delays andinterruptions.However, the Company hasnot 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 interestbearing securities and accounts.As ofMarch 31, 2003,the Companys cash and cash equivalents and other interestbearing assets were $75,100.Accordingly, a change in market interest rates would not havesignificant impact on the value of the Companys assets or on interest income.

 

The Company is subject to fluctuating interest rates forvariable rate bank borrowings.Thesefluctuations may impact, adversely or otherwise, results of operations or cashflows.

 

As of March 31, 2003, the Company has a mortgage in theamount of $3,332,900 with a maturity date of June 10, 2030.The interest rate at March 31, 2003 was8.00%, decreasing to 6.75% on April 10, 2003.The current interest rate is fixed through April 10, 2008; the interestrate will be changed on April 10th of each fifth year to the thencurrent prime rate plus .35%.

 

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

 

*Foreign Exchange Risk:*The Company operates primarily in the United States, and alldomestic sales to date have been made in U.S. dollars.Although significant portions of theCompanys revenues are contributed by overseas sales, these sales are alwaysdenominated in U.S. dollars.Accordingly, there has not been any material exposure to foreigncurrency rate fluctuations.

 

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

 
Item 4 - Controls and Procedures
* *

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

 

The Companys chief executive officer and chief financialofficer, after evaluating the Companys disclosure controls and procedures(as defined in Securities Exchange Act of 1934 (the Exchange Act) Rules13a-14c and 15-d as of a date (the Evaluation Date) within 90 days before thefiling date of this Quarterly Report on Form 10Q have concluded that as of theEvaluation Date, the Companys disclosure controls and procedures are effectiveto ensure that information it is required to disclose in reports that it filesor submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and Exchange4817:    Commissionrulesandforms

 

(b) Changes in internal controls.

 

Subsequent to the Evaluation Date, there were no significantchanges in the Companys internal controls or in other factors that couldsignificantly affect its disclosure controls and procedures, nor were there anysignificant deficiencies or material weaknesses identified in its internalcontrols.As a result, no correctiveactions were required or undertaken.

 

 

PART II OTHER INFORMATION

 

Item 5 Other Information

 

The Company has a $3,400,000 mortgage loan with ButteCommunity Bank with a maturity date of June 10, 2030.Principal is amortized over a 29 year term from January 10,2001; interest on this loan facility is fixed for five year increments. In March, 2003, the mortgage financing wasrenegotiated, resulting in a reduction of interest from 8% to 6.75% and achange in the initial interest adjustment date from June 10, 2005 to April 10,2008, at which time the interest rate will be adjusted to the then currentprime rate plus .35%.

 

 

Item 6 - Exhibits and Reports on Form 8-K

 

a.Exhibits

 

10.11 (k) Changein Terms Agreements between Registrant as Borrower and Butte Community Bank aslender dated March 24, 2003.

 

99.1ManagementCertifications pursuant to 18U.S.C.1350.

 

 

b. Reportson Form 8-K

 

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

** **

SIGNATURE

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 

FAFCO,Inc. (Registrant)

 

 

 

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

Chairmanof the Board, President a

andChief Executive Officer

(PrincipalExecutive Officer)

 

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

NancyI. Garvin,

VicePresident - Finance

(PrincipalFinancial and Accounting Officer)

 

 

 

 

CERTIFICATION

 

I, Freeman A. Ford, certify that:

 

1.        I have reviewed this 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 omit to state a material fact necessary to     make the statements made, in light of the circumstances under which such     statements were made, 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 quarterly report, fairly present in all material respects     the financial condition results of operations and cash flows of the     Registrant as of, and for, the periods presented in this quarterly report;

 
- The     Registrants other certifying officers and I are responsible for     establishing and maintaining disclosure 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 the Registrant, including its consolidated      subsidiaries, is made known to us by others within those entities,      particularly during the period in which this quarterly report is being      prepared;

 
evaluated      the effectiveness of the Registrants disclosure controls and procedures      as of a date within 90 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 and procedures based on our evaluation as of the      Evaluation Date;

 

5.       The Registrants other certifying officers and I havedisclosed, based on our most recent evaluation, to the Registrants auditorsand the audit committee of Registrants board of directors (or personsperforming the equivalent functions):

 
all      significant deficiencies in the design or operation of internal controls      which could adversely affect the registrants ability to record, process,      summarize and report financial data and have identified for the      Registrants auditors any material weaknesses in internal controls; and

 
any      fraud, whether or not material, that involves management of other      employees who have a significant role in the Registrants internal      controls; and

 
- The     Registrants other certifying officers and I have indicated in the     quarterly report whether or not there were significant changes in internal     controls or in other factors that could significantly Page 14 of 1affect     internal controls subsequent to the date of our most recent evaluation,     including any corrective actions with regard to significant deficiencies     and material weaknesses.

 

 

Date:May 10,2003

By:/s/FreemanA. Ford

Name:Freeman A.Ford

Title: Chairmanof the Board, President, and 

Chief Executive Officer (PrincipalExecutive Officer)

CERTIFICATION

 

I, Nancy I. Garvin, certify that:

 

1I have reviewed this quarterly report onForm 10-Q of FAFCO, Inc. (The Registrant)

 

2        Based on my knowledge, this quarterly report does not containany untrue statement of a material fact of omit to state a material factnecessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3        Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition results of operations and cash flowsof the Registrant as of, and for, the periods presented in this quarterlyreport;

 

4        The Registrants other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and wehave:

 

a.       designed such disclosure controls and procedures to ensurethat material information relating to the Registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b.      evaluated the effectiveness of the Registrants disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis 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 evaluationas of the Evaluation Date;

 

5        The Registrants other certifying officers and I havedisclosed, based on our most recent evaluation, to the Registrants auditorsand the audit committee of registrants board of directors (or personsperforming the equivalent functions):

 

a.       all significant deficiencies in the design or operation ofinternal controls which could adversely affect the Registrants ability torecord, process, summarize and report financial data and have identified forthe Registrants auditors any material weaknesses in internal controls; and

 

b.      any fraud, whether or not material, that involves managementof other employees who have a significant role in the Registrants internalcontrols; and

 

6        The Registrants other certifying officers and I haveindicated in the quarterly report whether or not there were significant changesin internal controls or in other factors that could significantly affectinternal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses. 

 

 

Date:May 10,2003

By:/s/NancyI. Garvin

Name:Nancy I.Garvin

Title:  VicePresident of Finance and

ChiefFinancial Officer (Principal Financial Officer)

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