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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q





(Mark One)

[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the quarterly period ended September 30, 2002 or



[  ]  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the transition period from 
  to



Commission file number 0-10120





FAFCO, Inc.

(Exact name of Registrant as specified in its charter)



California              
                               
                               
                94-2159547

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



435 Otterson Drive, Chico,  California 95928

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



(530) 332-2100

(Company’s telephone number, including area code)





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



YesX   No





At November 13, 2002, 3,855,591 shares of the Company’s Common Stock, $.125 par value were issued and outstanding.



| | 
| | 

Part 1 - FINANCIAL INFORMATION



Item 1 - Financial Statements



FAFCO, Inc.

CONSOLIDATED BALANCE SHEET



|                                                                                                                                                | September 30, 2002

(unaudited) | December 31, 2001 
|----------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------
|Assets                                                                                                                                          |                                 |                   
|Current assets:                                                                                                                                 |                                 |                   
|Cash and cash equivalents                                                                                                                       | $                               | 16,200            
|Accounts receivable, less allowance for doubtful accounts of $488,200 in 2002 and $479,600 in 2001                                              |                                 | 2,012,600         
|Inventories                                                                                                                                     |                                 | 1,439,200         
|Prepaid expenses and other current assets                                                                                                       |                                 | 242,500           
|Other accounts receivable, net of allowance                                                                                                     |                                 | 87,000            
|Deferred tax asset, net of allowance                                                                                                            |                                 | 249,600           
|Total current assets                                                                                                                            |                                 | 4,047,100         
|Property, plant and equipment, at cost                                                                                                          |                                 | 8,461,400         
|Less accumulated depreciation and amortization                                                                                                  |                                 | (     2,478,200   
|Net fixed assets                                                                                                                                |                                 | 5,983,200         
|Other assets (net)                                                                                                                              |                                 | 28,800            
|Deferred tax asset, net of allowance                                                                                                            |                                 | 273,800           
|Total assets                                                                                                                                    | $                               | 10,332,900        
|Liabilities and shareholders’ equity                                                                                                            |                                 |                   
|Current Liabilities:                                                                                                                            |                                 |                   
|Bank line of credit                                                                                                                             | $                               | 134,600           
|Notes payable to bank                                                                                                                           |                                 | 237,600           
|Accounts payable and other accrued expenses                                                                                                     |                                 | 1,367,300         
|Accrued compensation and benefits                                                                                                               |                                 | 347,500           
|Accrued warranty expense                                                                                                                        |                                 | 259,600           
|Other current liabilities                                                                                                                       |                                 | ---               
|Total current liabilities                                                                                                                       |                                 | 2,346,600         
|Mortgage

Notes payable to bank                                                                                                                 |                                 | 3,318,700

295,400
|Subordinated debt                                                                                                                               |                                 | 500,000           
|Other non-current liabilities                                                                                                                   |                                 | 32,600            
|Total liabilities                                                                                                                               | $                               | 6,493,300         
|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 September 30, 2002 and December 31, 2001. | $                               | 481,900           
|Capital in excess of par value                                                                                                                  |                                 | 5,137,300         
|Notes receivable secured by common stock                                                                                                        |                                 | (     75,100      
|Accumulated deficit                                                                                                                             |                                 | (     1,704,500   
|Total shareholders’ equity                                                                                                                      | $                               | 3,839,600         
|Total liabilities and shareholders’ equity                                                                                                      | $                               | 10,332,900        
|The accompanying notes are an integral part of this statement.                                                                                  |                                 |                   



Part I - FINANCIAL INFORMATION - Item 1 (continued)



FAFCO, Inc.

CONSOLIDATED STATEMENT OF OPERATIONS

(unaudited)





Quarter Ended

September 30
Nine Months Ended

September 302002

2001

2002

2001Net sales
$
3,495,200
$
2,653,100

11,768,000
$
9,541,900Other income (net)

49,800

53,400

25,900

51,200Total revenues
$
3,545,000
$
2,706,500

11,793,900
$
9,593,100Cost of goods sold

2,197,800

1,668,600

6,951,600

5,580,000Marketing and selling expense

577,500

624,900

1,950,800

1,864,600General and administrative expense

443,900

435,500

1,369,500

1,322,300Research and development expense

80,600

95,100

244,900

178,900Net interest expense

111,400

107,500

344,700

334,000Total costs and expenses
$
3,411,200
$
2,931,600

10,861,500
$
9,279,800Income (loss) before taxes

133,800

(     225,100
)
932,400

313,300Provision for (benefit) income taxes

45,800

(      86,100
)
350,800

55,400Net income (loss)
$
88,000
$
(     139,000
)
581,600
$
257,900Basic net income (loss) per share
$
0.02
$
(     0.04
)
0.15
$
0.07Diluted net income (loss) per share
$
0.02
$
(     0.04
)
0.14
$
0.06Average shares outstanding

3,855,591

3,850,673

3,855,591

3,854,791


The accompanying notes are an integral part of this statement.

Part I - FINANCIAL INFORMATION (continued)



FAFCO, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                                             |   | Nine Months Ended

September 30



March 31, |  
|------------------------------------------------------------------------------------------------------------ | - | -------------------------------------------- | -
|                                                                                                             |   | 2002                                         |  
|Cash flow from operating activities:                                                                         |   |                                              |  
|Net income                                                                                                   | $ | 581,600                                      |  
|Adjustments to reconcile net income to net cash provided by

(used

















in operating activities: |   |                                              |  
|(used in) operating activities:                                                                              |   |                                              |  
|Depreciation and amortization                                                                                |   | 421,600                                      |  
|Write offs and allowance for doubtful accounts

Provision for inventory reserve                              |   | 92,468                                       |  
|Gain on sale of fixed assets                                                                                 |   | (           600                              | )
|Change in assets and liabilities:                                                                            |   |                                              |  
|Accounts receivable                                                                                          |   | (    536,068                                 | )
|Inventories                                                                                                  |   | (    267,400                                 | )
|Prepaid expenses and other assets                                                                            |   | (      68,300                                | )
|Deferred tax assets                                                                                          |   | 291,400                                      |  
|Payables, accrued expenses and other

current liabilities                                                    |   | 6,400                                        |  
|Other non-current liabilities                                                                                |   | (       2,800                                | )
|Net cash provided by operation activities                                                                    |   | 518,300                                      |  
|Cash flow from investing activities:                                                                         |   |                                              |  
|Purchase of fixed assets                                                                                     |   | (   286,700                                  | )
|Proceeds from sale of fixed assets                                                                           |   | 600                                          |  
|Net cash used in investing activities                                                                        |   | (   286,100                                  | )
|Cash flow from financing activities:                                                                         |   |                                              |  
|Proceeds from exercise of stock options                                                                      |   | ---                                          |  
|Proceeds of subordinated debt issuance                                                                       |   | 500,000                                      |  
|Proceeds from bank line of credit                                                                            |   | 3,032,200                                    |  
|Repayment of bank line of credit                                                                             |   | (3,666,300                                   | )
|Proceeds from notes payable to bank                                                                          |   | ---                                          |  
|Repayment of notes payable to bank                                                                           |   | (   181,800                                  | )
|Repayment of mortgage                                                                                        |   | (     21,300                                 | )
|Net cash (used in) provided by financing activities                                                          |   | (   337,200                                  | )
|Net decrease in cash and cash equivalents                                                                    |   | (   105,000                                  | )
|Cash and cash equivalents, beginning of period                                                               |   | 121,200                                      |  
|Cash and cash equivalents, end of period                                                                     | $ | 16,200                                       |  
|                                                                                                             |   |                                              |  
|Supplemental disclosures of cash flow information:                                                           |   |                                              |  
|Cash paid during the period for interest                                                                     | $ | 334,600                                      |  
|                                                                                                             |   |                                              |  

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 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)



The accompanying financial statements of FAFCO, Inc. (the “Company”) have been prepared in accordance with accounting principals generally accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete
financial statements.  However, in the opinion of the Company’s management, all adjustments necessary for a fair statement of results for the periods presented have been included.  The results for the period ended
September 30, 2002 are not necessarily indicative of results to be expected for the entire year.  These financial statements, notes, and analyses should be read in conjunction with the Company’s audited annual financial
statements for the year ended December 31, 2001, included in its 2001 Annual Report to Shareholders.



In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,  “Accounting for Business Combinations.”  This statement requires the purchase method
of accounting to be used for all business combinations initiated after June 30, 2001, and establishes specific criteria for the recognition of intangible assets separately from goodwill.  The Company has not effected any
business combinations that are subject to SFAS No. 141.



In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, goodwill and intangible assets with indefinite life are not
amortized.  Instead of amortizing goodwill and intangible assets deemed to have an indefinite life, the statement requires a test for impairment to be performed annually, or immediately if conditions indicate that such
impairment could exist.  The amortization period of intangible assets with finite lives will no longer be limited to forty years.  This statement is effective for fiscal years beginning after December 15, 2001, and
permits early adoption for fiscal years beginning after March 15, 2001.  The Company does not currently have any goodwill or other intangible assets that are subject to SFAS No. 142.



In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” which addresses financial accounting and reporting for the
impairment and disposal of long-lived assets with adoption required no later than fiscal year 2003.  SFAS No. 144 was effective January 1, 2002 for the Company.

The Company’s adoption of SFAS No. 144 did not have a material impact on its financial position or results of operations.



In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 addresses the
timing and amount of costs recognized as a result of restructuring and similar activities.  The Company will apply SFAS No. 146 to activities initiated after December 31, 2002.  The adoption of SFAS No. 146 is not
expected to have a material impact on the Company’s consolidated statements of income or financial position.



Basic and diluted net income per share is calculated using the weighted average number of common and common equivalent shares outstanding during the periods presented.  (See Note 5)



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



|                |   | September 30, 2002 |   | December 31, 2001
|--------------- | - | ------------------ | - | -----------------
|Raw materials   | $ | 633,800            | $ | 515,700          
|Work in process |   | 362,300            |   | 230,200          
|Finished goods  |   | 443,100            |   | 425,900          
|                | $ | 1,439,200          | $ | 1,171,800        



Part I - FINANCIAL INFORMATION – Item 1 (continued)



The Company has a line of credit agreement with Butte Community Bank, which allows the Company to borrow the lesser of $1,000,000 or an amount determined by a formula applied to accounts receivable.  Unused borrowing
capacity was $865,400 at September 30, 2002.  Amounts borrowed bear interest at prime rate plus 1.5% (6.25% at September 30, 2002) per annum and are secured by substantially all the assets of the Company.  This line of
credit was renewed on August 8, 2002 with a maximum borrowable amount of $1,000,000 and expires on August 10, 2003.  At September 30, 2002, the Company had complied with the loan covenants.

In addition to the line of credit, the Company has a 36-month term loan facility in the amount of $445,000 bearing interest at prime plus 1.5% (6.25% at September 30, 2002).  At
September 30, 2002, the Company had an outstanding balance of $104,900 on this loan facility.  The Company also has a 60-month term loan facility in the amount of $500,000 bearing interest at prime plus 1.5% (6.25% at
September 30, 2002).  At September 30, 2002, the Company had an outstanding balance of $388,000 on this loan facility.

The Company also has a $3,400,000 mortgage loan with a maturity date of June 10, 2030.  Principal is amortized over a 29 1⁄2 year term from January 10, 2001.   The
interest rate is fixed for five-year increments and is currently fixed at 8.00% through June 10, 2005.  The interest rate will be changed on June 10th of each fifth year to the then current prime rate plus
..35%.  The balance on this mortgage at September 30, 2002 was $3,358,800.  The loan is secured by the Company’s office and manufacturing facilities.



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

September 30 | Nine Months Ended

September 30
|--------------------------------- | --------------------------- | -------------------------------
|                                  |                             | 2002                           
|Net income                        | $                           | 88,000                         
|Average common shares outstanding |                             | 3,855,591                      
|Earnings per share                | $                           | 0.02                           



Basic earnings per share are calculated by dividing net income by the weighted average number of shares issued and outstanding.



Part I - FINANCIAL INFORMATION – Item 1 (continued)



Diluted earnings per share were calculated as follows:



|                                                                                                     | Quarter Ended
 September 30 | Nine Months Ended
 September 30
|---------------------------------------------------------------------------------------------------- | --------------------------- | -------------------------------
|                                                                                                     |                             | 2002                           
|Adjusted net income                                                                                  | $                           | 88,000                         
|Average common shares outstanding                                                                    |                             | 3,855,591                      
|Add:  Exercise of options reduced by the number of shares purchasable with proceeds                  |                             | 134,655                        
|Add:  Exercise of warrants reduced by the number of shares purchasable with proceeds                 |                             | 70,409                         
|Add: Exercise of warrants attached to debt reduced by the number of shares purchasable with proceeds |                             | 71,264                         
|                                                                                                     |                             |                                
|Adjusted weighted average shares outstanding                                                         |                             | 4,131,919                      
|Earnings per common share assuming full dilution                                                     | $                           | 0.02                           



At September 30, 2002, options and warrants for the purchase of 145,500 shares of common stock at prices ranging from $0.50 to $0.56 were antidilutive and therefore not included in the
computation of diluted earnings per share.  At September 30, 2001, options and warrants for the purchase of 236,000 shares of common stock at prices ranging from $0.50 to $0.625 were antidilutive 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 and marketing of polymer heat exchangers for the solar and thermal energy storage markets
worldwide.



Quarter Ended            September 30

Nine Months Ended

September 302002

2001

2002

2001Product LineNet SalesPool Products
$
1,936,000
$
1,981,900
$
8,069,100
$
7,654,000Thermal Energy Products

1,559,200

671,200

3,698,900

1,887,900$
3,495,200
$
2,653,100
$
11,768,000
$
9,541,900




Part I - FINANCIAL INFORMATION – Item 1 (continued)



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



Quarter Ended

September 30

Nine Months Ended

September 302002

2001

2002

2001Net SalesDomestic
$
2,501,500
$
2,163,000
$
9,246,800
$
7,996,300ForeignJapan

897,400

219,700

1,910,500

598,100Other

96,300

270,400

610,700

947,500$
3,495,200
$
2,653,100
$
11,768,000
$
9,541,900




Long-lived assets   September 30, 2002 December 31, 2001

Domestic        $5,983,200        $6,110,900

Foreign          
                             
                 ---        
                             
                                     
---



For the nine months ended September 30, 2002, the Company had one major customer who individually accounted for 10% or more of sales totaling $1,910,500.  For the quarter ended
September 30, 2002, the Company had one major customer who individually accounted for 10% or more of sales totaling $897,500.  For the nine months ended September 30, 2001, and the quarter ended September 30, 2001, the Company
had no single customer who accounted for 10% or more of the sales.



Concentration of Credit Risk:  Most of the Company’s business activity is with customers located in California, Florida and foreign countries.  As of September 30, 2002,
unsecured trade accounts receivable from customers in California, Florida, and foreign countries were $433,700; $1,063,200; and $343,200 respectively.



7.     Property, Plant, and Equipment



Property, plant and equipment consist of the following:



|                                                |   | September 30, 2002 |   |   | December 31, 2001 |  
|----------------------------------------------- | - | ------------------ | - | - | ----------------- | -
|Building                                        | $ | 3,679,100          |   | $ | 3,679,100         |  
|Land                                            |   | 550,400            |   |   | 550,400           |  
|Machinery and equipment                         |   | 2,839,900          |   |   | 2,590,900         |  
|Office and computer

equipment                  |   | 474,900            |   |   | 474,900           |  
|Leasehold improvements                          |   | 596,900            |   |   | 585,200           |  
|Vehicles                                        |   | 320,200            |   |   | 309,900           |  
|                                                | $ | 8,461,400          |   |   | $8,190,400        |  
|Less accumulated depreciation

and amortization |   | (   2,478,200      | ) |   | (   2,079,500     | )
|                                                | $ | 5,983,200          |   | $ | 6,110,900         |  
|                                                |   |                    |   |   |                   |  



Part I - FINANCIAL INFORMATION  (continued)



# 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 of Operations contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  The forward-looking statements involve risks and uncertainties, including, among other things, the uncertainties associated with forecasting future revenues,
costs and expenses.  Our actual results may differ materially from the results discussed in the forward-looking statements.  You are cautioned not to place undue reliance on the forward-looking statements, which speak
only as of the date of this report.  Factors that might cause such a difference include, but are not limited to, those discussed below and under “Factors Affecting Future Results”.  We assume no obligation to
update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements.



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



# Results of Operations



Net sales for the quarter ended September 30 increased by 31.7% to $3,495,200 in 2002 from $2,653,100 in 2001 due to increased unit sales of the Company’s IceStor products, partially
offset by decreased unit sales of pool products.  Net sales increased by 23.3% to $11,768,000 in the first nine months of 2002 from $9,541,900 in the corresponding period in 2001.  This increase was due to increased unit
sales of the Company’s pool products and of the Company’s IceStor products.



Sales of the Company’s IceStor products have increased each of the first three quarters of 2002 and this trend is expected to continue for the 4th quarter.  This increase in sales
is primarily due to increased orders form the Company’s major customer in Japan.  The Company does not expect this trend to continue into 2003, and IceStor sales may decline in the first quarter for 2003.



Cost of goods increased in absolute dollars to $2,197,800 in the quarter ended September 30, 2002 from $1,668,600 in the corresponding period in 2001, but remained stable at 62.9% of net
sales for both periods.  For the nine-month period ending September 30, cost of goods sold increased to $6,951,600 (59.1% of net sales) from $5,580,000 (58.5% of net sales) in 2001.  These increases in absolute dollars
were due to increased sales; the slight increase as a percentage of net sales for the nine-month period was due primarily to higher sales of the Company’s lower margin products.



Marketing and selling expenses decreased to $577,500 (16.5% of net sales) in the third quarter of 2002 compared with $624,900 (23.6% of net sales) in the third quarter of 2001. 
Marketing and selling expenses increased to $1,950,800 (16.6% of net sales) for the first nine months of 2002 compared with $1,864,600 (19.5% of net sales) in the corresponding period in 2001.  This increase in absolute
dollars was due to higher sales commissions and other sales-related costs resulting from higher net sales revenues offset in part by decreased personnel costs.  The decreases as a percent of sales were due to the higher sales
volumes in 2002 compared with 2001.



General and administrative expenses remained relatively stable in absolute dollars at $443,900 (12.7% of net sales) in the third quarter of 2002 compared with $435,500 (16.4% of net sales)
in the third quarter of 2001.  For the nine-month period ending September 30, general and administrative expenses increased to $1,369,500 (11.6% of net sales) in 2002 from $1,322,300 (13.9% of net sales) in the corresponding
period in 2001.  The decreases as a percent of net sales were due to the higher sales volumes in 2002 compared with 2001.

Part I - FINANCIAL INFORMATION – Item 2  (continued)



Research and development expenses decreased to $80,600 (2.3% of net sales) in the third quarter of 2002 compared with $95,100 (3.6% of net sales) in the third quarter of 2001 but increased
for the nine-month period ending September 30, 2002 to $244,900 (2.1% of net sales) compared with $178,900 (1.9% of net sales) for the corresponding period of 2001.



Net interest expense increased to $111,400 (3.2% of net sales) in the third quarter of 2002 compared with $107,500 (4.1% of net sales) in the third quarter of 2001 and increased to $344,700
(2.9% of net sales) for the nine-month period ending September 30, 2002 compared with $334,000 (3.5% of net sales) for the corresponding period in 2001.



# Liquidity and Capital Resources



The Company’s cash position decreased from $121,200 at 2001 fiscal year end to $16,200 at September 30, 2002 principally due to investing activities (purchase of fixed assets and
payment of debt) partially offset by cash provided by operations.



At September 30, 2002, the Company’s net accounts receivable had increased to $2,012,600 from $1,620,500 at December 31, 2001, due to a general increase in sales for the
year.



At September 30, 2002, the Company’s net inventories had increased to $1,439,200 from $1,171,800 at December 31, 2001.  This increase in inventory was primarily to accommodate
orders for 4th quarter shipments of the Company’s IceStor products and was offset in part by a decrease resulting from increased sales.



At September 30, 2002, the Company’s current ratio was 1.72:1.00 compared to 1.12:1.00 at December 31, 2001.  The Company had working capital of $1,700,500 at September 31, 2002
compared with $353,500 at December 31, 2001.  Total assets exceeded total liabilities by $3,839,600 at September 30, 2002 compared with $3,229,200 at December 31, 2001.



At September 30, 2002, total bank debt (line of credit plus term loan plus mortgage) had decreased to $3,986,300 from $4,823,500 at December 31, 2001.



The Company believes that its cash flow from operations, together with bank borrowing and issuance of $500,000 in convertible subordinated notes as discussed in Note 4, will be sufficient to
support operations during the next twelve months.  The foregoing statement of how long the Company’s capital resources are expected to last is a forward-looking statement involving risks and uncertainties, including the
amount of the variability of demand for the Company’s products and uncertainty regarding the ability of the Company to control its operating expenses.  If sales decline from current levels additional debt or equity
financing may be required.  There can be no assurance that financing, if required, would be available on favorable terms or 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 $134,600 had been utilized, and $865,400 remained available at September 30, 2002.  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 $445,000, bearing interest at prime plus 1.5%.  At September 30, 2002, the Company had
an outstanding balance of $104,900 on this loan facility.



The Company also has a 60-month term loan facility available in the amount of $500,000 bearing interest at prime plus 1.5%.  At September 30, 2002, the Company had outstanding balance
of $388,000 on this loan facility.



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

Part I - FINANCIAL INFORMATION – Item 2  (continued)



At September 30, 2002, the Company owed an aggregate of $3,986,300 under various bank credit facilities.  Payments due under these credit facilities are as follows:



Total amounts committed
Amount of commitment expiration per periodLess than year
1-3 years
Over 4 years
Over 5 yearsLine of credit
$ 134,600
$ 134,600Bank term loans
492,900
197,500
$ 295,400Mortgage
3,358,800
40,100
93,900
$ 78,000
$ 3,146,800Total
$ 3,986,300
$ 372,200
$ 389,300
$ 78,000
$ 3,146,800


The bank may accelerate payment of the amount owed if we fail to meet financial and other covenants set forth in the loan agreements.  The Company is currently in compliance with all
covenants and expects to remain in compliance.  The Company must maintain various loan covenants including a maximum debt to net worth ratio; minimum current, quick, and cash flow ratios; minimum net worth and working capital. 
Failure to meet these covenants could result in the Company’s loans being called by its bank.  Although the Company is currently in compliance with all covenants, in January the measurement date will be re-set and may
result in a failure to meet the cash flow ratio covenant.  In the past when the Company has failed to comply with its loan covenants the bank issued waivers, however, there is no assurance that it will continue to do so in the
future.  Factors Affecting Future Results  U.S. Economic Conditions:  A protracted U.S. recession would adversely impact new housing and commercial construction in our largest market, which in turn would cause us
to miss our revenue growth goals.  Asian Economic Conditions:  Sales in Japan and other Asian countries account for virtually all our international sales, and contribute a significant portion of our overall
revenues.  In the event that these economics experience declining growth or accelerated contraction, our sales in this region will be adversely impacted.  Despite the increased sales in Japan during the last quarter,
forecasted future sales are expected to be flat to somewhat lower.  Growth of U.S. Thermal Energy Storage (TES) Market:  Our ability to increase sales of our thermal energy storage products is dependent on growth in the overall market
because opportunities for market share growth are limited.  An extended recession in the general economy, a general decline in construction of commercial properties or a decline in energy prices would all adversely affect
demand for thermal energy storage systems.  Seasonality:  Historically, the Company has experienced lower solar sales during the first quarter than during other quarters of each year.  In addition, sales
typically have increased significantly during the second quarter, declined slightly, and then remained relatively constant during the third and fourth quarters.  As the Company’s product mix shifts to include a larger
proportion of other products, such as thermal energy storage products, the traditional seasonality is being mitigated.  Net income is affected by the seasonality of sales as well as by significant marketing and selling
expenses typically incurred during the first quarter of each year.  These expenses are incurred to develop programs and materials for the use throughout the remainder of the year.  Customer Concentration:  We rely on a limited number of customers and distributors for a significant portion of our revenues.  During the quarter ended September 30,
2002, a single customer accounted for 26% of our net revenues.  We have no long-term purchase agreements with any of our customers, and any customer could choose to reduce or discontinue purchasing our products at any time,
which could have a material adverse impact on our operating results.  In addition, our revenues may be adversely impacted to the extent that one or more of our significant customers experiences financial difficulties or fails
to make payments due to use for any other reason.  Destabilizing Incidents:  Additional destabilizing events such as terrorist attacks or overseas conflicts, if they occur, could disrupt our supply chain, increase our
materials costs, reduce demand for our products, and otherwise negatively impact our operating results.  Materials Prices:  Raw materials including resins account for a major portion of our cost of sales.  Any increase in these prices because of supply shortages or
otherwise would reduce our operating margins and adversely impact our profitability.  Export salesare subject to certain controls and restrictions, including tariffs and import duties and are subject to certain risks, including changing regulatory requirements
of foreign jurisdictions and transportation delays and interruptions.  However, the Company has not experienced any material difficulties in the past relating to such limitations.  Item 3 - Quantitative and Qualitative Disclosures About Market Risk  Interest Rate Risk:  The Company typically maintains only minimal investments in interest bearing securities and accounts.  As of September 30, 2002, the
Company’s cash and cash equivalents and other interest bearing assets were $16,200.  Accordingly, a change in market interest rates would not have significant impact on the value of the Company’s assets or on
interest income.  The Company is subject to fluctuating interest rates for variable rate bank borrowings.  These fluctuations may impact, adversely or otherwise, results of operations or cash
flows.  As of September 30, 2002, the Company has a mortgage in the amount of $3,358,800 with a maturity date of June 10, 2030.  The interest rate at September 30, 2002 was 9.05%, decreasing to
8.00% on November 10, 2002.  The current interest rate is fixed through June 10, 2005; the interest rate will be changed on June 10th of each fifth year to the then current prime rate plus .35%.  The Company also has a 36-month term loan with a principal balance of $104,900 and a maturity date of May 10, 2003.  The Company also has a 60-month term loan with a principal balance
of $388,000 and a maturity date of May 10, 2006.  The interest rate on these loan facilities is prime plus 1.5%.  Foreign Exchange Risk: We operate primarily in the United States, and all domestic sales to date have been made in U.S. dollars.  Although significant portions of
our revenues are contributed by overseas sales, these sales are always denominated in U.S. dollars.  Accordingly, there has not been any material exposure to foreign currency rate fluctuations.  Equity Market Risk: We did not hold any equity securities of other Companies as of September 30, 2002.  Accordingly, we have not had any material exposure to equity
market fluctuations.  Part I - FINANCIAL INFORMATION – Item 2  (continued)  Item 4 - Controls and Procedures  (a) Evaluation of disclosure controls and procedures.  Our chief executive officer and our chief financial officer, after evaluating our “disclosure controls and procedures” (as defined in Securities Exchange Act of 1934 (the
“Exchange Act”) Rules 13a-14© and 15-d as of a date (the “Evaluation Date”) within 90 days before the filing date of this Quarterly Report on Form 10Q have concluded that as of the Evaluation Date, our
disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission  rules and forms.  (b) Changes in internal controls.  Subsequent to the Evaluation Date, there were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures, nor
were there any significant deficiencies or material weaknesses in our internal controls.  As a result, no corrective actions were required or undertaken.   Part II - OTHER INFORMATION   Item 6 - Exhibits and Reports on Form 8-K  a.     The following exhibit is filed as part of this Form 10Q report:  Exhibit                    Description Certification of chief executive officer and chief financial officer pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  b.     Reports on Form 8-K  No reports on Form 8-K were filed during the quarter ended September 30, 2002.   SIGNATURE   Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.   FAFCO, Inc. (Registrant)    DATE: November 13,
2002                                BY: /s/ Freeman A.
Ford Chairman of the Board, President a and
Chief Executive Officer (Principal Executive Officer)   DATE:   November 13,
2002                                BY: /s/ Nancy I.
Garvin Nancy I. Garvin, Vice President - Finance (Principal Financial and Accounting Officer)




CERTIFICATION





I, Freeman A. Ford, certify that:



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



1. 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;



1. 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;



1. The Registrant’s 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 Registrant’s 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;




The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors 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 the registrant’s ability to record, process, summarize and report financial
data and have identified for the Registrant’s 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 Registrant’s internal controls; and




1. The Registrant’s 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 affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date:                November 13,
2002

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 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 Registrant’s 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 Registrant’s 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;



The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors 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 the Registrant’s ability to record, process, summarize and report financial data and have identified for the
Registrant’s 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 Registrant’s internal controls; and



The Registrant’s 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 affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date:                November 13,
2002

By:                /s/Nancy I.
Garvin

Name:     Nancy I.
Garvin

Title:       Vice President of Finance and

Chief Financial Officer (Principal Financial Officer)