10-Q 1 f77212e10-q.txt FAFCO, INC. FORM 10-Q PERIOD ENDED 09/30/2001 ================================================================================ 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, 2001 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------- ------------- Commission file number 0-10120 FAFCO, Inc. (Exact name of Registrant as specified in its charter)

~~MARCH~~California ~~31,~~94-2159547 ~~2001~~ (~~UNAUDITED)~~State ~~DECEMBER~~or 31, 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 77,500 $ 10,100 Accounts receivable, less allowance for doubtful accounts of $413,300 in 2001 and $400,000 in 2000 2,238,100 1,969,400 Inventories 1,161,700 1,225,900 Prepaid expenses and other ~~current~~jurisdiction ~~assets 263,500 211,500 Other accounts receivable, net~~ of ~~allowance~~incorporation ~~21,600~~or 21,600 Deferred tax asset, net of allowance 215,700 215,700 ------------ ------------ Total current assets $ 3,978,100 $ 3,654,200 ------------ ------------ Property, plant and equipment, at cost 7,604,100 7,104,000 Less accumulated depreciation and amortization (1,825,000organization) (1,760,000) ------------ ------------ 5,779,100 5,344,000 ------------ ------------ Notes receivable and other assets (net) 9,300 9,300 Deferred tax asset, net of allowance 648,600 648,600 ------------ ------------ Total assets $ 10,415,100 $ 9,656,100 ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Bank line of credit $ 543,900 $ 450,500 Notes payable to bank 231,900 143,000 Accounts payable and other accrued expenses 1,971,200 1,744,700 Accrued compensation and benefits 244,200 267,800 Accrued warranty expense 306,700 287,700 Other current liabilities 100 5,100 ------------ ------------ Total current liabilities 3,298,000 2,898,800 ------------ ------------ Mortgage 3,362,600 3,366,500 Notes payable to bank 561,200 224,000 Other non-current liabilities 34,200 34,200 ------------ ------------ Total liabilities $ 7,256,000 $ 6,523,500 ------------ ------------ Commitments and contingent liabilities Shareholders' equity: Preferred Stock-authorized 1,000,000 shares of $1I.~~00 par value, none of which has been issued Common Stock-authorized 10,000,000 shares of $0~~R.~~125~~S. ~~par~~Employer ~~value,~~Identification 3,854,791 shares issued and outstanding in 2001 and 3,834,791 issued and outstanding in 2000 481,800 479,300 Capital in excess of par value 5,108,500 5,106,000 Notes receivable secured by Common Stock (75,100No.) (75,100) Accumulated deficit (2,356,100) (2,377,600) ------------ ------------ Total shareholders' equity $ 3,159,100 $ 3,132,600 ------------ ------------ Commitments and contingent liabilities Total liabilities and shareholders' equity $ 10,415,100 $ 9,656,100 ------------ ------------

435 Otterson Drive, Chico, California 95928-8207 (Address, including zip code, of Registrant's principal executive offices) (530) 332-2100 (Company's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At November 13, 2001, 3,854,791 shares of the Company's Common Stock, $.125 par value were issued and outstanding. ================================================================================ Page 1 of 10 Part I - FINANCIAL INFORMATION Item 1 - Financial Statements FAFCO, Inc. CONSOLIDATED BALANCE SHEET

~~THREE~~SEPTEMBER ~~MONTHS~~30, ~~ENDED~~DECEMBER ~~MARCH~~ 31, 2001 2000 ------------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 39,400 $ 10,100 Accounts receivable, less allowance for doubtful accounts of $444,800 in 2001 and $400,000 in 2000 1,745,000 1,969,400 Inventories 1,178,800 1,225,900 Prepaid expenses and other current assets 260,600 211,500 Other accounts receivable, net of allowance 196,900 21,600 Deferred tax asset, net of allowance 215,700 215,700 ------------ ~~2001~~------------ ~~2000~~Total current assets 3,636,400 3,654,200 ------------ ------------ ~~Net~~Property, ~~sales~~plant $and 2equipment,~~862,600~~ $at 2cost 8,~~722~~224,100 ~~Other~~7,104,000 ~~income~~Less accumulated depreciation and amortization (~~net~~2,082,300) (381,~~200~~760,000) 2------------ ------------ 6,~~500~~141,800 5,344,000 ------------ ------------ Notes receivable and other assets (net) 13,600 9,300 Deferred tax asset, net of allowance 648,600 648,600 ------------ ------------ Total ~~revenues~~assets 210,~~824~~440,400 29,~~724~~656,~~600~~100 ------------ ------------ ~~Cost~~LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Bank line of ~~goods~~credit ~~sold~~$ 640,000 $ 450,500 Notes payable to bank 265,400 143,000 Accounts payable and other accrued expenses 1,~~663~~633,~~800~~200 1,~~748~~744,~~300~~700 ~~Marketing~~Accrued &compensation ~~selling~~and ~~expense~~benefits ~~584~~290,~~700~~900 ~~537~~267,800 ~~General~~Accrued &warranty ~~administrative~~ expense ~~406~~310,600 ~~406~~287,700 Other current liabilities 2,900 5,100 ------------ ------------ Total current liabilities 3,143,400 2,898,800 ~~Research~~------------ &------------ ~~development~~Mortgage ~~expense~~3,353,600 543,366,500 ~~117~~Note payable to bank 503,900 ~~Net~~224,000 ~~interest~~Other ~~expense~~non-current 85liabilities 44,~~600~~400 634,~~300~~200 ------------ ------------ Total ~~costs~~liabilities ~~and~~$ ~~expenses 2~~7,~~795~~044,~~200~~900 2$ 6,~~817~~523,~~100~~500 ------------ ------------ ~~Income~~Commitments ~~(loss)~~and ~~before~~contingent ~~income~~liabilities ~~taxes~~------------ 29------------ Shareholders' equity: Preferred stock-authorized 1,~~200~~000,000 ~~(92~~shares of $1.00 par value, none of which has been issued Common stock-authorized 10,000,000 shares of $0.125 par value; 3,854,791 shares issued and outstanding in 2001 and 3,834,791 issued and outstanding in 2000. 481,800 479,300 Capital in excess of par value 5,108,500) ~~Provision~~5,106,000 ~~for~~Notes receivable secured by Common Stock (~~benefit~~75,100) ~~from~~(75,100) ~~income~~Accumulated ~~taxes~~deficit 7(2,119,700) (312,~~500~~377,600) ------------ ------------ ~~Net~~Total ~~income~~shareholders' ~~(loss)~~equity $ 213,395,500 $ ~~(61~~3,~~000)~~132,600 ~~===========~~------------ ~~===========~~------------ ~~Basic~~Commitments ~~earnings~~and ~~net~~contingent ~~income~~liabilities ~~per~~------------ ~~share~~------------ $Total ~~0.01~~liabilities $and ~~(0.02)~~shareholders' ~~Diluted~~equity ~~net~~$ ~~income~~10,440,400 ~~per share~~ $ ~~0.01~~9,656,100 $------------ ~~(0.02)~~------------

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

~~THREE~~QUARTER ENDED NINE MONTHS ENDED ~~MARCH~~SEPTEMBER ~~31,~~30 SEPTEMBER 30 ---------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ~~CASH~~----------- ~~FLOW~~----------- ~~FROM OPERATING ACTIVITIES:~~ Net ~~income~~sales ~~(loss)~~ $ 212,~~500~~653,100 $ ~~(61~~2,~~000) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 65~~595,~~000~~800 ~~48,200~~$ ~~Write offs and allowance for doubtful accounts 13~~9,~~300 13~~541,~~300~~900 ~~Provision~~$ ~~for inventory reserve Change in assets and liabilities: Accounts receivable (282~~8,~~000) (344~~904,~~500) Deferred tax assets (31,500) Inventories 64,~~200 ~~(72,300)~~Other ~~Prepaid~~income ~~expenses and other assets~~ (~~52,000~~net) 5253,400 ~~Payables~~5,300 ~~accrued expenses and other current liabilities 216~~51,~~900~~200 ~~333,000~~700 ~~Other non~~-~~current liabilities 16,000~~ ---------- ----------- ~~Net cash provided by (used in) operations 46,900 (46,400)~~ ----------- ----------- ~~CASH~~Total ~~FLOW~~revenues ~~FROM~~2,706,500 ~~INVESTING~~2,601,100 ~~ACTIVITIES: Purchase of fixed assets (500~~9,593,100) ~~(731~~8,~~000)~~904,900 ----------- ----------- ~~Net cash used in investing activities (500,100) (731,000)~~ ----------- ----------- ~~CASH~~Cost ~~FLOW~~of ~~FROM~~goods ~~FINANCING~~sold ~~ACTIVITIES:~~1,668,600 ~~Proceeds~~1,730,500 ~~from~~5,580,000 ~~exercise~~5,625,100 ofMarketing ~~options~~& 5selling expense 624,~~000~~900 67503,300 1,864,600 1,572,800 General & administrative expense 435,500 ~~Borrowings~~417,100 ~~from~~1,322,300 ~~bank~~1,215,800 ~~line~~Research of& ~~credit~~development 93expense 95,100 36,900 178,900 242,500 Net interest expense 107,500 48,400 ~~270~~334,000 ~~Borrowings~~94,300 ~~from~~Relocation ~~bank~~costs ~~422~~388,~~200~~800 ~~472~~570,~~300~~700 ----------- ----------- ~~Net~~----------- ~~cash~~----------- ~~provided~~Total bycosts ~~financing~~and ~~activities~~expenses ~~520~~2,931,600 ~~809~~3,125,000 9,279,800 9,321,200 ----------- ----------- ~~Net~~----------- ~~increase~~----------- in(Loss) ~~cash~~income ~~and~~before ~~cash~~income ~~equivalents~~taxes 67(225,~~400~~100) 32(523,~~400~~900) ~~Cash~~313,300 ~~and cash equivalents~~(416,300) ~~beginning~~Provision offor ~~period~~income 10taxes (86,100) 64(36,~~800~~600) 55,400 ----------- ----------- ~~Cash~~----------- ~~and~~----------- ~~cash~~Net ~~equivalents,~~(loss) ~~end~~income of$ ~~period~~(139,000) $ 77(487,~~500~~300) $ 97257,~~200~~900 $ (416,300) =========== =========== ~~SUPPLEMENTAL~~=========== ~~DISCLOSURES~~=========== OFBasic ~~CASH~~earnings ~~FLOW~~net ~~INFORMATION:~~(loss) ~~Cash~~income ~~paid~~per ~~during~~share ~~the~~$ ~~period~~(0.04) ~~for~~$ ~~interest~~(0.13) $ ~~109,400~~0.07 $ (0.11) Diluted net (loss) income per share $ (0.04) $ (0.13~~,200~~) $ 0.06 $ (0.11) ----------- ----------- ----------- -----------

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

~~MARCH~~NINE ~~31,~~MONTHS ~~2001~~ENDED ~~DECEMBER~~SEPTEMBER ~~31,~~30 ---------------------------- 2001 2000 ----------- ----------- ~~Raw~~CASH ~~materials~~FLOW FROM OPERATING ACTIVITIES: Net income $ ~~619~~257,~~100~~900 $ ~~606~~(416,~~500~~300) ~~Work~~Adjustments to reconcile net income to net cash provided by (used in) ~~process~~operating ~~256~~activities: Depreciation 322,~~700~~300 ~~269~~151,~~900~~000 ~~Finished~~Loss ~~goods~~on ~~285~~disposition of fixed assets 1,100 Write offs and allowance for doubtful accounts 44,800 42,800 Change in assets and liabilities: Accounts receivable 4,300 (326,100) Inventories 47,100 95,100 Prepaid expenses and other assets (53,400) 13,900 ~~349~~Notes receivable and other long term assets (900) Payables and accrued expenses and other current liabilities (67,700) 684,800 Other non-current liabilities 10,200 25,700 ----------- ----------- Net cash provided by operating activities 565,500 271,100 ----------- ----------- $CASH FLOW FROM INVESTING ACTIVITIES: Purchase of fixed assets (1,~~161~~120,~~700~~100) $(3,007,400) ----------- ----------- Net cash used in investing activities (1,~~225~~120,100) (3,007,400) ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from exercise of options 5,000 Proceeds from exercise of common stock warrants 67,500 Repayment of bank line of credit 189,500 103,900 Proceeds from term loan 389,400 500,000 Repayment of term loan (97,900) Proceeds from construction loan 2,129,600 ----------- ----------- Net cash provided by financing activities 583,900 2,703,100 ----------- ----------- Net increase in cash and cash equivalents 29,300 (33,200) Cash and cash equivalents, beginning of period 10,100 64,800 ----------- ----------- Cash and cash equivalents, end of period $ 39,400 $ 31,600 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 331,000 $ 84,800 Cash paid during the period for income taxes

The accompanying notes are an integral part of this statement. Page 4 of 10 Part I - FINANCIAL INFORMATION - Item 1 (continued) FAFCO, Inc. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. This information is unaudited; however, in the opinion of the Company's management, all adjustments necessary for a fair statement of results for the periods presented have been included. The results for the period ended September 30, 2001 are not necessarily indicative of results to be expected for the entire year. These financial statements, notes and analyses should be read in conjunction with the Company's audited annual financial statements for the year ended December 31, 2000, included in its 2000 Annual Report to Shareholders. 2. Net income (loss) per share is calculated using the weighted average number of common and common equivalent shares outstanding during the periods presented. (See Note 5) 3. Inventories are valued at the lower of cost or market, determined on a first in, first out (FIFO) basis, and consists of the following.

~~QUARTER~~SEPTEMBER ~~ENDED~~30, ~~MARCH~~2001 DECEMBER 31, 2000 ------------------~~---------------~~ ~~2001 2000~~ ---------- -------~~------~~ ~~Net~~Raw ~~income~~materials ~~(loss)~~ $ 21636,~~500~~100 $ ~~(61~~606,~~000)~~500 ~~Average~~Work ~~common~~in ~~shares~~process ~~outstanding~~238,200 3269,~~842~~900 Finished goods 304,~~347~~500 3349,~~321,113~~500 ----------- ----------- ~~Earnings (loss) per share~~ $1,178,800 ~~0.01~~ $1,225,900 ~~(0.02)~~========== ==========

4. The Company has a line of credit agreement with Butte Community Bank, which line of credit allows the Company to borrow the lesser of $1,000,000 or an amount determined by a formula applied to accounts receivable. Unused borrowing capacity was $360,000 at September 30, 2001. Amounts borrowed bear interest at prime rate plus 1.5% per annum (7.5% at September 30, 2001) and are secured by substantially all the assets of the Company. This line of credit expires on August 10, 2002. At September 30, 2001, the Company had complied with or obtained waivers for compliance with the loan covenants. In addition to the line of credit, the Company has a 36-month term loan through Butte Community Bank in the amount of $445,000 bearing interest at prime plus 1.5% (7.5% at September 30, 2001). At September 30, 2001, the Company had an outstanding balance of $256,200 on this loan. The company also has a 58-month term loan in the amount of $500,000 bearing interest at prime plus 1.5% (7.5% at September 30, 2001). At September 30, 2001, the company had an outstanding balance of $479,600 on this loan. The Company also has a 29-1/2 year mortgage in the amount of $3,400,000 bearing interest at 9.05% per year fixed for 5 years. The balance on this mortgage at September 30, 2001 was $3,387,100. 5. Net Income Per Share Basic (loss) earnings per share were calculated as follows:

QUARTER ENDED ~~MARCH~~NINE ~~31,~~MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ~~Adjusted~~----------- ~~net~~----------- Net (loss) income $ 21(139,~~500~~000) $ (61487,~~000~~300) $ 257,900 $ (416,300) Average common shares outstanding 3,~~842~~854,~~347~~791 3,~~321~~843,~~113~~311 ~~Add:~~3,850,673 ~~Exercise of options reduced by the number of shares purchased with proceeds Add: Exercise of warrants reduced by the number of shares purchased with proceeds 30~~3,~~927~~669,880 ~~Add: Expense of warrants attached to debt reduced by the number of shares purchased with proceeds~~ ----------- ----------- ~~Adjusted weighted average shares outstanding 3,873,274 3,321,113~~ ----------- ----------- ~~Earnings~~(Loss) earnings per ~~common~~ share ~~assuming~~$ ~~dilution~~(0.04) $ (0.0113) $ 0.07 $ (0.0211) =========== =========== =========== ===========

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

QUARTER ENDED ~~MARCH~~NINE 31MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ~~Product~~----------- ~~Line~~----------- ~~Net~~Adjusted ~~Sales~~net ~~Pool~~(loss) ~~Products~~income $2 (139,~~248~~000) $ (487,~~700~~300) $2 257,~~088~~900 $ (416,~~700~~300) ~~Thermal~~Average ~~Energy~~common ~~Storage~~shares ~~Products~~outstanding ~~613~~3,~~900~~854,791 ~~633~~3,~~400~~843,311 3,850,673 3,669,880 Add: Exercise of options reduced by the number of shares purchased with proceeds N/A N/A 156,566 N/A Add: Exercise of warrants reduced by the number of shares purchased with proceeds N/A N/A 64,969 N/A Adjusted weighted average shares outstanding 3,854,791 3,843,311 4,072,208 3,669,880 ----------- ----------- ----------- ----------- (Loss) earnings per common share assuming full dilution $~~2,862,600~~ (0.04) $~~2,722,100~~ (0.13) $ 0.06 $ (0.11) =========== =========== =========== ===========

At September 30, 2001, options and warrants for the purchase of 355,700 shares of common stock at prices ranging from $0.50 to $0.625 were antidilutive and therefore not included in the computation of diluted earnings per share. 6. Business Segment and Concentration of Credit Risk Business Segment. The Company operates in one business segment, the development, production and marketing of polymer heat exchangers for the solar and thermal energy storage markets worldwide.

QUARTER ENDED ~~MARCH~~NINE 31MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------------- --------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Product Line Net Sales ~~Domestic~~Pool Products $2 1,~~342~~981,~~000~~900 $2 1,~~353~~606,~~500~~200 ~~Foreign~~$ ~~Japan~~7,654,000 96$ 6,~~700~~135,400 ~~291~~Thermal Energy Products 671,200 ~~Other~~989,600 ~~423~~1,887,900 772,~~400~~768,800 ----------- ----------- ----------- ----------- $ 2,~~862~~653,~~600~~100 $ 2,~~722~~595,~~100~~800 $ 9,541,900 $ 8,904,200 =========== =========== =========== ===========

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

~~Long-lived~~QUARTER ~~assets~~ENDED ~~MARCH~~NINE ~~31,~~MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ---------------------------- --------------------------- 2001 ~~MARCH~~2000 ~~31,~~2001 2000 ----------- ----------- ----------- ----------- Net Sales Domestic $5 2,~~779~~163,~~100~~000 $ 1,~~605~~692,~~200~~600 $ 7,996,300 $ 6,766,700 Foreign Japan 219,700 569,500 598,100 1,642,100 Other 270,400 333,700 947,500 495,400 ----------- ----------- ----------- ----------- $ 2,653,100 $ 2,595,800 $ 9,541,900 $ 8,904,200 =========== =========== =========== ===========

~~MARCH~~Long-lived 31assets SEPTEMBER 30, 2001 DECEMBER 31, 2000 ----------- -------~~----~~ ~~Building $ 3,595,400 $ 3,441,400 Land 550,400 550,400 Machinery and equipment 2,643,200 2,332,500 Office and computer equipment 524,900 510,800 Vehicles 290,200 268,900~~ ----------- ------~~-----~~ $Domestic ~~7,604,100~~ $ 76,~~104~~141,~~000~~800 ~~Less accumulated depreciation and amortization (1,825,000) (1,760,000) ----------- -----------~~ $ 5,~~779,100 $ 5,~~344,000 ~~=========== ===========~~

For the nine months ended September 30, 2001, the Company had no single customer who accounted for 10% or more of sales. At September 30, 2000, the Company had one major customer who individually accounted for 10% or more of the sales totaling $1,642,100. 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, 2001, unsecured trade accounts receivable from customers in California, Florida, and foreign countries were $580,300, $1,292,400 and $198,600 respectively. 7. Property, Plant and Equipment Property, plant and equipment consist of the following:

~~Shares~~SEPTEMBER 31, 2001 DECEMBER 31, 2000 ------------------ ~~Common~~----------------- ~~Stock:~~Building ~~authorized~~$ 103,~~000~~679,~~000~~100 ~~shares~~$ of3,441,400 ~~$.125~~Land ~~par~~550,400 ~~value;~~550,400 ~~issued~~Machinery and ~~outstanding~~equipment ~~at December 31~~3,149,400 ~~2000~~2,332,500 asOffice ~~reported~~and incomputer ~~the~~equipment ~~Registrant's~~535,300 ~~Annual~~510,800 ~~Report~~Vehicles on309,900 ~~Form~~268,900 10-K---------- ~~filed~~----------- ~~for~~$ ~~the fiscal year ended December 31~~8,224,100 ~~2000~~$ 37,~~834~~104,~~791~~000 ~~Issued~~Less ~~during~~accumulated ~~the~~depreciation ~~quarter~~and 20amortization (2,082,300) (1,760,000) ----------- ~~Outstanding~~----------- at$ ~~March 31~~6,141,800 ~~2001~~$ 35,~~854~~344,~~791~~000 =========== ===========

Page 7 of 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) Results of Operations Net sales for the quarter ended September 30 increased by 2.2% to $2,653,100 in 2001 from $2,595,800 in 2000 and increased by 7.2% to $9,541,900 in the first nine months of 2001 from $8,904,200 in the corresponding period in 2000. This increase was due to increased unit sales of the Company's pool products partially offset by decreased unit sales of the Company's IceStor products. Cost of goods sold decreased to $1,668,600 (62.9% of net sales) in the quarter ended September 2001 compared with $1,730,500 (66.7% of net sales) in the corresponding quarter of 2000. For nine months ended September 30, cost of goods sold decreased to $5,580,000 (58.5% of net sales) in 2001 from $5,625,100 (63.2% of net sales) in 2000. These decreases were due primarily to increased sales of the Company's higher margin pool products along with decreased sales of the lower margin IceStor products. Marketing and selling expenses increased to $624,900 (23.6% of net sales) in the third quarter of 2001 compared with $503,300 (19.4% of net sales) in the third quarter of 2000 and to $1,864,600 (19.5% of net sales) for the first nine months of 2001 compared with $1,572,800 (17.7% of net sales) for the corresponding period in 2000. These increases were due to increased advertising, freight costs, travel and costs related to operating the Company's retail office in Florida. General and administrative expenses were relatively stable at $435,500 (16.4% of net sales) in the third quarter of 2001 compared with $417,100 (16.1% of net sales) in the third quarter of 2000. For the nine-month period ending September 30, general and administrative expenses increased to $1,322,300 (13.9% of net sales) in 2001 from $1,215,800 (13.7% of net sales) in the corresponding period in 2000. These increases in absolute dollars were due to a variety of expenses including business insurance; legal fees related to patent filings; equipment rental and costs related to operating the Company's retail office in Florida Research and development expenses increased to $95,100 (3.6% of net sales) in the third quarter of 2001 from $36,900 (1.4% of net sales) into the third quarter of 2000 but decreased for the nine-month period ending September 30,2001 to $178,900 (1.9% of net sales) compared with $242,500 (2.7% of net sales for the corresponding period of 2000. These fluctuations represent the change in engineering related costs between capital and expensed projects. Net interest expense increased to $107,500 (4.1% of net sales) in the third quarter of 2001 compared with $48,400 (1.9% of net sales) in the third quarter of 2000 and to $334,000 (3.5% of net sales for the nine month period ending September 30, 2001 compared with $94,300 (1.1% of net sales) for the corresponding period in 2000. This increase was due to increased bank borrowing (primarily the Company's mortgage) during 2001, offset slightly by decreased borrowing costs Other income (net) includes $102,500 in grant income from the California Energy Commission related to an energy efficiency program in which the Company participated. Page 8 of 10 Liquidity and Capital Resources The Company's cash position increased slightly from $10,100 at 2000 fiscal year end to $39,400 at September 30, 2001. At September 30, 2001, the Company's accounts payable and other accrued expenses had decreased to $1,633,200 from $1,744,700 at December 31,2000. This decrease is due to a decrease in accrued liabilities, primarily utilities, offset in part by an increase to accounts payable. At September 30, 2001, the Company's net accounts receivable had decreased to $1,745,000 from $1,969,400 at December 31,2000 due to the seasonal decrease in sales. At September 30, 2001, the Company's net inventories had decreased slightly to $1,178,800 from $1,225,900 at December 31, 2000. At September 30, 2001, the Company's current ratio was 1.16 to 1 compared to 1.26 to 1 at December 31, 2000. The Company had working capital of $493,400 at September 30, 2001 compared with $755,400 at December 31, 2000. total assets exceeded total liabilities by $3,395,500 at September 30,2001 compared with $3,132,600 at December 31, 2000. At September 30, 2001, total bank debt (line of credit plus term loan plus mortgage) had increased to $4,729,400 from $4,184,000 at December 31, 2000, due mainly to borrowings to cover costs related to the acquisition of new production equipment. The Company believes that its cash flow from operations along with its available line of credit and construction financing will be sufficient to support operations during the next twelve months. Part II - OTHER INFORMATION Item 5 - Other Information The following table summarizes the outstanding securities during the quarter ended September 30, 2001.

Item 6 - Exhibits and Reports on Form 8-K a. Exhibits: none b. Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2001. Page 9 of 10 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FAFCO, Inc. (Registrant) DATE: November 13, 2001 BY: /s/ Nancy I. Garvin ----------------- -------------------------------- Nancy I. Garvin, Vice President - Finance and Chief Financial Officer Page 10 of 10

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