U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1998
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 No. 0-22524
REAL GOODS TRADING CORPORATION
(Exact name of small business issuer as specified in its charter)
California 68-0227324
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
555 Leslie Street, Ukiah, California 95482
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (707) 468-9292
Former name, former address and former fiscal year, if changed
since last report.
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the past 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
As of January 20, 1998, there were issued and outstanding
4,080,742 shares of common stock of the issuer.
<PAGE>
REAL GOODS TRADING CORPORATION
INDEX
Page
Form 10-QSB Cover Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheet at December 26, 1998 3
Condensed Consolidated Statements of Operations for the three
and nine months ended December 26, 1998 and December 27, 1997 4
Condensed Consolidated Statements of Cash Flows for the
six months ended December 26, 1998 and December 27, 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 11
Item 2. Changes in Securities. 11
Item 3. Defaults Upon Senior Securities. 11
Item 4. Submission of Matters to a Vote of Security-Holders. 11
Item 5. Other Information. 11
Item 6. Exhibits and Reports on Form 8-K. 11
Signatures 12
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
REAL GOODS TRADING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 26,
1998
<S> <C>
ASSETS
Current Assets
Cash $2,913
Accounts Receivable, net of allowance of $6 201
Note receivable from affiliate 176
Inventories 2,202
Deferred catalog costs, net 338
Prepaid expenses 168
Total current assets 5,998
Property, equipment and improvements, net 3,500
Intangible assets and other assets, net 151
Income taxes receivable 121
Total assets $9,770
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable $904
Accrued expenses 831
Customer deposits 108
Current maturities of long-term debt 20
Deferred income taxes 23
Other taxes payable 200
Total current liabilities 2,086
Long-term debt 556
Total liabilities 2,642
Shareowners' equity
Preferred stock, without par value;
Authorized 1,000,000 shares;
None issued or outstanding -
Common stock, without par value:
Authorized 10,000,000 shares;
Issued and outstanding 4,080,742 shares 7,195
Accumulated Deficit (67)
Total shareowners' equity $7,128
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $9,770
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
REAL GOODS TRADING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
<C> <C> <C> <C>
Net Sales $6,374 $6,977 $12,963 $13,533
Cost of sales 3,584 3,338 7,296 6,815
Gross Profit 2,790 3,639 5,667 6,718
Selling, general
and administrative
expenses 2,625 3,266 6,008 6,710
Earnings(loss)
from operations 165 373 (341) 8
Interest income
(expense) net of
interest expense 7 (16) 36 (71)
Earnings (loss)
before income taxes 172 357 (305) (63)
Income tax
benefit (expense) (69) (143) 121 25
NET EARNINGS (LOSS) $103 $214 $(184) $(38)
NET EARNINGS (LOSS)
PER SHARE BASIC $0.03 $0.06 $(0.05) $(0.01)
NET EARNINGS (LOSS)
PER SHARE DILUTED $0.06
Weighted average
shares outstanding,
basic 4,080,742 3,580,103 3,982,251 3,427,684
Weighted average
shares outstanding,
diluted 3,742,677
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
REAL GOODS TRADING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
December 26, December 27,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $(184) $(38)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 257 233
Changes in assets and liabilities:
Accounts receivable 9 (191)
Note receivable from affiliate (176) -
Inventory 134 (541)
Deferred catalog costs 101 29
Prepaid expenses 46 (50)
Income taxes receivable 46 25
Accounts payable 178 447
Accrued expenses 486 127
Other taxes payable 166 (41)
Customer deposits (326) 121
NET CASH PROVIDED BY OPERATING ACTIVITIES 737 121
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, improvements,
and construction in progress (265) (434)
Proceeds from sale of equipment
and other assets 19 35
NET CASH USED IN INVESTING ACTIVITIES (246) (399)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (9) (589)
Proceeds from issuance of common stock, net 1,130 1,379
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,121 808
NET INCREASE IN CASH 1,612 530
CASH AT BEGINNING OF PERIOD 1,301 513
CASH AT END OF PERIOD $2,913 $1,043
</TABLE>
See notes to condensed consolidated financial statements
<PAGE>
REAL GOODS TRADING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED DECEMBER 26, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared from the records of the Company
and, in the opinion of management, include all adjustments
(consisting of only normal recurring accruals) necessary to
present fairly the financial position at December 26, 1998 and
the interim results of operations for the three and nine months
ended December 26, 1998 and December 27, 1997 and cash flows
for the nine months ended December 26, 1998 and December 27,
1997. Certain reclassifications have been made in the December
1997 financial statements to conform to the December 1998
presentation.
Accounting policies followed by the Company are described in Note
1 to the audited financial statements for the fiscal year ended
March 31, 1998 included in the Company's fiscal 1998 Annual
Report to Shareowners. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have
been condensed or omitted for purposes of the condensed financial
statements. The condensed consolidated financial statements
should be read in conjunction with the audited financial
statements, including notes thereto, for the year ended March 31,
1998.
The results of operations for the three and nine month periods
herein presented are not necessarily indicative of the
results to be expected for the entire fiscal year ending March
31, 1999.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
During the first quarter of fiscal 1999, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." SFAS No. 130 requires the
presentation, by major components and as a single total, the
change in the Company's net assets during a period from non-owner
sources. As the Company has no changes in net assets from
non-owner sources, comprehensive income and net income are the
same.
In June 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No.131 "Disclosures about Segments of an Enterprise
and Related Information", which establishes annual and interim
reporting standards for an enterprise's operating segments and
related disclosures about its products, services, geographic
areas and major customers. Adoption of this statement will not
impact the Company's consolidated financial position,
results of operations or cash flows, and any effect will be
limited to the form and content of its disclosures. This
statement is effective for Company's fiscal year ending March
31, 1999.
NOTE 3 - LINE OF CREDIT
On April 7, 1998 the Company renewed its $1,500,000 line of
credit agreement with National Bank of the Redwoods (the "Bank")
through April 7, 1999. Borrowings bear interest at 1.5% over the
prime rate, interest is payable monthly, and there are no loan
fees. The line is personally guaranteed by the Company's CEO. On
December 26, 1998, no amounts were outstanding on the Company's
line of credit.
The line of credit agreement contains restrictive covenants
including debt to net worth and current ratios, restrictions on
capital expenditures, positive cash flow at a certain point in
the fiscal year and prohibitions on payment of cash dividends
without the Bank's approval. The line is collateralized by
substantially all of the Company's assets including inventory,
accounts receivable and mailing lists as well as a key person
life insurance policy on the life of the Company's CEO. The
Company was in compliance with all covenants of the extended
line of credit agreement as of December 26, 1998.
NOTE 4 - SHAREOWNERS' EQUITY
On August 11, 1997, the Company commenced a direct public
offering of 1,000,000 shares of newly issued stock and 300,000
shares of a selling shareowner. As of the closing date of the
offering on June 30, 1998, the Company had sold 677,000 shares
for gross proceeds of $3.6 million with costs of approximately
$675,000.
On August 19, 1998 the Board of Directors approved the repurchase
of up to $100,000 of the Company's outstanding Common Stock. As
of December 26, 1998 the Company had repurchased and retired
3,900 shares at a total cost of $14,850.
On September 14, 1998 the Board of Directors amended all existing
employee stock options to reduce the exercise price to $4.50 per
share. Also, additional options to purchase 242,000 shares were
granted to key employees in conjunction with adoption of the
Company's Strategic Plan for fiscal years ending March 31,
2000-2002.
Under the terms of the Company's Articles of Incorporation, the
Board of Directors may determine the rights, preferences and
terms of the Company's authorized but unissued shares of
preferred stock.
NOTE 5 - LEGAL ACTION
Earlier this year the Company was named as the defendant in a
class-action suit, which alleges that, with respect to three
products sold through the Company's catalogs, certain claims were
deceptive, untrue or misleading. The suit sought restitution for
the amount of revenues derived from these products over the four
years prior to this suit and attorney's fees. The matter has been
settled.
NOTE 6 - EARNINGS PER SHARE
Outstanding options are anti-dilutive and are not included in the
calculation of diluted earnings per share on December 26, 1998.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES
Net sales for the nine months ended December 26, 1998 were
$12,963,000, a decrease of 4% from $13,533,000 in the same period
last year. A decrease in catalog sales due to the
discontinuation of the Earth Care Catalog ($1,588,000 of the
fiscal 1998 total year to date) was partially offset by
substantial increases in retail and renewable energy division
sales, reflecting the increased consumer interest in renewable
energy products and a concern with Year 2000 preparedness issues.
Catalog net sales for the nine months ended December 26, 1998
decreased 19% to $7,900,000 compared with $9,715,000 in the same
period last year. The decrease was due to a slightly lower
response rate to the Company's Real Goods Catalog and
discontinuation of the Earth Care Catalog. Catalog sales were 61%
of total net sales in the nine months ended December 26, 1998,
compared with 72% of total net sales in the same period last
year.
Retail store sales in the nine months ended December 26, 1998
increased 27% to $2,929,000 compared to $2,300,000 for
the same period last year. In August 1997, the Company
sold its Snow Belt store, which accounted for $262,000 in sales
in the nine months ended December 27, 1997. Also, the Company
opened a new store in Berkeley, CA, in November 1997.
Retail store sales amounted to 23% of total net sales in the nine
months ended December 26, 1998, compared with 17% of total net
sales in the same period last year. The Company is refining its
retail store format prior to opening additional retail stores in
the future.
Renewable Energy Division sales in the nine months ended December
26, 1998 increased 46% to $2,134,000 compared to $1,466,000 for
the same period last year. Increases in this area of the
business continue to be driven by customers' interests in
potential Year 2000 (Y2K) renewable energy solutions, and the
incentive program being offered through at least March 2002
by the California Energy Commission in conjunction with the
deregulation of California utilities. This program did not exist
last year. Renewable energy sales amounted to 17% of total net
sales in the nine months ended December 26, 1998, compared with
11% for the same period last year.
For the three months ended December 26, 1998, the Company's net
sales decreased 9%, or $603,000 to $6,374,000 compared to
$6,977,000 in the same period last year. Net catalog sales for
the three months decreased 22% to $4,364,000 compared to
$5,637,000 for the same period in the same period last year for
the reasons cited above. Retail store sales for the three months
were $1,225,000, an increase of 34% compared to $917,000 during
the same period last year. The increase in retail and renewable
energy sales is due to stronger demand for renewable energy
products, in part stimulated by increasing concern for the
potential Year 2000 (Y2K) problems. Renewable energy sales
increased 90% to $785,000 compared to $413,000 for same period
last year.
GROSS PROFIT
On December 26, 1998 the company performed a complete physical
inventory which resulted in a shrinkage adjustment of $60,000 at
the retail stores (14% of retail gross profit and 2% of total
company gross profit for the quarter). Management evaluated
existing inventories and determined that, based on recent
decisions taken such as the discontinuation of Earth Care
Catalog, additional reserves were warranted. As a result,
reserves of $180,000 were established and charged to cost of
sales in December 1998. Reserves related to the catalog business
amount to $117,000 or 5.5% of gross profit for the quarter.
Reserves related to the Retail and Renewable Divisions were
$35,000 and $28,000, respectively. These charges to cost of
sales are 8% and 12%, respectively, of gross profits for the
quarter.
Overall, the reserves taken as of December 26, 1998 amount to
6.5% of gross profit for the quarter and 3% of gross profit for
the nine months ended December 26, 1998.
For the nine months ended December 26, 1998 after the inventory
adjustments mentioned above, gross profit decreased to 43.7% of
sales, or $5,667,000, compared to 49.6%, or $6,718,000 of sales
for the same period last year. As mentioned earlier, the
shrinkage adjustment ($60,000) and the obsolescence reserve
($180,000) account for 4.2% of the total decrease of 5.9% in
gross profit. The remaining 1.7% decrease in gross profit is
primarily due to increased product costs, a relatively lower
portion of catalog sales, (historically the Company's most
profitable segment) and a higher proportion of low margin
renewable energy sales in the nine months ended December 26,
1998, compared with the same period last year.
For the nine months ended December 26, 1998, catalog sales
had a gross profit of $3,876,000, or 49.1% of sales, compared to
$5,210,000, or 53.6% of sales for the same period last year.
Retail store sales had a gross profit of $1,109,000, or 37.9% of
sales, compared to $941,000 of sales, or 40.9% in the same period
last year. Renewable energy sales had a gross profit of 32.0%,
or $682,000, compared to 35.1% of sales or $515,000 for the
same period last year. Last years gross profit also included
$52,000 of Institute for Solar Living sales.
For the three months ended December 26, 1998, gross profit
decreased to 43.8% of sales, or $2,790,000, compared to 52.2% of
sales, or $3,639,000 all for the reasons cited above. Had the
charges to cost of sales (totaling $240,000) not been taken gross
profit for the catalog would have been $2,250,000, or 51.6%
versus $3,103,000 or 55.5% in the same period last year; gross
profit for retail stores would have been $518,000, or 42.3%
versus $380,000 or 41.4% for the same period last year; and gross
profit for renewable energy would have been $262,000 or 33.4%
versus $146,000, or 35.4%. This would have shown an improvement
in retail gross profit of 0.9%, but decreased gross profit in the
catalog and renewable energy operations of 3.4% and 1.0%
respectively. The increase in gross profit at the retail
operations is attributable to a higher proportion of high margin
(catalog) product sales and a relatively lower proportion of low
margin (renewable energy) sales during the holiday season.
Decreases in gross profit at the catalog and renewable energy
operations are attributable to higher product costs.
After inventory adjustments, ($117,000 for catalog, $95,000 for
retail and $28,000 for renewable energy) catalog sales had a
gross profit of $2,133,000 or 48.9% of sales for the quarter,
compared to $3,103,000 or 55% of sales for the same period last
year. Retail store sales had a gross profit of $423,000, or
of sales, compared to $380,000, or 34.5% of sales for the same
period last year. Renewable energy sales had a gross profit of
$234,000, or 29.8% of sales compared with $146,000, or 35.4% of
sales in the same period last year. Last year's gross profit for
the quarter also included $10,000 related to the Institute for
Solar Living.
OPERATING EXPENSES
Selling, general and administrative expenses were $6,008,000, or
46.4% of sales for the nine months ended December 26, 1998,
compared to $6,710,000, or 49.6% for the same period last year.
Selling, general and administrative expenses amounted to
$2,625,000, or 41.2% for the quarter, compared to $3,266,000, or
46.8% for the same period last year.
The Company has been effective in controlling operating costs,
despite increases that occurred in labor, depreciation, purchased
services, recruitment and fixed charges such as rent. Savings in
operating expenses have been made in the areas of catalog costs,
advertising, postage and freight and purchases of supplies.
INTEREST EXPENSE AND OTHER INCOME
The Company had $17,000 of net interest income in the first nine
months, compared to $71,000 of net interest expense in the same
period last year. The Company also had a gain of $19,000 on the
sale of equipment in the nine months ended December 26, 1998.
EARNINGS
The Company had a before-tax loss of $305,000 ($65,000 loss prior
to inventory adjustments) and a net loss of $184,000 ($39,000
loss prior to inventory adjustments $0.01 per share) or $0.05 per
share for the nine months ended December 26, 1998. In the same
period last year, the Company had a before-tax loss of $63,000
and a net loss of $38,000, or $0.01 per share. For the three
months ended December 26, 1998, the Company had before-tax
earnings of $172,000 ($412,000 prior to inventory adjustments)
with net earnings of $103,000, ($247,000 prior to inventory
adjustments, or $0.06 per share) or $0.03 per share, compared to
a before-tax earning of $357,000 and net earnings of $214,000, or
$0.06 per share in the same period last year. The Company
generally experiences seasonal effects, with sales and earnings
increasing in the first three quarters with the largest gains in
the Company's third quarter, which is the holiday season, while
sales and earnings fall in the fourth quarter.
INCOME TAX PROVISION
The provision for income taxes was 40% in both periods. The
Company believes that the applied tax rate accurately reflects
its projected rate for the year.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended December 26, 1998, $737,000 was
provided by operations primarily from depreciation, payables,
accrued expenses and other taxes payable. These sources of cash
were partially offset by reductions in customer deposits of
$326,000. The Company's direct public offering generated net
proceeds to the Company of $1,130,000 in the nine months ended
December 26, 1998. The Company spent $265,000 on capital assets
and received $19,000 on the sale of assets in the nine month
ended December 26, 1998 compared with $434,000 spent on assets
and $35,000 received from the sale of assets in the same period
last year.
The net effect of all cash flows was a net increase to cash of
$1,612,000 in the nine months of fiscal 1999, compared
with $530,000 in fiscal 1998.
On June 30, 1998, the Company concluded its direct public
offering, wherein it sold 677,000 shares out of a
potential total of 1,000,000 shares. It raised a total of
$2,900,000 net of expenses of approximately $675,000.
The net proceeds are intended to be used to expand the Company's
retail presence and improve its systems and infrastructure. The
Company also has a $1,500,000 credit line (see Note 3) under
which no amounts are outstanding.
The Company believes that current cash and cash flows from
operations and available borrowings from the line of credit will
be sufficient to meet anticipated requirements for working
capital, capital expenditures, and debt service for the
foreseeable future.
EFFECTS OF INFLATION
The overall effects of inflation on the Company's business during
the periods discussed were not believed to be material.
YEAR 2000 PREPAREDNESS
Real Goods is addressing the Year 2000 problem through a
comprehensive evaluation of it's hardware, software,
communications and key external vendors and suppliers. At
February 1, 1999 the Company estimates that it has
completed substantially all of the necessary hardware upgrades
and a large portion of its software upgrades. Costs of the
evaluation and upgrades approximate $150,000 and are being
completed in the normal course of business as periodic software
and hardware upgrades.
During the third quarter of fiscal 1999, the Company installed
upgrades of its accounting software that are Year 2000 compliant
and further upgraded some of its hardware.
The Company is continuing its software upgrades and vendor
evaluations and certifications. The Company's Year 2000
initiatives are on schedule and no major problems have been
encountered to this time. However, there can be no assurance that
the systems of other companies on which the Company's systems
rely will be converted in a timely fashion, or that any such
failure to convert by another company would not have an adverse
effect on the Company's systems. Furthermore, there can be no
guarantee that these estimates will be achieved, and actual
results could differ materially from these estimates. Specific
factors that might cause such material differences include, but
are not limited to, the availability of and cost of personnel
trained in this area, the ability to locate and correct all
relevant computer codes and similar uncertainties.
While the Company cannot accurately predict a "worst case
scenario", with regard to its Year 2000 issues, the failure by
the Company and/or vendors to complete Year 2000 compliance work
in a timely manner could have a materially adverse effect on the
Company's operations. The Company is in the process of assessing
these risks and uncertainties and is developing appropriate
courses of action.
*****
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Incorporated by reference; see Note 5 - "Legal Action" in
accompanying Notes to Condensed Consolidated Financial
Statements.
Item 2. Changes in Securities.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security-Holders.
Not Applicable
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
Not Applicable
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
REAL GOODS TRADING CORPORATION
(Registrant)
DATED: February 9, 1998
by:[S]LESLIE B. SEELY
Leslie B. Seely
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-26-1998
<CASH> 2913
<SECURITIES> 0
<RECEIVABLES> 201
<ALLOWANCES> 6
<INVENTORY> 2202
<CURRENT-ASSETS> 5998
<PP&E> 4511
<DEPRECIATION> 1011
<TOTAL-ASSETS> 9770
<CURRENT-LIABILITIES> 2086
<BONDS> 0
0
0
<COMMON> 7195
<OTHER-SE> (67)
<TOTAL-LIABILITY-AND-EQUITY> 9770
<SALES> 12963
<TOTAL-REVENUES> 12963
<CGS> 7296
<TOTAL-COSTS> 7296
<OTHER-EXPENSES> 6008
<LOSS-PROVISION> (341)
<INTEREST-EXPENSE> (36)
<INCOME-PRETAX> (305)
<INCOME-TAX> (121)
<INCOME-CONTINUING> (184)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (184)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
