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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 September 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 Identification
incorporation or organization) 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 October 30, 1998, there were issued and outstanding
4,080,742 shares of common stock of the issuer.
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
September 26, 1998 3
Condensed Consolidated Statements of Operations
for the three and six months ended September 26,
1998 and September 27, 1997 4
Condensed Consolidated Statements of Cash Flows
for the six months ended September 26, 1998 and
September 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
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
REAL GOODS TRADING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands except share data)
September 26,
1998
ASSETS
Current Assets
Cash $1,684
Accounts Receivable, net of allowance of $6 281
Note receivable from affiliate 111
Inventories 2,562
Deferred catalog costs, net 405
Prepaid expenses 166
Total current assets 5,209
Property, equipment and improvements, net 3,524
Intangible assets and other assets, net 151
Income taxes receivable 357
Total assets $9,241
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities
Accounts payable $1,027
Accrued expenses 443
Customer deposits 103
Current maturities of long-term debt 18
Deferred income taxes 23
Other taxes payable 42
Total current liabilities 1,656
Long-term debt 560
Total liabilities 2,216
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 (170)
Total shareowners' equity $7,025
Total liabilities and shareowners' equity $9,241
See notes to condensed consolidated financial statements
REAL GOODS TRADING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except share data)
Three Months Ended Six Months Ended
9/26/98 9/27/97 9/26/98 9/27/97
Net Sales $3,534 $3,337 $6,589 $6,556
Cost of sales 2,014 1,781 3,713 3,476
Gross Profit 1,520 1,556 2,876 3,079
Selling, general
and administrative
expenses 1,701 1,701 3,382 3,444
Loss from operations (181) (145) (506) (365)
Interest income
(expense)net of
interest expense 9 (25) 29 (55)
Loss before
income taxes (172) (170) (477) (420)
Income tax benefit 68 68 190 168
Net Loss $ (104) $ (102) $ (287) $ (252)
Net Loss per share $(0.03) $(0.03) $(0.07) $(0.07)
Weighted
average shares
outstanding 4,032,800 3,405,203 3,950,760 3,404,503
See notes to condensed consolidated financial statements
REAL GOODS TRADING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
September 26, September 27,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (287) $ (252)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 173 151
Changes in assets and liabilities:
Accounts receivable (71) (145)
Note receivable from affiliate (111) -
Inventory (226) (237)
Deferred catalog costs 34 (319)
Prepaid expenses 48 (323)
Income taxes receivable (190) (168)
Accounts payable 301 801
Accrued expenses 98 (4)
Other taxes payable 8 (46)
Customer deposits (331) 527
Net cash used in operating activities (554) (15)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment, improvements,
and construction in progress (205) (198)
Proceeds from sale of equipment
and other assets 19 35
Net cash used in investing activities (186) (163)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt (7) (23)
Sale of common stock 1,130 20
Net cash provided by (used in)
financing activities 1,123 (3)
Net increase (decrease) in cash 383 (181)
Cash at beginning of period 1,301 513
Cash at end of period $ 1,684 $ 332
See notes to condensed consolidated financial statements
REAL GOODS TRADING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 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 September 26, 1998 and
the interim results of operations for the three and six months
ended September 26, 1998 and September 27, 1997 and cash flows
for the six months ended September 26, 1998 and September 27,
1997. Certain reclassifications have been made in the September
1997 financial statements to conform to the September 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 six 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 and
majority shareowner. On September 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 September 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. In a unanimous resolution 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 September 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. In addition, further options for 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
The Company has been 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 are deceptive,
untrue or misleading. The suit seeks restitution for the amount
of revenues derived from these products over the four years prior
to this suit and attorney's fees.
The Company intends to defend the matter aggressively. No
reserves for this action have been established as of September
26, 1998.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES
Net sales for the first six months of fiscal 1999 were
$6,589,000, which was slightly up from $6,556,000 in the first
six months of the previous year. A drop in catalog sales was
offset by increases in retail division and renewable energy
division sales, reflecting the Company's strategic direction of
placing more emphasis on retail stores.
Catalog net sales for the first six months of fiscal 1999 were
down 13% to $3,536,000 compared with $4,078,000 in the previous
year. The main reasons for the decrease were a lower response
rate to the Company's Real Goods catalog and discontinuation of
the Earth Care catalog. Catalog sales were 54% of total net sales
in the first half of fiscal 1999, compared with 62% of total net
sales in fiscal 1998.
Retail store sales in the first six months of fiscal 1999
increased 23% to $1,704,000 compared to $1,383,000 for the same
period in the previous year. In August 1997, the Company sold
its Snow Belt store, which accounted for $262,000 in sales in the
first six months of fiscal 1998. Also, the Company opened a new
store in Berkeley, CA, in November 1997 and it contributed
$494,000 to the retail sales total in the first half of fiscal
1999. Sales at the Hopland store were down while sales at the
Eugene, Oregon store increased.
Retail stores amounted to 26% of total net sales in the first
half of fiscal 1999, compared with 21% of total net sales in the
same period last year. The Company is continuing to examine and
revise its retail store format prior to opening additional
retail stores.
Renewable energy sales in the first six months of fiscal 1999
increased 28% to $1,349,000 compared to $1,053,000 for the same
period in fiscal 1998. The primary reason for this increase is
the consumers' utilization of 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 21% of total net sales, compared with 16% in fiscal
1998.
For the three months ended September 26, 1998, the Company's net
sales increased 6%, or $197,000 to $3,534,000 compared to
$3,337,000 in the previous period. Net catalog sales for the
three months were down 10% to $1,783,000 compared to $1,975,000
for the same period in the previous year for the reasons cited
above. Retail store sales for the three months were $942,000, an
increase of 28% over the previous year's sales of $738,000.
Sales for the three months reflect comparable operations at the
Hopland and Eugene stores. The increase in retail sales was due
to stronger sales at Berkeley and Eugene and stronger demand for
renewable energy products at these locations, in part stimulated
by increasing concern for the potential Year 2000 (Y2K) computer
uncertainties. Renewable energy sales increased 35% to $809,000
compared to $598,000 for the previous year.
GROSS PROFIT
For the first six months of 1999, gross profit dropped to 43.7%
of sales, or $2,876,000, compared to 47.0%, or $3,079,000 of
sales, for the first six months of fiscal 1998. The Company's
gross margins decreased in the six month period, primarily due to
increased cost of product, 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
first half of fiscal 1999, compared with the first half of fiscal
1998.
For the first six months ended September 26, 1998, catalog sales
had a gross profit of $1,743,000, or 49.3% of sales, compared to
$2,107,000, or 51.6% of sales for the previous period. Retail
store sales had a gross margin of $686,000, or 40.3% of sales,
compared to $562,000 of sales, or 40.6% in the previous period.
Renewable energy sales had a gross margin of 33.2%, or $448,000,
compared to 35.1% of sales or $369,000 for the previous period.
For the three months ended September 26, 1998, gross profit
decreased to 43.0% of sales, or $1,520,000, compared to 46.6% of
sales, or $1,556,000 all for the reasons cited above. Catalog and
retail sales showed decreases in gross profit over the same
periods in the previous year, and renewable energy sales were at
a more historical rate in comparison to the previous period.
Catalog sales had a gross profit of $889,000, or 49.9% of sales,
compared to $1,009,000, or 51.1% of sales for the previous
period. Retail store sales had a gross profit of $379,000, or
40.2% of sales, compared to $299,000, or 40.4% of sales in the
previous period. The decline in gross profit for retail
is attributed to a much larger portion of retail sales being
renewable energy product sales, compared with catalog product
sales. Renewable energy sales had a gross profit of $253,000, or
31.3% of sales, compared to $223,000, or 37.3% of sales in the
previous year.
OPERATING EXPENSES
Selling, general and administrative expenses were $3,382,000, or
51.3% of sales for the six months ending September 26, 1998,
compared to $3,444,000, or 52.5% for the previous year. Selling,
general and administrative expenses amounted to $1,701,000, or
48.1% for the quarter, compared to $1,701,000, or 51.0% for the
same period last year.
The Company has been effective in controlling operating costs,
despite first quarter increases that occurred in labor,
depreciation, and fixed charges such as rent. Depreciation
in the first half of fiscal 1999 was $173,000, compared with
$151,000 in the previous year. Savings in operating expenses have
been made in the areas of advertising, postage and freight,
purchases of supplies and equipment, and interest expense.
INTEREST EXPENSE AND OTHER INCOME
The Company had $10,000 of net interest income in the first six
months, compared to $55,000 of net interest expense in the same
period of the prior year. The Company also had a gain of $19,000
on the sale of equipment in the first half of fiscal 1999.
EARNINGS
The Company had a before-tax loss of $477,000 and a net loss of
$287,000, or $0.07 per share for the first six months of fiscal
1999. In the previous year, the Company had a before-tax loss of
$420,000 and a net loss of $252,000, or $0.07 per share. For the
three months ended September 26, 1998, the Company had a
before-tax loss of $172,000 with a net loss of $104,000, or $0.03
per share, compared to a before-tax loss of $170,000 and a net
loss of $102,000, or $0.03 per share in the comparable prior
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
During the six months ended September 26, 1998, $554,000 was used
by operations primarily for inventory, receivables, income taxes
receivable, and customer deposits. These increases in uses of
cash were offset by increases in accounts payable and accrued
expenses of $399,000. The Company's direct public offering
generated net proceeds to the Company of $1,130,000 in the first
six months of fiscal 1999. The Company spent $205,000 on capital
assets and received $19,000 on the sale of assets in the first
six months of fiscal 1999 compared with $198,000 spent on assets
and $35,000 received from the sale of assets in fiscal 1998.
The net effect of all cash flows was a net increase to cash of
$383,000 in the first half of fiscal 1999, compared with a net
decrease in cash of $181,000 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
November 1, 1998 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 accomplished in the
normal course of business as periodic software and hardware
upgrades.
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 no 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.
*****
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.
The Annual Meeting of shareowners of Real Goods Trading
Corporation was held on August 15, 1998. The following persons
were elected to serve as Directors of the Corporation for a term
of one year or until their successors are elected and qualified:
Withheld, against
For and abstentions
Linda Francis 3,001,210 938,370
John Lenser 3,002,307 937,273
Stephen Morris 3,003,464 936,116
Barry Reder 3,001,473 938,107
John Schaeffer 3,001,105 938,475
Sam Salkin 1,808,612 * *
*Proxy holder elected not to cast proxy votes for last
available seat.
The number of shares issued, outstanding and entitled to vote at
the meeting was 3,939,580.
Item 5. Other Information.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
July 20, 1998 - News Release
Real Goods Completes Third Direct Public
Offering
July 29, 1998 - Revised News Release of July 20, 1998
Real Goods Completes Third Direct Public
Offering
August 24, 1998 - News Release
Real Goods Announces Stock Repurchase Program
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: November 6, 1998
by: LESLIE B. SEELY
Leslie B. Seely
Chief Financial Officer