U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________
TO ____________
Commission File Number 1-12614
SEVENTH GENERATION, INC.
(Exact name of small business issuer as specified in its charter)
Vermont 03-0300509
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
1 Mill Street, Box A26, Burlington, VT 05401-1530
(Address of principal executive offices)
(802) 658-3773
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(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 Exchange Act 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 [ ]
The number of shares of Common Stock, $.000333 par value, outstanding as of
July 31, 1997 was 2,428,791. The number of Redeemable Common Stock Purchase
Warrants outstanding as of July 31, 1997 was 1,562,994.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
TOTAL NUMBER OF PAGES: 22 EXHIBIT INDEX APPEARS ON PAGE: 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
ASSETS
June 30, December 31,
1997 1996
(Unaudited)
Current assets:
Cash and cash equivalents $ 304,833 $ 1,233,006
Short-term marketable securities 504,965
Accounts receivable-trade, net of allowance
for doubtful accounts of $18,703
at March 31, 1997 and
$20,191 at December 31, 1996 879,901 480,568
Accounts receivable-other 2,285 3,868
Inventories 276,794 234,349
Other assets 80,227 153,117
----------- ------------
Total current assets 2,049,005 2,104,908
----------- ------------
Equipment:
Computer equipment 56,935 45,636
Office equipment and furniture 33,863 32,648
----------- ------------
90,798 78,284
Less accumulated depreciation and amortization 60,488 54,926
----------- ------------
Equipment, net 30,310 23,358
----------- ------------
Deposits and other assets 12,089 11,427
----------- -----------
Total assets $ 2,091,404 $ 2,139,693
=========== ===========
See accompanying notes to financial statements
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1997 1996
(Unaudited)
Current liabilities:
Current installments of subordinated
convertible debentures $ 620,000 $
Accounts payable-trade 268,325 234,499
Other accrued expenses 206,142 188,918
----------- ------------
Total current liabilities 1,094,467 423,417
Long-term debt:
Subordinated convertible debentures,
excluding current installments 200,000 820,000
----------- ------------
Total liabilities 1,294,467 1,243,417
----------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.001 par value;
2,500,000 shares authorized; none issued
Common stock-$.000333 par value;
15,000,000 shares authorized; 2,428,791
shares issued and outstanding in
1997 and 1996 809 809
Additional paid-in capital 12,264,623 12,264,623
Accumulated deficit (11,468,495) (11,369,156)
----------- ------------
Total stockholders' equity 796,937 896,276
----------- ------------
Total liabilities and stockholders' equity $ 2,091,404 $ 2,139,693
=========== ============
See accompanying notes to financial statements
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
For the Three Months Ended
June 30, June 30,
1997 1996
(Unaudited) (Unaudited)
Sales $ 1,693,035 $ 1,240,013
Cost of sales 1,182,286 943,573
----------- ------------
Gross profit 510,749 296,440
Other operating income 100,000
----------- ------------
610,749 296,440
Operating expenses: ----------- ------------
Selling and marketing expenses 312,894 222,677
Operations and distribution expenses 116,194 88,050
General and administrative expenses 198,363 144,080
----------- ------------
Total operating expenses 627,451 454,807
----------- ------------
Other income (expense):
Interest income 11,557 13,668
Interest expense (20,942) (20,989)
Other (238) (239)
----------- ------------
Total other expense, net (9,623) (7,560)
----------- ------------
Net loss $ (26,325) $ (165,927)
=========== ============
Loss per common share: $ (0.01) $ (0.07)
Weighted average shares outstanding
during the period 2,428,791 2,428,791
See accompanying notes to financial statements
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
For the Six Months Ended
June 30, June 30,
1997 1996
(Unaudited) (Unaudited)
Sales $ 3,263,200 $ 2,558,617
Cost of sales 2,271,613 1,835,510
----------- -----------
Gross profit 991,587 723,107
Other operating income 100,000 12,500
----------- -----------
1,091,587 735,607
----------- -----------
Operating expenses:
Selling and marketing expenses 584,253 443,425
Operations and distribution expenses 221,033 208,705
General and administrative expenses 361,602 312,138
----------- -----------
Total operating expenses 1,166,888 964,268
----------- -----------
Other income (expense):
Interest income 18,093 32,265
Interest expense (41,655) (44,658)
Other (476) (476)
----------- -----------
Total other expense, net (24,038) (12,869)
----------- -----------
Net loss (99,339) (241,530)
=========== ===========
Loss per common share $ (0.04) $ (0.10)
Weighted average shares outstanding during
the period 2,428,791 2,428,791
See accompanying notes to financial statements
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
For the Six Months Ended
June 30, June 30,
1997 1996
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (99,339) $ (241,530)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,562 4,940
Provision for doubtful accounts 500 15,010
Gain on short-term securities (4,965)
Changes in assets and liabilities:
Increase in accounts receivable-trade (399,833) (28,644)
Decrease (increase) in accounts receivable-other 1,583 11,705
Increase in inventories (42,445) (78,366)
Decrease (increase) in other assets 72,890 4,214
Increase in deposits and other assets (662) (1,724)
Increase in accounts payable-trade 33,826 13,248
Increase (decrease) in accrued expenses 17,224 76,192
(Decrease) in deferred income (12,500)
----------- ------------
Net cash used in operating activities (415,659) (237,455)
----------- ------------
Cash flows from investing activities:
Purchase of short-term securities (500,000)
Purchases of equipment (12,514) (3,726)
----------- ------------
Net cash used in investing activities (512,514) (3,726)
----------- ------------
Cash flows from financing activities:
Principal payments on subordinated
convertible debentures (180,000)
----------- ------------
Net cash used in financing activities 0 (180,000)
----------- ------------
Net decrease in cash and cash equivalents (928,173) (421,181)
Cash and cash equivalents, beginning of period 1,233,006 1,609,476
----------- ------------
Cash and cash equivalents, end of period $ 304,833 $ 1,188,295
=========== ============
See accompanying notes to financial statements
SEVENTH GENERATION, INC.
Notes to Consolidated Financial Statements
June 30, 1997 and 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
consolidated financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair statement of the interim
financial data have been included. Results from operations for the six month
period ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 1997.
For further information, please refer to the financial statements and footnotes
filed as Item 7 in the Form 10-KSB for Seventh Generation, Inc. for the fiscal
year ended December 31, 1996, under Commission File # 1-12614.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Business.
Seventh Generation, Inc. (the "Company") began operations in 1988 for the
purpose of marketing a variety of environmentally friendly consumer products
primarily through its mail-order catalog. In 1992 the Company began selling
its Seventh Generation brand products to retailers on a wholesale basis. Since
the sale of the catalog in May 1995, the Company focuses exclusively on the
wholesale business.
Principles of Consolidation.
Effective January 1, 1994, Seventh Generation, Inc. formed a wholly owned
subsidiary, Seventh Generation Wholesale, Inc., to carry on the operations of
its wholesale business. The accompanying Consolidated Financial Statements
include all of the accounts of Seventh Generation, Inc. and its wholly owned
subsidiary, Seventh Generation Wholesale, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition, Sales Discounts and Sales Returns.
Sales are recorded upon shipment of products to customers. The Company
maintains an allowance for estimated future sales returns and doubtful accounts.
Revenue is recorded net of sales discounts.
Cash and Cash Equivalents.
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less and are valued at cost.
Inventories.
Inventories include purchased goods, which are stated at the lower of cost or
market using the first-in, first-out (FIFO) method.
Equipment.
Equipment is recorded at cost net of depreciation using the straight-line
method over the estimated useful lives of the assets. When assets are sold,
retired or otherwise disposed of, the applicable costs and accumulated
depreciation are removed from the accounts and the resulting gain or loss is
recognized.
Net (Loss) Income Per Common Share.
Net (loss) income per common share is computed by dividing net (loss) income by
the weighted average number of common shares outstanding during the respective
periods. The impact of the stock options and warrants outstanding as common
stock equivalents was not dilutive for the three months ended June 30, 1997 and
1996 or for the six months ended June 30, 1997 and 1996 and thus did not affect
net (loss) income per common share in the respective periods.
Short-Term Investments.
Short-term investments consist of marketable debt securities, which are
recorded at market value.
3. TRANSACTIONS WITH GAIAM
In 1995, the Company reached the conclusion that the financial resources
necessary to develop both the catalog and wholesale businesses were beyond
its means. The Company sold the assets of the catalog business to
Gaiam Inc. (Gaiam) on May 24, 1995.
The Company also entered into Licensing, Operating (subsequently re-named the
"Reimbursement Agreement") and Supply Agreements with Gaiam. Under the Licensing
Agreement, Gaiam operates a catalog using the Seventh Generation(r) name in
consideration for which Gaiam paid the Company a fee of $200,000, of which
$12,500 was recognized in 1996 and $187,500 in 1995 as other operating income.
The Licensing Agreement also requires Gaiam to pay an annual non-refundable
licensing fee of $100,000 commencing on May 24, 1997 if Gaiam continues to use
the Seventh Generation(r) name, which the Company received on June 4, 1997. This
licensing fee requires no further performance by the Company and has been
received in full. Gaiam has announced that it plans to change the name on the
mail order catalog it purchased from the Company to "Harmony" and may choose at
any time to discontinue use of the Seventh Generation(r) name. Accordingly, the
Company does not anticipate any further renewals of this Agreement.
Pursuant to the Reimbursement Agreement, the Company's President and his
assistant assisted Gaiam with the operation of its catalog, and certain office
equipment expenses had been shared between the two companies. The original
Operating Agreement expired on January 31, 1996. A new Agreement of more
limited scope was signed on April 11, 1996, covering the period from February
1, 1996 to December 31, 1996. During the three months ended June 30, 1996, the
Company was reimbursed for approximately $24,000 of expenses. During the six
months ended June 30, 1996, the Company was reimbursed for approximately $56,000
of expenses. The Reimbursement Agreement terminated at the end of 1996.
Pursuant to a Supply Agreement with Gaiam, the Company now sells its brand name
products to Gaiam, which Gaiam resells through its mail order catalog. These
sales increased the Company's wholesale sales in the first six months of 1997
and in 1996. Gross margins from these sales are lower than on natural products
and supermarket sales. Under a provision of the Supply Agreement, Gaiam is
obligated to purchase from the Company a minimum of $2,500,000 of brand name
products over a three year period, beginning May 24, 1995, at cost plus
20%. After Gaiam has purchased this minimum amount of product, the Company is
required to sell additional product to Gaiam at cost plus 5%. During the three
months ended June 30, 1997, Gaiam purchased approximately $340,000 of product
under the terms of the Supply Agreement, of which approximately $283,000 is
applicable towards the minimum. Sales to other customers for the three months
ended June 30, 1997 were approximately $1,353,000, yielding approximately
$454,000 in gross profit (33.5%). During the three months ended June 30, 1996,
sales to Gaiam were approximately $392,000. Sales to other customers
were approximately $848,000. During the six months ended June 30, 1997,
Gaiam purchased approximately $649,000 of product under the terms of the Supply
Agreement, of which approximately $540,000 is applicable towards the minimum.
Sales to other customers for the six months ended June 30, 1997 were
approximately $2,614,000, yielding approximately $883,000 in gross profit
(33.8%). During the six months ended June 30, 1996, sale to Gaiam were
approximately $666,000. Sales to other customers for the six months ended June
30, 1996 were approximately $1,892,000. As of June 30, 1997, Gaiam has
purchased approximately $2,837,000 of product under the Supply Agreement, of
which approximately $2,362,000 is applicable toward the minimum, leaving a
balance to purchase of approximately $138,000. The Company anticipates that
Gaiam will fulfill its obligations under the Supply Agreement at some point
in the third quarter of 1997.
4. SUBORDINATED CONVERTIBLE DEBENTURES
June 30, 1997 December 31, 1996
Subordinated convertible debentures
consist of the following:
10% subordinated convertible debentures,
unsecured, due February 28, 1998,
convertible at a price per
common share of $6.67 $620,000 $620,000
10% subordinated convertible debentures,
unsecured, due November 30, 1998,
convertible at a price per
common share of $6.67 100,000 100,000
12% subordinated convertible debentures, unsecured,
due February 28, 2002, convertible at a price per
common share of $6.67 100,000 100,000
--------- ---------
Total subordinated convertible debentures 820,000 820,000
Less current installments (620,000) 0
--------- ---------
Subordinated convertible debentures,
less current installments $ 200,000 $ 820,000
========= =========
During 1996, the holder of a $100,000 subordinated convertible debenture due
February 28, 1997 agreed to extend the due date of that debenture to February
28, 2002.
During 1995, the holders of $240,000 in subordinated convertible debentures
due February 28, 1995 agreed to extend the due dates for $180,000 of those
debentures to February 28, 1996. The $180,000 was paid with accrued interest
in February 1996.
The number of shares of common stock reserved for the potential conversion of
these debentures was 122,940 at June 30, 1997 and December 31, 1996.
5. COMMITMENTS AND CONTINGENCIES
Uncertainties:
The Company has historically incurred losses from operations, which have
resulted, in part, from its catalog operations. In 1995, the Company sold the
catalog business and focused on expanding sales through the wholesale
distribution channels. The Company relies on a limited number of wholesale
distributors, including Gaiam, the purchaser of the Seventh Generation catalog.
If the number of distributors was reduced or any of the Company's principal
customers do not meet their commitments, the Company may not have adequate
liquidity.
From time to time, the Company is engaged in various types of disputes
concerning trademark issues, product performance and liability issues, and
other matters in the ordinary course of business.
Contractual Obligation:
The Company's contractual relationship under the Supply Agreement with Gaiam,
the purchaser of the catalog, will change. Gaiam's obligation to purchase
product at a 20% markup will change to cost plus a 5% markup in the third
quarter of 1997 (which is when the Company believes Gaiam will fulfill its
obligations under the Supply Agreement), which will reduce the Company's sales
and contribution margin from Gaiam.
6. NEW ACCOUNTING STANDARD
Statement of Accounting Standards No. 128 - "Earnings Per Share"
Effective December 15, 1997, the Company is required to adopt Financial
Accounting Standard No. 128, "Earnings per Share." This Standard requires both
basic and diluted earnings per share to be reported for all periods presented.
When loss per common share is calculated in accordance with this Standard, for
the three and six months ended June 30, 1997 and 1996, basic and diluted loss
per common share do not significantly differ from reported amounts.
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Overview
With the exception of historical information, the matters discussed in the
following analysis are forward-looking statements, as that term is defined
in the Private Securities Litigation Reform Act of 1995. The Company cautions
investors that there can be no assurance that actual results or business
conditions will not differ materially from those projected or suggested in
such forward-looking statements as a result of various risk factors, including,
but not limited to, continuing relationships with and purchasing patterns of the
Company's key customers, the stability of the Company's suppliers, their
manufacturing capacity and the availability of raw materials, economic
conditions, the regulatory and trade environment, competitive products and
pricing, the risk of entering into new market segments, product demand,
ability to enforce trademarks, and other unforeseen risks and uncertainties.
Seventh Generation, Inc.'s primary strategic objective is to establish Seventh
Generation(r) as the leading brand name for environmentally responsible consumer
products. The Company believes that today it is one of the leading marketers of
environmentally friendly household products in the United States. The Company
sells Seventh Generation(r) brand name products through distributors to natural
products stores throughout the United States and in Western Canada, is expanding
sales of its brand name products into upscale supermarkets primarily in the
Northeast and West Coast, and the Company is developing new distribution
channels primarily in partnership with schools and other non-profit
organizations seeking to raise funds. The Company has recently started two
programs: "Shop & Care"(TM) and "Learning to Make a Difference"(TM), which the
Company designed to help schools and other non-profit organizations raise funds
by selling the Company's products. The Company's products are also marketed
through the Seventh Generation(r) mail order catalog (the "Catalog"), which
was sold to Gaiam on May 24, 1995, and is operated by Gaiam using the Seventh
Generation(r) trademarked name pursuant to a Licensing Agreement further
described below.
Seventh Generation(r) brand name products include: paper towels, bathroom and
facial tissues, napkins and paper plates that are made from 100% recycled fiber
and are manufactured without the use of chlorine bleach; cleaning and laundry
products that are non-toxic, renewable-resource based, phosphate-free and
biodegradable; plastic trash bags made from 100% recycled plastic; and feminine
hygiene products. The Company markets and distributes, but does not
manufacture, its products.
Seventh Generation(r) brand name products are available in natural products
retail stores. In the first six months of 1997, the Company's sales to the
natural products industry grew in comparison to sales in the first six months
of 1996 as a result of continued market penetration, increased consumer
promotions, and new product introductions. The Company plans to continue its
efforts to introduce new products and expand distribution in the natural
products industry.
In January 1995, the Company made its first sales to supermarkets in the
Northeastern United States. The Company's sales efforts are focused primarily
on upscale supermarket retailers and wholesalers.
The Company plans to continue with its primary focus of expanding distribution
in the natural products industry and to continue sales to supermarket chains in
the Northeast and West Coast, coupled with brand name product sales to mail
order catalogs, primarily the mail order catalog operated by Gaiam. The
Company continues to explore other opportunities to expand distribution,
including the new "Learning to Make a Difference"(TM) and "Shop & Care"(TM)
programs.
Results of Operations:
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Operations
Sales to the natural products industry, supermarkets, Gaiam, and other
customers increased $453,022, or 36.5%, during the three months ended June 30,
1997 to $1,693,035, compared to $1,240,013 during the three months ended June
30, 1996. This favorable performance was due primarily to the continued growth
of sales to the natural products industry and the growth of sales to other
customers.
Gross profit was $510,749, compared to $296,440 during 1996, an increase of
$214,309, or 72.3%. Gross profits increased to 30.2% as a percentage of sales
in the 1997 period, compared to 23.9% in 1996, due primarily to the changing mix
of sales.
Operating expenses increased 0.4% as a percentage of sales from 36.7% of sales
in the 1996 period to 37.1% of sales for the 1997 period. Operating expenses
were $627,451 in the three months ended June 30, 1997 compared to $454,807
during 1996. The additional expenditures were due primarily to additional
variable selling and marketing expenses and increased general and administrative
expenses. Sales and marketing expenses were 18.5% of sales in the three months
ended June 30, 1997 and 18.0% of sales in 1996. Operations and distribution
expenses increased to $116,194 from $88,050 in the 1996 period. This increase
was due primarily to an increase in outbound freight costs, which increase with
higher sales volume. General and administrative expenses were 11.7% of sales,
compared to 11.6% in the 1996 period.
The net loss in 1997 was $26,325, compared to $165,927 in 1996, a decrease of
$139,602. The decrease is a result, in part, by the receipt of a $100,000
non-refundable licensing fee for the use of the Seventh Generation(r) name on
the Gaiam mail order catalog and increased sales volume. This licensing fee
requires no further performance by the Company and has been received in full.
The decrease in net loss was also achieved despite a decrease of approximately
$24,000 in reimbursements from Gaiam under the Reimbursement Agreement and the
increased operating expenses listed above. Net interest expense increased in
1997 as a result of a lower rate of return realized on investments in 1997 and
a lower amount of cash available for investment.
Transactions with Gaiam
Pursuant to a Supply Agreement with Gaiam, the Company now sells its brand name
products to Gaiam, which Gaiam resells through its mail order catalog. These
sales increased the Company's wholesale sales in the first quarter of 1997 and
in 1996. Gross margins from these sales of 16.7% are lower than on sales to the
natural products industry and supermarkets. As part of the Supply Agreement,
Gaiam is obligated to purchase from the Company a minimum of $2,500,000 of brand
name products over a three year period, beginning May 24, 1995, at cost plus
20%. After Gaiam has purchased this minimum amount of product, the Company is
required to sell additional product to Gaiam at cost plus 5%. During the three
months ended June 30, 1997, Gaiam purchased approximately $340,000 of product
under the terms of the Supply Agreement, of which approximately $283,000 is
applicable towards the minimum. As of June 30, 1997, Gaiam has purchased
approximately $2,837,000 of product under the Supply Agreement, of which
approximately $2,362,000 is applicable toward the minimum, leaving a balance to
purchase of approximately $138,000. The Company anticipates that Gaiam will
fulfill its obligations under the Supply Agreement at some point in the third
quarter of 1997.
The Company also entered into an Operating Agreement whereby some of the
Company's management assisted Gaiam with the operation of its Seventh
Generation(r) mail order catalog, and certain office and personnel expenses were
shared between the two companies. The Operating Agreement expired on January
31, 1996. A new Agreement, the "Reimbursement Agreement," of more limited scope
than the Operating Agreement, was signed on April 11, 1996, covering the period
from February 1, 1996 to December 31, 1996. During the three months ended
June 30, 1996, the Company was reimbursed approximately $24,000 under these
agreements. The Reimbursement Agreement terminated at the end of 1996. The
Company was reimbursed for approximately $109,000 of expenses during the year
ended December 31, 1996. As a result of the termination of these agreements,
the Company will incur approximately $109,000 in additional expenses for the
year ended December 31, 1997. This will, however, allow Jeffrey Hollender, the
Company's President and CEO, to devote 100% of his time to the Company's
wholesale business.
The Company also entered into a Licensing Agreement with Gaiam, pursuant to
which the Company has granted Gaiam the limited right to use the Seventh
Generation(r) trademark in connection with a consumer mail order catalog. Gaiam
has paid the Company an initial license fee of $200,000 and an annual license
fee of $100,000 for continued use of the rights through May 23, 1998. Gaiam
has announced that it plans to change the name on its mail order catalog to
"Harmony" and may choose at any time to discontinue use of the Seventh
Generation(r) name. Accordingly, the Company does not anticipate any further
renewals of this Agreement. No licensing revenue was recognized during the
three months ended June 30, 1996.
If Gaiam reduces or terminates product purchases, the Company's rate of
increase in revenues is likely to slow. However, the Company may experience
increased gross margins since the Company sells product to Gaiam at lower prices
than to other customers. If Gaiam continues to purchase product at the same
rate or increases its purchases, the Company may experience decreased gross
margin as a percentage of sales since the Company will sell product to Gaiam
at cost plus a 5% markup. The Company cannot predict the net impact its
relationship with Gaiam will have on the Company's results from operations.
Summary
Sales during the three months ended June 30, 1997 increased $453,022, or 36.5%
to $1,693,035, compared to $1,240,013 during the 1996. Gross profit was
$510,749, or 30.2% of sales, compared to $296,440, or 23.9% of sales during
the same period in 1996. Operating expenses increased 0.4% as a percentage
of sales to 37.1% of sales, compared to 36.7% of sales in 1996. The net loss
for the three months ended June 30, 1997 was $26,325, compared to $165,927 in
1996, a decrease of $139,602, although the Company received $100,000 in
licensing revenue in the 1997 period. Included as a reduction in expenses
during the 1996 period is approximately $24,000 in reimbursements from Gaiam.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Operations
Sales to natural products accounts, supermarkets, Gaiam, and other customers
increased $704,583, or 27.5%, during the six months ended June 30, 1997 to
$3,263,200, compared to $2,558,617 during the six months ended June 30, 1996.
This favorable performance was due primarily to the continued growth of sales to
the natural products industry and the growth of sales to other customers.
Gross profit was $991,587, compared to $723,107 during 1996, an increase of
$268,480, or 37.1%. Gross profits increased to 30.4% as a percentage of sales
in the 1997 period, compared to 28.3% in 1996, due primarily to the changing
mix of sales.
Operating expenses decreased 1.9% as a percentage of sales from 37.7% of sales
in the 1996 period to 35.8% of sales for the 1997 period. Operating expenses
were $1,166,888 in the six months ended June 30, 1997 compared to $964,268
during 1996. While operating expenses declined as a percentage of sales, the
additional expenditures were due primarily to additional variable selling and
marketing expenses, variable freight costs, and a reduction in reimbursements
from Gaiam. Sales and marketing expenses were 17.9% of sales in the first
six months of 1997 and 17.3% of sales in 1996. Operations and distribution
expenses were 6.8% of sales in the first six months of 1997, compared to 8.2%
of sales in 1996. This improvement can primarily be attributed to the growth
in sales during the 1997 period. General and administrative expenses were
11.1% of sales, compared to 12.2% in the 1996 period. This favorable
performance can be primarily attributed to reductions in bad debt expense and
in legal fees as well as the aforementioned increase in sales. Included as a
reduction in operating expenses during 1996 is the effect of reimbursement by
Gaiam to the Company of approximately $56,000 under the Reimbursement Agreement
described below.
The net loss in 1997 was $99,339, compared to $241,530 in 1996, a decrease of
$142,191. The decrease was the result, in part, of an increase in licensing
revenue of $87,500 for the use of the Seventh Generation(r) name on the Gaiam
mail order catalog (despite a decrease of approximately $56,000 in
reimbursements from Gaiam under the Operating and Reimbursement Agreements)
and the increased operating expenses listed above. Interest expense decreased
in 1997 as a result of the repayment of $180,000 in subordinated convertible
debentures in February of 1996. Interest income declined as a result of lower
cash reserves and a lower rate of return realized on investments in 1997.
Transactions with Gaiam
During the six months ended June 30, 1997, Gaiam purchased approximately
$649,000 of product under the terms of the Supply Agreement, of which
approximately $541,000 is applicable towards the minimum. The Company
anticipates that Gaiam will fulfill its obligations under the Supply Agreement
at some point in the third quarter of 1997.
During the first six months of 1996, the Company was reimbursed approximately
$56,000 under the Operating and Reimbursement agreements. The Operating
Agreement terminated on January 31, 1996. The Reimbursement Agreement
terminated at the end of 1996.
During the first six months of 1997, $100,000 of non-recurring licensing
revenue was recognized as compared to $12,500 in the 1996 period.
If Gaiam reduces or terminates product purchases, the Company's rate of
increase in revenues is likely to slow. However, the Company may experience
increased gross margins since the Company sells product to Gaiam at lower
prices than to other customers. If Gaiam continues to purchase product at the
same rate or increases its purchases, the Company may experience decreased
gross margin as a percentage of sales since the Company will sell product to
Gaiam at cost plus a 5% markup. The Company cannot predict the net impact its
relationship with Gaiam will have on the Company's future results from
operations.
Summary
Sales during the first six months of 1997 increased $704,583, or 27.5%
to $3,263,200, compared to $2,558,617 during the first six months of 1996.
Gross profit was $991,587, or 30.4% of sales, compared to $723,107, or 28.3%
of sales during 1996. Operating expenses decreased 1.9% as a percentage of
sales to 35.8% of sales during the first six months of 1997, compared to 37.7%
of sales in 1996. The net loss for the six months ended June 30, 1997 was
$99,339, compared to $241,530 in the first six months of 1996, a decrease of
$142,191. Included in the net loss for the first six months of 1997 is
$100,000 in non-recurring licensing revenue, compared to $12,500 in 1996.
Included as a reduction in expenses during the first six months of 1996 is
approximately $56,000 in reimbursements from Gaiam.
Liquidity and Capital Resources
The Company has historically financed its operations through equity and debt
financing and by the extension of credit from its suppliers. During its
history, the Company has raised $12,265,432 in equity investments, while
generating $11,468,494 in accumulated deficits through June 30, 1997.
On May 24, 1995, the Company sold the assets of the Catalog to Gaiam. The
infusion of cash from the sale, the payments received under the associated
Supply, Operating (subsequently re-named the "Reimbursement Agreement"), and
Licensing Agreements, the elimination of the catalog operating losses, and
the discontinued need for capital resources necessary to fund catalog marketing
costs and inventories, are all significant factors in improving the liquidity
of the Company. The catalog asset sale provided the Company immediate liquidity
and has allowed the Company, through the Supply Agreement, to continue to market
its brand name products in the Seventh Generation(r) mail order catalog, while
reducing the operating loss exposure and capital requirements which had been a
continual drain on the Company's resources. Furthermore, the sale of the
catalog has allowed the Company to concentrate its efforts and resources on
expanding the distribution of its brand name products to the natural products
industry, regional supermarkets, other mail order catalogs, and new channels
of distribution.
While the Company and Gaiam have discussed the possible termination of the
Licensing Agreement and the alteration of the Supply Agreement, Gaiam elected
to renew the Licensing Agreement through May 23, 1998. Gaiam has announced that
it plans to change the name on its mail order catalog to "Harmony" and may
choose at any time to discontinue use of the Seventh Generation(r) name.
This will not affect the $100,000 in non-refundable licensing revenue received
in 1997. In this event, the Company would not receive the $100,000 fee in 1998,
adversely affecting the Company's liquidity. Gaiam's obligation to purchase
product at a 20% markup will terminate in the third quarter of 1997 (which is
when the Company believes Gaiam will fulfill its obligations under the Supply
Agreement) which reduce the Company's gross margin percentage in the future.
If Gaiam reduces or terminates product purchases, the Company's rate of
increase in revenues is likely to slow, and may even decline. However, the
Company may experience increased gross margins since the Company sells product
to Gaiam at lower prices than to other customers. If Gaiam continues to purchase
product at the same rate or increases its purchases, the Company may experience
decreased gross margin as a percentage of sales since the Company will sell
product to Gaiam at cost plus a 5% markup. The Company cannot predict the net
impact its relationship with Gaiam will have on the Company's liquidity or its
results from operations.
The Company's sales strategy is to focus primarily on the natural products
industry and, secondarily, on sales to select supermarkets, mail order catalogs,
and other new distribution channels that the Company is exploring without having
to materially increase its operating costs, including the "Learning to Make a
Difference"(TM) and "Shop & Care" (TM) programs mentioned above. This approach
is designed to reduce the Company's risks by focusing sales efforts on primarily
those accounts that serve customers similar to the Company's current account
base. This has helped to reduce operating expenses and losses as a percentage
of sales.
The Company relies primarily on a non-traditional marketing strategy to
stimulate consumer trial and repeat purchases in natural products stores and
supermarkets, rather than more costly traditional marketing strategies such
as television advertising and mass-delivered consumer promotions. However,
some traditional marketing expenses have been and will continue to be incurred
on a limited basis. Although the Company has started to realize sales to
supermarkets, there can be no assurance that the Company will be successful
with its marketing strategy.
The Company incurred during 1996 and the first six months of 1997, and expects
to continue to incur during the remainder of 1997, expenditures to support the
expansion of its wholesale distribution business. At a minimum, the Company
will need to purchase additional inventory and incur additional marketing
expenses. The Company will also incur expenditures relating to trade and
consumer marketing and research, new product development, package design,
and the development of the "Learning to Make a Difference"(TM) and "Shop &
Care"(TM) programs. If the planned expansion is successful, the Company will
have to increase its inventory and carry a higher level of receivables, both
of which will impact the Company's liquidity.
During the six months ended June 30, 1997, the Company used approximately
$428,000 of its available cash balances. The Company used approximately
$400,000 as accounts receivable expanded with the increase in sales. The
Company used approximately $42,000 of cash to increase its inventories.
Additionally, the Company has increased its accounts payable by approximately
$51,000. As of June 30, 1997, the Company's primary sources of liquidity were
approximately $305,000 in cash, approximately $505,000 in marketable securities,
and approximately $880,000 in accounts receivable. During the first six months
of 1997, the Company invested approximately $505,000 of its cash in short-term
marketable securities.
The Company has three customers whose purchases of the Company's products
accounted for more than 10% each of the Company's total sales in the first
six months of 1997, collectively accounting for 50.0% of the Company's sales.
The loss of any of these customers, a decision by one of them to significantly
reduce its purchases, or any disruption to the relationship the Company
maintains with them, could affect the Company's liquidity.
As the Company continues its expansion into natural products stores and
targeted supermarkets in the Northeast, West Coast, and other targeted markets,
it plans to carefully monitor its expenses, and will focus on reducing them
where possible. During the six months ended June 30, 1997, the Company's net
loss was $99,339, compared to $241,530 in 1996, a decrease of $142,191. In
the 1997 period, licensing revenue of increased $87,500, while the decline in
reimbursements under the Reimbursement Agreement, was approximately $56,000.
The Company may not receive any further licensing revenue and will not receive
reimbursements in the future.
While the Company did not reach operating levels during the first six months of
1997 to allow it to be profitable, management believes that it has taken the
steps necessary to control losses while building the business. Prior to 1996,
the Company experienced liquidity problems from time to time, which resulted in
insufficient resources to pay its creditors within terms. The sale of the
catalog assets to Gaiam, and Gaiam's assumption of certain liabilities and the
significant reduction in operating losses, has significantly improved the
Company's liquidity. The Company is current in all of its obligations. The
Company's working capital as of June 30, 1997 was approximately $954,000, and
the current ratio (current assets/current liabilities) was 1.9 to 1. The
Company believes that the cash infusion from the Catalog sale, together with
a manageable level of operating losses, will allow the Company sufficient
liquidity to pay its obligations on a timely basis at least into the third
quarter of 1998. The Company's longer-term liquidity will depend on the
Company's ability to generate profits from operations and to refinance its
existing indebtedness.
The Company repaid $180,000 in subordinated convertible debentures in February
of 1996. On December 18, 1996, the holder of an outstanding convertible
debenture, with a principal balance of $100,000, agreed to extend the due date
to February 29, 2002. In February 1998, $620,000 of debentures are scheduled to
come due, with an additional $100,000 due in November of 1998. The Company is
actively involved in seeking to extend or refinance these debentures as well as
raising additional funds. The Company's success in these matters will affect
the Company's results from operations and liquidity in 1998. The Company's
inability to extend the due dates of these debentures or replace them with
alternate financing would adversely affect the Company's liquidity. There is
no assurance that the Company will be able to arrange alternate financing.
The Company faced a number of significant challenges prior to 1996. The sale of
the Catalog assets to Gaiam, however, has allowed the Company to eliminate the
losses from its catalog business and put the Company in a significantly improved
liquidity position. Management believes the Company has positioned itself to
control its losses and continue the expansion of its revenue base in order to
achieve profitability, while pursuing its mission of making Seventh
Generation(r) the leading brand of environmentally friendly household products.
New Accounting Pronouncements
Statement of Accounting Standards No. 128 - "Earnings Per Share"
Effective December 15, 1997, the Company is required to adopt Financial
Accounting Standard No. 128, "Earnings per Share." This Standard requires both
basic and diluted earnings per share to be reported for all periods presented.
When income/(loss) per common share is calculated in accordance with this
Standard, for the three and six months ended June 30, 1997 and 1996, basic
and diluted income/(loss) per common share do not significantly differ from
reported amounts.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
The annual meeting of the Stockholders of SEVENTH GENERATION, INC., a Vermont
corporation, was held on Monday, May 5, 1997 at the Company's offices located at
One Mill Street, Burlington, Vermont for the purpose of electing five members to
the Board of Directors to hold office until the next annual meeting of
Stockholders and until their successors are duly elected and qualified.
Board of Directors Election Results:
For Withheld Abstentions
Arthur Gray Jr. 1,961,739 17,700 0
Jeffrey A. Hollender 1,960,889 18,550 0
Sheila Hollender 1,961,889 17,550 0
Joshua Sapan 1,961,289 18,150 0
Peter Graham 1,961,289 18,150 0
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
EXHIBITS:
Exhibit # Description
(11) Statement re: Computation of Loss Per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June 30, 1997.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SEVENTH GENERATION, INC.
Date: August 4, 1997 By: /s/ Jeffrey A. Hollender
Jeffrey A. Hollender
President and Chief Executive Officer
(Principal Executive & Financial Officer)
INDEX TO EXHIBITS
Sequentially
Exhibit Number Numbered Page
11 19
27 21
Exhibit 11
Exhibit 11
SEVENTH GENERATION, INC.
Calculation of Shares Used In Determining Net Loss Per Common Share
Three Months Ended June 30,
1997 1996
Weighted Average Shares Outstanding
During the Period 2,428,791 2,428,791