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, 1996
[ ] 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, 1996 was 2,428,791. The number of Redeemable Common Stock Purchase
Warrants outstanding as of July 31, 1996 was 1,603,080.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
TOTAL NUMBER OF PAGES: 21 EXHIBIT INDEX APPEARS ON PAGE: 17
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
ASSETS
<TABLE>
June 30, December 31,
1996 1995
===================== =====================
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,188,295 $ 1,609,476
Accounts receivable-trade, net of allowance for doubtful
accounts of $79,800 and $56,800 at June 30, 1996 and
December 31, 1995, respectively 614,168 600,534
Accounts receivable-other 37,413 49,118
Inventories 262,343 183,977
Other assets 93,137 97,351
--------------------- ---------------------
Total current assets 2,195,356 2,540,456
--------------------- ---------------------
Equipment:
Computer equipment 40,928 37,990
Office equipment and furniture 28,735 27,948
--------------------- ---------------------
69,663 65,938
Less accumulated depreciation and amortization 47,816 42,877
--------------------- ---------------------
Equipment, net 21,847 23,061
--------------------- ---------------------
Deposits and other assets 15,927 14,203
--------------------- ---------------------
Total assets $ 2,233,130 $ 2,577,720
===================== =====================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
June 30, December 31,
1996 1995
===================== =====================
(Unaudited)
<S> <C> <C>
Current liabilities:
Current installments of subordinated convertible debentures $ 100,000 $ 180,000
Accounts payable-trade 311,755 298,507
Other accrued expenses 182,703 106,511
Deferred income 12,500
--------------------- ---------------------
Total current liabilities 594,458 597,518
Long-term debt:
Subordinated convertible debentures,
excluding current installments 720,000 820,000
--------------------- ---------------------
Total liabilities 1,314,458 1,417,518
--------------------- ---------------------
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 1996 and 1995 809 809
Additional paid-in capital 12,264,623 12,264,623
Accumulated deficit (11,346,760) (11,105,230)
--------------------- ---------------------
Total stockholders' equity 918,672 1,160,202
--------------------- ---------------------
Total liabilities and stockholders' equity $ 2,233,130 $ 2,577,720
===================== =====================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
For the Three Months Ended
June 30, June 30,
1996 1995
=================== ====================
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Sales $ 1,240,013 $ 644,919
Cost of sales 943,573 432,848
------------------- --------------------
Gross profit 296,440 212,071
Other operating income 37,500
------------------- --------------------
296,440 249,571
------------------- --------------------
Operating expenses:
Selling and marketing expenses 222,677 122,748
Operations and distribution expenses 88,050 73,479
General and administrative expenses 144,080 98,294
------------------- --------------------
Total operating expenses 454,807 294,521
------------------- --------------------
Loss from continuing operations (158,367) (44,950)
------------------- --------------------
Other income/(expense):
Interest income 13,668 19,999
Interest expense (20,989) (25,476)
Other (239) (238)
------------------- --------------------
Total other expense, net (7,560) (5,715)
------------------- --------------------
Net loss from continuing operations (165,927) (50,665)
------------------- --------------------
Discontinued operations:
Loss from discontinued operations (45,832)
Gain on disposal of discontinued catalog operation, including
provision for operating losses of $12,390 during phase-out
period (net of income taxes of $2,000 in 1995) 760,105
------------------- --------------------
Income from discontinued operations 714,273
------------------- --------------------
Net income (loss) $ (165,927) $ 663,608
=================== ====================
Income (loss) per common share:
Loss from continuing operations $ (0.07) $ (0.02)
Loss from discontinued catalog operation (0.02)
Gain on disposal of discontinued catalog operation 0.31
------------------- --------------------
Net income (loss) per common share $ (0.07) $ 0.27
=================== ====================
Weighted average shares outstanding during the period 2,428,791 2,428,791
=================== ====================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
For the Three Months Ended
June 30, June 30,
1996 1995
=================== ====================
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Sales $ 2,558,617 $ 1,188,852
Cost of sales 1,835,510 766,557
------------------- --------------------
Gross profit 723,107 422,295
Other operating income 12,500 37,500
------------------- --------------------
735,607 459,795
------------------- --------------------
Operating expenses:
Selling and marketing expenses 443,425 256,566
Operations and distribution expenses 208,705 169,656
General and administrative expenses 312,138 190,405
------------------- --------------------
Total operating expenses 964,268 616,627
------------------- --------------------
Loss from continuing operations (228,661) (156,832)
------------------- --------------------
Other income/(expense):
Interest income 32,265 33,103
Interest expense (44,658) (52,016)
Other (476) (476)
------------------- --------------------
Total other expense, net (12,869) (19,389)
------------------- --------------------
Net loss from continuing operations (241,530) (176,221)
------------------- --------------------
Discontinued operations:
Loss from discontinued operations (123,530)
Gain on disposal of discontinued catalog operation, including
provision for operating losses of $12,390 during phase-out
period (net of income taxes of $2,000 in 1995) 760,105
------------------- --------------------
Income from discontinued operations 636,575
------------------- --------------------
Net income (loss) $ (241,530) $ 460,354
=================== ====================
Income (loss) per common share:
Loss from continuing operations $ (0.10) $ (0.07)
Loss from discontinued catalog operation (0.05)
Gain on disposal of discontinued catalog operation 0.31
------------------- --------------------
Net income (loss) per common share $ (0.10) $ 0.19
=================== ====================
Weighted average shares outstanding during the period 2,428,791 2,428,791
=================== ====================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
For the Six Months Ended
June 30, June 30,
1996 1995
===================== =====================
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (241,530) $ 460,354
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 4,940 7,103
Provision for doubtful accounts 15,010
Changes in assets and liabilities:
(Increase) decrease in accounts receivable-trade (28,644) (18,716)
(Increase) decrease in accounts receivable-other 11,705 (35,567)
(Increase) decrease in inventories (78,366) (6,622)
(Increase) decrease in other prepaid expenses 4,214 36,973
(Increase) decrease in other assets (1,724) 7,793
(Increase) decrease in assets of discontinued catalog
operation - net 464,568
Increase (decrease) in accounts payable-trade 13,248 (105,844)
Increase (decrease) in accrued expenses 76,192 (20,756)
Increase (decrease) in deferred income (12,500) 162,500
--------------------- ---------------------
Net cash used in operating activities (237,455) 951,786
--------------------- ---------------------
Cash flows from investing activities:
Proceeds from disposal of equipment 1,800
Purchases of equipment (3,726)
--------------------- ---------------------
Net cash (used in) provided by investing activities (3,726) 1,800
--------------------- ---------------------
Cash flows from financing activities:
Principal payments on subordinated convertible debentures (180,000) (60,000)
--------------------- ---------------------
Net cash used in financing activities (180,000) (60,000)
--------------------- ---------------------
Net increase (decrease) in cash and cash equivalents (421,181) 893,586
Cash and cash equivalents, beginning of period 1,609,476 1,117,651
--------------------- ---------------------
Cash and cash equivalents, end of period $ 1,188,295 $ 2,011,237
===================== =====================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
SEVENTH GENERATION, INC.
Notes to Financial Statements
June 30, 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, 1996 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 1996.
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, 1995, 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.
Net Loss Per Common Share.
Net loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding during the respective periods.
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.
New Accounting Pronouncements.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(FAS 123). FAS 123 establishes fair value-based method of accounting for
stock-based compensation plans. Entities may either adopt FAS 123 or elect to
continue accounting for the issuance of stock under compensation plans in
accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees".
The Company has not yet selected the accounting method it will use to account
for stock-based compensation plans and has not measured the impact of changing
its method from APB Opinion No. 25 to FAS 123.
3. DISCONTINUED OPERATIONS
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. Accordingly, the results of operations of this business segment
have been accounted for as discontinued operations for all periods in the
Consolidated Statement of Operations. Net sales of discontinued operations were
approximately $713,000 for the three months ended June 30, 1995. Net sales
of discontinued operations were approximately $2,255,000 for the six months
ended June 30, 1995.
The Company also entered into Licensing, Reimbursement and Supply Agreements
with Gaiam. Under the Licensing Agreement, Gaiam operates a catalog using the
Seventh Generation name in consideration for which Gaiam paid the Company a fee
of $200,000 of which $187,500 was recognized in 1995 as other operating income.
The Licensing Agreement also requires Gaiam to pay an annual licensing fee of
$100,000 commencing on May 24, 1997 if Gaiam continues to use the Seventh
Generation name.
Pursuant to the Operating Agreement (subsequently re-named the
"Reimbursement Agreement") the Company's President and his assistant assist
Gaiam with the operation of its catalog, and certain office equipment expenses
are shared between the two companies. This Agreement has helped lower the
Company's overall operating expenses. The term of the Reimbursement Agreement
expires on December 31, 1996. For the three months ended June 30, 1996, the
Company was reimbursed for approximately $24,000 of expenses. For the six months
ended June 30, 1996, the Company was reimbursed for approximately $56,000 of
expenses. The Reimbursement Agreement is of more limited scope than the
Operating Agreement and is expected to provide for reimbursement to the Company
of approximately $100,000 of expenses for the period February 1, 1996 to
December 31, 1996.
Through the Supply Agreement, Gaiam purchases Seventh Generation brand
product for resale to its catalog customers. Gaiam is required to purchase and
the Company is required to make reasonable efforts to supply a minimum of $2.5
million in Seventh Generation products at a 20% markup. After Gaiam has
purchased this minimum amount of product, the Company may sell any additional
product to Gaiam at a 5% markup. Included in the Company's sales for the three
months ended June 30, 1996 is approximately $393,000 to Gaiam under the terms
of the Supply Agreement, of which approximately $325,000 is applicable towards
the minimum. Included in the Company's sales for the six months ended June 30,
1996 is approximately $668,000 to Gaiam under the terms of the Supply Agreement,
of which approximately $552,000 is applicable towards the minimum.
4. SUBORDINATED CONVERTIBLE DEBENTURES
<TABLE>
June 30, December 31,
Subordinated convertible debentures consist of the following: 1996 1995
----- ----
<C> <C>
10% subordinated convertible debentures, unsecured, $180,000 due February 28,
1996, convertible at a price per share of $13.33 and $620,000 due February 28,
<S>
1998, convertible at a price per common share of $6.67 $ 620,000 $ 800,000
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, 1997, convertible at a price per
common share of $6.67 100,000 100,000
----------- -----------
Total subordinated convertible debentures 820,000 1,000,000
Less current installments (100,000) (180,000)
------------ ------------
Subordinated convertible debentures, less current installments $ 720,000 $ 820,000
=========== ===========
</TABLE>
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 136,444 at June 30, 1996.
5. COMMITMENTS AND CONTINGENCIES
Uncertainties:
The Company has historically incurred losses from operations which
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 catalog business segment.
If the number of distributors and retailers were reduced or Gaiam was unable to
meet its commitments, the Company may not have adequate liquidity.
Litigation:
In conjunction with the sale of catalog business segment assets to
Gaiam, Inc., the investment banking firm of Ulin & Holland alleged that the
Company owed it a fee of $98,500. The Company denied any liability and filed
suit in the United States District Court for the District of Vermont on October
23, 1995 seeking a declaratory judgment that it had no such liability. Ulin &
Holland answered the Complaint and filed a Counterclaim against the Company
alleging breach of contract, fraudulent misrepresentation, and violation of the
Massachusetts Fair Business Practices Act. The Company moved to dismiss the
latter two counterclaims for failure to state a claim upon which relief may be
granted. Ulin & Holland sought $98,500 on its breach of contract claim. Its
fraudulent misrepresentation and Fair Business Practices Act claims sought,
in addition to the contract damages, punitive damages (or triple damages) and
attorneys' fees.
While management believed it had meritorious defenses against the suit,
the Company entered into a preliminary settlement agreement on July 29, 1996
pursuant to which the Company will pay Ulin & Holland $50,000 to settle this
matter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Seventh Generation, Inc.'s primary strategic objective is to establish
Seventh Generation as the leading brand name for environmentally responsible
consumer products. Seventh Generation, Inc. (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 brand name
products through distributors to natural food stores throughout the United
States, and the Company is expanding sales of its brand name products into
upscale supermarkets primarily in the Northeast. The Company's products are also
marketed through the "Seventh Generation" mail order catalog (the "Catalog"),
which was sold to Gaiam, Inc. ("Gaiam") on May 24, 1995, and is operated by
Gaiam using the "Seventh Generation" trademarked name pursuant to a Licensing
Agreement further described below.
Seventh Generation brand name products include: paper towels, bathroom
and facial tissue, napkins and paper plates made from 100% recycled fiber,
manufactured without the use of chlorine bleach; cleaning and laundry products
that are renewable resource based, phosphate free and biodegradable; plastic
trash bags made from 100% recycled plastic; and feminine hygiene products
manufactured without the use of chlorine bleach. The Company markets and
distributes, but does not manufacture, its products.
Seventh Generation brand name products are available in the natural food
industry's larger retail chains. In 1995, the Company's sales to the natural
food industry grew significantly over sales in 1994 as a result of increased
same store sales, new product introductions, consumer promotions, and continued
market penetration. The Company plans to continue its efforts to introduce new
products and expand distribution in the natural food industry.
In January 1995, the Company made its first sales to supermarkets in the
northeastern United States. The Company's sales efforts are now focused
primarily on upscale supermarket retailers and wholesalers. Although the
Company has realized initial sales to this market segment, there can be no
assurance that the Company will be successful with its marketing strategy or
that the Company will be able to expand sales to this segment.
The Company plans to continue with its primary focus of expanding
distribution in the natural foods industry and to continue sales to supermarket
chains in the Northeast, coupled with brand name product sales to the Seventh
Generation mail order catalog operated by Gaiam, as well as other catalog
companies. The Company continues to explore other opportunities to expand
distribution including a new program called Shop & Care (TM) designed to help
not for profit organizations raise funds by selling the Company's products,
which the Company introduced in the first quarter of 1996.
Results of Operations
Three Months Ended June 30, 1996 Compared to the
Three Months Ended June 30, 1995
The Company's Consolidated Statement of Operations for the three months
ended June 30, 1996 and 1995 present the catalog operations in the
"Discontinued Operations" section of the Statement.
Operations
Sales from continuing operations to natural food customers, supermarkets,
Gaiam and other customers during the three months ended June 30, 1996 were
$1,240,013, an increase of $595,094, or 92%, compared to $644,919 during the
three months ended June 30, 1995. This favorable performance was due to the
continued growth of sales to natural food customers and the growth of sales to
supermarkets and Gaiam.
Gross profits were $296,440, an increase of $84,369, or 40%, compared to
$212,071 during 1995. Gross margins decreased to 23.9% as a percentage of sales,
from 32.9% in 1995, primarily due to the changing mix of sales.
Operating expenses were $454,807 or 36.7% of sales, compared to $294,521 or
45.7% of sales during 1995. The increase was due primarily to the settlement of
the Ulin & Holland lawsuit mentioned previously, variable selling and marketing
expenses, which increase with the sales volume, start up costs related to the
Company's new Shop & Care (TM) marketing program, and increased general and
administrative expenses. Included in operating expenses are general and
administrative costs which include the expense of maintaining the Company's
status as a "public" company (filing fees, transfer agent costs, legal fees,
officers and directors liability insurance, and the cost of annual reports and
proxy statements). Also included as a reduction in operating expenses is the
effect of reimbursement by Gaiam to the Company of approximately $24,000 under
the Reimbursement Agreement described below.
The loss from continuing operations was $165,927, an increase of $115,262,
or 227%, compared to $50,665 in 1995. The increase can be attributed to the
legal costs and the settlement of the lawsuit of approximately $36,000
recognized in the quarter, lower gross margin as a percentage of sales and
higher spending for variable selling and marketing expenses. Additionally,
losses from continuing operations in the 1995 period were reduced by the
recognition of $37,500 in licensing fees from Gaiam for the use of the
"Seventh Generation" name on the Gaiam mail order catalog. No licensing revenue
was recognized in the second quarter, adversely affecting the results of the
Company's continuing operations in comparison to the 1995 quarter. No further
licensing revenue may be earned until May 25, 1997.
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 second quarter of
1996. Gross margins from these sales of 16.7% are lower than on natural food and
supermarket sales. 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 may sell additional
product to Gaiam at cost plus 5%. For the three month period ended June 30,
1996, Gaiam purchased approximately $668,000 of product under the Supply
Agreement, of which approximately $552,000 is applicable toward the minimum.
Pursuant to the Licensing Agreement, Gaiam has paid the Company an initial
license fee of $200,000 and will pay an annual license fee of $100,000,
commencing May 25, 1997, if it continues to use the rights. Pursuant to the
Operating Agreement (subsequently re-named the "Reimbursement Agreement"), the
Company's President and his assistant assist Gaiam with the operation of its
catalog, and certain office equipment expenses are shared between the two
companies. This Agreement has helped lower the Company's overall operating
expenses. The term of the Reimbursement Agreement expires on December 31,
1996. During the quarter ended June 30, 1996, the Company was reimbursed for
approximately $24,000 of expenses. The Reimbursement Agreement is of more
limited scope than the Operating Agreement and is expected to provide for the
reimbursement to the Company of approximately $100,000 of expenses for the
period February 1, 1996 to December 31, 1996.
Discontinued Operations
On May 24, 1995 the Company entered into the Operating and Licensing
Agreements mentioned above and sold the assets of its catalog business to Gaiam
for $1,270,000 in cash and the assumption of over $500,000 in liabilities. The
Company had no activity from discontinued operations in the second quarter of
1996. This compares to a loss of $45,832 in the second quarter of 1995 from the
operation of the catalog business. Additionally, in 1995 the gain on disposal
of discontinued catalog operations was $760,105.
Summary
The net loss for the quarter ending June 30,1996, was $165,927, a decrease
of $829,535 from the net income of $663,608 in 1995, which includes the $760,105
gain on disposal of discontinued catalog operations and $37,500 of licensing
revenue.
Six Months Ended June 30, 1996 Compared to the
Six Months Ended June 30, 1995
The Company's Consolidated Statement of Operations for the six months ended
June 30, 1996 and 1995 present the catalog operations in the "Discontinued
Operations" section of the Statement.
Operations
Sales from continuing operations to natural food customers, supermarkets,
Gaiam and other customers during the six months ended June 30, 1996 were
$2,558,617, an increase of $1,369,765, or 115%, compared to $1,188,852 during
the six months ended June 30, 1995. This favorable performance was due to the
continued growth of sales to natural food customers and the growth of sales to
supermarkets and Gaiam.
Gross profits were $723,107, an increase of $300,812, or 71%, compared to
$422,295 during 1995. Gross margins decreased to 28.3% as a percentage of sales,
from 35.5% in 1995, primarily due to the changing mix of sales.
Operating expenses were $964,268, or 37.7% of sales, an increase of
$347,641, or 56.4%, compared to $616,627, or 51.9% of sales during 1995. The
increase was due primarily to the settlement of the lawsuit, variable selling
and marketing expenses and operations and distribution expenses, which increase
with the sales volume, start up costs related to the Company's new Shop &
Care (TM) marketing program, and increased general and administrative expenses.
Included in operating expenses are general and administrative costs, which
include the expense of maintaining the Company's status as a "public" company
(officers and directors liability insurance, legal fees, transfer agent costs,
filing fees, and the cost of annual reports and proxy statements). Also
included as a reduction in operating expenses is the effect of reimbursement by
Gaiam to the Company of approximately $56,000 under the Reimbursement Agreement
described above.
The loss from continuing operations was $241,530, an increase of $65,309,
or 37.1%, compared to $176,221 in 1995. The increase can be attributed to higher
spending for variable selling and marketing expenses, lower gross margin as a
percentage of sales, legal costs and the settlement of the lawsuit of approxi-
mately $36,000 recognized in the period, and an increase in operations expenses
due to the higher levels of inventory required to service the higher sales
volume. Additionally, losses in the 1995 period were reduced as a result of the
recognition of $37,500 in licensing fees from Gaiam for the use of the "Seventh
Generation" name on the Gaiam mail order catalog, as compared to $12,500 during
the first quarter of 1996. The lower amount recognized in the first quarter and
no recognition of licensing revenue in the second quarter adversely affected the
results of the Company's continuing operations in comparison to the 1995 period.
No further licensing revenue may be earned until May 25, 1997.
Transactions with Gaiam
Sales pursuant to the Supply Agreement with Gaiam increased the Company's
wholesale sales in the first half of 1996, although gross margins from these
sales of 16.7% are lower than on natural food and supermarket sales. Pursuant
to the Reimbursement Agreement, the Company was reimbursed for approximately
$56,000 of expenses in the first half of 1996.
Discontinued Operations
The Company had no activity from discontinued operations in the first six
months of 1996. This compares to a loss of $123,530 in the first six months of
1995 from the operation of the catalog business. Additionally, in 1995, the
gain on disposal of discontinued catalog operations was $760,105.
Summary
The net loss for the six months ended June 30, 1996, was $241,530, a
decrease of $701,884 from the net income of $460,354 in 1995, which includes
the $760,105 gain on disposal of discontinued catalog operations.
Liquidity and Capital Resources
The Company has historically financed its operations through equity and
debt financing, and the extension of credit by its trade creditors and its
landlord. During its history, the Company has raised $12,265,432 in equity
investments, while generating $11,346,760 in accumulated deficits through
June 30, 1996.
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 and Licensing Agreements, the elimination of the catalog
operating losses, and the 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 allows the Company, through the Supply Agreement, to continue to
market its brand name products in the Seventh Generationr mail order catalog,
while reducing the operating loss exposure and capital requirements which had
been a continual drain on the Company's resources. Furthermore, it allows the
Company to concentrate its efforts and resources on expanding the distribution
of its brand name products to the natural foods industry, regional supermarkets,
other mail order catalogs and new channels of distribution.
To date, the Company's wholesale expansion into supermarkets has proceeded
more slowly than expected. As a result, the Company's sales strategy has
evolved and changed to focus primarily on the natural food 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 Shop & Care (TM) program mentioned
above. This more targeted sales approach is designed to reduce the Company's
risks by focusing sales efforts on primarily those accounts who serve customers
similar to the Company's current customer base. This has helped to reduce
operating expenses and losses.
The Company still intends to rely primarily on a non-traditional marketing
strategy to stimulate consumer trial and repeat purchases in 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
when appropriate. Although the Company is starting to realize sales to
supermarkets, there can be no assurance that the Company will be successful with
its marketing strategy.
The Company incurred during 1995, and expects to continue to incur during
1996, 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 public relations, product development, retail
promotions, and package design. 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
first six months of 1996, the Company's operations and debt repayment utilized
$421,181 of the Company's available cash balances. The Company used $78,366 to
increase its inventories. The Company has provided for the payment of the
settlement of a lawsuit and associated legal expenses, although the payment is
expected to be made in the third quarter. On February 29, 1996, the Company
repaid $180,000 of its outstanding 10% Subordinated Convertible Debentures. On
February 28, 1997, an additional $100,000 of its outstanding 12% Subordinated
Convertible Debentures will come due.
The Company has two 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 1996, collectively accounting for 44% of the Company's sales. The
loss of either 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, would affect the Company's liquidity.
As the Company continues its expansion into targeted supermarkets in the
Northeast and other targeted markets, it plans to carefully monitor its
expenses, and will focus on reducing them when possible. During the six months
ended June 30, 1996, the Company's loss from continuing operations increased by
$65,309, or 37%, from $176,221 in 1995 to $241,530 in 1996. A factor in the
Company's decline in performance during this period was the $37,500 of licensing
income realized during the 1995 period. In the second, third and fourth
quarters of 1995 and the first quarter of 1996, the Company realized a total of
$200,000 of licensing income. Because this licensing income has not been
realized since the first quarter of 1996, and may not be realized again until
May 23, 1997, the Company's operating results will be affected during the
balance of 1996 in comparison to 1995.
While the Company had not reached revenue levels during the first half of
1996 which allowed it to be profitable on continuing operations, management
believes that it has taken the steps necessary to control losses while building
the business. The Company has experienced liquidity problems from time to time,
which has 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, 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, 1996 was $1,600,898, and the current ratio (current assets/current
liabilities) was 3.7 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.
The Company has faced a number of significant challenges prior to 1995. 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 the leading brand of environmentally friendly
household products.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In conjunction with the sale of catalog business segment assets to Gaiam,
Inc., the investment banking firm of Ulin & Holland alleged that the Company
owed it a fee of $98,500. The Company denied any liability and filed suit in
the United States District Court for the District of Vermont on October 23,
1995 seeking a declaratory judgment that it had no such liability. Ulin &
Holland answered the Complaint and filed a Counterclaim against the Company
alleging breach of contract, fraudulent misrepresentation, and violation of the
Massachusetts Fair Business Practices Act. The Company moved to dismiss the
latter two counterclaims for failure to state a claim upon which relief may be
granted. Ulin & Holland sought $98,500 on its breach of contract claim. Its
fraudulent misrepresentation and Fair Business Practices Act claims sought, in
addition to the contract damages, punitive damages (or triple damages) and
attorneys' fees.
While management believed the Company had meritorious defenses against the
suit, the Company entered into a preliminary settlement agreement on July 29,
1996 pursuant to which the Company will pay Ulin & Holland $50,000 to settle
this matter.
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 6, 1996 at the Company's offices
located at One Mills 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 Abstention
-------------- -------------- ------------
Arthur Gray Jr. 1,991,702 12,950 0
Jeffrey A. Hollender 1,991,702 12,950 0
Sheila Hollender 1,991,502 13,150 0
Joshua Sapan 1,990,952 13,700 0
Peter Graham 1,991,702 12,950 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 Per Share Loss
(27) Financial Data Sheet
(b) Reports on Form 8-K:
No reports on Form 8K were filed during the quarter ended June 30, 1996.
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 13, 1996 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
SEVENTH GENERATION, INC.
Calculation of Shares Used In Determining Net Loss Per Common Share
Three Months Ended June 30,
1996 1995
Weighted Average Shares Outstanding
During the Period 2,428,791 2,428,791
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
See accompanying notes.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 1,188,295 1,188,295
<SECURITIES> 0 0
<RECEIVABLES> 731,381 731,381
<ALLOWANCES> (79,800) (79,800)
<INVENTORY> 262,343 262,343
<CURRENT-ASSETS> 2,195,356 2,195,356
<PP&E> 69,663 69,663
<DEPRECIATION> (47,816) (47,816)
<TOTAL-ASSETS> 2,233,130 2,233,130
<CURRENT-LIABILITIES> 594,458 594,458
<BONDS> 720,000 720,000
0 0
0 0
<COMMON> 809 809
<OTHER-SE> 917,863 917,863
<TOTAL-LIABILITY-AND-EQUITY> 2,233,130 2,233,130
<SALES> 1,240,013 2,558,617
<TOTAL-REVENUES> 1,240,013 2,558,617
<CGS> 943,573 1,835,510
<TOTAL-COSTS> 943,573 1,835,510
<OTHER-EXPENSES> 454,807 964,268
<LOSS-PROVISION> (158,367) (228,661)
<INTEREST-EXPENSE> 20,989 44,658
<INCOME-PRETAX> (165,927) (241,530)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (165,927) (241,530)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (165,927) (241,530)
<EPS-PRIMARY> (.07) (.10)
<EPS-DILUTED> (.07) (.10)
</TABLE>
