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 SEPTEMBER 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
October 31, 1996 was 2,428,791.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
TOTAL NUMBER OF PAGES: 23 EXHIBIT INDEX APPEARS ON PAGE: 17
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
ASSETS
<TABLE>
September 30, December 31,
1996 1995
===================== =====================
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,162,046 $ 1,609,476
Accounts receivable-trade, net of allowance for doubtful
accounts of $70,550 and $56,800 at September 30, 1996 and
December 31, 1995, respectively 524,745 600,534
Accounts receivable-other 18,020 49,118
Inventories 179,686 183,977
Other assets 188,544 97,351
--------------------- ---------------------
Total current assets 2,073,041 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 50,074 42,877
--------------------- ---------------------
Equipment, net 19,589 23,061
--------------------- ---------------------
Deposits and other assets 15,354 14,203
--------------------- ---------------------
Total assets $ 2,107,984 $ 2,577,720
===================== =====================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
September 30, December 31,
1996 1995
===================== =====================
(Unaudited)
<S> <C> <C>
Current liabilities:
Current installments of subordinated convertible debentures $ 100,000 $ 180,000
Accounts payable-trade 196,031 298,507
Other accrued expenses 171,374 106,511
Deferred income 12,500
--------------------- ---------------------
Total current liabilities 467,405 597,518
Long-term debt:
Subordinated convertible debentures,
excluding current installments 720,000 820,000
--------------------- ---------------------
Total liabilities 1,187,405 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 (11,344,853) (11,105,230)
--------------------- ---------------------
Total stockholders' equity 920,579 1,160,202
--------------------- ---------------------
Total liabilities and stockholders' equity $ 2,107,984 $ 2,577,720
===================== =====================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
For the Three Months Ended
September 30, September 30,
1996 1995
=================== ====================
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Sales $ 1,322,924 $ 985,218
Cost of sales 912,427 689,794
------------------- --------------------
Gross profit 410,497 295,424
Other operating income 75,000
------------------- --------------------
410,497 370,424
------------------- --------------------
Operating expenses:
Selling and marketing expenses 183,871 152,490
Operations and distribution expenses 87,160 85,028
General and administrative expenses 130,692 113,876
------------------- --------------------
Total operating expenses 401,723 351,394
------------------- --------------------
Income from continuing operations 8,774 19,030
------------------- --------------------
Other income/(expense):
Interest income 14,535 26,338
Interest expense (21,164) (25,709)
Other (238) (238)
------------------- --------------------
Total other expense, net (6,867) 391
------------------- --------------------
Net income $ 1,907 19,421
=================== ====================
Income per common share:
Net income per common share $ 0.00 $ 0.01
=================== ====================
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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
For the Nine Months Ended
September 30, September 30,
1996 1995
=================== ====================
(Unaudited) (Unaudited)
<S> <C> <C>
Revenue:
Sales $ 3,881,541 $ 2,174,070
Cost of sales 2,747,937 1,456,351
------------------- --------------------
Gross profit 1,133,604 717,719
Other operating income 12,500 112,500
------------------- --------------------
1,146,104 830,219
------------------- --------------------
Operating expenses:
Selling and marketing expenses 627,296 409,056
Operations and distribution expenses 295,865 254,684
General and administrative expenses 442,830 304,281
------------------- --------------------
Total operating expenses 1,365,991 968,021
------------------- --------------------
Loss from continuing operations (219,887) (137,802)
------------------- --------------------
Other income/(expense):
Interest income 46,800 59,441
Interest expense (65,822) (77,725)
Other (714) (714)
------------------- --------------------
Total other expense, net (19,736) (18,998)
------------------- --------------------
Net loss from continuing operations (239,623) (156,800)
------------------- --------------------
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) $ (239,623) $ 479,779
=================== ====================
Income (loss) per common share:
Loss from continuing operations $ (0.10) $ (0.06)
Loss from discontinued catalog operation (0.05)
Gain on disposal of discontinued catalog operation 0.31
------------------- --------------------
Net income (loss) per common share $ (0.10) $ 0.20
=================== ====================
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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
For the Nine Months Ended
September 30, September 30,
1996 1995
===================== =====================
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (239,623) $ 479,775
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 7,197 8,495
Provision for doubtful accounts 13,750
Changes in assets and liabilities:
(Increase) decrease in accounts receivable-trade 62,040 (273,882)
(Increase) decrease in accounts receivable-other 31,098 (6,454)
(Increase) decrease in inventories 4,291 (17,078)
(Increase) decrease in other assets (91,193) 41,423
(Increase) decrease in deposits and other assets (1,151) 9,791
(Increase) decrease in assets of discontinued catalog
operation - net 464,568
Increase (decrease) in accounts payable-trade (102,476) (78,965)
Increase (decrease) in accrued expenses 64,863 (74,703)
Increase (decrease) in deferred income (12,500) 87,500
--------------------- ---------------------
Net cash used in operating activities (263,704) 640,470
--------------------- ---------------------
Cash flows from investing activities:
Proceeds from disposal of equipment 6,257
Purchases of equipment (3,726)
--------------------- ---------------------
Net cash (used in) provided by investing activities (3,726) 6,257
--------------------- ---------------------
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 (447,430) 586,727
Cash and cash equivalents, beginning of period 1,609,476 1,117,651
--------------------- ---------------------
Cash and cash equivalents, end of period $ 1,162,046 $ 1,704,378
===================== =====================
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
SEVENTH GENERATION, INC.
Notes to Financial Statements
September 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. There were no sales from discontinued
operations for the three months ended September 30, 1995. Net sales of discon-
tinued operations were approximately $2,255,000 for the nine months ended
September 30, 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 name
in consideration for which Gaiam paid the Company a fee of $200,000, of which
$187,500 was recognized in 1995 and $12,500 in 1996 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 Reimbursement Agreement, the CompanyOs 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 CompanyOs overall operating expenses. The term of the
Reimbursement Agreement expires on December 31, 1996. For the three months
ended September 30, 1996, the Company was reimbursed for approximately $24,000
of expenses. For the nine months ended September 30, 1996, the Company was
reimbursed for approximately $80,000 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. The Company does not anticipate
that this Agreement will be renewed in 1997.
Through the Supply Agreement, Gaiam purchases Seventh Generation brand
products 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 September 30, 1996 is approximately $356,000 to Gaiam under the
terms of the Supply Agreement, of which approximately $293,000 is applicable
towards the minimum. Included in the Company's sales for the nine months ended
September 30, 1996 is approximately $1,023,000 to Gaiam under the terms of the
Supply Agreement, of which approximately $845,000 is applicable towards the
minimum.
4. SUBORDINATED CONVERTIBLE DEBENTURES
<TABLE>
September 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 122,940 at September 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.
Stock Appreciation Rights Plan:
The purpose of the Plan is to benefit the Company by enabling it to
attract and retain highly qualified and motivated key executive employees and
Board members and to aid the Company in retaining its present management and
Board, while offering such employees a chance to share in the growth of the
Company.
The Plan shall be administered by the Compensation Committee of the
Board of Directors of the Company (the "Committee"), as such Committee shall
be composed from time to time. The Committee shall have exclusive authority
to select persons for participation in the Plan and to make all determinations
required under the Plan. The Committee shall have full power and authority to
interpret, construe and administer the Plan, and the Committee's interpretations
and construction thereof, and actions thereunder, shall be binding and
conclusive on all persons for all purposes. The maximum number of Incentive
Units that may be awarded under the Plan shall not exceed an aggregate of
300,000.
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.
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, the stability of our suppliers and their manufacturing capacity,
the risk of entering into new market segments, product demand, availability of
raw materials and critical manufacturing equipment for our suppliers, economic
conditions, the regulatory and trade environment, competitive products and
pricing, manufacturing efficiencies of our suppliers, new product development,
ability to enforce trademarks, and other unforeseen risks and uncertainties.
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. The Company is expanding sales of its brand name products into upscale
supermarkets primarily in the Northeast. The Company has recently started a
program called "Shop & Care," through which non-profit organizations sell the
Company's products as a fund-raising means. The Company's products are also
marketed through mail order catalogs, primarily 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; natural
formula baby wipes; 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 natural food
retail stores. In the first 9 months of 1996, the CompanyOs sales to the
natural food industry have grown significantly over sales in the same period
of 1995 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 focused
primarily on upscale supermarket retailers and wholesalers. Sales to this
market segment in the first 9 months of 1996 have grown significantly over the
same period of 1995.
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 mail order
catalogs, primarily the Seventh Generation mail order catalog operated by Gaiam.
The Company continues to explore other opportunities to expand distribution,
including the new Shop & Care (TM) program which the Company introduced in the
first quarter of 1996, designed to help non-profit organizations raise funds by
selling the Company's products.
Results of Operations
Three Months Ended September 30, 1996 Compared to the
Three Months Ended September 30, 1995
Operations
Sales to natural food accounts, supermarkets, Gaiam, and other customers
during the three months ended September 30, 1996 were $1,322,924, compared to
$985,218 during the three months ended September 30, 1995, an increase of
$337,706, or 34.3%. This favorable performance was due to growth of sales to
natural food retailers and supermarkets.
Gross profits were $410,497, compared to $295,424 during 1995, an
increase of $115,073, or 39.0%. Gross margins were 31.0% as a percentage of
sales, compared to 30.0% in 1995, an increase of 1.0%, primarily due to the
changing mix of sales.
Operating expenses were $401,723, or 30.4% of sales, compared to
$351,394, or 35.7% of sales during 1995. The 5.3% reduction as a percentage of
sales is a result of the Company's efforts to control costs while increasing
market penetration. The increase in expenditures was due primarily to variable
selling and marketing expenses, which increase with additional sales volume,
start up costs related to the Company's new Shop & Care (TM) marketing program,
and increased general and administrative expenses. General and administrative
costs 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, as compared to approximately $39,000 in the 1995 period.
The income from continuing operations was $1,907, compared to $19,421
in 1995, a decrease of $17,514. The decrease can be attributed primarily to an
absence of licensing revenue for the use of the "Seventh Generation" name on
the Gaiam mail order catalog in the third quarter of 1996, as compared to
$75,000 in the 1995 period. 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 CompanyOs wholesale sales in the third
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 September 30, 1996, Gaiam purchased approximately $356,000 of
product under the Supply Agreement, of which approximately $293,000 is
applicable toward the minimum.
Pursuant to 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 CompanyOs overall operating expenses. The term of the
Reimbursement Agreement expires on December 31, 1996. During the quarter
ended September 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. The Company does not anticipate that this Agreement
will be renewed in 1997.
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.
Discontinued Operations
On May 24, 1995, the Company entered into the Supply, Operating
(subsequently renamed the "Reimbursement Agreement") 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 third quarter of
1996 or 1995.
Summary
Gross margins were 31.0% of sales, compared to 30.0% in 1995, an
improvement of 1.0%. Operating expenses were 30.4% of sales, compared to
35.7% in 1995, an improvement of 5.3%. The net income for the quarter ending
September 30, 1996 was $1,907, compared to $19,421 in 1995, a decrease of
$17,514, which included $75,000 of licensing revenue.
Nine Months Ended September 30, 1996 Compared to the
Nine Months Ended September 30, 1995
The Company's Consolidated Statement of Operations for the nine months
ended September 30, 1996 and 1995 present the catalog operations in the
"Discontinued Operations" section of the Statement.
Operations
Sales from continuing operations to natural food accounts, super-
markets, Gaiam and other customers during the nine months ended
September 30, 1996 were $3,881,541, compared to $2,174,070 during the nine
months ended September 30, 1995, an increase of $1,707,471, or 78.5%. This
favorable performance was due to the continued growth of sales to natural
food accounts and the growth of sales to supermarkets and Gaiam.
Gross profits were $1,133,604, compared to $717,719 during 1995, an
increase of $415,885, or 57.9%. Gross margins were 29.2% as a percentage of
sales, compared to 33.0% in 1995, a decrease of 3.8%, primarily due to the
changing mix of sales.
Operating expenses were $1,365,991, or 35.2% of sales, compared to
$968,021, or 44.5% of sales during 1995. While operating expenses declined
as a percentage of sales, primarily as a result of the growth in sales, the
additional expenditures were due primarily to the settlement of the Ulin &
Holland lawsuit, variable selling and marketing expenses, and operations and
distribution expenses, which increase with additional sales volume, start up
costs related to the Company's new Shop & Care (TM) marketing program, and
increased general and administrative expenses. Also included as a reduction
in operating expenses is the effect of reimbursement by Gaiam to the Company
of approximately $80,000 under the Reimbursement Agreement described above,
as compared to approximately $58,000 in the 1995 period.
The loss from continuing operations was $239,623, compared to $156,800
in 1995, an increase of $82,823. The increase can be attributed to a decline
in licensing revenue of $100,000 for the use of the OSeventh GenerationO name
on the Gaiam mail order catalog, legal costs and the settlement of the Ulin &
Holland lawsuit of approximately $36,000 recognized in the period, increased
variable selling and marketing expenses, lower gross margins as a percentage
of sales, and costs associated with the start-up of the Company's "Shop &
Care" program. Losses in the 1995 period were reduced as a result of the
recognition of $112,500 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 or third
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
Pursuant to 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, which
yields a 16.7% gross margin. 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 nine months ended September 30, 1996
is approximately $1,023,000 to Gaiam under the terms of the Supply Agreement,
of which approximately $845,000 is applicable towards the minimum. As of
September 30, 1996, Gaiam has purchased approximately $1,885,000 of product
under the Supply Agreement, of which approximately $1,567,200 is applicable
toward the minimum, leaving a balance to purchase of approximately $932,800.
The Company expects that Gaiam will fulfill its obligations under the Supply
Agreement at some point in the middle of 1997.
Pursuant to the Reimbursement Agreement, the Company was reimbursed
for approximately $80,000 of expenses in the first nine months of 1996, as
compared to approximately $58,000 in the 1995 period.
Discontinued Operations
The Company had no activity from discontinued operations in the first
nine months of 1996. This compares to a loss of $123,530 in the first nine
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
Gross margins were 29.2% of sales, compared to 33.0% in 1995, a
decrease of 3.8%. Operating expenses were 35.2% of sales, compared to 44.5%
of sales in 1995, an improvement of 9.3%. The net loss from continuing
operations for the first nine months of 1996 was $239,623, compared to $156,800
in the first nine months of 1995, an increase of $82,823. Included in the net
loss from continuing operations for the first nine months of 1996 is $12,500
in licensing revenue, compared to $112,500 during the first nine months of
1995, a decrease of $100,000.
The net loss for the nine months ended September 30, 1996 was $239,623,
compared to the net income of $479,775 in 1995, a decrease of $719,398, which
includes the $760,105 gain on disposal of discontinued catalog operations and
$123,530 net loss from 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.
During its history, the Company has raised $12,265,432 in equity investments,
while generating $11,344,853 in accumulated deficits through September 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 (subsequently re-named the "Reimbursement Agreement") 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 CompanyOs 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.
The Company's sales strategy is 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 approach is designed to reduce the Company's
risks by focusing sales efforts on primarily those accounts who serve customers
similar to the CompanyOs current account base. This has helped to reduce
operating expenses and losses.
The Company intends to rely primarily on a non-traditional marketing
strategy to stimulate consumer trial and repeat purchases in natural food
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 1995 and 1996, and expects to continue to
incur during 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 retail promotions, package design,
and the development of the "Shop & Care" program. 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 nine months of 1996, the Company's operations and debt
repayment utilized $447,430 of the Company's available cash balances. The
Company used $91,193 to increase its prepaid expenses. The Company realized
approximately $107,000 by reducing its accounts receivable and approximately
$4,000 by reducing its inventories. Theses reductions in accounts receivable
and inventories are viewed as temporary differences due to timing issues.
Additionally, the Company has used $102,476 of its available cash to reduce
accounts payable to take advantage of cash discount terms with its vendors.
The Company has paid approximately $56,000 for legal costs and the payment of
the settlement of the Ulin & Holland lawsuit. 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 three customers whose purchases of the Company's
products accounted for more than 10% each of the CompanyOs total sales in
the first nine months of 1996, collectively accounting for 54.6% 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, would affect the Company's
liquidity.
As the Company continues its expansion into natural food stores and
targeted supermarkets in the Northeast and other targeted markets, it plans
to carefully monitor its expenses, and will focus on reducing them. During
the nine months ended September 30, 1996, the Company's loss from continuing
operations was $239,623, compared to $156,800 in 1995, an increase of $82,823.
A factor in the CompanyOs decline in performance during this period was the
$100,000 decline in licensing revenue realized in comparison to 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 did not reach operating levels during the first nine
months of 1996 to allow it to be profitable from continuing operations,
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, has significantly improved the
Company's liquidity. The Company is current in all of its obligations. The
Company's working capital as of September 30, 1996 was approximately
$1,606,000, and the current ratio (current assets/current liabilities) was
4.4 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 faced a number of significant challenges prior to
mid-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. The 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 settlement agreement on August 16, 1996,
pursuant to which the Company has paid 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
Not applicable.
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
(10) Amendment to Incentive Agreement
(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
September 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: November 8, 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
10 18
11 20
27 22
Exhibit 10
Exhibit 10
AMENDMENT TO INCENTIVE LETTER
__________________________, 1996
________________________
Name
________________________
________________________
Address
Dear ___________________:
Reference is made to the Letter Agreement dated January ____, 1996,
pursuant to which we indicated that you had received ________ Incentive Units
pursuant to SGI's Incentive Plan.
After further consideration of the Incentive Units, the Compensation
Committee of the Board of Directors has determined that adding a performance
standard to payment under the Incentive Units would further the purposes of
the Plan and the interests of the Company. Accordingly, subject to your
consent, the Company amends your Incentive Units so that no payments will be
made pursuant to the Units unless the Company's sales meet or exceed $10,000,000
or the Company's operating profits exceed $250,000 for the Company's 1998 fiscal
year. While this is a very aggressive goal, and the Compensation Committee
reserves the right to amend the goal (but not to increase it without your
consent), either as a result of changing marketplace conditions or as a result
of other goals that they may define, the Company also believes that this is an
achievable goal and encourages you to work hard to help the Company achieve it.
If the foregoing amendment to your Incentive Units is acceptable to you,
please so indicate by signing the enclosed copy of this letter.
Very truly yours,
SEVENTH GENERATION, INC.
By: _______________________________
Jeffrey A. Hollender,
President & CEO
The undersigned AGREES that his/her Incentive Units are amended so that no
payments will be made unless the performance standard set forth above is
achieved.
_____________________________________
Exhibit 11
Exhibit 11
SEVENTH GENERATION, INC.
Calculation of Shares Used In Determining Net Loss Per Common Share
Three Months Ended September 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 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 1,162,046 1,162,046
<SECURITIES> 0 0
<RECEIVABLES> 542,765 542,765
<ALLOWANCES> (70,550) (70,550)
<INVENTORY> 179,686 179,686
<CURRENT-ASSETS> 2,073,041 2,073,041
<PP&E> 69,663 69,663
<DEPRECIATION> (50,074) (50,074)
<TOTAL-ASSETS> 2,107,984 2,107,984
<CURRENT-LIABILITIES> 467,405 467,405
<BONDS> 720,000 720,000
0 0
0 0
<COMMON> 809 809
<OTHER-SE> 919,770 919,770
<TOTAL-LIABILITY-AND-EQUITY> 2,107,984 2,107,984
<SALES> 1,322,924 3,881,541
<TOTAL-REVENUES> 1,322,924 3,881,541
<CGS> 912,427 2,747,937
<TOTAL-COSTS> 912,427 2,747,937
<OTHER-EXPENSES> 401,723 1,365,991
<LOSS-PROVISION> 0 (228,661)
<INTEREST-EXPENSE> 21,164 65,822
<INCOME-PRETAX> 1,907 (239,623)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 1,907 (239,623)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,907 (239,623)
<EPS-PRIMARY> (.00) (.10)
<EPS-DILUTED> (.00) (.10)
</TABLE>
