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 MARCH 31, 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
April 30, 1997 was 2,428,791. The number of Redeemable Common Stock Purchase
Warrants outstanding as of April 30, 1996 was 1,562,994.
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
March 31, 1997 and December 31, 1996
ASSETS
March 31, December 31,
1997 1996
(Unaudited)
Current assets:
Cash and cash equivalents $ 365,491 $ 1,233,006
Short-term marketable securities 498,316
Accounts receivable-trade, net of allowance
for doubtful accounts of $20,191
at March 31, 1997 and December 31, 1996 744,392 480,568
Accounts receivable-other 3,296 3,868
Inventories 292,171 234,349
Other assets 121,092 153,117
----------- ------------
Total current assets 2,024,758 2,104,908
----------- ------------
Equipment:
Computer equipment 54,481 45,636
Office equipment and furniture 33,863 32,648
----------- ------------
88,344 78,284
Less accumulated depreciation and amortization 56,108 54,926
----------- ------------
Equipment, net 32,236 23,358
----------- ------------
Deposits and other assets 12,327 11,427
----------- -----------
Total assets $ 2,069,321 $ 2,139,693
=========== ===========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1997 1996
(Unaudited)
Current liabilities:
Current installments of subordinated
convertible debentures $ 620,000 $
Accounts payable-trade 303,464 234,499
Other accrued expenses 122,595 188,918
----------- ------------
Total current liabilities 1,046,059 423,417
Long-term debt:
Subordinated convertible debentures,
excluding current installments 200,000 820,000
----------- ------------
Total liabilities 1,246,059 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 (11,442,170) (11,369,156)
----------- ------------
Total stockholders' equity 823,262 896,276
----------- ------------
Total liabilities and stockholders' equity $ 2,069,321 $ 2,139,693
=========== ============
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
For the Three Months Ended
March 31, March 31,
1997 1996
(Unaudited) (Unaudited)
Sales $ 1,570,165 $ 1,318,604
Cost of sales 1,089,327 891,937
----------- ------------
Gross profit 480,838 426,667
Other operating income 12,500
----------- ------------
480,838 439,167
Operating expenses: ----------- ------------
Selling and marketing expenses 271,359 220,748
Operations and distribution expenses 104,839 120,655
General and administrative expenses 163,239 168,058
----------- ------------
Total operating expenses 539,437 509,461
----------- ------------
Other income (expense):
Interest income 6,535 18,597
Interest expense (20,712) (23,669)
Other (238) (237)
----------- ------------
Total other expense, net (14,415) (5,309)
----------- ------------
Net loss $ (73,014) $ (75,603)
=========== ============
Loss per common share: $ (0.03) $ (0.03)
Weighted average shares outstanding
during the period 2,428,791 2,428,791
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
For the Three Months Ended
March 31, March 31,
1997 1996
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (73,014) $ (75,603)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,182 2,470
Provision for doubtful accounts 7,990
Loss on short-term securities 1,684
Changes in assets and liabilities:
Increase in accounts receivable-trade (263,824) (220,391)
Decrease (increase) in accounts receivable-other 572 (23,234)
Increase in inventories (57,822) (120,332)
Decrease (increase) in other assets 32,025 (24,357)
Increase in deposits and other assets (900) (31,632)
Increase in accounts payable-trade 68,965 69,790
Increase (decrease) in accrued expenses (66,323) 26,759
(Decrease) in deferred income (12,500)
----------- ------------
Net cash used in operating activities (357,455) (401,040)
----------- ------------
Cash flows from investing activities:
Purchase of short-term securities (500,000)
Purchases of equipment (10,060) (2,493)
----------- ------------
Net cash used in investing activities (510,060) (2,493)
----------- ------------
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 (867,515) (583,533)
Cash and cash equivalents, beginning of period 1,233,006 1,609,476
----------- ------------
Cash and cash equivalents, end of period $ 365,491 $ 1,025,943
=========== ============
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
Notes to Consolidated Financial Statements
March 31, 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 three month period ended March 31, 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
March 31, 1997 and 1996 and thus did not affect net (loss) income per common
share.
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
licensing fee of $100,000 commencing on May 24, 1997 if Gaiam continues to
use the Seventh Generation(r) name. Gaiam is currently testing an alternative
name on the mail order catalog it purchased from the Company and may choose
at any time to discontinue use of the Seventh Generation(r) name.
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
March 31, 1996, the Company was reimbursed for approximately $32,000 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
quarter of 1997 and in 1996. Gross margins from these sales are lower
than on natural products 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 is required to sell additional product to Gaiam at
cost plus 5%. During the three months ended March 31, 1997, Gaiam purchased
approximately $309,000 of product under the terms of the Supply Agreement,
of which approximately $258,000 is applicable towards the minimum. As of
March 31, 1997, Gaiam has purchased approximately $2,497,000 of product
under the Supply Agreement, of which approximately $2,079,000 is applicable
toward the minimum, leaving a balance to purchase of approximately $421,000.
The Company anticipates that Gaiam will fulfill its obligations under the
Supply Agreement at some point in the second or third quarter of 1997. The
following tables summarize sales to Gaiam during the periods indicated.
For the three months ended March 31, 1997:
Gaiam Others Total
Sales $309,158 100.0% $1,261,007 100.0% $1,570,165 100.0%
Cost of goods sold 257,762 83.4% 831,565 65.9% 1,089,327 69.4%
-------- ----- ---------- ----- ---------- -----
Gross Profit $51,396 16.6% $429,442 34.1% $480,838 30.6%
======== ===== ========== ===== ========== =====
For the three months ended March 31, 1996:
Gaiam Others Total
Sales $274,710 100.0% $1,043,894 100.0% $1,318,604 100.0%
Cost of goods sold 227,725 82.9% 664,212 63.6% 891,937 67.6%
-------- ----- ---------- ----- ---------- -----
Gross Profit $46,985 17.1% $379,682 36.4% $426,667 32.4%
======== ===== ========== ===== ========== =====
4. SUBORDINATED CONVERTIBLE DEBENTURES
March 31, December 31,
Subordinated convertible debentures 1997 1996
consist of the following:
10% subordinated convertible debentures,
unsecured, $180,000 due February 28, 1996,
convertible at a price per share of
$13.33, and an additional $620,000 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 $100,000 in 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 March 31, 1997 and December 31, 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 Seventh Generation(r)
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.
The Company's contractual relationship with Gaiam, the purchaser of the
catalog, is uncertain. Gaiam's obligation to purchase product at a 20% markup
will terminate in the second or third quarter of 1997 (which is when the
Company believes Gaiam will fulfill its obligations under the Supply
Agreement), which may reduce the Company's sales or its contribution margin.
The Company and Gaiam are currently discussing the possible termination of
the Licensing Agreement and the alteration of the Supply Agreement. If the
Licensing Agreement were to be terminated, no further licensing revenue
would be received from Gaiam. The outcome of these discussions is uncertain
at this date.
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.
6. NEW ACCOUNTING STANDARD
Statement of Accounting Standards No. 128 - "Earnings Per Share"
This new statement, which is effective for financial statements issued
for periods ending after December 15, 1997, simplifies the computation of
earnings per share (EPS) by replacing the "primary" EPS requirements with
a "basic" EPS computation based upon weighted-average shares outstanding.
This new standard requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted
EPS computation. Management has not yet made a determination of the impact,
if any, that the adoption of this standard would have on the consolidated
financial statements.
<PAGE>
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 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 three months of 1997, the Company's
sales to the natural products industry grew in comparison to sales in the
first three 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 March 31, 1997 Compared to
Three Months Ended March 31, 1996
Operations
Sales to natural products accounts, supermarkets, Gaiam, and other
customers increased $251,561, or 19.1%, during the three months ended
March 31, 1997 to $1,570,165, compared to $1,318,604 during the three months
ended March 31, 1996. This favorable performance was due primarily to the
continued growth of sales to natural products accounts and the growth of
sales to other customers.
Gross profit was $480,838, compared to $426,667 during 1996, an increase
of $54,171, or 12.7%. Gross profits decreased to 30.6% as a percentage of
sales in the 1997 period, compared to 32.4% in 1996, due primarily to the
changing mix of sales.
Operating expenses decreased 4.2% as a percentage of sales from 38.6% of
sales in the 1996 period to 34.4% of sales for the 1997 period. Operating
expenses were $539,437 in the three months ended March 31, 1997 compared to
$509,461 during 1996. While operating expenses declined as a percentage of
sales, the additional expenditures were due primarily to additional variable
selling and marketing expenses. Sales and marketing expenses were 17.3% of
sales in the first three months of 1997 and 16.7% of sales in 1996.
Operations and distribution expenses declined to $104,839 from $120,655 in the
1996 period. This reduction was due primarily to a reduction in freight costs
and a reduction in warehousing costs. General and administrative expenses
were 10.4% of sales, compared to 12.7% in the 1996 period. This favorable
performance can be primarily attributed to a reduction in bad debt expense
and a reduction in legal fees. Included as a reduction in operating expenses
during 1996 is the effect of reimbursement by Gaiam to the Company of
approximately $32,000 under the Reimbursement Agreement described below.
The net loss in 1997 was $73,014, compared to $75,603 in 1996, a decrease
of $2,589. The decrease was achieved despite a reduction in licensing revenue
of $12,500 for the use of the Seventh Generation(r) name on the Gaiam mail
order catalog, a decrease of approximately $32,000 in reimbursements from
Gaiam under the Operating and Reimbursement Agreements, and the increased
operating expenses listed above. Net interest expense decreased in 1997 as a
result of the repayment of $180,000 in subordinated convertible debentures in
February of 1996 and a lower rate of return realized on investments in 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 first
quarter of 1997 and in 1996. Gross margins from these sales of are lower than
on natural products 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 is required to sell additional product to Gaiam at cost plus 5%.
During the three months ended March 31, 1997, Gaiam purchased approximately
$309,000 of product under the terms of the Supply Agreement, of which
approximately $258,000 is applicable towards the minimum. As of
March 31, 1997, Gaiam has purchased approximately $2,497,000 of product under
the Supply Agreement, of which approximately $2,079,000 is applicable toward
the minimum, leaving a balance to purchase of approximately $421,000. The
Company anticipates that Gaiam will fulfill its obligations under the Supply
Agreement at some point in the second or 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 first three months of 1996, the Company was reimbursed approximately
$32,000 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 absorb these 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 must pay an
annual license fee of $100,000, commencing May 24, 1997, if it continues to
use the rights. Gaiam is currently testing an alternative name on the mail
order catalog it purchased from the Company and may choose at any time to
discontinue use of the Seventh Generation(r) name. During the first three
months of 1996, $12,500 of licensing revenue was recognized.
The Company and Gaiam are currently discussing the possible termination
of the Licensing Agreement and the alteration of the Supply Agreement. Gaiam's
obligation to purchase product at a 20% markup will terminate in the second or
third quarter of 1997 (which is when the Company believes Gaiam will fulfill
its obligations under the Supply Agreement). The outcome of these discussions
is uncertain at this date.
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. The Company cannot predict the net impact
its relationship with Gaiam will have on the Company's results from
operations.
Summary
Sales during the first three months of 1997 increased $251,561, or 19.1%
to $1,570,165, compared to $1,318,604 during the first three months of 1996.
Gross profit was $480,838, or 30.6% of sales, compared to $426,667, or 32.4%
of sales during 1996. Operating expenses decreased 4.2% as a percentage of
sales to 34.4% of sales during the first three months of 1997, compared to
38.6% of sales in 1996. The net loss for the three months ended March 31,
1997 was $73,014, compared to $75,603 in the first three months of 1996, a
decrease of $2,589. Included in the net loss for the first three months
of 1996 is $12,500 in licensing revenue and approximately $32,000 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 $11,442,170 in accumulated deficits through March 31, 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.
The Company and Gaiam are currently discussing the possible termination
of the Licensing Agreement and the alteration of the Supply Agreement. Gaiam's
obligation to purchase product at a 20% markup will terminate in the second or
third quarter of 1997 (which is when the Company believes Gaiam will fulfill
its obligations under the Supply Agreement). The outcome of these discussions
is uncertain at this date.
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. The Company
cannot predict the net impact its relationship with Gaiam will have on the
Company's liquidity.
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 quarter 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, 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 three months ended March 31, 1997, the Company used
approximately $368,000 of its available cash balances. The Company used
approximately $264,000 as accounts receivable expanded. The Company used
approximately $58,000 to increase its inventories. Additionally, the Company
has increased its accounts payable by approximately $69,000. As of
March 31, 1997, the Company's primary sources of liquidity were approximately
$365,000 in cash, approximately $498,000 in marketable securities, and
approximately $744,000 in accounts receivable. During the first quarter of
1997, the Company invested approximately $498,000 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
three months of 1997, collectively accounting for 48.1% 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 three months ended March 31, 1997,
the Company's net loss was $73,014, compared to $75,603 in 1996, a decrease
of $2,589. The decline in reimbursements under the Reimbursement Agreement
was approximately $32,000. Since the Company will not receive further
reimbursements, the Company will need to absorb these costs during future
periods.
While the Company did not reach operating levels during the first three
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, Gaiam's assumption of certain
liabilities, and the significant reduction in operating loss have
significantly improved the Company's liquidity. The Company is current in
all of its obligations. The Company's working capital as of March 31, 1997 was
approximately $979,000, 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 first 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 and obtain refinancing.
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 exploring alternatives for extending or refinancing
these debentures. The Company's success in these matters is likely to
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 effect the Company's liquidity.
There is no assurance that the Company will be able to arrange alternate
financing.
The Financial Accounting Standards Board has recently issued
Statement of Accounting Standards No. 128 - "Earnings Per Share."
This new statement, which is effective for financial statements issued for
periods ending after December 15, 1997, simplifies the computation of
earnings per share (EPS) by replacing the "primary" EPS requirements with a
"basic" EPS computation based upon weighted-average shares outstanding. This
new standard requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted
EPS computation. Management has not yet made a determination of the impact,
if any, that the adoption of this standard would have on the consolidated
financial statements.
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.
<PAGE>
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
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
(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 March 31, 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: May 14, 1997 By: /s/Jeffrey A. Hollender
Jeffrey A. Hollender
President and Chief Executive Officer
(Principal Executive & Financial Officer)
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Number Numbered Page
11 18
27 20
<PAGE>
Exhibit 11
<PAGE>
Exhibit 11
SEVENTH GENERATION, INC.
Calculation of Shares Used In Determining Net Loss Per Common Share
Three Months Ended March 31,
1997 1996
Weighted Average Shares Outstanding
During the Period 2,428,791 2,428,791
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
See accompanying notes.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 365491
<SECURITIES> 498316
<RECEIVABLES> 767879
<ALLOWANCES> (20191)
<INVENTORY> 292171
<CURRENT-ASSETS> 2024758
<PP&E> 88344
<DEPRECIATION> (56108)
<TOTAL-ASSETS> 2069321
<CURRENT-LIABILITIES> 1046059
<BONDS> 200000
0
0
<COMMON> 809
<OTHER-SE> 822453
<TOTAL-LIABILITY-AND-EQUITY> 2069321
<SALES> 1570165
<TOTAL-REVENUES> 1570165
<CGS> 1089327
<TOTAL-COSTS> 1089327
<OTHER-EXPENSES> 539437
<LOSS-PROVISION> (73014)
<INTEREST-EXPENSE> 14415
<INCOME-PRETAX> (73014)
<INCOME-TAX> 0
<INCOME-CONTINUING> (73014)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73014)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
