U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 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 (IRS Employer Identification Number)
incorporation or organization)
1 Mill Street, Burlington, VT 05401
----------------------------------------
(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, $0.000333 par value, outstanding as of
October 31, 1997 was 2,428,791. The number of Redeemable Common Stock Purchase
Warrants outstanding as of October 31, 1997 was 1,562,994.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
TOTAL NUMBER OF PAGES: 24 EXHIBIT INDEX APPEARS ON PAGE: 20
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
ASSETS
September 30, December 31,
1997 1996
(Unaudited)
Current assets:
Cash and cash equivalents $ 170,606 $ 1,233,006
Short-term marketable securities 512,821
Accounts receivable-trade, net of
allowance for doubtful accounts
of $19,203 at September 30, 1997
and $20,191 at December 31, 1996 817,615 480,568
Accounts receivable-other 4,283 3,868
Inventories 309,461 234,349
Other assets 47,897 153,117
----------- -----------
Total current assets 1,862,683 2,104,908
----------- -----------
Equipment:
Computer equipment 67,729 45,636
Office equipment and furniture 33,863 32,648
----------- -----------
101,592 78,284
Less accumulated depreciation and amortization 64,868 54,926
----------- -----------
Equipment, net 36,724 23,358
Cash restricted for debenture refinancing 236,108
Deposits and other assets 11,567 11,427
----------- -----------
Total assets $ 2,147,082 $ 2,139,693
=========== ===========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1997 1996
(Unaudited)
Current liabilities:
Current installments of subordinated
convertible debentures $ 337,500 $
Accounts payable-trade 186,036 234,499
Other accrued expenses 197,484 188,918
----------- -----------
Total current liabilities 721,020 423,417
Long-term debt:
Obligations due under capital leases 9,000
Subordinated convertible debentures,
excluding current installments 717,500 820,000
----------- -----------
Total liabilities 1,447,520 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 (11,565,870) (11,369,156)
---------- ----------
Total stockholders' equity 699,562 896,276
---------- ----------
Total liabilities and stockholders' equity $ 2,147,082 $ 2,139,693
========== ==========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
For the Three Months Ended
September 30, September 30,
1997 1996
(Unaudited) (Unaudited)
Sales $ 1,564,689 $ 1,322,924
Cost of sales 1,095,947 912,427
---------- ----------
Gross profit 468,742 410,497
Other operating income - -
---------- ----------
468,742 410,497
---------- ----------
Operating expenses:
Selling and marketing expenses 251,053 183,871
Operations and distribution expenses 116,127 87,160
General and administrative expenses 187,444 130,692
---------- -----------
Total operating expenses 554,624 401,723
---------- -----------
Other income (expense):
Interest income 13,144 14,535
Interest expense (24,400) (21,164)
Other (238) (238)
---------- -----------
Total other expense, net (11,494) (6,867)
---------- -----------
Net (loss) income $ (97,376) $ 1,907
========== ===========
(Loss) income per common share: $ (0.04) $ 0.00
Weighted average shares outstanding during the
period 2,428,791 2,428,791
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
For the Nine Months Ended
September 30, September 30,
1997 1996
(Unaudited) (Unaudited)
Sales $ 4,827,890 $ 3,881,541
Cost of sales 3,367,560 2,747,937
---------- ----------
Gross profit 1,460,330 1,133,604
Other operating income 100,000 12,500
---------- ----------
1,560,330 1,146,104
---------- ----------
Operating expenses:
Selling and marketing expenses 835,305 627,296
Operations and distribution expenses 337,160 295,865
General and administrative expenses 549,047 442,830
---------- ----------
Total operating expenses 1,721,512 1,365,991
---------- ----------
Other income (expense):
Interest income 31,237 46,800
Interest expense (66,055) (65,822)
Other (714) (714)
---------- ----------
Total other expense, net (35,532) (19,736)
---------- ----------
Net loss $ (196,714) $ (239,623)
========== ==========
Loss per common share: $ (0.08) $ (0.10)
Weighted average shares outstanding during the
period 2,428,791 2,428,791
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
For the Nine Months Ended
September 30, September 30,
1997 1996
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (196,714) $ (239,623)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 9,942 7,197
Provision for doubtful accounts (988) 13,750
Net gain on short-term securities (12,821)
Changes in assets and liabilities:
Increase in accounts receivable-trade (336,059) 62,040
Decrease (increase) in accounts receivable-other (415) 31,098
Increase in inventories (75,112) 4,291
Decrease (increase) in other assets 105,220 (91,193)
Increase in deposits and other assets (140) (1,151)
(Decrease) increase in accounts payable-trade (48,463) (102,476)
(Decrease) increase in accrued expenses 8,566 64,863
(Decrease) in deferred income - (12,500)
---------- ----------
Net cash used in operating activities (546,984) (263,704)
---------- ----------
Cash flows from investing activities:
Purchase of short-term securities (500,000)
Purchases of equipment (23,308) (3,726)
---------- ----------
Net cash used in investing activities (523,308) (3,726)
---------- ----------
Cash flows from financing activities:
Obligations due under capital leases 9,000
Deposits received on debenture offering 235,000
Increase in restricted cash
restricted for debenture payments (236,108)
Principal payments on subordinated
convertible debentures - (180,000)
---------- -----------
Net cash provided by (used in) financing activities 7,892 (180,000)
---------- -----------
Net decrease in cash and cash equivalents (1,062,400) (447,430)
Cash and cash equivalents, beginning of period 1,233,006 1,609,476
---------- -----------
Cash and cash equivalents, end of period $ 170,606 $ 1,162,046
========== ===========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
Notes to Consolidated Financial Statements
September 30, 1997 and 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair statement of the interim
financial data have been included. Results from operations for the nine month
period ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 1997.
For further information, please refer to the financial statements and
footnotes filed as Item 7 in the Form 10-KSB for Seventh Generation, Inc. for
the fiscal year ended December 31, 1996, under Commission File # 1-12614.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Business.
Seventh Generation, Inc. (the "Company") began operations in 1988 for
the purpose of marketing a variety of environmentally friendly consumer products
primarily through its mail-order catalog. In 1992 the Company began selling its
Seventh Generation brand products to retailers on a wholesale basis. Since the
sale of the catalog in May 1995, the Company focuses exclusively on the
wholesale business.
Principles of Consolidation.
Effective January 1, 1994, Seventh Generation, Inc. formed a wholly owned
subsidiary, Seventh Generation Wholesale, Inc., to carry on the operations of
its wholesale business. The accompanying Consolidated Financial Statements
include all of the accounts of Seventh Generation, Inc. and its wholly owned
subsidiary, Seventh Generation Wholesale, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition, Sales Discounts and Sales Returns.
Sales are recorded upon shipment of products to customers. The Company
maintains an allowance for estimated future sales returns and doubtful accounts.
Revenue is recorded net of sales discounts.
Cash and Cash Equivalents.
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less and are valued at cost.
Short-Term Investments.
Short-term investments consist of marketable debt securities, which are
recorded at market value.
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 or nine months ended
September 30, 1997 and 1996 and thus did not affect net (loss) income per common
share in the respective periods.
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
name in consideration for which Gaiam paid the Company a fee of $200,000, of
which $12,500 was recognized in 1996 and $187,500 in 1995 as other operating
income. The Licensing Agreement also requires Gaiam to pay an annual
non-refundable licensing fee of $100,000 commencing on May 24, 1997 if Gaiam
continues to use the Seventh Generation name, which the Company received on
June 4, 1997. This licensing fee requires no further performance by the Company
and has been received in full. Gaiam has announced that it plans to change
the name on the mail order catalog it purchased from the Company to "Harmony"
and may choose at any time to discontinue use of the Seventh Generation name.
The Company does not anticipate any further licensing revenue pursuant to this
Agreement.
Pursuant to the Reimbursement Agreement, the Company's President and his
assistant assisted Gaiam with the operation of its catalog, and certain office
equipment expenses had been shared between the two companies. The original
Operating Agreement expired on January 31, 1996. A new Agreement of more
limited scope was signed on April 11, 1996, covering the period from February
1, 1996 to December 31, 1996. During the three and nine months ended September
30, 1996, the Company was reimbursed for approximately $24,000 and $80,000 of
expenses, respectively. The Reimbursement Agreement terminated at the end of
1996, thus no reimbursements have been received during 1997.
Pursuant to a Supply Agreement with Gaiam, the Company sells its brand name
products to Gaiam, which Gaiam resells through its mail order catalog. Gross
margins from these sales are lower than on sales to other customers. Under a
provision of the Agreement, Gaiam was 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%. During the three months ended September 30,
1997, Gaiam purchased approximately $138,000 of product at cost plus 20% under
the terms of the Supply Agreement, yielding approximately $165,000 in sales,
fulfilling its $2,500,000 obligation under this Agreement. Pursuant to the
Supply Agreement, the Company now sells its brand name products to Gaiam at
cost plus 5%. During the three months ended September 30, 1997, Gaiam purchased
approximately $133,000 of product at cost plus 5%, yielding sales of
approximately $140,000. Gross margin from these sales is approximately 4.8%.
The following table summarizes sales to Gaiam and other customers and the
corresponding gross profit percentages for the periods indicated. All sales
are approximate.
Gaiam Others Total
Three months ended September 30, 1997 $305,000 $1,259,000 $1,564,000
Gross profit percentage 11.1% 33.7% 30.0%
Three months ended September 30, 1996 $356,000 $967,000 $1,323,000
Gross profit percentage 16.7% 36.3% 31.0%
Percent change in sales from 1996 -14.3% 30.2% 18.3%
Nine months ended September 30, 1997 $954,000 $3,874,000 $4,828,000
Gross profit percentage 15.0% 34.0% 30.3%
Nine months ended September 30, 1996 $1,023,000 $2,858,000 $3,881,000
Gross profit percentage 16.7% 33.7% 29.2%
Percent change in sales from 1996 -6.7% 35.5% 24.4%
4. SUBORDINATED CONVERTIBLE DEBENTURES
September 30, 1997 December 31, 1996
Subordinated convertible debentures
consist of the following:
Deposits received on 10.85% subordinated
debentures, unsecured, due June 30, 2002 $235,000 $
10% subordinated convertible debentures,
unsecured, due February 28, 1998,
convertible at a price per common share
of $6.67 620,000 620,000
10% subordinated convertible debentures,
unsecured, due November 30, 1998,
convertible at a price per common share
of $6.67 100,000 100,000
12% subordinated convertible debentures,
unsecured, due February 28, 2002,
convertible at a price per common share
of $6.67 100,000 100,000
--------- ---------
Total subordinated debentures 1,055,000 820,000
Less current installments (337,500) 0
--------- ---------
Subordinated debentures,
less current installments $ 717,500 $ 820,000
========= =========
During 1997, the Company has undertaken a securities offering to raise a
minimum of $500,000 and a maximum of $1,500,000 of privately placed subordinated
debentures. As of October 31, 1997, $347,500 of new debentures had been placed
($235,000 of which had been raised as of September 30, 1997, and is classified
as cash restricted for debenture refinancing) and holders of $175,000 in
existing debentures had signed new debenture agreements, agreeing to participate
in the new offering by converting their existing debentures into the new
offering. The combined amount of $522,500 ($410,000 as of September 30, 1997)
exceeds the $500,000 minimum placement and, accordingly, has been classified as
long term debt to reflect management's ability and intent to refinance these
debentures due in February, 1998. The new debentures are due June 30, 2002 at
an annual rate of interest of 10.85%.
During 1996, the holder of a $100,000 subordinated convertible debenture due
February 28, 1997 agreed to extend the due date of that debenture to February
28, 2002.
During 1995, the holders of $240,000 in subordinated convertible debentures
due February 28, 1995 agreed to extend the due dates for $180,000 of those
debentures to February 28, 1996. The $180,000 was paid with accrued interest
in February 1996.
The number of shares of common stock reserved for the potential conversion
of these debentures was 122,940 at September 30, 1997 and December 31, 1996.
5. COMMITMENTS AND CONTINGENCIES
Uncertainties:
The Company has historically incurred losses from operations, which have
resulted, in part, from its catalog operations. In 1995, the Company sold
the catalog business and focused on expanding sales through the wholesale
distribution channels. The Company relies on a limited number of wholesale
distributors, including Gaiam, the purchaser of the Seventh Generation catalog.
If the number of distributors was reduced or any of the Company's principal
customers do not meet their commitments, the Company may not have adequate
liquidity.
From time to time, the Company is engaged in various types of disputes
concerning trademark issues, product performance and liability issues, and
other matters in the ordinary course of business.
Contractual Obligation:
The Company's contractual relationship under the Supply Agreement with
Gaiam, the purchaser of the catalog, has changed. Gaiam's obligation to
purchase product at a 20% markup changed to cost plus a 5% markup during the
third quarter of 1997. This will reduce the Company's sales and contribution
margin from Gaiam in the future.
6. NEW ACCOUNTING STANDARD
Statement of Accounting Standards No. 128 - "Earnings Per Share"
Effective December 15, 1997, the Company is required to adopt Financial
Accounting Standard No. 128, "Earnings per Share." This Standard requires
both basic and diluted earnings per share to be reported for all periods
presented. When loss per common share is calculated in accordance with this
Standard, for the three and nine months ended September 30, 1997 and 1996,
basic and diluted loss per common share do not differ from reported amounts.
<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 and purchasing patterns of
the Company's key customers, the stability of the Company's suppliers, their
manufacturing capacity and the availability of raw materials, economic
conditions, the regulatory and trade environment, competitive products and
pricing, the risk of entering into new market segments, cost of product,
product demand, 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 safe and environmentally
responsible consumer products. The Company believes 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 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 sells privately
labeled products to a limited number of customers. The Company has recently
launched "Learning to Make a Difference"(TM), a new program the Company
designed to help elementary and secondary schools raise funds by selling the
Company's products. The Company's products are also marketed through the
Seventh Generation mail order catalog (the "Catalog"), which was sold to
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 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, feminine
hygiene products, baby wipes, and full-spectrum light bulbs. The Company
markets and distributes, but does not manufacture, its products.
Seventh Generation brand name products are available in natural products
retail stores. In the first nine months of 1997, the Company's sales to the
natural products industry grew in comparison to sales in the first nine 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 their 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 sales and distribution, including the new "Learning to Make a
Difference"(TM) program.
Results of Operations
- ---------------------
Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996
Operations
----------
Sales to the natural products industry, Gaiam, and other customers
increased $241,765, or 18.3%, during the three months ended September
30, 1997 to $1,564,689, compared to $1,322,924 during the three months
ended September 30, 1996. This favorable performance was due primarily to
the continued growth of sales to the natural products industry and other
customers, excluding Gaiam.
Gross profit was $468,742, compared to $410,497 during 1996, an increase
of $58,245, or 14.2%. Gross profit declined to 30.0% as a percentage of sales
in the 1997 period, compared to 31.0% in 1996, primarily due to the changing
mix of sales. The Company expects its total gross profit percentage to
decrease in the future primarily due to the decrease in markup percentage
on products sold to Gaiam.
Operating expenses were $554,624, or 35.5% of sales in the three months
ended September 30, 1997 compared to $401,723, or 30.4% during 1996. The
additional expenditures were due primarily to increased variable selling
and marketing expenses and expenses related to new product introductions.
Sales and marketing expenses were 16.0% of sales in the three months ended
September 30, 1997 and 13.9% of sales in 1996. The increase was due
primarily to an increase in marketing research and an increase in supermarket
marketing expenses. Operations and distribution expenses were $116,127, or
7.4% of sales compared to $87,160, or 6.6% of sales in the 1996 period.
This increase was due primarily to an increase in outbound freight costs,
which increase with higher sales volume, and increased warehousing costs,
incurred to support a higher level of inventory. General and administrative
expenses were $187,444, or 12.0% of sales, compared to $130,692, or 9.9% of
sales in the 1996 period. The increase was due, in part, to a reduction in
reimbursements from Gaiam of approximately $24,000, additional expenditures
for consultants exploring new suppliers and distribution channels, and state
taxes paid on behalf of the subsidiary.
The net loss in 1997 was $97,376, compared to a net income of $1,907 in
1996, an increase of $99,283, reflecting the increased expenses listed above
coupled with the reduction in reimbursements from Gaiam.
Transactions with Gaiam
-----------------------
Pursuant to a Supply Agreement with Gaiam, the Company sells its brand name
products to Gaiam, which Gaiam resells through its mail order catalog. Gross
margins from these sales are lower than on sales to other customers. Under a
provision of the Agreement, Gaiam was 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%. During the three months ended
September 30, 1997, Gaiam purchased approximately $138,000 of product at
cost plus 20% under the terms of the Supply Agreement, yielding approximately
$165,000 in sales, fulfilling its $2,500,000 obligation under this Agreement.
Pursuant to the Supply Agreement, the Company now sells its brand name
products to Gaiam at cost plus 5%. During the three months ended September
30, 1997, Gaiam purchased approximately $133,000 of product at cost plus 5%,
yielding sales of approximately $140,000. Gross margin from these sales is
approximately 4.8%.
The following table summarizes sales to Gaiam and other customers and the
corresponding gross profit percentages for the periods indicated. All
sales are approximate.
Gaiam Others Total
Three months ended September 30, 1997 $305,000 $1,259,000 $1,564,000
Gross profit percentage 11.1% 33.7% 30.0%
Three months ended September 30, 1996 $356,000 $967,000 $1,323,000
Gross profit percentage 16.7% 36.3% 31.0%
Percent change in sales from 1996 -14.3% 30.2% 18.3%
The Company also entered into an Operating Agreement whereby some of the
Company's management assisted Gaiam with the operation of its Seventh
Generation mail order catalog, and certain office and personnel expenses
were shared between the two companies. The Operating Agreement expired on
January 31, 1996. A new Agreement, the "Reimbursement Agreement," of more
limited scope than the Operating Agreement, was signed on April 11, 1996,
covering the period from February 1, 1996 to December 31, 1996. During the
three months ended September 30, 1996, the Company was reimbursed
approximately $24,000 under these agreements. The Reimbursement Agreement
terminated at the end of 1996. The Company was reimbursed for approximately
$109,000 of expenses during the year ended December 31, 1996. As a result
of the termination of these agreements, the Company will incur additional
expenses for the year ended December 31, 1997. This has, however, allowed
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 trademark in connection with a consumer mail order catalog. Gaiam
has paid the Company an initial license fee of $200,000 and an annual license
fee of $100,000 for continued use of the rights through May 23, 1998. Gaiam
has announced that it plans to change the name on its mail order catalog to
"Harmony" and may choose at any time to discontinue use of the Seventh
Generation name. Accordingly, the Company does not anticipate any further
licensing revenue pursuant to this Agreement. No licensing revenue was
recognized during the three months ended September 30, 1997 or the three
months ended September 30, 1996.
Summary
-------
Sales during the three months ended September 30, 1997 increased $241,765,
or 18.3% to $1,564,689, compared to $1,322,924 during the 1996 period. Gross
profit was $468,742, or 30.0% of sales, compared to $410,497, or 31.0% of
sales during the same period in 1996. Operating expenses were $554,624, or
35.5% as a percentage of sales, compared to $401,723, or 30.4% of sales
in 1996. The net loss for the three months ended September 30, 1997 was
$97,376, compared to a net income of $1,907 in 1996, an increase of $99,283.
Included as a reduction in expenses during the 1996 period is approximately
$24,000 in reimbursements from Gaiam.
<PAGE>
Nine Months Ended September 30, 1997 Compared to
Nine Months Ended September 30, 1996
Operations
----------
Sales to natural products accounts, supermarkets, Gaiam, and other
customers increased $946,349, or 24.4%, during the nine months ended
September 30, 1997 to $4,827,890, compared to $3,881,541 during the nine
months ended September 30, 1996. This favorable performance was due primarily
to the continued growth of sales to the natural products industry,
supermarkets, and private label customers.
Gross profit was $1,460,330, compared to $1,133,604 during 1996, an
increase of $326,726, or 28.8%. Gross profit increased to 30.3% as a
percentage of sales in the 1997 period, compared to 29.2% in 1996, due
primarily to the changing mix of sales.
Operating expenses were $1,721,512, or 35.7% as a percentage of sales
during the nine months ended September 30, 1997, compared to $1,365,991, or
35.2% of sales in the 1996 period. The increase was due primarily to
additional selling and marketing expenses, expenses related to new product
introductions, increased freight and warehousing costs, and a reduction in
reimbursements from Gaiam. Sales and marketing expenses were 17.3% of sales
in the first nine months of 1997 and 16.2% of sales in 1996, reflecting a
higher level of promotional spending. Operations and distribution expenses
were 7.0% of sales in the first nine months of 1997, compared to 7.6% of
sales in 1996, reflecting improved operating efficiency. General and
administrative expenses were $549,047 in 1997 and $442,830 in 1996, an
increase of $106,217. General and administrative expenses were 11.4% of
sales, in both the 1997 and 1996 periods. The increase in expenditure was
due primarily to the reduction in reimbursements from Gaiam of approximately
$80,000, additional expenditures for consultants exploring new suppliers and
distribution channels, and state taxes paid on behalf of the subsidiary.
Included as a reduction in operating expenses during 1996 is the effect of
reimbursement by Gaiam to the Company of approximately $80,000 under the
Reimbursement Agreement described below.
The net loss in 1997 was $196,714, compared to a net loss of $239,623 in
1996, a decrease of $42,909. Interest income declined as a result of lower
cash reserves.
Transactions with Gaiam
-----------------------
Pursuant to the Supply Agreement with Gaiam, during the nine months ended
September 30, 1997, Gaiam purchased approximately $678,000 of product under
the terms of the Supply Agreement at cost plus 20%, yielding approximately
$814,000 in sales, fulfilling its obligation to purchase $2,500,000 of brand
name products under this agreement. Pursuant to the Supply Agreement,
the Company now sells its brand name products to Gaiam at cost plus 5%.
During the nine months ended September 30, 1997, Gaiam purchased approximately
$133,000 of product at cost plus 5%, yielding sales of approximately $140,000.
Gross margin from these sales is approximately 4.8%.
The following table summarizes sales to Gaiam and other customers and
the corresponding gross margins for the periods indicated. All sales
are approximate.
Gaiam Others Total
Nine months ended September 30, 1997 $954,000 $3,874,000 $4,828,000
Gross profit percentage 15.0% 34.0% 30.3%
Nine months ended September 30, 1996 $1,023,000 $2,858,000 $3,881,000
Gross profit percentage 16.7% 33.7% 29.2%
Percent change in sales from 1996 -6.7% 35.5% 24.4%
During the first nine months of 1996, the Company was reimbursed
approximately $80,000 under the Operating and Reimbursement agreements. The
Operating Agreement terminated on January 31, 1996. The Reimbursement
Agreement terminated at the end of 1996, thus no reimbursements have been
received in 1997.
During the first nine months of 1997, $100,000 of non-recurring licensing
revenue was recognized as compared to $12,500 in the 1996 period.
Summary
-------
Sales during the first nine months of 1997 increased $946,349, or 24.4% to
$4,827,890, compared to $3,881,541 during the first nine months of 1996, due
to increased sales to natural products accounts and other customers, excluding
Gaiam. Gross profit was $1,460,330, or 30.3% of sales, compared to $1,133,604,
or 29.2% of sales during 1996, increasing primarily due to the changing mix of
sales. Operating expenses were $1,721,512, or 35.7% of sales in 1997, compared
to $1,365,991, or 35.2% of sales in 1996, increasing due to increased variable
trade promotional spending and the elimination of reimbursements from Gaiam.
The net loss for the nine months ended September 30, 1997 was $196,714,
compared to a loss of $239,623 in the first nine months of 1996, a decrease
of $42,909. Included in the net loss for the first nine months of 1997 is
$100,000 in non-recurring licensing revenue, compared to $12,500 in 1996.
Included as a reduction in expenses during the first nine months of 1996 is
approximately $80,000 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 $11,565,870 in accumulated deficits through September 30, 1997.
On May 24, 1995, the Company sold the assets of the Catalog to Gaiam. The
catalog asset sale provided the Company immediate liquidity, while reducing
the operating loss exposure and capital requirements which had been a continual
drain on the Company's resources. Furthermore, the sale of the catalog has
allowed the Company to concentrate its efforts and resources on expanding the
distribution of its brand name products to the natural products industry,
regional supermarkets, other mail order catalogs, and new channels of
distribution.
While the Company and Gaiam have discussed the possible termination of the
Licensing Agreement, Gaiam elected to renew the Licensing Agreement through
May 23, 1998. Gaiam has announced that it plans to change the name on its mail
order catalog to "Harmony" and may choose at any time to discontinue use of
the Seventh Generation name. This will not affect the $100,000 in non-refundable
licensing revenue received in 1997. In this event, the Company would not
receive any further licensing fees, which may adversely affect the Company's
results in comparison to 1997. Gaiam's obligation to purchase product at a
20% markup terminated in the third quarter of 1997 which will reduce the
Company's gross margin percentage on sales to Gaiam in the future, and is
expected to slow the overall rate of the Company's revenue growth and reduce
overall gross margin percentage.
The Company's sales strategy is to focus primarily on the natural products
industry and, secondarily, on sales to select supermarkets, mail order
catalogs, a limited number of privately labeled products to a limited number
of select customers, 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) program 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 has incurred expenditures to support the expansion of its
wholesale distribution business during 1996, the first nine months of 1997,
and expects to continue to incur these expenses during the remainder of 1997
and during 1998. At a minimum, the Company will need to purchase additional
inventory and incur additional marketing expenses. The Company will also
incur expenditures relating to trade and consumer marketing and research,
new product development, package design, and the development of the "Learning
to Make a Difference"(TM) 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 nine months ended September 30, 1997, the Company used
approximately $547,000 of its available cash balances through operations.
The Company used approximately $336,000 as accounts receivable expanded with
the increase in sales. The Company used approximately $75,000 of cash to
increase its inventories. Additionally, the Company has decreased its
accounts payable by approximately $49,000. As of September 30, 1997, the
Company's primary sources of liquidity were approximately $177,000 in cash,
approximately $236,000 in restricted cash, approximately $513,000 in
marketable securities, and approximately $817,000 in accounts receivable.
During the first nine months of 1997, the Company invested approximately
$500,000 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
nine months of 1997, collectively accounting for 51.5% 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 their relationship
with the Company, could adversely 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 nine months ended September
30, 1997, the Company's net loss was $196,714, compared to $239,623 in 1996,
a decrease of $42,909. In the 1997 period, licensing revenue increased
$87,500, while the decline in reimbursements under the Reimbursement
Agreement, was approximately $80,000. The Company will not likely receive any
further licensing revenue or reimbursements from Gaiam in the future.
During 1997, the Company has undertaken a debt offering to raise a minimum
of $500,000 and a maximum of $1,500,000 of privately placed subordinated
debentures. As of October 31, 1997, $347,500 of new debentures had been
placed ($235,000 of which had been raised as of September 30, 1997, and is
classified as restricted cash in escrow) and holders of $175,000 in existing
debentures had signed new agreements, agreeing to participate in the new
offering by converting their existing debentures into the new offering. The
combined amount of $522,500 ($410,000 as of September 30, 1997) exceeds the
$500,000 minimum placement and, accordingly, has been classified as long term
debt to reflect management's ability and intent to refinance these debentures
due in February, 1998. The new debentures are due June 30, 2002 at an annual
rate of interest of 10.85%.
The Company repaid $180,000 in subordinated convertible debentures in
February of 1996. On December 18, 1996, the holder of an outstanding
convertible debenture, with a principal balance of $100,000, agreed to extend
the due date to February 29, 2002. In February 1998, $620,000 of debentures
are scheduled to come due, with an additional $100,000 due in November of
1998. The Company is actively involved in seeking to extend or refinance
these debentures as well as raising additional funds. The Company's success
in these matters will affect the Company's results from operations and
liquidity in 1998. The Company's inability to extend the due dates of these
debentures or replace them with new debentures or alternate financing would
adversely affect the Company's liquidity.
While the Company did not reach operating levels during the first nine
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. The
Company is current in all of its obligations. The Company's working capital
as of September 30, 1997 was approximately $1,142,000, and the current ratio
(current assets/current liabilities) was 2.6 to 1. The Company believes that
the cash infusion from the recent private placement of debentures, together
with a manageable level of operating losses, will allow the Company sufficient
liquidity to pay its obligations on a timely basis at least through 1998. The
Company's longer-term liquidity will depend on the Company's ability to
generate profits from operations and to refinance its existing indebtedness.
The Company 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 the leading brand of environmentally friendly
household products.
New Accounting Pronouncements
- -----------------------------
Statement of Accounting Standards No. 128 - "Earnings Per Share"
----------------------------------------------------------------
Effective December 15, 1997, the Company is required to adopt Financial
Accounting Standard No. 128, "Earnings per Share." This Standard requires
both basic and diluted earnings per share to be reported for all periods
presented. When income/(loss) per common share is calculated in accordance
with this Standard, for the three and nine months ended September 30, 1997
and 1996, basic and diluted income/(loss) per common share do not differ
from reported amounts.
<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 September 30, 1997.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SEVENTH GENERATION, INC.
Date: November 11, 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 21
27 23
<PAGE>
Exhibit 11
<PAGE>
Exhibit 11
SEVENTH GENERATION, INC.
Calculation of Shares Used In Determining Net Loss Per Common Share
Three and Nine Months Ended September 30,
1997 1996
Weighted Average Shares Outstanding
During the Period 2,428,791 2,428,791
<PAGE>
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See accompanying notes.
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<SECURITIES> 512821
<RECEIVABLES> 841101
<ALLOWANCES> (19203)
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<PP&E> 101592
<DEPRECIATION> (64868)
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<BONDS> 717500
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<COMMON> 809
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