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 MARCH 31, 1998
[ ] 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.
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(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
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(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
April 30, 1998 was 2,428,791. The number of Redeemable Common Stock Purchase
Warrants outstanding as of April 30, 1998 was 1,540,869.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
TOTAL NUMBER OF PAGES: 20 EXHIBIT INDEX APPEARS ON PAGE: 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
ASSETS
March 31, December 31,
1998 1997
(Unaudited)
Current assets:
Cash and cash equivalents $ 186,832 $ 311,226
Short-term marketable securities 162,269 257,698
Accounts receivable-trade,
net of allowance for doubtful
accounts of $25,000 at March 31,
1998 and December 31, 1997 1,455,836 911,320
Accounts receivable-other 10,951 39,856
Inventories 699,489 344,440
Other assets 77,163 54,278
------------ ------------
Total current assets 2,592,540 1,918,818
Equipment:
Computer equipment 75,929 68,129
Equipment and furniture 53,436 33,863
------------ ------------
129,365 101,992
Less accumulated depreciation
and amortization 74,562 70,142
------------ ------------
Equipment and furniture, net 54,803 31,850
------------ ------------
Deposits and other assets 23,202 25,054
------------ ------------
Total assets $ 2,670,545 $ 1,975,722
============ ============
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1998 1997
(Unaudited)
Current liabilities:
Current installments of
subordinated convertible debentures $ 100,000 $ 100,000
Current portion of capital leases 2,242 2,151
Accounts payable-trade 851,413 251,368
Other accrued expenses 303,539 160,095
------------ ------------
Total current liabilities 1,257,194 513,614
Long-term debt:
Obligations due under capital leases 5,769 6,365
Subordinated convertible debentures,
excluding current installments 847,500 847,500
------------ ------------
Total liabilities 2,110,463 1,367,479
------------ ------------
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 1998 and 1997 809 809
Additional paid-in capital 12,264,623 12,264,623
Accumulated deficit (11,705,350) (11,657,189)
------------- ------------
Total stockholders' equity 560,082 608,243
------------- ------------
Total liabilities and stockholders' equity $ 2,670,545 $ 1,975,722
============= ============
See accompanying notes to financial statement
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
For the Three Months Ended
March 31, March 31,
1998 1997
(Unaudited) (Unaudited)
Sales $ 2,287,702 $ 1,570,165
Cost of sales 1,613,361 1,089,327
----------- -----------
Gross profit 674,341 480,838
----------- -----------
Operating expenses:
Selling and marketing expenses 326,910 271,359
Operations and distribution expenses 157,945 104,839
General and administrative expenses 221,881 163,239
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Total operating expenses 706,735 539,437
----------- -----------
Other income (expense):
Interest income 12,129 6,535
Interest expense (26,043) (20,712)
Other (1,852) (238)
----------- -----------
Total other expense, net (15,767) (14,415)
----------- -----------
Net loss $ (48,161) $ (73,014)
=========== ===========
Loss per common share: $ (0.02) $ (0.03)
Weighted average shares
outstanding during the period 2,428,791 2,428,791
See accompanying notes to financial statement
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
For the Three Months Ended
March 31, March 31,
1998 1997
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (48,161) $ (73,014)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,420 1,182
(Gain) loss on short-term securities (9,118) 1,684
Changes in assets and liabilities:
Increase in accounts receivable-trade (544,516) (263,824)
Decrease in accounts receivable-other 28,905 572
Increase in inventories (355,049) (57,822)
(Increase) decrease in other assets (22,885) 32,025
Decrease (increase) in
deposits and other assets 1,852 (900)
Increase in accounts payable-trade 600,045 68,965
Increase (decrease) in accrued expenses 143,444 (66,323)
---------- ----------
Net cash used in operating activities (201,063) (357,455)
---------- ----------
Cash flows from investing activities:
Sales of short-term securities 182,265 -
Purchases of short-term securities (77,718) (500,000)
Purchases of equipment (27,373) (10,060)
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Net cash provided by (used in)
investing activities 77,174 (510,060)
---------- ----------
Cash flows from financing activities:
Principal payments on capital leases (505) -
---------- ----------
Net cash used in financing activities (505) -
---------- ----------
Net decrease in cash and cash equivalents (124,394) (867,515)
Cash and cash equivalents, beginning of period 311,226 1,233,006
---------- ----------
Cash and cash equivalents, end of period $ 186,832 $ 365,491
========== ==========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
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, 1998.
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, 1997, 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 Generationr brand products to retailers on a wholesale basis.
Since the sale of its catalog in May 1995, the Company has focused exclusively
on the wholesale business.
Principles of Consolidation.
Effective January 1, 1994, the Company 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 discounts.
Cash and Cash Equivalents.
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
Short-Term Investments.
Short-term investments consist of marketable corporate debt securities,
which are recorded at market value.
Inventories.
Inventories include purchased goods that are stated at the lower of cost or
market using the first-in, first-out (FIFO) method.
Furniture and Equipment.
Furniture and equipment are 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.
Stock Based Compensation.
The Company has elected to continue accounting for the issuance of stock
based compensation under APB Opinion No. 25, "Accounting for Stock Issued to
Employees."
Advertising.
Advertising, selling, and marketing expenses are expensed as they are
incurred. The amounts spent on advertising, selling and marketing expenses
for the three months ended March 31, 1998 and 1997 were $82,242 and $79,071,
respectively. Included in advertising expense for the three months ended
March 31, 1998 and 1997 were approximately $25,000 and approximately $31,000,
respectively, for co-op advertising with distributors and retailers, and
approximately $57,000 and approximately $48,000, respectively, for charge-backs
related to marketing promotions.
3. EARNINGS PER SHARE
Basic and diluted net loss per common share are computed by dividing net loss
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 1998 and 1997 and thus did
not affect basic or diluted net loss per common share.
4. TRANSACTIONS WITH GAIAM
Pursuant to a Supply Agreement with Gaiam, Inc., the purchaser of the
Company's former catalog (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. Pursuant to the
Supply 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 year ended December 31, 1997, Gaiam
fulfilled 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 March 31, 1998, Gaiam purchased
approximately $311,700 of product at cost plus 5%, yielding sales of
approximately $327,300. Gross margin from these sales wass approximately
4.8%. During the three months ended March 31, 1997, Gaiam purchased
approximately $257,700 of product at cost plus 20%, yielding sales of
approximately $309,200. Gross margin from these sales was approximately 16.7%.
The decrease in gross profit for the three months ended March 31, 1998 due to
the change in markup percentage was approximately $46,700.
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 March 31, 1998 $327,300 $1,960,400 $2,287,700
Gross profit percentage 4.8% 33.6% 29.4%
Three months ended March 31, 1997 $309,200 $1,261,000 $1,570,200
Gross profit percentage 16.7% 34.1% 30.6%
Percentage increase in sales from 1997 5.9% 55.5% 45.7%
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 paid the Company a non-refundable license fee of $100,000 for continued
use of the rights through May 23, 1998. The license fee requires no further
performance by the Company and was recognized as revenue in 1997. Gaiam has
announced that it plans to change the name on its mail order catalog and may
choose at any time to discontinue use of the Seventh Generation(r) name.
Accordingly, the Company does not anticipate receiving any further licensing
revenue pursuant to this Agreement.
The Company also entered into a Non-Compete Agreement with Gaiam, pursuant to
which the Company agreed not to sell environmental products directly to end
users through a mail order catalog operated by the Company.
5. SUBORDINATED CONVERTIBLE DEBENTURES
March 31,1998 December 31, 1997
------------- -----------------
Subordinated convertible debentures
consist of the following:
Variable rate subordinated debentures,
unsecured, due June 30, 2002 $ 847,500 $ 847,500
10% subordinated convertible debentures,
unsecured, due November 30, 1998,
convertible at a price per common share
of $6.67 100,000 100,000
----------- -----------
Total subordinated convertible debentures 947,500 947,500
Less current installments (100,000) (100,000)
----------- -----------
Subordinated convertible debentures,
less current installments $ 847,500 $ 847,500
=========== ===========
The variable rate debentures are due June 30, 2002, and bear interest at an
initial annual rate of 10.85%. The Company has the option to pay interest at
the lesser of 4% over the June 30 five-year United States Treasury Note yield
(currently 10.85%) or 12.5% annually through December 31, 1998. At January 1,
1999, the Company has the option of paying interest as previously calculated or
paying an annual rate of 22%. If the Company chooses to continue paying
interest as previously calculated, the debentures become convertible at the
option of the debenture holder at any time after January 1, 1999. The
debenture will be convertible at a discounted price ranging from 25% to 50%
of the fair market value of the Company's common stock, based on certain stock
price benchmarks. In no event will the conversion price be less than $0.50 per
share. Accordingly, a minimum of 1,695,000 shares of common stock are
reserved for the potential conversion of these debentures.
The number of shares of common stock reserved for the potential conversion of
convertible debentures was 14,993 at March 31, 1998 and December 31, 1997.
6. 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 customers, including
Gaiam, the purchaser of the catalog segment. The Company's contractual
relationship with Gaiam is uncertain. Gaiam's obligation to purchase product
at a 20% markup terminated in 1997 and the Company is currently obligated to
sell its products to Gaiam at cost plus 5%, which will reduce the Company's
sales and its profit margins on sales to Gaiam. If the number of distributors
were reduced, principal customers do not meet their commitments, or sales and
gross profit margins do not reach sufficient levels to provide positive cash
flow, the Company may not have adequate liquidity to sustain long term
operations and meet long term obligations.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments at March 31, 1998
approximate their estimated fair values. The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:
Cash and Cash Equivalents.
The carrying amount approximates fair value due to the short-term maturity
of these instruments.
Short-Term Investments.
Short-term investments consist of marketable corporate debt securities,
which are recorded at market value.
Subordinated Convertible Debentures.
The carrying amount approximates fair value as the interest rates on the
debentures approximate the Company's current borrowing rate.
8. RELATED PARTY TRANSACTIONS
During 1997, the Company engaged KSV Communicators, the firm of one of its
directors, Yoram Samets, to perform marketing services at a cost of
approximately $37,000 for the year ended December 31, 1997. These services
have cost approximately $89,000 during the first three months of 1998.
9. CONCENTRATIONS OF CREDIT RISK
Concentration of credit risk consists primarily of cash and cash equivalents.
From time to time the Company has on deposit with certain banks and financial
institutions cash and cash equivalents which exceed the amount subject to
federal insurance. The Company attempts to mitigate this risk by depositing
its cash and cash equivalents with high credit quality financial institutions.
10. MAJOR SUPPLIERS AND CUSTOMERS
The Company purchased approximately 82% of its product from four suppliers
during the three months ended March 31, 1998.
The Company had sales of approximately 66% to three customers during the three
months ended March 31, 1998 and approximately 70% of accounts receivable were
due from three customers as of March 31, 1998.
During 1998 and 1997, Jeffrey A. Hollender, the Chief Executive Officer of
the Company, guaranteed up to $300,000 of the obligations of the Company to
one of its principal suppliers.
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, the effects
of the year 2000 on customers' and suppliers' computer systems, and other
unforeseen risks and uncertainties.
The Company's primary strategic objective is to establish Seventh
Generation(r) as the leading brand name for products that are "safer for you
and the environment." The Company believes that it is one of the leading
marketers of environmentally friendly household products in the United States
and in Central and Western Canada. The Company sells Seventh Generation(r)
brand name products through distributors to natural products stores throughout
the United States and in Central and 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 sales opportunities and
distribution channels through it's "Learning to Make a Difference" program
and private label sales. The Company's products are also marketed through the
Harmony / 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 all 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; full spectrum light bulbs; baby wipes and feminine hygiene products.
The Company markets and distributes, but does not manufacture, its products.
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's marketing strategy utilizes in-store promotion as its primary
means to stimulate consumer trial and repeat purchases in natural products
stores and supermarkets, rather than more costly marketing strategies such
as television advertising and mass-delivered consumer promotions.
The Company has begun to expand its marketing activities to include direct
mail and radio advertising.
The Company's other marketing activities have included public relations
programs that have led to news coverage on television, in magazines and
newspapers, in-store point of purchase displays and educational literature,
participation in environmental events and activities, trade promotions directed
to the natural products and supermarket industries, the distribution of product
samples to encourage new customers to try the Company's products, the
development of a web site to provide information and education
(www.seventhgen.com) and the licensing of its name for use on the Gaiam mail
order catalog which is distributed directly to consumers.
Seventh Generation(r) brand name products are available in natural products
retail stores. During the three months ended March 31, 1998, the Company's
sales to the Natural Products Industry and supermarkets grew significantly
over sales in the three months ended March 31, 1997 as a result of continued
market penetration, increased consumer marketing and trade promotions, and
new product introductions. The Company plans to continue its efforts to
introduce new products and expand distribution.
In January 1995, the Company made its first sales to supermarkets in the
Northeastern United States. The Company plans to continue with its primary
focus of expanding its sales and marketing efforts in the natural products
industry and to continue sales to upscale supermarket chains in the Northeast
and West Coast. 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's products are also sold through the Harmony / Seventh
Generation(r) mail order catalog operated by Gaiam. The Company continues
to develop other opportunities to expand sales and distribution, including
the new "Learning to Make a Difference" (TM) program and a limited number of
private label sales relationships.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to
Three Months Ended March 31, 1997
Operations
Sales to natural products accounts, supermarkets, Gaiam, and other customers
increased $717,537, or 45.7%, during the three months ended March 31, 1998 to
$2,287,702, compared to $1,570,165 during the three months ended March 31, 1997.
This favorable performance was due primarily to the continued growth of sales to
natural products and supermarket accounts and the growth of sales to other
customers.
Gross profit was $674,341 in the three months ended March 31, 1998, compared
to $480,838 during 1997, an increase of $193,503 over the same period in 1997,
or 40.2%. Gross profits decreased to 29.5% as a percentage of sales in the
1998 period, compared to 30.6% in 1997, due primarily to the changing mix of
sales and the change in the markup percentage on sales to Gaiam. The decrease
in gross profit on sales to Gaiam due to the change in markup percentage was
approximately $46,700.
Operating expenses were $706,735 in the three months ended March 31, 1998
compared to $539,437 during 1997, a decrease of 3.5% as a percentage of sales
from 34.4% of sales in the 1997 period to 30.9% of sales for the 1998 period.
Sales and marketing expenses were $326,910 in the period, compared to
$271,359 in the 1997 period. The additional expenses incurred were primarily
due to increased promotional spending and higher sales commissions, which
increase with sales. Sales and marketing expenses decreased 3% as a percentage
of sales from 17.3% in the first three months of 1997 to 14.3% in the first
three months of 1998.
Operations and distribution expenses were $157,945 in the 1998 period,
compared to $104,839 in the 1997 period. The additional expenses incurred
were primarily due to increased warehousing and freight costs on the higher
sales volume. Operations and distribution expenses increased slightly as a
percentage of sales from 6.7% in the first three months of 1997 to 6.9% in
the first three months of 1998.
General and administrative expenses were $221,881 in the 1998 period,
compared to $163,239 in the 1997 period. The additional expenses incurred
were primarily due to increased personnel costs. General and administrative
expenses decreased from 10.4% of sales in the first three months of 1997 to
9.7% of sales in the first three months of 1998.
Net other expenses increased slightly in 1998 as higher earnings on funds
invested were offset by an increase in interest due to the issuance of new
debentures in the fourth quarter of 1997 at a higher rate than was paid on
the debentures in 1997. See footnote # 5 of the financial statements for a
more complete description of debenture activity.
The net loss in the 1998 period was $48,161, compared to $73,014 in 1997, a
decrease of $24,853, or 34.0%.
Transactions with Gaiam
Pursuant to a Supply Agreement with Gaiam, Inc., the Company sells its brand
name products to Gaiam, which are resold through the Gaiam mail order catalog.
Gross margins from these sales are lower than on sales to other customers.
Pursuant to the Supply 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 year ended
December 31, 1997, Gaiam fulfilled 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
March 31, 1998, Gaiam purchased approximately $311,700 of product at cost
plus 5%, yielding sales of approximately $327,300. Gross margin from these
sales was approximately 4.8%. During the three months ended March 31, 1997,
Gaiam purchased approximately $257,700 of product at cost plus 20%, yielding
sales of approximately $309,200. Gross margin from these sales was
approximately 16.7%. The decrease in gross profit due to the change in markup
percentage was approximately $46,700.
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 March 31, 1998 $327,300 $1,960,400 $2,287,700
Gross profit percentage 4.8% 33.6% 29.4%
Three months ended March 31, 1997 $309,200 $1,261,000 $1,570,200
Gross profit percentage 16.7% 34.1% 30.6%
Percentage increase in sales from 1997 5.9% 55.5% 45.7%
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 paid the Company a non-refundable license fee of $100,000 for continued
use of the rights through May 23, 1998. The license fee requires no further
performance by the Company and was recognized as revenue in 1997. Gaiam has
announced that it plans to change the name on its mail order catalog and may
choose at any time to discontinue use of the Seventh Generation(r) name.
Accordingly, the Company does not anticipate receiving any further licensing
revenue pursuant to this Agreement.
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 its intention to change the name on its
mail order catalog to "Harmony" and may choose at any time to discontinue
use of the Seventh Generation(r) name. This will not affect the $100,000 in
non-refundable licensing revenue received in 1997. In the event that Gaiam
terminates the Licensing Agreement, the Company would not receive any further
licensing fees, which may adversely affect the Company's future results in
comparison to 1997. Gaiam's obligation to purchase products at a 20%
markup terminated in 1997 and the Company is currently obligated to sell its
products to Gaiam at cost plus 5%, which has reduced the Company's gross
margin percentage on sales to Gaiam in the first quarter of 1998 in comparison
to 1997, and is expected continue to reduce overall gross margin percentage.
The Company also entered into a Non-Compete Agreement with Gaiam, in which
the Company agreed not to sell environmental products directly to end users
through a mail order catalog operated by the Company.
Summary
Sales during the first three months of 1998 were $2,287,702, an increase of
$717,537, or 45.7%, from the sales of $1,570,165 during the 1997 period.
Gross profits were $674,341 for the first three months of 1998, an increase
of $193,503, or 40.2%, from $480,838 in the 1997 period. Gross profits were
29.5% of sales for the first three months of 1998, compared to 30.6% of sales
in the 1997 period. Operating expenses for the first three months of 1998
were $706,735, or 30.9% of sales, compared to $539,437, or 34.4% of sales in
the 1997 period. This was an improvement of 3.5% as a percentage of
sales. The net loss for the first three months of 1998 was $48,161, or 2.1%
of sales compared to $73,014, or 4.7% of sales in the 1997 period. This
represents a 34.0% reduction in the net loss for the periods compared.
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 $11,705,350 in accumulated deficits through March 31, 1998.
On May 24, 1995, the Company sold the assets of its mail order 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, and new channels of distribution.
The Company has incurred expenditures to support the expansion of its
wholesale distribution business during 1997 and the first three months of
1998 and expects to increase these expenditures during the remainder of 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 advertising and marketing, new product
development, package design, and the development of the "Learning to Make a
Difference"(TM) program. The Company also plans, for the first time, to use
radio advertising, which will significantly increase its marketing expenses.
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, 1998, the Company used approximately
$201,000 of its available cash balances through operations. The Company used
approximately $545,000 as accounts receivable expanded with the increase in
sales. The Company used approximately $355,000 of cash to increase its
inventories. Additionally, the Company has increased its accounts payable
by approximately $600,000, while increasing its accrued liabilities by
approximately $143,000. As of March 31, 1998, the Company's primary sources
of liquidity were approximately $187,000 in cash, approximately $162,000 in
marketable securities, and approximately $1,456,000 in accounts receivable.
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 1998 and together accounted for 66% 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 first three months of 1998, the
Company's net loss was $48,161, compared to $73,014 in 1997, a decrease of
$24,853, a 34.0% improvement.
During 1997, the Company completed a debt offering of privately placed
subordinated debentures. As of December 31, 1997, $572,500 of new debentures
had been sold, and holders of $275,000 of existing debentures had signed
agreements to participate in the new offering by converting their existing
debentures into the new debentures, extending the maturity dates to June 30,
2002. The new debentures are due June 30, 2002, and bear interest at an
initial annual rate of 10.85%. The Company has the option to pay interest
at the lesser of 4% over the June 30 five-year United States Treasury Note
yield (currently 10.85%) or 12.5% annually through December 31, 1998. At
January 1, 1999, the Company has the option of paying interest as previously
calculated or paying an annual rate of 22%. If the Company chooses to
continue paying interest as previously calculated, the debentures become
convertible at the option of the debenture holder at any time after
January 1, 1999. The debentures will be convertible at a discounted price
ranging from 25% to 50% of the fair market value of the Company's common
stock, based on certain stock price benchmarks. In no event will the
conversion price be less than $0.50 per share. Accordingly, a minimum of
1,695,000 shares of common stock have been reserved for the potential
conversion of these debentures. In November 1998, $100,000 of debentures
are scheduled to come due.
While the Company did not reach operating levels during the first three
months of 1998 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 March 31, 1998 was approximately $1,335,000, and the current ratio
(current assets/current liabilities) was 2.1 to 1. The Company believes
that the proceeds 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 the second
quarter of 1999. The Company's longer-term liquidity will depend on the
Company's ability to generate profits from operations.
The Company faced a number of significant challenges prior to 1996. The sale
of its 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,
while pursuing its mission of making Seventh Generation(r) the leading brand
of environmentally friendly household products. However, there can be no
assurance that the Company will be successful in this regard.
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. Management
believes that all software used is Year 2000 compliant. The Company is
currently unable to predict the extent to which the Year 2000 issue will
affect its suppliers or customers, or the extent to which it would be
vulnerable to such suppliers' or customers' failure to remediate any Year
2000 issue on a timely basis. The failure of a major supplier or customer
subject to the Year 2000 issue to convert its computer systems on a timely
basis could have a material adverse affect on the Company.
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, 1998.
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 4, 1998 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 17
27 19
<PAGE>
Exhibit 11
<PAGE>
EXHIBIT 11
SEVENTH GENERATION, INC.
Calculation of Shares Used in Determining
Basic and Diluted Earnings Per Common Share
Three Months Ended March 31
1998 1997
Loss applicable to common stockholders (48,161) (73,014)
Weighted average shares outstanding 2,428,791 2,428,791
Basic and diluted earnings per share $ (0.02) $ (0.03)
The calculation above for diluted earnings per common share excludes the
potentially dilutive effect of both common stock equivalents (stock options
and warrants) and the impact of conversion of any debentures into the
Company's common stock since the impact would be anti-dilutive for both
1998 and 1997.
<PAGE>
Exhibit 27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
See accompanying notes.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 186832
<SECURITIES> 162269
<RECEIVABLES> 1491787
<ALLOWANCES> (25000)
<INVENTORY> 699489
<CURRENT-ASSETS> 2592540
<PP&E> 129365
<DEPRECIATION> (74562)
<TOTAL-ASSETS> 2670545
<CURRENT-LIABILITIES> 1157194
<BONDS> 947500
0
0
<COMMON> 809
<OTHER-SE> 559273
<TOTAL-LIABILITY-AND-EQUITY> 2670545
<SALES> 2287702
<TOTAL-REVENUES> 2287702
<CGS> 1613361
<TOTAL-COSTS> 1613361
<OTHER-EXPENSES> 706735
<LOSS-PROVISION> (48161)
<INTEREST-EXPENSE> 15767
<INCOME-PRETAX> (48161)
<INCOME-TAX> 0
<INCOME-CONTINUING> (48161)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48161)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
