UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 1-12614
SEVENTH GENERATION, INC.
(Name of small business issuer in its charter)
Vermont 03-0300509
State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization
1 Mill St., Box A26, Burlington, Vermont 05401-1530
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (802) 658-3773
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of exchange on which registered
Common Stock, $.000333 par value Boston Stock Exchange
Redeemable Common Stock Purchase Warrants Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: None
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended December 31, 1997: $6,694,749
The aggregate market value of the voting stock held by non-affiliates of the
registrant (without admitting that any person whose shares are not included
in determining such value is an affiliate) was approximately $1,517,994 as
of February 14, 1998 (computed by reference to the average of the bid and ask
price of such stock on the OTC Bulletin Board). The number of shares of
Common Stock, $.000333 par value, outstanding as of February 14, 1998, was
2,428,791. The number of Redeemable Common Stock Purchase Warrants outstanding
as of February 14, 1998 was 1,562,994.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in response to Part III of Form 10-KSB is hereby
incorporated by reference to the specified portions of the registrant's Proxy
Statement for the 1997 Annual Meeting of Stockholders to be held May 4, 1998.
TOTAL NUMBER OF PAGES: 59 EXHIBIT INDEX APPEARS ON PAGE: 35
<PAGE>
PART I
Item 1. Business
Introduction
Seventh Generation, Inc.'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. Seventh Generation, Inc. (the "Company") was incorporated in
Vermont in September 1988 under the name Niche Marketing Services, Inc. and
began active operations in September 1988 when it published the first edition
of the Seventh Generation(r) Catalog. The Company's name was changed to
Seventh Generation, Inc. in May 1989. The Company is one of the leading
marketers of environmentally friendly household products in the United States
Natural Products Industry. 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 on the West
Coast, and has recently launched its "Learning to Make a Difference" program to
schools and other non-profit organizations seeking to raise funds. The
Company's products are also marketed through the "Harmony" / Seventh
Generation(r) mail order catalog (the "Catalog"), which was sold to Gaiam,
Inc. ("Gaiam") on May 24, 1995, and has been 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 takes its name from the Great Law of the Haudenosaunee (Six
Nation Iroquois Confederacy): "In our every deliberation, we must consider
the impact of our decisions on the next seven generations." This American
Indian quote expresses the concern that our planet is a fragile and delicate
place that is only temporarily entrusted to our care and that our actions have
repercussions that will affect future generations. The Company tries to honor
this philosophy by developing and marketing products, which have minimal
adverse impact on the environment and protect the planet for this generation
and those to come.
The Market for Environmentally Friendly Products
The Company's primary customers are consumers who are concerned about
their health and the health of the environment. Recent studies indicate that
there are a large number of people who identify themselves as environmentalists
and who act upon this concern and purchase "green" products. A number of
reports issued over the past year, briefly summarized below, confirm this
view.
A 1997 Roper Starch "Green Gauge" report found that the number of consumers
reading labels "to see if contents are environmentally safe" jumped from 19%
in 1996 to 25% in 1997. A November 1997 survey by the National Environmental
Education & Training Foundation found that 90% of those surveyed regularly
engage in at least 6 of 10 activities to protect the environment. A third
study, by Cambridge ReportS, published in February 1997 found that 78% of
the public believes that "recycling used products into new products is
absolutely essential."
For the third year in a row, sales of natural products were reported to grow
by greater than 20%. This growth brings total sales in natural / health food
stores and health food chains up to $11.5 billion, according to the June 1997
issue of the Natural Foods Merchandiser. This represents tremendous expansion
in an industry that had total sales of under $1 billion in 1980. The expansion
of the natural and health food industry is driven by "Americans' search for
natural, effective and safe health-care solutions," according to the magazine.
The Company's marketing strategy is focused on growing sales and becoming a
key supplier to targeted retailers and distributors that are participating in
this market. The Company's strategy is in part to obtain a strategic advantage
with its social and environmental reputation as it competes with many larger
and better capitalized companies.
The Company believes that the market for "green" products within more
traditional retail outlets will experience significant growth in the coming
years. The Company believes that its expansion into supermarkets may allow
it establish a successful track record, allowing it to participate in this
growth and expand sales into a significantly larger market than it has to
date.
Products and Product Development
The Company strives to be a pioneer and leader in the marketing of
environmental benefits in consumer products, and believes it is equally
important to develop competitively priced, high-quality products. In addition,
the Company strives to present to its customers complete and detailed
information about the positive environmental impact of the products the
Company sells, and believes this is an important value-added service.
The Company markets products in a number of categories, including: paper
products, such as bathroom and facial tissues, paper towels, napkins and
plates; a diverse range of non-toxic, biodegradable laundry and cleaning
products; trash bags made from recycled plastic; full spectrum light bulbs;
and personal care products, including baby wipes and feminine hygiene products.
The Company considers the development of new products and the improvement
of its current products to be an important part of its overall business
strategy. The Company's senior management is directly involved in both of
these activities. The Company estimates that in each of fiscal 1996 and 1997
it spent approximately $50,000 to develop new branded products.
In 1997 the Company introduced eight new products. They included the
Company's first entry into the lighting category with three full spectrum
light bulbs, a new travel pack size of baby wipes, a new green apple scent
dish liquid with aloe vera, and three lower count paper products. These
lower count paper products enable the Company to provide its customers with
bathroom tissue, paper towels and napkins at retail prices as much as 50%
lower than its current jumbo count products. The Company also introduced
improved versions of its jumbo 4-pack bathroom tissue, automatic dish
detergent and white paper towels.
The Company does not manufacture any of its products. During 1997, the
Company purchased products from 12 suppliers. The Company relied on three
suppliers for approximately 76% of its inventory purchases in 1997 (compared
to 84% in 1996). The Company has no long-term contracts with any of its
suppliers. The loss of one of these suppliers, or a disruption in product
availability from them, could have a material adverse effect on the Company's
results from operations.
Although the Company is not a manufacturer, as a seller of products it is
exposed to potential liability and maintains product liability insurance.
During its history, product liability claims have not resulted in any
material liabilities for the Company. There can be no assurance, however,
that the Company will not experience legal claims in excess of its insurance
coverage or claims which are ultimately not covered by insurance. If any
claims are instituted against the Company, the Company's business may be
adversely affected by related negative publicity.
Brand Development
As part of the Company's commitment to disseminating environmental
information to consumers, its product packaging, point of sale materials,
and sales literature include educational information to help consumers make
informed buying decisions. For example, the packaging on each roll of the
Company's paper towels informs the consumer that: "If every household in the
U.S. replaced just one roll of 180 sheet virgin fiber paper towels with 100%
recycled ones, we would save - 864,000 trees - 3.4 million cubic feet of
landfill space, equal to 3,900 full garbage trucks - 354 million gallons of
water, one year's supply for 10,100 families of four." Additionally, the
Company's President, Jeffrey Hollender, authored a book published by W.W.
Norton & Co. in March 1995 entitled "How to Make the World a Better Place
- - 116 Ways You Can Make a Difference," and often speaks at universities,
trade shows and conferences.
In 1996, the Company published "Frequently Asked Questions about Chlorine,"
the first in a series of educational brochures. The series is an integral
part of the Company's ongoing public education campaign. The campaign will
focus on answering frequently asked questions that consumers have about the
environment and environmental products. The educational series is available
free to the public and will be distributed by mail and through natural
products stores nationally. The second publication in this series,
"Frequently Asked Questions about Petroleum and Household Cleaners," was
published in the first quarter of 1997. In the fourth quarter of 1997, the
Company co-published with Friends of the Earth, "Understanding the Chemicals
Used in Common Household Products," a 44 page guide designed to help buyers
in retail stores make better environmental choices about the products they
stock.
The Company believes that each of these activities builds an understanding of
the health and environmental issues that relate to the Company's products,
thereby broadening the market for and enhancing the credibility of the Seventh
Generation(r) brand name.
Social & Environmental Responsibility
The Company's commitment to social and environmental responsibility is
achieved through its actions in a number of different areas:
ENVIRONMENTALLY RESPONSIBLE PRODUCTS
Seventh Generation's mission is: "To provide high quality, environmentally
conscious products that are safer for your home, your neighborhood, and the
Earth's environment. We are dedicated to providing competitively-priced
products that work as well as or better than leading brands, fit effortlessly
into your everyday life, and put a smile on your face whenever you use them."
Seventh Generation's line of 37 consumer household products include bathroom
and facial tissues, laundry and dish products, cleaning products, trash bags,
full spectrum light bulbs and personal care products. Our paper products and
trash bags are manufactured with high post consumer content recycled materials
and without the use of any chlorine. All cleaning products are based upon
ingredients that are derived from renewable resources (vegetable as opposed
to petroleum), are non-toxic, biodegradable and are not tested on animals.
Seventh Generation tracks the amount of petroleum, trees, landfill space and
water saved as a result of the sale of the Company's environmental, recycled,
natural resource-based household products as compared to traditional products
made with toxic, non-renewable or virgin materials. The Company's positive
environmental impact during 1997 was substantially greater than during 1996,
reflecting the Company's growing sales during 1997.
Seventh Generation's "Environmental Saving Statement" for 1997 calculates the
total environmental savings from the sale of its recycled paper products,
renewable resource-based cleaners and its trash bags which are manufactured
with recycled plastic. The Company included for the first time in its 1997
calculation the energy saved as a result of manufacturing paper from recycled
rather than virgin fiber.
Seventh Generation
Environmental Savings 1997
Total Petroleum Saved:
in # of gallons 268,299
in # of New England homes heated for a year 268
in # of miles driven on petroleum saved 6.7 million
Trees saved 27,250
Landfill space saved, in cubic feet 111,620
Equivalent # of garbage trucks 134
Water saved, in millions of gallons of 11.2
CO2 (greenhouse gases) saved, in pounds 60,421
HUMAN RESOURCE POLICIES
The challenge of creating a healthy workplace and treating employees with the
respect and dignity they deserve is as important to Seventh Generation as the
care that goes into the products the Company markets and distributes.
Policies such as providing comprehensive health insurance at no cost to the
Company's employees, coverage for unmarried and same sex partners, education
and training paid for by the Company, flex-time, tele-commuting, and a work
environment that supports and encourages open and honest communication are
some of the ways the Company supports its staff.
SUPPORTING COMMUNITY ORGANIZATIONS AND ENVIRONMENTAL NON-PROFITS
Seventh Generation has consistently supported community organizations and
environmental non-profit organizations with product donations and a limited
amount of cash contributions. Some of the groups the Company has supported
include: Citizens Clearing House for Hazardous Waste, Environmental Health
Research Foundation, and Friends of the Earth.
Seventh Generation also supports a number of organizations through
memberships including: Vermont Businesses for Social Responsibility, the
Social Venture Network, Chlorine Free Products Association and Green Seal
Environmental Partners.
The Company's President, Jeffrey Hollender, is also a frequent speaker at
environmentally oriented events and conferences, including: Natural
Nutritional Food Association, SOHO Show; International Emerging Technologies
Conference; the Harvard Environmental Forum; and Businesses for Social
Responsibility.
Seventh Generation also supports its local community. In 1997 the Company
was the co-sponsor of a statewide project to evaluate the health of Vermont's
frog population. The Company co-sponsored a three day speaking tour for Sandra
Steingrabber, the author of "Living Downstream, An Ecologist Looks at Cancer
and the Environment," and the Company also underwrote the "Sustainable
Lifestyles Conference" in South Royalton, VT.
AWARDS & RECOGNITION
The Company has won numerous awards over the years. In the past three years,
the Company received the "Green Seal Award," the "Environmental Stewardship
Challenge Award" from the Direct Marketing Association, the "Massachusetts
Packaging Challenge Gold Award," the "Most Responsive Mailer Award" from the
National Waste Prevention Coalition, and the "Socially Responsible Business
Award" from the Natural Products Expo.
OUR BOARD OF ADVISORS
To help guide the Company's development, an Advisory Board was assembled in
1989. The Advisory Board includes a number of the United States' most
respected environmentalists: Alice Tepper-Marlin, Founder & Executive
Director of the Council on Economic Priorities; Amory Lovins, President of the
Rocky Mountain Institute; Gregory Watson, formerly the Eastern Regional
Director of the The Nature Conservancy; Peter Bahouth, former Executive
Director of Greenpeace, currently Executive Director of Turner Foundation,
Inc.; Winona LaDuke, Director, White Earth Land Recovery Project, Indigenous
Women's Network; Mindy Lubber, U.S.P.I.R.G., President, Green Century
Fund; Martin Wolf, President, Giessen Wolf Associates; and Stephen Viederman,
President of the Jessie Smith Noyes Foundation. The Advisory Board does not
endorse, test or approve products, nor are they compensated for their efforts.
Marketing
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 has relied 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. In the future, the Company plans to expand its marketing
activities targeted directly to consumers, which may include direct mail and
radio advertising. 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 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 product and grocery 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.
The Company believes that these activities have effectively begun to build
awareness of the Seventh Generationr brand name. The Company's marketing
strategy also focuses on its innovative products, corporate activities that
demonstrate the Company's environmental leadership, educational activities,
and the public profile of the Company's Chief Executive Officer, Jeffrey A.
Hollender. Environmental information and educational material can be found
in almost all Company communications.
Wholesale Distribution
Natural Products Stores
In January 1992, the Company launched its wholesale distribution program
through which the Company began to market its Seventh Generation(r) brand name
products to natural product retailers. Today, Seventh Generation(r) brand name
products are available in almost all of the Natural Products Industry's larger
stores. In 1997, the Company's sales to the Natural Products Industry grew
significantly over sales in 1996 as a result of continued market penetration,
new product introductions, the Company's "Every Day Low Price" programs which
lowered its retail prices, and consumer and trade promotions. The Company's
primary focus in 1998 is expected to continue to be the expansion of its
distribution and promotions in the Natural Products Industry.
Additionally, based on the Company's research which indicated that only 10%
to 20% of customers shopping in natural food stores purchase environmental
household products, the Company will attempt to attract a greater share of
these targeted customers to trying the Company's products through a variety
of new marketing programs, including radio.
Some of the merchandise categories in which the Company sells its Seventh
Generation(r) brand products to the natural product industry have experienced
"dramatic sales increases" during both 1996 and 1997, according to SPINS
Distributor Information reports. The SPINS data, which covered category
growth in sales dollars during the first ten months of 1996, reported that
cleaning products overall grew 36.9%, with dish products growing 46.5% and
laundry products up 29.8%. Paper products also showed strong growth with
paper towels up 47.4% and other paper items such as facial tissue and paper
plates up 40.6%. Sales of environmental household products grew at a
significantly faster pace than the industry overall in 1997.
Mass Market Retail Outlets
The Company believes that entry into upscale supermarkets will allow it to
expose Seventh Generationr brand name products to additional consumers
interested in "green products." Expansion into this market also represents a
logical growth path since the product categories represented by the Company's
brand name products are primarily purchased in supermarkets. Supermarkets
are currently stocking natural and environmental products. The March/April
1996 issue of Private Label magazine reporting on key growth categories in
the supermarket industry found that "natural food" sales dollars grew 19.58%
from 1994 to 1995. The study, based on Infoscan supermarket data, determined
that the "natural food" category was the sixth fastest growing of the 243
categories they track.
In January 1995, the Company made its first sales to supermarkets in the
Northeastern United States. The Company's sales efforts are now focused
primarily on upscale supermarket retailers and wholesalers in the Northeast
and on the West Coast. Although the Company is starting to realize sales to
this market segment, it has also encountered numerous challenges related to
generating product sell through without consumer advertising. There can be
no assurance that the Company will be successful with its sales and marketing
strategy in this area, though it plans to continue to invest in developing
this market.
New Sales & Distribution Activities
Over the past year, the Company has developed a new fund-raising program
called "Learning to Make a Difference" and began marketing this program in
the fourth quarter of 1997. J.L. Hammett, one of the nation's leading
marketers of school supplies has agreed to participate as the Company's
marketing partner in this program. The fund-raising program is targeted
to schools and environmental organizations and is designed to sell the
Company's products.
"Learning to Make a Difference" combines information and activities concerning
the importance of "closing the loop" on recycling and engages students through
the development of math, science, art, and writing and communications skills.
Students then use these skills during the second phase of the program as they
focus on the sales and marketing of the Company's recycled paper products to
raise funds for their school. The sales effort concentrates on how the
recycled products make a positive contribution to the environment by saving
trees, landfill space, energy and water. As products are sold, students
monitor the specific impact they are having on the environment, and then
publicize the positive contribution they and their schools have made. The
project is designed to inspire students, build confidence, and allow the
students to experience ways to make positive contributions to alleviate
problems faced by the environment.
While the Company has initially received a very positive response to this new
program there can be no assurance that the Company will be successful with its
sales and marketing strategy in this area.
The Company's sales to natural products stores and supermarkets are generally
made to distributors who resell the products to retail outlets. The Company
has two customers whose purchases of the Company's products accounted for more
than 10% each of the Company's total sales in 1997 and together accounted for
59% of the Company's sales.
Competition
Companies selling similar consumer products compete on price, quality, product
features and benefits, brand credibility and customer service. The
environmental product marketplace is becoming increasingly competitive, with
a number of competitive brands now on the market. Many of these competitors
may have an advantage over the Company because they manufacture the products
they sell. In 1997, one of the Company's largest natural product retail
customers began to market its own brand of private label environmental
products. Other of the Company's customers, including distributors, are
considering similar programs. These new private label programs create
significant new competition for the Company and may adversely effect the
Company's growth in the Natural Products Industry.
In addition, the Company's competitors and other large consumer products
companies who may decide to develop competitive products may have financial
resources, distribution capabilities and marketing experience superior to that
of the Company.
Transactions with Gaiam
In connection with the sale of assets to Gaiam for $1,270,000 and the
assumption of over $500,000 in liabilities, on May 24, 1995, the Company also
entered into a Licensing Agreement, 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 an
initial license fee of $200,000 and paid an additional annual, non-refundable
license fee of $100,000, for a one-year period commencing May 25, 1997. Gaiam
is currently using the name "Harmony" together with the Seventh Generation(r)
name on the mail order catalog it purchased from the Company and the Company
believes, based upon representations made to the Company by Gaiam, that Gaiam
will choose to discontinue use of the Seventh Generation(r) name at the end of
the current period. Accordingly, management expects not to receive further
licensing revenue under the Licensing Agreement.
At time of the sale of the mail order catalog, the Company entered into a
Supply Agreement with Gaiam. As a result of this Supply Agreement, the
Company sells its brand name products to Gaiam and Gaiam resells those
products through its "Harmony" / Seventh Generation(r) mail order catalog.
Gaiam had agreed to purchase, as part of the Supply Agreement, a minimum of
$2,500,000 of brand name products over a three year period, beginning on May
24, 1995, at cost plus 20%. During 1997, Gaiam fulfilled its obligation under
the Supply Agreement to purchase this minimum amount of product. Currently
the Company is required to sell certain products to Gaiam at cost plus 5%.
This has affected, and will continue to affect the Company's gross profit.
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. This Operating Agreement helped lower
the Company's overall operating expenses. 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
that period the Company was reimbursed approximately $109,000. The
Reimbursement Agreement terminated at the end of 1996, causing the Company to
incur additional expenses during 1997. This, however, has 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 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.
Trademarks
The Company is the owner of United States Service Mark Registration No.
1,637,211 for the mark Seventh Generation(r) covering mail order catalog
services in the field of environmentally sensitive products. This
registration is due to expire on March 5, 2001, but may be renewed on or
before that date and each 10-year period thereafter, so long as the Company
continues to use the name, or license its use, on mail order catalogs. The
Company is also the owner of United States Trademark Registration No.
1,847,543 for the mark Seventh Generation(r) covering a wide range of its
branded products. This registration will be due for a declaration of use by
August 2, 2000. It will then be due to expire on August 2, 2004, but may be
renewed on or before that date and each ten years thereafter.
The Company is the owner of United States Registration No. 1,957,311 for the
slogan "Products For a Healthy Planet" covering a wide range of its branded
products. This registration will be due for a declaration of use by February
2, 2002. It will then be due to expire on February 20, 2006, but may be
renewed on or before that date and each ten years thereafter.
The Company also uses the Seventh Generation(r) mark in connection with mail
order catalog services and on its branded products in Canada. The Company is
the owner of Canadian Trademark Registration No. 476,203 for the mark Seventh
Generation(r) covering mail order catalog services and a wide range of its
branded products. This registration will be due for renewal on May 13, 2012.
The Company believes that its ability to market its products has been based
largely on its reputation as a reliable source of environmentally friendly
products and that its use of the Seventh Generation(r) mark is integral to
its business.
Government Regulation
The Company must remain in compliance with a variety of laws, regulations and
guidelines issued by the Federal Trade Commission and the states' attorneys
general, as well as other agencies, with respect to the use of environmental
marketing claims on packaging, and in other advertising and marketing
literature. While the time and cost of compliance with such laws and
regulations is not material, if the Company were to fail to comply with their
requirements, it could be assessed fines and penalties that could adversely
affect the Company and its reputation.
Employees and Consultants
As of December 31, 1997, the Company had 7 full-time employees. The Company
engages consultants on an ongoing basis.
Item 2. Properties
The Company currently rents 1,968 square feet at One Mill Street, Burlington,
Vermont, where the Company's marketing and administrative staff is located.
The Company's inventories are held in public warehouses in New Jersey and
California. The Company believes that these facilities are adequate for its
present needs.
Item 3. Legal Proceedings
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. There currently are no
proceedings against the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the National Association of
Securities Dealers, Inc. ("NASDAQ") OTC Bulletin Board under the symbol
"SVNG" and on the Boston Stock Exchange under the symbol "SGN". The
Company's Redeemable Common Stock Purchase Warrants are traded on the
NASDAQ OTC Bulletin Board under the symbol "SVNGW" and on the Boston Stock
Exchange under the symbol "SGN&W."
The Company's securities have traded on the NASDAQ OTC Bulletin Board
since June 22, 1995 on the basis of actual trading prices. Prior to such date,
the Company's securities traded on the NASDAQ SmallCap Market system on the
basis of actual trading prices. The following table sets forth the range of
quarterly high and low bid quotations for the period from January 1, 1996 to
December 31, 1997, as furnished by NASDAQ. The quotations represent
inter-dealer quotations without adjustment for retail markups, markdowns, or
commissions, and may not necessarily represent actual transactions.
COMMON STOCK
Calendar 1997: HIGH LOW
Fourth Quarter .63 .47
Third Quarter .63 .47
Second Quarter .69 .44
First Quarter .84 .50
Calendar 1996: HIGH LOW
Fourth Quarter 1.00 .44
Third Quarter 1.50 .75
Second Quarter 1.88 .56
First Quarter .81 .38
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Calendar 1997: HIGH LOW
Fourth Quarter .05 .016
Third Quarter .016 .016
Second Quarter .016 .016
First Quarter .06 .016
Calendar 1996: HIGH LOW
Fourth Quarter .06 .00
Third Quarter .22 .06
Second Quarter .22 .06
First Quarter .16 .03
The Company has not declared or paid cash dividends on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future. At
March 16, 1998, the approximate number of Stockholders of Record of the
Company's Common Stock was 155 and the approximate number of beneficial
owners was 1,159.
The number of shares of common stock reserved for the potential conversion of
convertible debentures was 14,993 at December 31, 1997 and 122,939 at December
31, 1996.
Item 6. 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 our 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 Generationr
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
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 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. In the future, the Company plans to expand its
marketing activities targeted directly to consumers which may include direct
mail and radio advertising. 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 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 grocery 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 year ended December 31, 1997, the Company's sales
to the Natural Products Industry grew significantly over sales in the year
ended December 31, 1996 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 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 its sales
and marketing efforts in the natural products industry and to continue sales
to supermarket chains in the Northeast and West Coast, coupled with sales to
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
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Operations
Sales to natural products retailers, supermarkets, Gaiam and other customers
during the year ended December 31, 1997 were $6,694,749, compared to $5,191,563
during the year ended December 31, 1996, an increase of $1,503,186, or 29.0%.
This favorable performance was due primarily to the continued growth of sales
to the Natural Products Industry.
Gross profit was $1,970,797, compared to $1,562,761 during 1996, an increase
of $408,036, or 26.1%. Gross profit was 29.4% as a percentage of sales,
compared to 30.1% in 1996 (see Transactions with Gaiam).
Operating expenses were $2,304,766, or 34.4% of sales, compared to $1,812,414,
or 34.9% of sales during 1996. While operating expenses declined as a
percentage of sales, the additional expenditures were due primarily to variable
selling and marketing expenses which increase with additional sales volume,
increased general and administrative expenses due to a reduction in
reimbursements from Gaiam, and an increase in freight and warehousing costs
due to higher sales volume, increased inventory levels, and higher freight
costs associated with new product introductions. Included as a reduction in
operating expenses in 1996 is the effect of reimbursement by Gaiam to the
Company of approximately $109,000 under the Reimbursement Agreement described
below.
The loss in 1997 was $288,033, compared to $263,926 in 1996, an increase of
$24,107. The increase can be attributed to a reduction in reimbursements
from Gaiam under the Reimbursement Agreement of approximately $109,000 and
the increased operating expenses listed above. Losses in the 1997 period
were reduced as a result of the recognition of $100,000 in licensing fees
from Gaiam for the use of the Seventh Generation(r) name on the Gaiam mail
order catalog, as compared to $12,500 during 1996. The higher amount
positively affected the results of the Company's operations in comparison to
1996. Net interest expense increased in 1997 as a result of lower cash
reserves, additional subordinated convertible debentures issued at a higher
interest rate, and a lower rate of return on cash invested.
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. 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 purchased approximately $678,000 of product at cost plus 20% under
the terms of the Supply Agreement, yielding approximately $814,000 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 year ended December 31, 1997, Gaiam purchased
approximately $397,000 of product at cost plus 5%, yielding sales of
approximately $417,000. Gross margin from these sales was approximately 4.8%.
The following table summarizes sales to Gaiam and other customers and the
corresponding gross profit percentages for the periods indicated. All amounts
are approximate.
Gaiam Others Total
Year ended December 31, 1997 $1,231,000 $5,463,700 $6,694,700
Gross profit percentage 12.7% 33.2% 29.4%
Year ended December 31, 1996 $1,306,000 $3,885,500 $5,191,500
Gross profit percentage 16.7% 34.4% 30.1%
Percent change in sales from 1996 (5.7%) 40.6% 29.0%
The Company also entered into an Operating Agreement with Gaiam 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 year ended December 31, 1996, the Company was reimbursed
approximately $109,000 under these agreements. The Reimbursement Agreement
terminated at the end of 1996. As a result of the termination of these
agreements, the Company incurred additional operating expenses for the year
ended December 31, 1997. This has, however, allowed Jeffrey Hollender,
the Company's President and CEO, to devote all 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 an annual
license fee of $100,000 for continued use of the rights through May 23, 1998.
Gaiam has changed the name on its mail order catalog to "Harmony" and may
choose at any time to discontinue use of the Seventh Generation(r) name.
Accordingly, the Company does not anticipate any further licensing revenue
pursuant to this Agreement.
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 year ended December 31, 1997 were $6,694,749, compared to
$5,191,563 during the year ended December 31, 1996, an increase of $1,503,186,
or 29.0%. Gross profit was 29.4% of sales, compared to 30.1% in 1996.
Operating expenses were 34.4% of sales, compared to 34.9% of sales in 1996,
an improvement of .5%. The net loss from operations for the year ended
December 31, 1997 was $288,033, or 4.3% of sales, compared to $263,926,
or 5.1% of sales in the year ended December 31, 1996, an increase of $24,107.
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 $11,657,189 in accumulated deficits through December 31, 1997.
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.
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 will reduce the Company's gross margin
percentage on sales to Gaiam in the future, and is expected to marginally slow
the overall rate of the Company's revenue growth and reduce overall gross
margin percentage.
The Company has incurred expenditures to support the expansion of its
wholesale distribution business during 1996 and 1997 and expects to increase
these expenditures 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 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 year ended December 31, 1997, the Company used approximately
$796,000 of its available cash balances through operations. The Company used
approximately $436,000 as accounts receivable expanded with the increase in
sales. The Company used approximately $109,000 of cash to increase its
inventories. Additionally, the Company has increased its accounts payable
by approximately $17,000, while decreasing its accrued liabilities by
approximately $29,000. As of December 31, 1997, the Company's primary
sources of liquidity were approximately $311,000 in cash, approximately
$258,000 in marketable securities, and approximately $950,000 in accounts
receivable.
The Company has two customers whose purchases of the Company's products
accounted for more than 10% each of the Company's total sales in 1997 and
together accounted for 59% of the Company's sales. The loss of either of
these customers, a decision by one of them to significantly reduce its
purchases or any disruption to 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 1997, the Company's net loss was $288,033, compared
to $263,926 in 1996, an increase of $24,107. In 1997, licensing revenue
increased $87,500, while the decline in reimbursements under the Reimbursement
Agreement, was approximately $109,000. The Company does not expect to receive
any further licensing revenue or reimbursements from Gaiam, which will
adversely affet liquidity.
During 1997, the Company undertook a debt 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 yeid (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 minnimum of 1,695,000 shares of common stock are
reserved for the potential conversion of these debentures.
The Company repaid $445,000 in subordinated convertible debentures, together
with accrued interest, on December 31, 1997.
The Company repaid $180,000 in subordinated convertible debentures in
February of 1996. In November 1998, $100,000 of debentures are scheduled to
come due.
While the Company did not reach operating levels during 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 December 31, 1997
was approximately $1,405,000, and the current ratio (current assets/current
liabilities) was 3.7 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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
Independent Auditors' Report are included in Item 7 of this report:
* Independent Auditors' Report
* Consolidated Balance Sheets as of December 31, 1997 and 1996
* Consolidated Statements of Operations for the Years Ended December 31,
1997 and 1996
* Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997 and 1996
* Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and 1996
* Notes to Financial Statements
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Seventh Generation, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Seventh
Generation, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Seventh
Generation, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Albany, New York
February 19, 1998
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
December 31, December 31,
1997 1996
Current assets:
Cash and cash equivalents $ 311,226 $ 1,233,006
Short-term marketable securities 257,698
Accounts receivable-trade, net of
allowance for doubtful accounts of
$25,000 at December 31, 1997 and
$20,191 December 31, 1996 911,320 480,568
Accounts receivable-other 39,856 3,868
Inventories 344,440 234,349
Other assets 54,278 153,117
----------- -----------
Total current assets 1,918,818 2,104,908
----------- -----------
Equipment:
Computer equipment 68,129 45,636
Office equipment and furniture 33,863 32,648
----------- -----------
101,992 78,284
Less accumulated depreciation and
amortization 70,142 54,926
----------- -----------
Equipment, net 31,850 23,358
----------- -----------
Deposits and other assets 25,054 11,427
----------- -----------
Total assets $ 1,975,722 $ 2,139,693
=========== ===========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
1997 1996
Current liabilities:
Current installments of subordinated
convertible debentures $ 100,000 $
Current portion of capital lease payments 2,151
Accounts payable-trade 251,368 234,499
Other accrued expenses 160,095 188,918
----------- ----------
Total current liabilities 513,614 423,417
Long-term debt:
Obligations due under capital leases 6,365
Subordinated debentures 847,500 820,000
----------- ----------
Total liabilities 1,367,479 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 (11,657,189) (11,369,156)
----------- -----------
Total stockholders' equity 608,243 896,276
----------- -----------
Total liabilities and stockholders' equity $ 1,975,722 $ 2,139,693
=========== ===========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
For the Year Ended
December 31, December 31,
1997 1996
Net Sales $ 6,694,749 $ 5,191,563
Cost of sales 4,723,952 3,628,802
---------- ----------
Gross profit 1,970,797 1,562,761
Other operating income 100,000 12,500
---------- ----------
2,070,797 1,575,261
---------- ----------
Operating expenses:
Selling and marketing expenses 1,068,404 855,588
Operations and distribution expenses 497,999 393,609
General and administrative expenses 738,363 563,217
---------- ----------
Total operating expenses 2,304,766 1,812,414
---------- ----------
Other income (expense):
Interest income 43,656 60,805
Interest expense (96,231) (86,626)
Other (1,489) (952)
---------- ----------
Total other expense, net (54,064) (26,773)
---------- ----------
Net loss $ (288,033) $ (263,926)
========== ==========
Basic and diluted earnings per common share: $ (0.12) $ (0.11)
Weighted average shares (basic and diluted)
outstanding during the period 2,428,791 2,428,791
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
Additional Total
Common Stock Paid-In Accumulated Stockholder's
Shares Amount Capital Deficit Equity
--------- ---- ----------- ------------ ----------
Balance at
December 31, 1995 2,428,791 $ 809 $12,264,623 $(11,105,230) $1,160,202
Net loss (263,926) (263,926)
--------- ---- ----------- ------------ ----------
Balance at
December 31, 1996 2,428,791 809 12,264,623 (11,369,156) 896,276
Net loss (288,033) (288,033)
--------- ---- ----------- ------------ ----------
Balance at
December 31, 1997 2,428,791 $ 809 $12,264,623 $(11,657,189) $ 608,243
========= ===== =========== ============ ==========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
For the Years Ended
December 31, December 31,
1997 1996
Cash flows from operating activities:
Net loss $ (288,033) $ (263,926)
Adjustments to reconcile
net loss to net cash used in
operating activities:
Depreciation and amortization 16,706 13,001
Provision for doubtful accounts 4,809 (19,659)
Loss on short-term securities 7,818
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable-trade (471,549) 184,875
Increase in inventories (110,091) (50,372)
Decrease (increase) in other assets 98,839 (55,766)
(Increase) decrease in deposits and
other assets (75) 1,824
Increase (decrease) in accounts
payable-trade 16,869 (64,008)
(Decrease) increase in accrued expenses (28,823) 82,407
Decrease in deferred income (12,500)
----------- -----------
Net cash used in operating activities (753,530) (184,124)
----------- -----------
Cash flows from investing activities:
Purchase of short-term securities (666,710)
Sales and redemption of short-term
securities 401,196
Purchases of furniture and equipment (13,798) (12,346)
----------- ----------
Net cash used in investing activities (279,312) (12,346)
----------- ----------
Cash flows from financing activities:
Principal payments under capital leases (1,394)
Debt issuance costs (15,044)
Proceeds from issuance of debentures 572,500
Principal payments on subordinated
convertible debentures (445,000) (180,000)
----------- ----------
Net cash provided by (used in)
financing activities 111,062 (180,000)
----------- ----------
Net decrease in cash and
cash equivalents (921,780) (376,470)
Cash and cash equivalents,
beginning of period 1,233,006 1,609,476
----------- ----------
Cash and cash equivalents,
end of period $ 311,226 $ 1,233,006
=========== ==========
Interest paid $ 126,965 $ 87,249
Supplemental disclosure of non-cash investing
and financing activities:
The Company acquired equipment under capital lease in the amount
of $9,910 in 1997.
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
1. 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(r) brand products to retailers on a wholesale basis.
Since the sale of the catalog in May 1995, the Company has focused
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 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.
Advertising.
Advertising, selling, and marketing expenses are expensed as they are
incurred. The amounts spent on advertising, selling and marketing expenses
for the years 1997 and 1996 were $336,998 and $216,330, respectively.
Included in advertising expense for the years ended December 31, 1997 and
1996 were approximately $132,000 and approximately $93,000, respectively,
for co-op advertising with distributors and retailers, and approximately
$205,000 and approximately $123,000, respectively, for charge-backs related
to marketing promotions.
Income Taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
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." The pro-forma impact of the fair value based method of
accounting for stock based compensation under Statement of Financial
Accounting Standard No. 123, "Accounting for Stock Based Compensation,"
is disclosed in footnote 5.
2. EARNINGS PER SHARE
Effective in 1997, the Company is adopted 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 years
ended December 31, 1997 and 1996, basic and diluted loss per common share do
not differ from previously reported amounts.
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 1997 and 1996 and thus did
not affect basic or diluted net loss per common share.
3. 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
purchased approximately $678,000 of product at cost plus 20% under the terms
of the Supply Agreement, yielding approximately $814,000 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 year ended December 31, 1997, Gaiam purchased approximately
$397,000 of product at cost plus 5%, yielding sales of approximately $417,000.
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
Year ended December 31, 1997 $1,231,000 $5,463,700 $6,694,700
Gross profit percentage 12.7% 33.2% 29.4%
Year ended December 31, 1996 $1,306,000 $3,885,500 $5,191,500
Gross profit percentage 16.7% 34.4% 30.1%
Percent change in sales from 1996 (5.7%) 40.6% 29.0%
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
year ended December 31, 1996, the Company was reimbursed approximately $109,000
under these agreements. The Reimbursement Agreement terminated at the end of
1996.
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. 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 any further licensing revenue pursuant to this
Agreement.
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.
4. SUBORDINATED CONVERTIBLE DEBENTURES
December 31,1997 December 31, 1996
Subordinated convertible debentures
consist of the following:
Variable rate subordinated debentures,
unsecured, due June 30, 2002 $ 847,500 $
10% subordinated convertible
debentures, unsecured, due February
28, 1998, convertible at a price per
common share of $6.67.
$445,000 paid with accrued interest on
December 31, 1997, $175,000 converted
into new debentures 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. Converted to new debenture
offering. 100,000
---------- ----------
Total subordinated convertible debentures 947,500 820,000
Less current installments (100,000) 0
---------- ----------
Subordinated convertible debentures,
less current installments $ 847,500 $ 820,000
========== ==========
During 1997, the Company undertook a debt 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 yeid (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
minnimum 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 December 31, 1997 and 122,939 at December
31, 1996.
5. STOCK BASED COMPENSATION AND WARRANTS
The Company has several stock based compensation plans, which are described
below:
Fixed Stock Option Plans
The Company has established three stock option plans, the 1994 Employee,
Director, and Consultant Stock Option Plan (the 1994 Plan), the 1993 Stock
Option Plan (the 1993 Plan) and the 1990 Stock Option Plan (the 1990 Plan).
These plans provide for the granting of qualified and non-qualified stock
options to the employees of the Company, Directors, and independent consultants
as determined by the Compensation Committee of the Board of Directors.
In addition to the above plans, the Company has also granted options to the
President, Directors, and investors of the Company. A total of 732,991 shares
of common stock have been reserved for issuance upon exercise of options under
these plans.
All options are granted at prices equal to or greater than the fair market
value of the Company's stock at the grant date and substantially all options
vest upon issuance. The exercise prices range from $0.49 to $8.33 per share,
and expire at various dates through December 31, 2007. Activity with respect
to these plans is summarized below:
1997 1997 1996 1996
Weighted Weighted
Number Average Number Average
of Shares Exercise Price of Shares Exercise Price
Shares under options
at January 1 589,192 $5.68 544,092 $6.29
Options granted 6,000 $0.49 64,500 $0.52
Options canceled (19,400) $5.83
-------- ------ --------- ------
Shares under options
at December 31 595,192 $5.63 589,192 $5.68
======== ====== ========= ======
Shares under exercisable
options at December 31 595,192 $5.63 577,192 $5.67
======== ====== ========= ======
Weighted average fair
value of options granted $0.42 $0.26
The following summarizes the status of the outstanding options:
Outstanding Options Exercisable Options
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life Price Number Price
$0 to $0.99 75,000 8.23 $0.51 75,000 $0.51
$1.00 to $2.49 21,000 6.37 $2.06 21,000 $2.06
$2.50 to $4.99 37,000 3.46 $2.88 37,000 $2.88
$5.00 to $8.32 260,358 2.96 $5.68 260,358 $5.68
$8.33 201,834 4.16 $8.33 201,834 $8.33
-------- ----- --------
595,192 6.91 595,192
======== ========
Performance Based Incentive Plan
In 1996, the Company established the Incentive Plan. Under the Incentive
Plan, selected employees and Directors of the Company may be granted incentive
units equal in value to one share of common stock of the Company.
Participant's awards are vested based upon the attainment of certain contingent
future performance goals established by the Compensation Committee of the Board
of Directors related to sales revenue and operating profit targets, but no
earlier than three years from the date of the grant of the units. The
determination date for valuing the units is defined as the earlier of the
vesting date of the participant, the termination date of the participant, or
the sale of the Company. There are 300,000 units established to be issued
under this plan. Canceled or forfeited units may be reallocated to other
participants. During 1997, the Company granted 30,000 units with a weighted
average fair value of $0.32 to plan participants and during 1996 the Company
granted 265,000 units with a weighted average fair value of $0.28 to plan
participants.
The fair value of awards granted under the fixed stock option plans and the
performance based incentive plan is estimated on the grant date using the
Black-Scholes Single Option model. Significant assumptions included as a
basis for the calculation were a dividend yield of 0% and an annual expected
stock price volatility of 102.81% for 1997 and 124.76% for 1996. The expected
life of the options and stock appreciation rights are assumed to be three
years, and the risk free interest rate ranges from 5.68% to 5.87% in 1997
and from 5.2% to 6.0% in 1996. There was no compensation cost recognized in
1997 and 1996 for stock based compensation awards. Had the Company recognized
compensation cost and fair value of this compensation at the grant dates for
the above awards pursuant to SFAS 123, the impact would be as follows:
1997 1996
--------- ---------
Net (Loss)/Income as reported ($288,033) ($263,926)
Pro Forma Net (Loss)/Income ($313,889) ($301,564)
Net (Loss)/Income per share, as reported ($0.12) ($0.11)
Pro Forma Net (Loss)/Income per share ($0.13) ($0.12)
The effects of applying SFAS 123 for providing pro-forma disclosures are not
necessarily likely to be representative of the effects on reported net income
for future years because additional awards are generally made each year.
Warrants
The Company has outstanding warrants to purchase 1,562,994 shares of
common stock, all of which were exercisable at December 31, 1997. The
exercise prices of the various warrants range from $2.50 to $5.25 and expire
at various dates through January 2003.
No warrants were granted during 1997 or 1996, and, accordingly, were not
included in the computation of fair value of stock based compensation.
6. INCOME TAXES
No income tax provision has been recorded for the years ended December 31,
1997 and 1996, primarily as a result of losses. The temporary difference that
gives rise to significant portions of the net deferred tax assets at December
31, 1997 and 1996 is the net operating loss carry-forward, which have been
offset by a full valuation allowance.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, historical and
projected future taxable income and tax planning strategies in making this
assessment. As a result, a full valuation allowance in the amount of
$4,297,000 and $4,263,000 exists against the net deferred tax assets at
December 31, 1997 and 1996, respectively. The net change in the valuation
allowance for the year ended December 31, 1997 was a decrease of $34,000.
Net operating loss carry-forwards which may be used to offset future taxable
income amount to $10,952,000 as of December 31, 1997 and $10,662,000 as of
December 31, 1996. The net operating loss carry-forwards expire at various
dates from 2003 to 2012.
7. MAJOR SUPPLIERS AND CUSTOMERS
The Company purchased approximately 76% of its product from three suppliers
during the year ended December 31, 1997.
The Company had sales of approximately 59% to two customers during the year
ended December 31, 1997 and approximately 58% of accounts receivable were due
from two customers as of December 31, 1997.
During 1997 and 1996, 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.
8. 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.
Agreements:
On November 29, 1993, the Company entered into a five-year employment
contract with its President, which provides, among other things, a minimum
compensation of $125,000 per year over the term of the agreement. The
agreement also contains a covenant prohibiting the President from competing
with the Company during his employment and for two years thereafter.
On February 28, 1994, the Company entered into a five year employment
agreement with its Executive Vice President of Marketing and Sales which
provides, among other things, a minimum compensation of $100,000 per year.
The agreement also contains a covenant prohibiting the Executive Vice President
from competing with the Company during his employment and for two years
thereafter.
The Company has entered into a consulting agreement to develop new
distribution channels for its products. The consultant is pursuing
relationships on behalf of the Company with non-profit organizations and in
the educational marketplace. The Company has paid a retainer of $3,865 per
month, commencing November 1, 1995 and terminating January 1, 1997. The
Company will be required to pay the consultant commissions on the sale of
qualified products at a rate of 3% and a commission of 6% on other funds
generated for the Company. Additionally, the consultant can earn stock
appreciation right units, based upon sales volume generated through
relationships developed by the consultant.
Leases:
The Company leases its office and certain equipment under non-cancelable
operating and capital leases expiring at various dates through 2002. Total
rental expense for years ended December 31, 1997 and 1996 was $28,007 and
$28,750, respectively. The office lease agreement provides for annual
escalation in rent based upon the Company's share of increased maintenance
costs for the building. Future minimum lease payments under non-cancelable
leases in effect at December 31, 1997 were as follows:
Year ending December 31:
Operating Capital Total
1998 $ 31,956 $ 3,413 $ 35,369
1999 13,916 3,413 17,329
2000 4,004 3,413 7,417
2001 3,252 830 4,082
2002 1,355 1,355
---------
11,069
Less imputed interest (2,553)
---------
$8,516
=========
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Instruments. The carrying values of the Company's financial
instruments at December 31, 1997 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.
10. RELATED PARTY TRANSACTIONS
As part of the 1997 subordinated debenture offering, three directors purchased
a total of $125,000 of debentures. Jeffrey Hollender, the Company's president,
purchased $50,000 of debentures, Peter Graham, a director of the Company,
purchased $50,000 of debentures, and Joshua Sapan, a director of the Company,
purchased $25,000 of debentures. 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. During 1997, the
Company engaged Peter Hollender, the brother of its president, to perform
consulting services at a cost of approximately $31,000.
11. 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 amount of the accounting loss due to credit risk the
Company would incur if parties to the financial instruments failed to perform
was $832,806 for the year ended December 31, 1996. The Company attempts to
mitigate this risk by depositing its cash and cash equivalents with high
credit quality financial institutions.
<PAGE>
Item 8. Changes in Accountants
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
Compliance with Section 16(a) of the Exchange Act
Information with respect to this item can be found under the captions
"Management - Directors," "Management - Executive Officers," and "Section 16(a)
Beneficial Ownership Reporting Compliance" appearing in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders. Such information is
incorporated herein by reference.
Item 10. Executive Compensation
The information set forth under the caption "Executive Compensation" appearing
in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Share Ownership" appearing in the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Relationships and Related
Transactions" appearing in the Company's Proxy Statement for the 1998 Annual
Meeting of Stockholders is incorporated herein by reference.
As part of the 1997 subordinated debenture offering, three directors purchased
a total of $125,000 of debentures. Jeffrey Hollender, the Company's president,
purchased $50,000 of debentures, Peter Graham, a director of the Company,
purchased $50,000 of debentures, and Joshua Sapan, a director of the Company,
purchased $25,000 of debentures.
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.
During 1997, the Company engaged Peter Hollender, the brother of its
president, to perform consulting services at a cost of approximately $31,000.
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as a part of this Report:
EXHIBITS:
Exhibit # Description
! (3.1) Articles of Incorporation of the Registrant, as amended
~ (3.3) Restated By-Laws of the Registrant, as amended
! (4.1) Article 4 of the Articles of Incorporation of the Registrant, as
amended (see Exhibit 3.1)
* (4.2) Form of Common Stock Certificate
* (4.3) Form of Warrant Certificate
* (4.4) Form of Underwriter's Purchase Option Agreement between
the Underwriter and the Registrant
* (4.5) Form of Warrant Agreement between Continental
Stock Transfer and Trust Company and the Registrant
*# (10.2) Employment Agreement between the Registrant and Jeffrey A.
Hollender
* (10.3) Agreement between the Registrant and Stanson Corporation
* (10.4) Stock Option Agreement, dated as of April 30, 1989, between
the Registrant and Gardener's Supply Company, Inc., as
assigned to Alan Newman
*# (10.5) Non-Qualified Stock Option Agreement dated May 11, 1990, between
the Registrant and Arthur Gray
*# (10.6) Form of Non-Qualified Stock Option Agreement between the
Registrant and Jeffrey A. Hollender
*# (10.7) Form of Non-Qualified Stock Option Agreement used by the
Registrant to grant options to Directors of the Registrant
*# (10.8) The Registrant's 1990 Stock Option Plan
*# (10.9) The Registrant's 1993 Employee, Director and Consultant
Stock Option Plan
*# (10.10) Warrant Agreement between the Registrant and Peter Graham
* (10.11) Form of Subscription Agreement applicable to the Selling
Security holders
* (10.12) Form of Promissory Note applicable to the Selling
Security holders
* (10.13) Form of Warrant Applicable to the Selling Security
holders
~# (10.14) Employment Agreement between the Registrant and
Jeffrey M. Phillips
^ (10.16) The Registrant's 1994 Employee, Director and Consultant
Stock Option Plan
X (10.18) Asset Purchase Agreement, dated May 24, 1995,
between the Company and Gaiam, Inc.
X (10.19) License Agreement, dated May 24, 1995, between
the Company and Gaiam, Inc.
X (10.20) Supply Agreement, dated May 24, 1995, between
the Company and Gaiam, Inc.
X (10.21) Operating Agreement, dated May 24, 1995, between
the Company and Gaiam, Inc.
X (10.22) Seventh Generation, Inc. Non-Competition and
Confidentiality Agreement, dated May 24, 1995,
between the Company and Gaiam, Inc.
X (10.23) Gaiam, Inc. Non-Competition Agreement, dated
May 24, 1995, between the Company and Gaiam, Inc.
} (10.24) Seventh Generation, Inc. Incentive Plan
(* (10.25) Amendment letter to Seventh Generation, Inc. Incentive Plan
*X (10.26) Form of Subscription Agreement applicable to the Selling
Security holders
*X (10.27) Form of Debenture Agreement
(11) Statement Re: Computation of Per Share Loss
(23) Consent of Coopers & Lybrand, L.L.P.
(27) Financial Data Schedule
____________________________________________________
* Filed as an Exhibit to Registration Statement Number 33-68272
on Form SB-2 and incorporated herein by reference
# Indicates a management contract or compensatory plan or
arrangement
! Filed as an Exhibit to Registration Statement on Form 8-A
(File Number 1-12614) and incorporated herein by reference
~ Filed as an Exhibit to Form 10-KSB for the fiscal year ended
December 31, 1993 (File Number 1-12614) and incorporated
herein by reference
^ Filed as an Exhibit to Form 10-KSB for the fiscal year ended
December 31, 1994 (File Number 1-12614) and incorporated
herein by reference
} Filed as an Exhibit to Form 10-QSB for the quarter ended
June 30, 1996 (File Number 1-12614) and incorporated
herein by reference
(*Filed as an Exhibit to Form 10-QSB for the quarter ended
September 30, 1996 (File Number 1-12614) and incorporated
herein by reference
X Filed as an Exhibit to Form 8-K, dated May 24, 1995, and
incorporated herein by reference.
*X Filed as an Exhibit to Form 10-KSB for the fiscal year ended
December 31, 1997 (File Number 1-12614)
____________________________________________________
(b) Reports on Form 8-K:
Form 8-K filed on December 2, 1997 including a press release regarding
the Company's issuance of subordinated debentures.
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: March 30, 1998 By: /s/Jeffrey A. Hollender
Jeffrey A. Hollender
President and Chief Executive Officer
(Principal Executive & Financial Officer)
In accordance with the requirements of the Exchange Act, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date: March 30, 1998 By: /s/Arthur Gray, Jr.
Arthur Gray, Jr.
Chairman of the Board
Date: March 30, 1998 By: /s/Peter Graham
Peter Graham
Director
Date: March 30, 1998 By: /s/Joshua Sapan
Joshua Sapan
Director
Date: March 30, 1998 By: /s/Sheila Hollender
Sheila Hollender
Director
Date: March 30, 1998 By: /s/Yoram Samets
Yoram Samets
Director
Date: March 30, 1998 By: /s/Charles J. Hogan
Charles J. Hogan
Controller
(Principal Accounting Officer)
Date: March 30, 1998 By: /s/Jeffrey A. Hollender
Jeffrey A. Hollender
Director, President & CEO
(Principal Executive & Financial Officer)
<PAGE>
EXHIBIT INDEX:
Exhibit # Description Page
(10.26) Form of Subscription Agreement applicable to the Selling
Security holders 36
(10.27) Form of Debenture Agreement 46
(11) Statement Re: Computation of Per Share Loss 54
(23) Consent of Coopers & Lybrand, L.L.P. 56
(27) Financial Data Schedule 58
EXHIBIT 10.26
<PAGE>
EXHIBIT 10.26
SUBSCRIPTION AGREEMENT
______ __, 1997
Seventh Generation, Inc.
One Mill Street
Burlington, VT 05401
Ladies and Gentlemen:
Subject to the terms and conditions set forth below, the undersigned hereby
agrees to the terms and conditions set forth in the form of Subordinated
Debenture attached to this Subscription Agreement as Exhibit A (the
"Debenture") and offers to purchase a Debenture from Seventh Generation,
Inc., a Vermont corporation (the "Company") in the principal amount of
____________________ ($_______) (the "Investment").
In connection with the execution of this Agreement, I hereby represent,
warrant and agree as follows:
1. I have thoroughly read and understand the terms and conditions of the
Debenture and this Agreement.
2. Subject to the terms and conditions set forth herein and in the Debenture,
intending to be legally bound, I hereby transfer the amount of $_________ to
the Company. I am delivering to the Company, together with this Agreement,
the following documents:
(a) One additional copy of this Agreement which has been fully
completed and signed by me and which, upon acceptance of this
subscription by the Company, will be signed by the Chief Executive Officer
of the Company and returned to me; and
(b) A check or wire transfer of funds made payable to the order
of Seventh Generation, Inc. in the amount subscribed for.
3. I am an Accredited Investor as such term is defined in Regulation D under
the Securities Act of 1933, as amended (the "Act") for the following reason
[Please initial one or more]:
____ My individual income was in excess of $200,000 in each of the past two
years, or my joint income with my spouse was in excess of $300,000 in
each of those years, and I reasonably expect my income to reach the
same level in the current year.
____ My individual net worth or joint net worth with my spouse exceeds
$1,000,000.
____ The undersigned is a trust, corporation or partnership with total assets
in excess of $5,000,000, not formed for the specific purpose of this
Investment, whose Investment will be directed by a person whose
knowledge and experience in financial and business matters is such that
he or she is capable of evaluating the merits and risks of the Investment.
____ The undersigned is an entity in which all of the equity owners are
accredited investors.
____ Other [Please Specify]
4. I am sufficiently experienced in financial and business matters to be
capable of evaluating the risk of the Investment in the Company and to make an
informed decision relating thereto. I have the financial capability for making
the Investment, can afford a complete loss of the Investment, and the
Investment is a suitable one for me.
5. Prior to the execution of this Agreement I have received and reviewed the
Company's Annual Report to Shareholders for 1996, the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996, the Company's definitive
proxy statement sent to its shareholders in connection with the annual meeting
of shareholders held on May 5, 1997 and the Company's Quarterly Report on Form
10-QSB for the most recent quarter. In addition, I have had the opportunity to
ask questions of and receive answers from representatives of the Company
concerning the finances, operations, business and prospects of the Company. I
am satisfied that I have received information with respect to all matters which
I consider material to my decision to make this Investment.
6. I fully understand that the Investment is speculative and involves a
high degree of risk of loss of my entire Investment. I fully understand the
nature of the risks involved in the Investment and I am qualified by my
knowledge and experience to evaluate investments of this type. In addition to
the other information contained in this Agreement and the Debenture, I have
carefully considered the following risk factors before purchasing the
Debenture. I understand that the forward-looking statements appearing in the
Company's filings under the Securities Exchange Act of 1934, as amended, which
are incorporated herein by reference, are based on current expectations that
involve a number of uncertainties including those set forth below and
that actual results could differ materially from those projected.
Reference is also made in particular to the discussions set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Business" in the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996 and the Company's
Quarterly Report on Form 10-QSB for the most recent quarter.
I have carefully considered the potential risks relating to the Company and
the Debenture. I am aware that the Debenture is highly illiquid and may not
be sold without compliance with applicable federal and state securities laws.
I understand that the Company is subject to all of the risks inherent in many
consumer products and distribution companies. In addition to such risks, I
have considered the following risks regarding this Investment in the Company:
(a) Operating Deficits; Capital Needs. The Company has
incurred substantial losses during its existence and continues to operate
at a deficit. Management anticipates that the Company may continue to
have negative cash flow even if it achieves profitability, as the Company
will have increased needs to finance inventory and accounts receivable
and may have additional marketing and/or capital costs. There can be no
assurance, however, that the Company will ever be profitable. The
Company has incurred substantial indebtedness to finance its operations
and expects to incur additional indebtedness in connection with its current
financing. As a result, the Company has (i) substantial periodic interest
payments, and (ii) substantial principal amounts to repay. If the Company
does not have sufficient funds to make required interest or principal
payments, the obligation to repay such amounts could be accelerated,
which would have a material adverse effect on the Company. The
Company will need to either generate cash flow from operations or raise
additional funds to satisfy the Company's obligations to repay its
indebtedness, maintain the Company's operations and satisfy its capital
needs. There can be no assurance that such funds will be available on
terms acceptable to the Company or at all. There can be no assurance
that the Company will generate sufficient funds through operations or
financing to satisfy these requirements. If the Company is not successful
in generating such funds, it is likely the undersigned will lose its entire
Investment in the Company.
(b) Offering Size; Use of Proceeds. The Company is offering a
minimum of $500,000 and a maximum of $1,500,000 of Debentures on a
private offering basis (the "Private Placement"). Jeffrey Hollender, the
Company's President and Chief Executive Officer, intends to purchase at
least $50,000 of the Debentures. Additional affiliates of the Company may
also purchase Debentures. All such purchases will be for investment
purposes only, and will be included in determining whether the Company
has received the minimum proceeds of the Private Placement. The
Company is offering the Debentures directly through its officers, although
the Company reserves the right to engage one or more broker-dealers to
act on its behalf in connection with the Private Placement. The Company
intends to use the proceeds of this offering, net of any fees or expenses
payable to broker-dealers selling Debentures on the Company's behalf, to
repay existing debentures maturing in 1998 and, if the maximum is sold, to
assist in the funding of the Company's operations. There can be no
assurance that the proceeds of this Private Placement will be sufficient for
the Company's needs. In particular, if the Company only sells the
minimum amount, the Company will need to use its existing resources to
repay outstanding debentures.
(c) Catalog Sale. In 1995, the Company sold the assets of its
catalog business to Gaiam, Inc. ("Gaiam") and the Company and Gaiam
entered into Supply, Operating and Licensing Agreements. The
Company's relationship with Gaiam is uncertain. The Operating
Agreement expired in January 1996, which was replaced by a
Reimbursement Agreement, which expired in December 1996. Gaiam's
obligation to purchase product at a 20% mark-up will terminate in the third
quarter of 1997 (which is when the Company believes Gaiam will fulfill its
obligations under the terms of the Supply Agreement), which may reduce
the Company's sales or its profit margins. The Company's relationship
with Gaiam is uncertain and could have a material adverse effect on the
Company.
(d) Concentration of Customers. 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 1996, collectively
accounting for 62.4% of the Company's sales. The loss of any one of
these customers, a decision by one of them to significantly reduces its
purchases, or any disruption to the relationship the Company maintains
with them, could affect the Company's liquidity and/or results from
operations.
(e) Concentration of Suppliers. The Company does not
manufacture any of the products it sells. During 1996, the Company
purchased products from 12 suppliers. The Company relied on three
suppliers for approximately 84% of its inventory purchases in 1996. The
Company has no long-term contracts with any of its suppliers. The loss of
one of these suppliers, or a disruption in product availability from them,
could affect the Company's liquidity and/or results from operations.
(f) Competition. The Company competes with a variety of other
companies, which sell similar products through a variety of outlets.
Companies selling similar consumer products compete on price, quality,
product features and benefits, brand credibility and customer service. The
environmental product marketplace is becoming increasingly competitive,
with a number of competitive brands now on the market. Many of these
competitors may have an advantage over the Company because they
manufacture the products they sell. In addition, the Company's
competitors and other large consumer products companies who may
decide to develop competitive products may have financial resources,
distribution capabilities and marketing experience superior to that of the
Company. As potential competitors enter the field, the Company's market
share may decrease or the Company may be forced to compete by
lowering its prices, thereby reducing margins on sales. There can be no
assurance that the Company will be able to compete effectively with
existing or potential competitors.
(g) Marketing. 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.
(h) New Business Ventures. The Company will also incur
expenditures relating to trade and consumer marketing, package design,
and the development of the Learning to Make a Difference? program
designed by the Company to help schools and other non-profit
organizations raise funds by selling the Company's products. 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
negatively impact the Company's liquidity.
(i) Product Liability Risks. While the Company endeavors to
sell safe products, there is always a possibility that someone could claim
personal injury or damage resulting from use of products purchased from
the Company. As a seller of products, the Company is exposed to
potential liability. While the Company maintains product liability insurance,
there can be no assurance that the Company will not experience legal
claims in excess of its insurance coverage or claims which are ultimately
not covered by such insurance. Furthermore, if any significant claims are
promulgated against the Company, the Company's business may be
adversely affected by related negative publicity.
(j) Reliance on Reputation. The Company believes that it has
been and will continue to be able to increase its sales based upon its
reputation as a reliable source of environmentally friendly products. As a
result of reliance on its reputation, if any of the Company's products are
publicly alleged to be unsafe, or contrary to claims made, the Company
could experience significant adverse impact.
(k) Government Regulation. As a result of the Company's
involvement in environmentally friendly products, the Company must
remain in compliance with a variety of laws, regulations and guidelines
issued by the Federal Trade Commission, the Environmental Protection
Agency and the states' attorney generals, as well as other agencies, with
respect to the use of the environmental marketing claims on packaging,
and in other advertising and marketing literature. While the Company
maintains a policy of full disclosure regarding its products and believes its
claims are accurate, the increased promulgation of laws and guidelines
make it increasingly harder for the Company to remain in compliance. If
the Company's disclosure violates a law or is inaccurate, the Company
could be subject to regulatory proceedings or civil actions.
(l) Management. The Company's operations are dependent on
the efforts of Jeffrey Hollender, its Chief Executive Officer. The loss of
services of Mr. Hollender could have a material adverse effect on the
Company, and there is no assurance that a suitable replacement could be
found in the event of his death, disability or resignation.
(m) Trademark Registration. The Company has invested
significant funds in the development of the name "Seventh Generation"
and has obtained United States service mark and trademark registrations
for its name. However, there can be no assurance that the Company will
be able to effectively protect against unauthorized use of its name in view
of the potentially prohibitive costs of enforcing its legal rights.
(n) Absence of Dividends. The Company has paid no dividends
on its common stock since its inception. The Company currently intends
to retain earnings, if any, for use in its business and does not anticipate
paying any cash dividends in the foreseeable future.
(o) Future Offerings. The Company reserves the right to offer
additional securities in the future, from time to time, at any purchase price
determined by the Company's Board of Directors. There can be no
assurance that the Company will not offer shares for sale, even in the near
future, at a purchase price less than the market value.
(p) Dilution. If the Company elects to permit the conversion of
the Debenture into Common Stock, upon election by the holder of the
Debenture to exchange all or part of the outstanding principal balance for
shares of Common Stock pursuant to the terms and conditions of the
Debenture, the holder of shares of Common Stock will experience
immediate and substantial dilution in net tangible book value per share.
Additional dilution may occur upon the exercise of outstanding stock
options, and upon the exercise of options to purchase the Company's
stock which may be granted from time to time in the future.
(q) Social Responsibility. A significant part of the Company's
philosophy is the importance of promoting its values, supporting the community
and supporting the goal of creating a healthier planet. Consistent with this
philosophy, the Company is committed to making donations to non-profit
environmentally oriented groups and to others who support similar goals. The
Company donates to such groups an amount of funds determined annually by
the Company's Board of Directors. Management believes that these donations
and the philosophy of which they form are part are an integral part of the
Company's goals and may ultimately lead to a profitable company.
I understand that the foregoing is not a complete list of risks involved in
this Investment in the Company. Both my advisors and I have had the
opportunity to ask questions of and receive answers from representatives of
the Company or persons acting on its behalf concerning the Company and the
terms and conditions of this proposed Investment in the Company, and my
advisors and I have also had the opportunity to obtain additional information
necessary to verify the accuracy of information furnished about the Company.
Accordingly, I have independently evaluated the risks of this Investment.
7. I am aware of my inability to liquidate the Debenture readily in case of an
emergency. My overall commitment to investments, which are not readily
marketable, is not excessive in view of my net worth and financial
circumstances and the Investment will not cause such commitment to become
excessive. In view of such facts, I acknowledge that I have adequate means
of providing for my current needs, anticipated future needs and possible
contingencies and emergencies and have no need for liquidity in the Debenture.
I am able to bear the economic risk of this Investment.
8. I warrant and represent that the Debenture and any security issuable upon
conversion, has been and will be acquired for my own account for the purpose of
investment and not with a view to, or for sale in connection with, a
distribution thereof and not with any present intention of distributing or
selling the Debenture or such securities. I understand that the Debenture
has not been registered under the Securities Act of 1933, as amended (the
"Act"), or the securities laws of any state, and I hereby agree not to make
any sale, transfer or other disposition of the Debenture unless either (i) the
Debenture first shall have been registered under the Securities Act and all
applicable state securities laws, or (ii) an exemption from such registration
is available, and the Company has received such documents and agreements from
me and the transferee as the Company requests at such time.
9. If, pursuant to the terms of the Debenture, the Company elects to permit
the conversion of the Debenture into Common Stock and I elect to exchange all
or part of the outstanding principal balance of the Debenture for shares of
the Common Stock of the Company, I understand that until the Common Stock has
been registered under the Securities Act and applicable state securities laws
or until the Company shall have received an opinion of its counsel stating
that such a legend is not necessary, each certificate representing such shares
of Common Stock shall bear a legend substantially similar to the following:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act") or any
state securities laws, have been acquired for investment, and may not be
sold, pledged, hypothecated or otherwise transferred unless a registration
statement under the Act and any applicable state law is in effect with
regard thereto or an exemption from such registration is available."
10. I understand that neither the United States Securities and Exchange
Commission nor the Commissioner or Department of Securities or Attorney General
of any state has passed upon the merits or qualifications of, nor recommended
nor approved, the Debenture or this Private Placement. Any representation to
the contrary is a criminal offense.
11. I acknowledge that no general solicitation or general advertising
(including communications published in any newspaper, magazine or other
broadcast) has been received by me and that no public solicitation or
advertisement with respect to the Private Placement has been made to me.
12. I understand I am urged to seek independent advice from my professional
advisors relating to the suitability of this Investment in the Company in view
of my overall financial needs and with respect to the legal and tax
implications of such an investment.
13. I satisfy any special suitability or other applicable requirements of my
state of residence.
14. This Agreement when executed by me constitutes my valid and binding
obligation and I have taken no action in connection therewith which could
subject the Company to any valid claim for any commission, fee or other
compensation to a finder or broker. The execution and performance hereof
violates no order, judgment, injunction, agreement or controlling document
to which I am a party or by which I am bound. If an organization, the
undersigned (i) is duly organized, validly existing and in good standing
under the laws of the jurisdiction in which it has been formed; (ii) has the
right and power under its organizational instruments to execute, deliver and
perform its obligations hereunder; (iii) this Agreement has been duly
authorized by all necessary action on the part of all officers, directors
and partners, stockholders and trustees and will not violate any agreement
to which the undersigned is a party; and (iv) the individual executing and
delivering this Agreement has the requisite right, power, capacity and
authority to do so on behalf of the organization. The undersigned has not
been organized for the purpose of this subscription.
15. I agree not to transfer or assign this Agreement except as may be
permitted by law and explicitly consented to by the Company and any such
transfer or assignment shall be made only in accordance with all applicable
laws and any such consent.
16. I understand that I may not cancel, terminate or revoke this Agreement or
any agreement made by me hereunder and that this Agreement shall survive my
death or disability and shall be binding upon my heirs, executors,
administrators, successors and assigns.
17. I understand that this Agreement constitutes the entire Agreement among
the parties hereto with respect to the subject matter hereof and may be
amended only by a writing executed by all parties.
18. I understand the meaning and legal consequences of this Agreement and
agree to indemnify and hold harmless the Company and each director and
officer thereof from and against any and all loss, damage or liability due to
or arising out of a breach of any representation, warranty or agreement of
the undersigned contained in this Agreement.
19. Within 10 days after receipt of a written request from the Company, I
agree to provide such information and to execute and deliver such documents
as reasonably may be necessary to comply with any and all laws and regulations
to which the Company is subject.
20. I understand that all notices and other communications hereunder shall be
in writing and shall be deemed to have been given when delivered or mailed by
first-class, registered or certified mail, postage prepaid, addressed (a) if
to the Company, to its address set forth above, and to such other person(s)
or address(es) as the Company shall have furnished to the other parties
hereto in writing; and (b) if to me, at such address as appears on the
records of the Company or at such other address as I have furnished to the
Company in writing.
21. I understand that whenever used herein, the singular number shall include
the plural, the plural shall include the singular, and the use of any gender
shall include all persons and entities.
22. I am purchasing the Debenture as follows (please check as appropriate):
____ individually ____ in trust
____ joint tenants ____ as a partnership
____ tenants in common ____ other:
Name: _____________________________________________
Telephone: _________________________________________
Home Address: _____________________________________
City: _________________ State: _________ Zip: _________
Business: __________________________________________
Address: ___________________________________________
City: _________________ State: _________ Zip: _________
Business Telephone: _________________________________
Communications should be sent to: ____ business or
____ home address
Federal Income Tax Identification Number
(Social Security Number for Individual Investors): _________________
23. Under penalties of perjury, I certify that:
(a) The number shown above is my correct Taxpayer
Identification Number (Social Security Number for Individual Investors);
(b) I am not subject to backup withholding either because I have
not been notified by the Internal Revenue Service (IRS) that I am subject
to backup withholding as a result of a failure to report all interest or
dividends, or the IRS has notified me that I am no longer subject to
backup withholding.
IN WITNESS WHEREOF, the undersigned has executed this Agreement as a
sealed instrument on this ___ day of __________, 1997.
__________________________________
Investor Signature
(For Co-owners, if applicable)
__________________________________
__________________________________
Investor Signature Investor Signature
__________________________________
__________________________________
Print Name Print Name
***************************************************************
The foregoing subscription for a Debenture of Seventh Generation, Inc. is
hereby accepted.
SEVENTH GENERATION, INC.
By:
__________________________________
Jeffrey A. Hollender, CEO
Date:
__________________________________
EXHIBIT 10.27
<PAGE>
EXHIBIT 10.27
THIS DEBENTURE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE
SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE DEBENTURE UNDER SAID ACT AND
APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND
APPLICABLE STATE LAWS
$_______
SEVENTH GENERATION, INC.
SUBORDINATED DEBENTURE
DUE JUNE 30, 2002
_____________, 1997 Burlington, Vermont
FOR VALUE RECEIVED, Seventh Generation, Inc., a Vermont corporation (the
"Company") promises to pay on June 30, 2002 to _________________ or his, her
or its registered assigns, the principal sum of ____________________________
($_____) and to pay interest on said sum semi-annually from the date hereof
as set forth below.
1. Interest. The Company promises to pay interest on said sum semi-
annually from the date hereof on June 30 and December 31 of each year
commencing on December 31, 1997 at the following rates: The interest rate
from the date hereof through June 30, 1998 shall be at the rate of 10.85%
per annum. The interest rate for the period from July 1, 1998 through December
31, 1998 shall equal the lesser of (i) four (4) points over the yield for
United States Treasury Notes with as close to a five (5) year due date as
exists on June 30, 1998 as published in the Wall Street Journal and (ii)
12.5 % per annum. Effective as of January 1, 1999 and through the remainder
of the term, the Company shall, at its option, either:
(a) continue to pay interest at the lesser of (i) four (4) points
over the then current yield for five-year United States Treasury Notes
adjusted annually on June 30 of each year, and (ii) 12.5% per annum, in
which case from and after January 1, 1999 the outstanding principal
balance of this Subordinated Debenture may be converted into shares of
the Company's common stock, par value $0.000333 per share (the
"Common Stock"), on the terms set forth in Section 2 hereof; or
(b) (i) pay interest on the outstanding principal balance hereof at
the rate of 22% per annum from January 1, 1999 through June 30, 2002;
and (ii) pay, on June 30, 2002, a premium of 25% over the amount of the
Debenture.
On or before January 15, 1999, the Company shall provide written notice to the
holder hereof as to which option the Company has elected for the remainder of
the term, which notice shall include a statement of the then current interest
rate and, in the event the Company has elected option (a) above, a statement
of the conversion price and the basis on which it has been calculated.
Interest shall be calculated on the basis of actual days elapsed. If this
Debenture is not paid in full on the due date, whether as stated or by
acceleration, interest on unpaid balances shall thereafter be payable on
demand at a fluctuating rate per annum equal to 2% in excess of the rate of
interest at which this Debenture then would otherwise bear interest.
2. Possible Conversion Rights. In the event that the Company elects to pay
interest pursuant to the provisions of paragraph (a) of Section 1 of this
Debenture, then at any time on or after January 1, 1999, the holder hereof
may elect to exchange all or part of the outstanding principal balance of
this Debenture, exclusive of interest, into shares of the Common Stock, par
value $.000333 per share, of the Company. Subject to adjustment as hereinafter
provided, the conversion price shall be based on the Fair Market Value of the
Company's Common Stock as of December 31, 1998 and calculated as follows:
(a) If the Fair Market Value is less than or equal to one dollar ($1.00),
then the purchase price shall equal 25% less than the Fair Market Value, but in
no event less than fifty cents ($.50) per share.
(b) If the Fair Market Value is greater than one dollar and less than or
equal to one dollar twenty-five cents ($1.25), then the purchase price shall
equal 30% less than the Fair Market Value.
(c) If the Fair Market Value is greater than one dollar twenty-five cents
($1.25) and less than or equal to one dollar fifty cents ($1.50), then the
purchase price shall equal 35% less than the Fair Market Value.
(d) If the Fair Market Value is greater than one dollar fifty cents ($1.50)
and less than or equal to one dollar seventy-five cents ($1.75), then the
purchase price shall equal 40% less than the Fair Market Value.
(e) If the Fair Market Value is greater than one dollar seventy-five
cents ($1.75) and less than or equal to two dollars ($2.00), then the purchase
price shall equal 45% less than the Fair Market Value.
(f) If the Fair Market Value is greater than two dollars ($2.00), then the
purchase price shall equal 50% less than the Fair Market Value.
For purposes hereof "Fair Market Value" shall mean a value equal to the
arithmetic average (rounded to the nearest five decimal places) of the last
reported sale price per share of the Common Stock on the NASDAQ electronic
bulletin board (or other principal United States market on which the Common
Stock is then trading) for the twenty consecutive business days ending with
the last business day prior to January 1, 1999. Any such exchange shall be
accomplished by surrender of this Debenture to the Company duly endorsed and
delivered to the Company by the holder of this Debenture together with an
investment letter duly endorsed and delivered by the holder in the form
requested by the Company. Each certificate evidencing shares of Common Stock
issued in exchange for this Debenture shall bear a legend substantially
similar to the following:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the "Act") or any
state securities laws, have been acquired for investment, and may not be
sold, pledged, hypothecated or otherwise transferred unless a registration
statement under the Act and any applicable state law is in effect with
regard thereto or an exemption from such registration is available."
If less than all of the unpaid principal amount evidenced by this Debenture
shall be converted into Common Stock, the Company will, upon such conversion,
execute and deliver to the holder hereof a new Debenture (dated the date
hereof) evidencing the remaining amount of principal then owing. No fraction
of a share of Common Stock shall be issuable upon conversion, but in lieu
thereof the Company shall make a cash adjustment. No adjustments shall be
made upon the conversion of this Debenture at the date of conversion, it being
understood, however, that interest accrued at the date of conversion upon the
portion of this Debenture then being converted shall be payable in cash at the
time of conversion.
In case at any time or from time to time after the date hereof, the holders of
Common Stock (or of any shares of stock or other securities at the time
receivable upon the conversion hereof) shall have received in respect
thereof, or on or after the record date fixed for the determination of
eligible shareholders shall have become entitled to receive in respect
thereof, without payment therefor other or additional or less stock or
other securities by way of dividend, spin-off, split-up, reclassification,
combination of shares or similar corporate rearrangement; then and in each
such case the holder of this Debenture, on any conversion hereof as provided
in this Section 2, shall be entitled to receive the amount of stock and other
securities which such holder would have held on the date of such conversion
if on the date hereof he, she or it had been the holder of record of the number
of shares of Common Stock to be then delivered to the holder under the terms of
this Section 2 and had thereafter, during the period from the date hereof to
and including the date of such conversion, retained such shares and/or all
such other or additional (or less) stock and other securities receivable by
him, her or it as aforesaid during such period giving effect to all adjustments
called for by the following paragraph.
In case the Company after the date hereof shall (a) effect a reorganization or
re-capitalization, (b) consolidate with or merge into any other entity, or (c)
transfer all or substantially all of its properties or assets to any other
person, then and in each such case the holder of this Debenture, on the
conversion hereof as provided in this Section 2 at any time after the
consummation of such reorganization, consolidation, merger or transfer as the
case may be, shall be entitled to receive, in lieu of the Common Stock or
other securities receivable upon the conversion hereof prior to such
consummation, the stock or other securities or property to which such holder
would have been entitled upon such consummation if such holder had converted
this Debenture immediately prior thereto, all subject to adjustment as provided
in the preceding paragraph.
3. Notice of Certain Events. In the event that the Company proposes any of
the following:
(a) the payment of any dividend or other distribution to its
shareholders;
(b) the offering of any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities
of the Company, except for the offer of any such stock or securities to any
employee of, director of, or consultant to the Company;
(c) any capital reorganization of the Company, any reclassification or re-
capitalization of the capital stock of the Company, any transfer of all or
substantially all of the assets of the Company to any other person, or any
consolidation with or merger into any other person; or
(d) any voluntary dissolution, liquidation or winding-up of the
Company;
then and in each such event the Company will mail or cause to be mailed to the
holder hereof a notice specifying, if applicable, (i) the date on which any
record is to be taken for the purpose of determining the holders of the
Company's Common Stock who are entitled to receive such dividend or
distribution and stating the amount and character of such dividend or
distribution, (ii) the proposed terms of any offering referred to in clause
(b) above, or (iii) the date on which any such reorganization,
reclassification, re-capitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any
is to be fixed, as of which the holders of record of Common Stock or other
securities shall be entitled to exchange their shares of Common Stock or other
securities for the securities or property deliverable on such reorganization,
reclassification, re-capitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up. Such notice shall be mailed at
least ten (10) days prior to the date therein specified and shall be provided
for notice purposes only.
4. Rights Reserved. No provisions of this Debenture and no right or option
granted or conferred herein shall in any way limit, affect or abridge the
exercise by the Company of any of its corporate rights or powers, including
without limitation, its corporate right and power to issue securities,
re-capitalize, amend its Articles of Association, reorganize, consolidate or
merge with or into another corporation, or transfer or encumber all or any
part of its property or assets.
5. Common Stock Reserved. At all times while any amounts are outstanding
hereunder, the Company will reserve and keep available, solely for issuance
and delivery on the conversion of this Debenture, all shares of Common Stock
(or other securities), if any, from time to time issuable on the conversion
of this Debenture.
6. Acceleration. This Debenture shall, at the option of the holder, become
immediately due and payable upon written notice from the holder to the Company
upon the occurrence and during the continuance of any of the following events:
(a) Failure to make any payment of principal or interest when
due which failure has continued for a period of thirty (30) days after written
notice thereof shall have been received by the Company from the holder hereof;
(b) Default in the payment or performance of any liability,
obligation or agreement of the maker hereof contained in this Debenture,
and such default shall continue for a period of forty-five (45) days after
written notice of such default shall have been received by the Company
from the holder hereof, or if such default shall not be curable within such
forty-five (45) day period, the Company shall not have commenced to cure
such default during such forty-five (45) day period and shall thereafter
diligently prosecute to conclusion any such cure;
(c) If the Company shall make an assignment for the benefit of
creditors or shall admit in writing its inability to pay its debts as they
become due;
(d) If the Company shall file a voluntary petition in bankruptcy,
or shall be adjudicated a bankrupt or insolvent, or shall file any petition
or answer seeking any reorganization arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under the present or any future
federal bankruptcy code or other applicable federal, state or similar statute,
law or regulation, or shall seek or consent to or acquiesce in the appointment
of any trustee, receiver or liquidator of the Company or of all or any
substantial part of its properties;
(e) If within ninety (90) days after the commencement of any
proceedings against the Company seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under the present or any future federal bankruptcy code or other
applicable federal, state or similar statute, law or regulation, such
proceeding shall not have been dismissed or if, within ninety (90) days
after the appointment, without the consent or acquiescence of the
Company, of any trustee, receiver or liquidator of the Company or of all or
any substantial part of its properties, such appointment shall not have
been vacated;
(f) If any Senior Indebtedness (as defined in Section 8) in
excess of $250,000 shall become due and payable prior to the stated
maturity thereof as a result of an event of default by the Company
pursuant to the terms of such Senior Indebtedness; or
(g) If any of the Company's other Subordinated Debentures
issued pursuant to a resolution of the Company's Board of Directors in
May, 1997 shall be accelerated in accordance with the terms thereof (the
"May 1997 Debentures").
7. Redemption. This Debenture may not be redeemed by the Company prior
to its maturity without the consent of the holder hereof. In the event the
Company offers to redeem all or any part of this Debenture prior to maturity,
the Company shall offer to redeem a like percentage of each other May 1997
Debenture.
8. Subordination. The indebtedness evidenced by this Debenture is
subordinate and junior to the prior payment in full of the principal of (and
premium, if any) and interest on all Senior Indebtedness. "Senior
Indebtedness" means the principal of (and premium, if any) and interest on
all indebtedness of the Company for money borrowed from banks and other
institutional lenders, whether outstanding on the date hereof or hereafter
arising. Nothing contained in this Section 8 shall limit or impair
the holder of this Debenture from exercising his, her or its rights, if any,
to convert this Debenture in accordance with Section 2 hereof.
Anything herein to the contrary notwithstanding, the Company covenants and
agrees, and any holder hereof by its acceptance hereof covenants and agrees,
expressly for the benefit of the present and future holders of the Senior
Indebtedness, that until the Senior Indebtedness shall have been paid in
full, the holder hereof will not take, demand or receive, and the Company
will not make, give or permit, directly or indirectly, by set-off, redemption,
purchase or in any other manner, any payment of the whole or any part hereof,
except that the holder hereof shall be entitled to receive regularly scheduled
payments of interest and principal in accordance with the terms hereof until
(if ever) the holder of any Senior Indebtedness shall have given notice to the
holder hereof (a "Standstill Notice") that (i) the Company is in default in
respect of any payment of principal of, interest on, or other amount due in
connection with any Senior Indebtedness, or (ii) an event has occurred and
is continuing or a condition exists which entitles any holder of the Senior
Indebtedness to declare the same to be due and payable prior to its express
maturity date, provided that the Company may make, and the holder hereof may
take, demand, receive, enforce and collect such payments of principal,
interest and other amounts after the period (the "Standstill Period") ending
on the first to occur of (a) the date such event or condition is waived or
cured and (b) with respect to a nonpayment default, one hundred and eighty
days after the date the Standstill Notice shall have been given to the holder
hereof, unless there shall then exist a payment default in respect of the
Senior Indebtedness in which case the Company shall not make, and the holder
shall not accept, any payment hereunder until such payment default has been
cured. There shall not be more than one Standstill Period in any 360-day
period. Each holder hereof, by its acceptance of this Debenture, hereby
agrees that the holders of the Senior Indebtedness may, at any time and from
time to time, without notice to the holders of this Debenture, without
releasing or impairing the subordination contained herein, change the manner,
place or terms of payment, or change or extend the time for payment of or renew
or alter, the Senior Indebtedness, or amend or supplement in any manner the
agreements, instruments or documents relating to, evidencing or securing the
Senior Indebtedness, or release any person liable in any manner for the payment
or collection of the Senior Indebtedness or exercise or refrain from exercising
any rights in respect of the Senior Indebtedness or apply any monies or other
property received to the Senior Indebtedness or accept or release any
security for the Senior Indebtedness.
Upon the liquidation, dissolution or other winding up of the Company or any
sale of the Company, receivership, insolvency, reorganization or bankruptcy
proceedings, assignment for the benefit of creditors, arrangement or the
commencement of any proceeding for the benefit of creditors, against the
Company for any relief under any bankruptcy, reorganization or insolvency
laws or any other law for the relief of debtors or the readjustment of
indebtedness or other event or condition described in the immediately
preceding paragraph, then and in any such event, any payment of
principal, interest or premium on this Debenture which but for the
subordination provisions of this Debenture would otherwise be payable or
deliverable to the holder hereof shall instead be paid over or delivered to
the holders of the Senior Indebtedness (pro rata, if more than one holder)
for application as a payment or prepayment on account of the Senior
Indebtedness, and the holder(s) hereof shall not receive any payment
therefrom unless and until all Senior Indebtedness shall have been fully paid
and satisfied or the holder of such Senior Indebtedness shall have otherwise
consented. If any holder hereof shall receive any payment in respect of this
Debenture in violation of the preceding, such holder, by its acceptance hereof,
hereby agrees to hold such payment in trust for the pro rata benefit of the
holders of the Senior Indebtedness and to pay over such amount in the form
received, except for the endorsement without recourse or warranty of the holder
hereof where appropriate, to the holders of the Senior Indebtedness for
application on account of the Senior Indebtedness.
The subordination provisions hereof are and are intended to be solely for the
purpose of defining the relative rights of the holder hereof and the holders
of the Senior Indebtedness and nothing contained herein is intended to or shall
impair, as between the Company, its creditors and the holder of this Debenture,
the obligation of the Company, which is unconditional and absolute, to pay to
the holder of this Debenture the principal of, and interest on, this Debenture
as and when the same shall become due and payable in accordance with the terms
hereof, or is intended to or shall affect the relative rights of the holder of
this Debenture and creditors of the Company (other than the holders of the
Senior Indebtedness), nor shall anything herein prevent the holder hereof
from exercising all rights and remedies under this Debenture in the Event
of Default hereunder, subject to the right of the holders of the Senior
Indebtedness to receive prior payment in full of such Senior Indebtedness.
Notwithstanding the foregoing, the holder of this Debenture shall not
commence any action for the payment of any principal, interest or other amount
due hereunder unless (i) any Senior Indebtedness shall have been accelerated
or (ii) the Company has become subject to an insolvency, reorganization or
bankruptcy proceeding, receivership proceeding, assignment for the benefit of
creditors or other like proceeding.
The holder hereof acknowledges that his, her or its intention is that the
rights of the holder hereof to payments of principal, interest and premium,
if any, on this Debenture shall be junior and subordinate to the rights of
the holders of any present or future Senior Indebtedness, and the holder hereof
hereby agrees to confirm the foregoing and to execute any and all such
documents as may be reasonably requested by the holder of any Senior
Indebtedness from time to time.
9. Investment Intent. The holder of this Debenture, by acceptance hereof,
warrants and represents that this Debenture and any security issuable upon
conversion hereof, has been and will be acquired for investment only and not
with a view to, or for sale in connection with, a distribution thereof and
not with a view to their resale, and that this Debenture and any security
issuable upon conversion hereof has been and will be acquired for the holder's
own account and not with a view to their division among others, and that no
other person has any direct or indirect beneficial interest in this Debenture
or any security issuable upon conversion hereof.
10. Transferability. Subject to the restrictions on the face hereof and the
other terms hereof, this Debenture and all rights hereunder are transferable
only on the books of the Company maintained for the purpose by the registered
holder hereof in person or by duly authorized attorney, upon surrender of this
Debenture properly endorsed and upon payment of any necessary transfer tax or
other governmental charges imposed upon such transfer. Each taker and holder
of this Debenture by taking or holding the same, consents and agrees that when
this Debenture shall have been endorsed in blank, the holder hereof may be
treated by the Company and all other persons dealing with this Debenture as
the absolute owner hereof for any purpose and as the person entitled to
exercise the rights represented hereby and to the transfer hereof on the
books of the Company, any notice to the contrary notwithstanding; but until
such transfer on such books, the Company may treat the registered holder
hereof as the owner for all purposes.
11. Notices. All notices given hereunder shall be in writing and delivered in
person, by recognized courier service, or by postage prepaid certified or
registered mail, return receipt requested. All notices intended for the
holder hereof shall be addressed to it at its last address, as it shall then
appear on the books of the Company. All notices intended for the Company shall
be addressed to it at 1 Mill Street, Box A26, Burlington, Vermont 05401-1530.
Said addresses may be changed by notice in accordance with this Section 11.
12. Certain Waivers. The maker hereof hereby consents that this Debenture
may be extended from time to time and that no such extension or other
indulgence, and no substitution, release or surrender of collateral and no
discharge or release of any other party primarily or secondarily liable
hereon, shall discharge or otherwise affect the liability of such maker. No
delay or omission on the part of the holder in exercising any right hereunder
shall operate as a waiver of such right or of any other right hereunder,
and a waiver of any such right on any one occasion shall not be construed as
a bar to or waiver of any such right on any future occasion. Presentment of
this Debenture for payment, notice of dishonor, protest and notice of protest,
shall be, and the same hereby are, waived by the Company.
13. Governing Law. This Debenture shall be governed by and construed in
accordance with the laws of The State of Vermont.
EXECUTED as an instrument under seal this ______ day of ________, 1997.
SEVENTH GENERATION, INC.
By: _________________________
Its Chief Executive Officer
Attest:
_________________________
Secretary
EXHIBIT 11
<PAGE>
EXHIBIT 11
SEVENTH GENERATION, INC.
Calculation of Shares Used in Determining
Basic and Diluted Earnings Per Common Share
Year Ended December 31
1997 1996
Income available to common stockholders (288,033) (263,926)
Weighted average shares outstanding 2,428,791 2,428,791
Basic and diluted earnings per share $ (0.12) $ (0.11)
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 1997 and 1996.
EXHIBIT 23
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Seventh Generation, Inc. and subsidiary on Form S-8 (File No. 33-85748) of our
report dated February 19, 1998, on our audits of the consolidated financial
statements of Seventh Generation, Inc. and subsidiary as of December 31, 1997
and December 31, 1996, and for the years then ended, which report is included
in this Annual Report on Form 10-KSB.
/s/ Coopers & Lybrand, L.L.P.
Albany, NY 12207
March 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
See accompanying notes.
This schedule contains summary financial information extracted from
the consolidated financial statements and is qualified in its entirety by
reference to such statements.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 311,226
<SECURITIES> 257,698
<RECEIVABLES> 976,176
<ALLOWANCES> (25,000)
<INVENTORY> 344,440
<CURRENT-ASSETS> 1,918,818
<PP&E> 101,992
<DEPRECIATION> (70,142)
<TOTAL-ASSETS> 1,975,722
<CURRENT-LIABILITIES> 513,614
<BONDS> 947,500
0
0
<COMMON> 809
<OTHER-SE> 607,434
<TOTAL-LIABILITY-AND-EQUITY> 1,975,722
<SALES> 6,694,749
<TOTAL-REVENUES> 6,694,749
<CGS> 4,723,952
<TOTAL-COSTS> 4,723,952
<OTHER-EXPENSES> 2,304,766
<LOSS-PROVISION> (233,969)
<INTEREST-EXPENSE> 54,064
<INCOME-PRETAX> (288,033)
<INCOME-TAX> 0
<INCOME-CONTINUING> (288,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (288,033)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
