U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________
TO ____________
Commission File Number 1-12614
SEVENTH GENERATION, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Vermont 03-0300509
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1 Mill Street, Burlington, VT 05401
----------------------------------------
(Address of principal executive offices)
(802) 658-3773
---------------------------
(Issuer's telephone number)
______________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares of Common Stock, $0.000333 par value, outstanding as of
July 31, 1998 was 2,428,791. The number of Redeemable Common Stock Purchase
Warrants outstanding as of July 31, 1998 was 1,540,869.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
TOTAL NUMBER OF PAGES: 24 EXHIBIT INDEX APPEARS ON PAGE: 20
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
ASSETS
June 30, December 31,
1998 1997
(Unaudited)
Current assets:
Cash and cash equivalents $ 347,412 $ 311,226
Short-term marketable securities 161,975 257,698
Accounts receivable-trade, net of
allowance for doubtful accounts of
$27,467 at June 30, 1998 and $25,000 at
December 31, 1997 616,603 911,320
Accounts receivable-other 5,094 39,856
Inventories 511,112 344,440
Other assets 74,111 54,278
----------- -----------
Total current assets 1,716,307 1,918,818
----------- -----------
Equipment:
Computer equipment 81,338 68,129
Equipment and furniture 56,754 33,863
----------- -----------
138,092 101,992
Less accumulated depreciation
and amortization 83,022 70,142
----------- -----------
Equipment and furniture, net 55,070 31,850
----------- -----------
Deposits and other assets 21,350 25,054
----------- -----------
Total assets $ 1,792,727 $ 1,975,722
=========== ===========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1998 1997
(Unaudited)
Current liabilities:
Current installments of subordinated
convertible debentures $ 100,000 $ 100,000
Current portion of capital leases 2,336 2,151
Accounts payable-trade 224,625 251,368
Other accrued expenses 191,995 160,095
----------- ------------
Total current liabilities 518,956 513,614
Long-term debt:
Obligations due under capital leases 5,149 6,365
Subordinated debentures,
excluding current installments 847,500 847,500
----------- ------------
Total liabilities 1,371,605 1,367,479
----------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.001 par value;
2,500,000 shares authorized; none issued
Common stock-$.000333 par value; 15,000,000
shares authorized; 2,428,791 shares issued
and outstanding in 1998 and 1997 809 809
Additional paid-in capital 12,264,623 12,264,623
Accumulated deficit (11,844,310) (11,657,189)
------------ ------------
Total stockholders' equity 421,122 608,243
------------ ------------
Total liabilities and stockholders' equity $ 1,792,727 $ 1,975,722
============ ===========
See accompanying notes to financial statement
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
For the Three Months Ended
June 30, June 30,
1998 1997
(Unaudited) (Unaudited)
Sales $ 1,892,282 $ 1,693,035
Cost of sales 1,263,363 1,182,286
---------- ----------
Gross profit 628,919 510,749
Other operating income 100,000 100,000
---------- ----------
728,919 610,749
---------- ----------
Operating expenses:
Selling and marketing expenses 437,788 312,894
Operations and distribution expenses 172,897 116,194
General and administrative expenses 236,285 198,363
---------- ----------
Total operating expenses 846,970 627,451
---------- ----------
Other income (expense):
Interest income 5,835 11,557
Interest expense (24,893) (20,942)
Other (1,851) (238)
---------- ----------
Total other expense, net (20,909) (9,623)
---------- ----------
Net loss $ (138,960) $ (26,325)
========== ==========
Loss per common share: $ (0.06) $ (0.01)
Weighted average shares outstanding during
the period 2,428,791 2,428,791
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
For the Six Months Ended
June 30, June 30,
1998 1997
(Unaudited) (Unaudited)
Sales $ 4,179,984 $ 3,263,200
Cost of sales 2,876,724 2,271,613
---------- ----------
Gross profit 1,303,260 991,587
Other operating income 100,000 100,000
---------- ----------
1,403,260 1,091,587
---------- ----------
Operating expenses:
Selling and marketing expenses 764,698 584,253
Operations and distribution expenses 330,842 221,033
General and administrative expenses 458,165 361,602
---------- ----------
Total operating expenses 1,553,705 1,166,888
---------- ----------
Other income (expense):
Interest income 17,964 18,093
Interest expense (50,936) (41,655)
Other (3,704) (476)
---------- ----------
Total other expense, net (36,676) (24,038)
---------- ----------
Net loss $ (187,121) $ (99,339)
========== ==========
Loss per common share: $ (0.08) $ (0.04)
Weighted average shares outstanding during
the period 2,428,791 2,428,791
See accompanying notes to financial statement
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
For the Six Months Ended
June 30, June 30,
1998 1997
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (187,121) $ (99,339)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 12,880 5,562
Provision for doubtful accounts 2,467 500
Loss (gain) on short-term securities 723 (4,965)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable-trade 292,250 (399,833)
Decrease in accounts receivable-other 34,762 1,583
Increase in inventories (166,672) (42,445)
(Increase) decrease in other assets (19,833) 72,890
Decrease (increase) in deposits and other assets 3,704 (662)
(Decrease) increase in accounts payable-trade (26,743) 33,826
Increase in accrued expenses 31,900 17,224
----------- ----------
Net cash used in operating activities (21,683) (415,659)
----------- ----------
Cash flows from investing activities:
Maturities of short-term securities 95,000
Purchases of short-term securities (500,000)
Purchases of equipment (36,100) (12,514)
----------- ----------
Net cash provided by (used in)
investing activities 58,900 (512,514)
----------- ----------
Cash flows from financing activities:
Principal payments on capital leases (1,031)
----------- ----------
Net cash used in financing activities (1,031)
----------- ----------
Net increase (decrease) in cash
and cash equivalents 36,186 (928,173)
Cash and cash equivalents, beginning of period 311,226 1,233,006
----------- ----------
Cash and cash equivalents, end of period $ 347,412 $ 304,833
=========== ==========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
Notes to Consolidated Financial Statements
June 30, 1998 and 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item
310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete consolidated financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair statement of the interim
financial data have been included. Results from operations for the six month
period ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 1998.
For further information, please refer to the financial statements and footnotes
filed as Item 7 in the Form 10-KSB for Seventh Generation, Inc. for the fiscal
year ended December 31, 1997, under Commission File # 1-12614.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Business.
Seventh Generation, Inc. (the "Company") began operations in 1988 for the
purpose of marketing a variety of environmentally friendly consumer products
primarily through its mail-order catalog. In 1992, the Company began selling
its Seventh Generation(r) brand products to retailers on a wholesale basis.
Since the sale of its catalog in May 1995, the Company has focused exclusively
on the wholesale business.
Principles of Consolidation.
Effective January 1, 1994, the Company formed a wholly owned subsidiary,
Seventh Generation Wholesale, Inc., to carry on the operations of its wholesale
business. The accompanying Consolidated Financial Statements include all of
the accounts of Seventh Generation, Inc. and its wholly owned subsidiary,
Seventh Generation Wholesale, Inc. All significant intercompany balances
and transactions have been eliminated in consolidation.
Use of Estimates.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition, Sales Discounts and Sales Returns.
Sales are recorded upon shipment of products to customers. The Company
maintains an allowance for estimated future sales returns and doubtful
accounts. Revenue is recorded net of cash discounts.
Cash and Cash Equivalents.
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
Short-Term Investments.
Short-term investments consist of marketable corporate debt securities,
which are recorded at market value.
Inventories.
Inventories include purchased goods that are stated at the lower of cost or
market using the first-in, first-out (FIFO) method.
Furniture and Equipment.
Furniture and equipment are recorded at cost net of depreciation using the
straight-line method over the estimated useful lives of the assets. When
assets are sold, retired or otherwise disposed of, the applicable costs and
accumulated depreciation are removed from the accounts and the resulting
gain or loss is recognized.
Stock Based Compensation.
The Company has elected to continue accounting for the issuance of stock
based compensation under APB Opinion No. 25, "Accounting for Stock Issued to
Employees."
Advertising.
Advertising, selling, and marketing expenses are expensed as they are
incurred. The amounts spent on advertising, selling and marketing expenses
for the three months ended June 30, 1998 and 1997 were approximately $279,000
and $135,000, respectively. Included in advertising expense for the three
months ended June 30, 1998 and 1997 was approximately $33,000 and $20,000,
respectively, for co-op advertising with distributors and retailers, and
approximately $60,000 and $74,000, respectively, for charge-backs related to
marketing promotions. Also included in advertising expense for the three
months ended June 30, 1998 is approximately $190,000 for radio advertising
and related expenses. The amounts spent on advertising, selling and marketing
expenses for the six months ended June 30, 1998 and 1997 were approximately
$430,000 and $245,000, respectively. Included in advertising expense for the
six months ended June 30, 1998 and 1997 were approximately $58,000 and
$51,000, respectively, for co-op advertising with distributors and retailers,
and approximately $117,000 and $122,000, respectively, for charge-backs
related to marketing promotions. Included in advertising expense for the six
months ended June 30, 1998 is approximately $190,000 for radio advertising.
3. EARNINGS PER SHARE
Basic and diluted net loss per common share are computed by dividing net loss
by the weighted average number of common shares outstanding during the
respective periods. The impact of the stock options and warrants outstanding
as common stock equivalents was not dilutive for 1998 and 1997 and thus
did not affect basic or diluted net loss per common share.
4. TRANSACTIONS WITH GAIAM
Pursuant to a supply Agreement with Gaiam, Inc., the purchaser of the Company's
former catalog (Gaiam), the Company sells its brand name products to Gaiam,
which Gaiam resells through its mail order catalog. Gross margins from these
sales are lower than on sales to other customers. Pursuant to the Supply
Agreement, Gaiam was obligated to purchase from the Company a minimum of
$2,500,000 of brand name products over a three-year period, beginning
May 24, 1995, at cost plus 20%. During the year ended December 31, 1997,
Gaiam fulfilled its $2,500,000 obligation under this Agreement. Pursuant to
the Supply Agreement, the Company now sells its brand name products to Gaiam
at cost plus 5%. During the three months ended June 30, 1998, Gaiam purchased
approximately $198,900 of product at cost plus 5%, yielding sales of
approximately $208,800. Gross margin from these sales was approximately 4.8%.
During the three months ended June 30, 1997, Gaiam purchased approximately
$283,000 of product at cost plus 20%, yielding sales of approximately $340,000.
Gross margin from these sales was approximately 16.7%. The decrease in gross
profit for the three months ended June 30, 1998 due to the change in markup
percentage was approximately $30,000. During the six months ended June 30,
1998, Gaiam purchased approximately $510,600 of product at cost plus 5%,
yielding sales of approximately $536,100. Gross margin from these sales was
approximately 4.8%. During the six months ended June 30, 1997, Gaiam
purchased approximately $540,000 of product at cost plus 20%, yielding sales
of approximately $649,000. Gross margin from these sales was approximately
16.7%. The decrease in gross profit for the six months ended June 30, 1998
due to the change in markup percentage was approximately $76,000.
The following table summarizes sales to Gaiam and other customers and the
corresponding gross profit percentages for the periods indicated. All sales
are approximate.
Gaiam Others Total
Three months ended June 30, 1998 $208,800 $1,683,500 $1,892,300
Gross profit percentage 4.8% 36.8% 33.2%
Three months ended June 30, 1997 $340,000 $1,353,000 $1,693,000
Gross profit percentage 16.7% 33.6% 30.2%
Percentage (decrease)
increase in sales from 1997 (38.6%) 24.4% 11.8%
Six months ended June 30, 1998 $536,100 $3,643,900 $4,180,000
Gross profit percentage 4.8% 35.1% 31.2%
Six months ended June 30, 1997 $649,000 $2,614,200 $3,263,200
Gross profit percentage 16.7% 33.8% 30.4%
Percentage (decrease)
increase in sales from 1997 (17.4%) 39.4% 28.1%
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. In
June of 1997, 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 required
no further performance by the Company and was recognized as revenue. In June
of 1998, Gaiam paid the Company a non-refundable license fee of $100,000 for
continued use of the rights through May 23, 1999. The license fee requires no
further performance by the Company and was recognized as revenue. Gaiam has
changed the name on its mail order catalog to "Harmony" and may choose at any
time to completely discontinue use of the Seventh Generation(r) name.
Accordingly, the Company does not anticipate receiving any further licensing
revenue pursuant to this Agreement.
The Company also entered into a limited Non-Compete Agreement with Gaiam,
pursuant to which the Company agreed not to sell environmental products
directly to end users through a mail order catalog operated by the Company.
5. SUBORDINATED DEBENTURES
June 30,1998 December 31, 1997
Variable rate subordinated debentures,
unsecured, due June 30, 2002 $ 847,500 $ 847,500
10% subordinated convertible debentures,
unsecured, due November 30, 1998,
convertible at a price per common share
of $6.67 100,000 100,000
----------- -----------
Total subordinated debentures 947,500 947,500
Less current installments (100,000) (100,000)
Subordinated debentures,
less current installments $ 847,500 $ 847,500
=========== ==========
The variable rate debentures are due June 30, 2002, and bear interest at an
initial annual rate of 10.85%. The Company has the option to pay interest
semiannually at the lesser of 4% over the June 30 five-year United States
Treasury Note yield (currently 9.454%) 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, which approximates the fair market value of the
stock at the time the debt was issued. Accordingly, a minimum of 1,695,000
shares of common stock are reserved for the potential conversion of these
debentures. The number of shares of common stock reserved for the potential
conversion of convertible debentures was 14,993 at June 30, 1998 and December
31, 1997.
6. COMMITMENTS AND CONTINGENCIES
Uncertainties:
The Company has historically incurred losses from operations, which resulted
in part from its catalog operations. In 1995, the Company sold the catalog
business and focused on expanding sales through the wholesale distribution
channels. The Company relies on a limited number of customers, including
Gaiam, the purchaser of the catalog segment. The Company's contractual
relationship with Gaiam is uncertain. Gaiam's obligation to purchase product
at a 20% markup terminated in 1997 and the Company is currently obligated to
sell its products to Gaiam at cost plus 5%, which has reduced the Company's
sales and its profit margins on sales to Gaiam. If the number of distributors
were reduced, principal customers do not meet their commitments, or sales and
gross profit margins do not reach sufficient levels to provide positive cash
flow, the Company may not have adequate liquidity to sustain long term
operations and meet long term obligations.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments at June 30, 1998
approximate their estimated fair values. The following methods and assumptions
were used to estimate the fair value of each class of financial instruments:
Cash and Cash Equivalents.
The carrying amount approximates fair value due to the short-term maturity of
these instruments.
Short-Term Investments.
Short-term investments consist of marketable corporate debt securities, which
are recorded at market value.
Subordinated Debentures.
The carrying amount approximates fair value as the interest rates on the
debentures approximate the Company's current borrowing rate.
8. RELATED PARTY TRANSACTIONS
During 1997, the Company engaged KSV Communicators, the firm of one of its
directors, Yoram Samets, to perform marketing services at a cost of
approximately $37,000 for the year ended December 31, 1997. These services
have cost approximately $260,000 during the first six months of 1998, of which
approximately $130,000 was for reimbursements for radio advertising.
9. CONCENTRATIONS OF CREDIT RISK
Concentration of credit risk consists primarily of cash and cash equivalents.
From time to time the Company has on deposit with certain banks and financial
institutions cash and cash equivalents which exceed the amount subject to
federal insurance. The Company attempts to mitigate this risk by depositing
its cash and cash equivalents with high credit quality financial institutions.
10. MAJOR SUPPLIERS AND CUSTOMERS
The Company purchased approximately 82% of its product from four suppliers
during the six months ended June 30, 1998.
The Company had sales of approximately 52% to two customers during the six
months ended June 30, 1998 and approximately 61% of accounts receivable were
due from two customers as of June 30, 1998.
During 1998 and 1997, Jeffrey A. Hollender, the Chief Executive Officer of the
Company, guaranteed up to $300,000 of the obligations of the Company to one of
its principal suppliers.
11. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No.131, "Disclosures
About Segments of an Enterprise and Related Information," which is required
to be adopted by the Company no later than fiscal year 1999. This statement
introduces a new model for segment reporting, called the management approach.
The management approach is based on the way that the chief operating
decision-maker organizes segments within a company for making operating
decisions and assessing performance. The Company plans to adopt this statement
in fiscal year 1999.
The Financial Accounting Standards Board issued SFAS No.133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be adopted
by the Company for all fiscal quarters of all fiscal years beginning after June
15, 1999. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. Management has not yet determined the impact
of adoption of this pronouncement on the financial position or results of
operation of the company.
12. SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Company issued $225,000 of subordinated
debentures. The 1998 variable rate debentures are due May 31, 2003, and bear
interest at an initial annual rate of 10.85% through May 31, 1999. Effective
as of June 1, 1999 and through the remainder of the term of the debentures,
the Company has the option to pay interest at the annual rate of (a) 22% or
(b) the lesser of (i) 4% over the May 31 five-year United States Treasury Note
and (ii) 12.5%, in which event the debentures become convertible into shares
of the Company's common stock at the option of the holder at any time after
May 31, 1999. If the Company elects to pay interest at 22% per annum, the
Company is required to pay a premium of 25% over the amount of the debenture
on May 31, 2003. If the Company elects the second interest option, the holders
of the debentures will have the option to convert the debentures into shares of
the Company's common stock (i) effective as of May 31, 1999 at a discount to
the fair market value of the common stock on such date based on certain stock
price benchmarks, subject to a $1.00 minimum conversion price or (ii) at any
time prior to maturity based on the fair market value of the common stock on
May 31, 1999 at no discount, but subject to a $1.50 minimum conversion price.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. The discussion
should be read in conjunction with the financial statements and footnotes,
which appear elsewhere in this report, as well as the Company's 10-KSB filing
for the fiscal year ending December 31, 1997. 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, Section 27A of the Securities Act of 1993 and Section
21E of the Securities Exchange Act of 1934. The words "believe," "expect,"
"anticipate," "intend," "estimate," and other expressions which are predictions
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. The Company cautions investors
that there can be no assurance that actual results or business conditions will
not differ materially from those projected or suggested in such forward-
looking statements as a result of various risk factors, including, but not
limited to, continuing relationships with the Company's key customers, the
stability of the Company's suppliers, their manufacturing capacity
and the availability of raw materials, economic conditions, the regulatory and
trade environment, competitive products and pricing, the risk of entering into
new market segments, product demand, ability to enforce trademarks, the effects
of the year 2000 on customers' and suppliers' computer systems, and other
unforeseen risks and uncertainties. The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise.
The Company's primary strategic objective is to establish Seventh Generation(r)
as the leading brand name for household products that are "safer for you and the
environment." The Company believes that it is today one of the leading
marketers of environmentally friendly household products in the United States
and in Central and Western Canada. The Company sells Seventh Generation(r)
brand name products through distributors to natural products stores throughout
the United States and in Central and Western Canada, is expanding sales of its
brand name products into upscale supermarkets primarily in the Northeast
and West Coast. The Company has tested a new sales distribution channel
through its "Learning to Make a Difference" program and is evaluating the
results. The Company's products are also marketed through the Harmony, formerly
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, and a limited number of privately labeled products to a limited
number of select customers. This approach is designed to reduce the Company's
risks by focusing sales efforts on primarily those accounts that serve
customers similar to the Company's current account base. This has helped to
reduce operating expenses and losses as a percentage of sales.
The Company's marketing strategy utilizes in-store promotion as its primary
means to stimulate consumer trial and repeat purchases in natural products
stores and supermarkets, rather than more costly marketing strategies such
as television advertising and mass-delivered consumer promotions. The Company
has begun to expand its marketing activities to include direct mail and radio
advertising.
During the second quarter of 1998, the Company used radio advertising for the
first time. The Company developed a series of informational radio ads designed
to heighten consumers' awareness of the toxins in our homes and the environment
caused by traditional household products. The ads encouraged consumers to
"Break the Toxic Cycle" by using Seventh Generation(r) brand non-toxic
products. The ads were broadcast in the Boston metropolitan area in
conjunction with the Company's expanded grocery distribution in the Boston
marketplace. If successful, this marketing program is designed to serve as a
model for initiating or expanding grocery distribution in other select
metropolitan markets around the country. These ads were designed not only to
generate interest and trial purchase of Seventh Generation(r) brand products
but also to educate and inform the consumer. As an extension of this
advertising effort the Company created the opportunity for consumers to receive
a free copy of the "Seventh Generation Guide to a Toxic-Free Home." This
guide contains information regarding the toxic chemicals used in common
household products and their effects on our health and the environment. The
guide is designed to raise consumers' awareness of the prevalence of toxins
in our environment and how to avoid them. The Company has spent approximately
$190,000 on these activities in the second quarter of 1998 and is currently
analyzing the results of this new marketing program.
The Company's other marketing activities have included public relations
programs that have led to news coverage on television, in magazines and
newspapers, in-store point of purchase displays and educational literature,
participation in environmental events and activities, trade promotions directed
to the natural products and supermarket industries, the distribution of product
samples to encourage new customers to try the Company's products, the
development of a web site to provide information and education
(www.seventhgen.com) and the licensing of its name for use on the Gaiam mail
order catalog which is distributed directly to consumers.
Seventh Generation(r) brand name products are available in natural products
grocery stores and mainstream supermarkets. During the three and six months
ended June 30, 1998, the Company's sales to the Natural Products Industry and
supermarkets grew significantly over sales in the three and six months
ended June 30, 1997 as a result of continued market penetration, increased
consumer marketing and trade promotions, and new product introductions. The
Company plans to continue its efforts to introduce new products and expand
distribution.
In January 1995, the Company made its first sales to supermarkets in the
Northeastern United States. The Company plans to continue with its primary
focus of expanding its sales and marketing efforts in the Natural Products
Industry as well as continuing to expand sales to upscale supermarket chains
in the Northeast and West Coast. Although the Company has started to realize
sales to supermarkets, there can be no assurance that the Company will be
successful with its marketing strategy.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Operations
Net sales increased $199,247, or 11.8%, during the three months ended
June 30, 1998 to $1,892,282, compared to $1,693,035 during the three months
ended June 30, 1997. This favorable performance was due primarily to the
continued growth of sales to natural products and supermarket accounts and the
growth of sales to other customers. In 1998 and 1997, the Company received
$100,000 in non-refundable licensing revenue from Gaiam for use of the
Seventh Generation(r) name in connection with the operation of its mail
order catalog.
Gross profit was $628,919 in the three months ended June 30, 1998, compared to
$510,749 during 1997, an increase of $118,170 over the same period in 1997, or
23.1%. Gross profit increased to 33.2% as a percentage of sales in the 1998
period, compared to 30.2% in 1997, due primarily to an increase in purchase
discounts earned on the higher purchase and inventory levels, despite the
change in the markup percentage on sales to Gaiam. The decrease in gross
profit on sales to Gaiam due to the change in markup percentage was
approximately $30,000.
Operating expenses were $846,970 in the three months ended June 30, 1998
compared to $627,451 during 1997, an increase of 7.7% as a percentage of sales
from 37.1% of sales in the 1997 period to 44.8% of sales for the 1998 period.
Sales and marketing expenses were $437,788 in the period, compared to $312,894
in the 1997 period. Sales and marketing expenses increased 4.7% as a
percentage of sales from 18.5% in the three months ended June 30, 1997 to
23.2% in the first three months ended June 30, 1998. Included in the 1998
expenses is approximately $190,000 (approximately 10% of sales) for radio
advertising introduced in the second quarter of 1998. See "Overview" for a
more complete description of these marketing activities.
Operations and distribution expenses were $172,897 in the 1998 period,
compared to $116,194 in the 1997 period. The additional expenses incurred
were primarily due to increased warehousing and freight costs due to the
introduction of new products, higher inventory levels, the changing mix of
sales, and the higher sales volume. Operations and distribution expenses
increased as a percentage of sales from 6.9% in the 1997 period to 9.1% in
the 1998 period.
General and administrative expenses were $236,285 in the 1998 period, compared
to $198,363 in the 1997 period. The increase in expenses incurred was
primarily due to increased personnel costs. General and administrative
expenses increased from 11.7% of sales in the 1997 period to 12.5% of sales
in the 1998 period.
Net other expenses increased in 1998 as earnings on funds invested decreased
due to a lower level of funds invested in 1998 and by an increase in interest
paid due to the issuance of new debentures in the fourth quarter of 1997 at a
higher interest rate than was paid on the debentures in 1997. See Footnote 5
of the financial statements for a more complete description of debenture
activity.
The net loss in the 1998 period was $138,960, compared to $26,325 in 1997, an
increase of $112,635.
Transactions with Gaiam
Pursuant to a Supply Agreement with Gaiam, the purchaser of the Company's
former catalog, the Company sells its brand name products to Gaiam, which
Gaiam resells through its mail order catalog. Gross margins from these sales
are lower than on sales to other customers. Pursuant to the Supply Agreement,
Gaiam was obligated to purchase from the Company a minimum of $2,500,000 of
brand name products over a three-year period, beginning May 24, 1995, at cost
plus 20%. During the year ended December 31, 1997, Gaiam fulfilled its
$2,500,000 obligation under this Agreement. Pursuant to the Supply Agreement,
the Company now sells its brand name products to Gaiam at cost plus 5%. During
the three months ended June 30, 1998, Gaiam purchased approximately $198,900 of
product at cost plus 5%, yielding sales of approximately $208,800. Gross
margin from these sales was approximately 4.8%. During the three months ended
June 30, 1997, Gaiam purchased approximately $283,000 of product at cost plus
20%, yielding sales of approximately $340,000. Gross margin from these sales
was approximately 16.7%. The decrease in gross profit for the three months
ended June 30, 1998 due to the change in markup percentage was approximately
$30,000. Sales to Gaiam are expected continue to reduce overall gross
margin percentage through at least the third quarter of 1998.
The table in Footnote 4 of the financial statements summarizes sales to Gaiam
and other customers and the corresponding gross profit percentages for the
three and six months ended June 30, 1998 and 1997.
Gaiam has elected to renew its Licensing Agreement with the Company through
May 23, 1999. Although Gaiam has changed the name on its mail order catalog
to "Harmony" and may choose at any time to completely discontinue use of the
Seventh Generation(r) name, this will not affect the $100,000 in non-refundable
licensing revenue received in 1998 from Gaiam. 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 and 1998.
Summary
Sales during the three months ended June 30, 1998 were $1,892,282, an increase
of $199,247, or 11.8%, from the sales of $1,693,035 during the 1997 period.
Gross profit was $628,919 for the three months ended June 30, 1998, an increase
of $118,170, or 23.1%, from $510,749 in the 1997 period. Gross profit was 33.2%
of sales for the three months ended June 30, 1998, compared to 30.2% of sales
in the 1997 period. Operating expenses for the three months ended June 30,
1998 were $846,970, or 44.8% of sales, compared to $627,451, or 37.1% of sales
in the 1997 period. Included in the 1998 expenses is approximately $190,000
(approximately 10% of sales) for radio advertising. In 1998 and 1997, the
Company received $100,000 in non-refundable licensing revenue from Gaiam for
use of the Seventh Generation(r) name in connection with the operation of its
mail order catalog. The net loss for the three months ended June 30, 1998
was $138,960, or 7.3% of sales compared to $26,325, or 1.6% of sales in the
1997 period.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Operations
Net sales increased $916,784, or 28.1%, during the six months ended
June 30, 1998 to $4,179,984, compared to $3,263,200 during the 1997 period.
This favorable performance was due primarily to the continued growth of sales
to natural products and supermarket accounts and the growth of sales to other
customers.
Gross profit was $1,303,260 in the six months ended June 30, 1998, compared to
$991,587 during 1997, an increase of $311,673 over the same period in 1997, or
31.4%. Gross profit increased to 31.2% as a percentage of sales in the 1998
period, compared to 30.4% in 1997, due primarily to an increase in purchase
discounts earned on the higher purchase and inventory levels, despite the
change in the markup percentage on sales to Gaiam. The decrease in gross
profit on sales to Gaiam due to the change in markup percentage was
approximately $76,000.
Operating expenses were $1,553,705 in the six months ended June 30, 1998
compared to $1,166,888 during 1997, a increase of 1.3% as a percentage of
sales from 35.8% of sales in the 1997 period to 37.1% of sales for the 1998
period.
Sales and marketing expenses were $764,698 in the period, compared to $584,253
in the 1997 period. Sales and marketing expenses increased .3% as a percentage
of sales from 17.9% in the six months ended June 30, 1997 to 18.2% in the six
months ended June 30, 1998. Included in the 1998 expenses is approximately
$190,000 (approximately 4.5% of sales) for radio advertising.
Operations and distribution expenses were $330,842 in the 1998 period,
compared to $221,033 in the 1997 period. The additional expenses incurred
were primarily due to increased warehousing and freight costs due to the
introduction of new products, higher inventory levels, the changing mix of
sales, and the higher sales volume. Operations and distribution expenses
increased as a percentage of sales from 6.8% in the 1997 period to 7.9% in
the 1998 period.
General and administrative expenses were $458,165 in the 1998 period, compared
to $361,602 in the 1997 period. The additional expenses incurred were
primarily due to increased personnel costs. General and administrative
expenses decreased from 11.1% of sales in the 1997 period to 11.0% of sales
in the 1998 period.
Net other expenses increased in 1998 due to the issuance of new debentures in
the fourth quarter of 1997 at a higher interest rate than was paid on the
debentures in 1997. See Footnote 5 of the financial statements for a more
complete description of debenture activity.
The net loss in the 1998 period was $187,121, compared to $99,339 in 1997, an
increase of $87,782.
Transactions with Gaiam
During the six months ended June 30, 1998, Gaiam purchased approximately
$510,600 of product at cost plus 5%, yielding sales of approximately $536,100.
Gross margin from these sales was approximately 4.8%. During the six months
ended June 30, 1997, Gaiam purchased approximately $540,000 of product at cost
plus 20%, yielding sales of approximately $649,000. Gross margin from these
sales was approximately 16.7%. The decrease in gross profit for the six months
ended June 30, 1998 due to the change in markup percentage was approximately
$76,000. Sales to Gaiam are expected continue to reduce overall gross margin
percentage through at least the third quarter of 1998.
The table in Footnote 4 of the financial statements summarizes sales to Gaiam
and other customers and the corresponding gross profit percentages for the
three and six months ended June 30, 1998 and 1997.
Summary
Sales during the six months ended June 30, 1998 were $4,179,984, an increase
of $916,784, or 28.1%, from the sales of $3,263,200 during the 1997 period.
Gross profit was $1,303,260 for the six months ended June 30, 1998, an increase
of $311,673, or 31.4%, from $991,587 in the 1997 period. Gross profit was 31.2%
of sales for the six months ended June 30, 1998, compared to 30.4% of sales in
the 1997 period. Operating expenses, including approximately $190,000 for
radio advertising, for the six months ended June 30, 1998 were $1,553,705, or
37.1% of sales, compared to $1,166,888, or 35.8% of sales in the 1997 period.
The net loss for the six months ended June 30, 1998 was $187,121, or 4.5% of
sales compared to $99,339, or 3.0% of sales in the 1997 period.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, the Company used approximately
$22,000 of its available cash balances through operations. The Company realized
approximately $292,000 as accounts receivable decreased. The Company used
approximately $167,000 of cash as its inventories increased. The Company used
approximately $20,000 by increasing prepaid expenses. Additionally, the
Company has decreased its accounts payable by approximately $27,000, while
increasing its accrued liabilities by approximately $32,000. As of
June 30, 1998, the Company's primary sources of liquidity were approximately
$347,000 in cash, approximately $162,000 in marketable securities, and
approximately $616,000 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 the first
six months of 1998 and together accounted for 52% 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 the first six months of 1998, the
Company's net loss was $187,120, compared to $99,339 in 1997, an increase
of $87,781. The Company has, for the first time, used radio advertising, at
a cost of approximately $190,000, which has significantly increased its
marketing expenses.
During 1997, the Company completed a debt offering of privately placed
subordinated debentures. As of December 31, 1997, $572,500 of debentures had
been sold, and holders of $275,000 of existing debentures had signed
agreements to participate in the new offering by converting their existing
debentures into the new debentures, extending the maturity dates to
June 30, 2002. The new debentures are due June 30, 2002, and bear interest
at an initial annual rate of 10.85%. The Company has the option to pay
interest at the lesser of 4% over the June 30 five-year United States
Treasury Note yield (currently 10.85%) or 12.5% annually through December
31, 1998. At January 1, 1999, the Company has the option of paying interest
as previously calculated or paying an annual rate of 22%. If the Company
chooses to continue paying interest as previously calculated, the debentures
become convertible at the option of the debenture holder at any time after
January 1, 1999. The debentures will be convertible at a discounted price
ranging from 25% to 50% of the fair market value of the Company's common
stock, based on certain stock price benchmarks. In no event will the
conversion price be less than $0.50 per share. Accordingly, a minimum of
1,695,000 shares of common stock have been reserved for the potential
conversion of these debentures. In November 1998, $100,000 of debentures
are scheduled to come due.
Subsequent to June 30, 1998, the Company issued $225,000 of new variable rate
debentures. The 1998 variable rate debentures are due May 31, 2003, and bear
interest at an initial annual rate of 10.85% through May 31, 1999. Effective
as of June 1, 1999 and through the remainder of the term of the debentures,
the Company has the option to pay interest at the annual rate of (a) 22% or
(b) the lesser of (i) 4% over the May 31 five-year United States Treasury
Note and (ii) 12.5%, in which event the debentures become convertible into
shares of the Company's common stock at the option of the holder at any time
after May 31, 1999. If the Company elects to pay interest at 22% per annum,
the Company is required to pay a premium of 25% over the amount of the
debenture on May 31, 2003. If the Company elects the second interest option,
the holders of the debentures will have the option to convert the debentures
into shares of the Company's common stock (i) effective as of May 31, 1999 at
a discount to the fair market value of the common stock on such date based on
certain stock price benchmarks, subject to a $1.00 minimum conversion price
or (ii) at any time prior to maturity based on the fair market value of the
common stock on May 31, 1999 at no discount, but subject to a $1.50 minimum
conversion price.
Year 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. Management believes
that all software used is Year 2000 compliant. The Company is currently unable
to predict the extent to which the Year 2000 issue will affect its suppliers or
customers, or the extent to which it would be vulnerable to such suppliers'
or customers' failure to remediate any Year 2000 issue on a timely basis. The
failure of a major supplier or customer subject to the Year 2000 issue to
convert its computer systems on a timely basis could have a material adverse
affect on the Company.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
The annual meeting of the Stockholders of SEVENTH GENERATION, INC., a Vermont
corporation, was held on Monday, May 4, 1998 at the Company's offices located
at One Mill Street, Burlington, Vermont for the purpose of electing six
members to the Board of Directors to hold office until the next annual meeting
of Stockholders and until their successors are duly elected and qualified.
Board of Directors Election Results: For Withheld Abstentions
Arthur Gray Jr. 1,953,565 26,050 0
Jeffrey A. Hollender 1,953,565 26,050 0
Sheila Hollender 1,952,465 27,150 0
Joshua Sapan 1,952,665 26,950 0
Peter Graham 1,948,565 31,050 0
Yoram Samets 1,952,665 26,950 0
ITEM 5. OTHER INFORMATION
To be considered for inclusion in the proxy statement relating to the Annual
Meeting of stockholders to be held in 1999, stockholder proposals must be
received no later than December 11, 1998. To be considered for presentation
at the Annual Meeting, although not included in the proxy statement, proposals
must be received not later than March 5, 1999. All stockholder proposals
should be marked for the attention of Jeffrey A. Hollender, President and
Chief Executive Officer, Seventh Generation, Inc., One Mill Street, Box A26,
Burlington, VT 05401-1530.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
EXHIBITS:
Exhibit # Description
(11) Statement re: Computation of Loss Per Share
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SEVENTH GENERATION, INC.
Date: August 14, 1998 By: /s/ Jeffrey A. Hollender
Jeffrey A. Hollender
President and Chief Executive Officer
(Principal Executive & Financial Officer)
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Number Numbered Page
11 21
27 23
<PAGE>
Exhibit 11
<PAGE>
EXHIBIT 11
SEVENTH GENERATION, INC.
Calculation of Shares Used in Determining
Basic and Diluted Earnings Per Common Share
Three Months Ended June 30,
1998 1997
Loss applicable to common stockholders $(138,960) $(26,325)
Weighted average shares outstanding 2,428,791 2,428,791
Basic and diluted earnings per share $ (0.06) $ (0.01)
Six Months Ended June 30,
1998 1997
Loss applicable to common stockholders $ (187,121) $ (99,339)
Weighted average shares outstanding 2,428,791 2,428,791
Basic and diluted earnings per share $ (0.08) $ (0.04)
The calculation above for diluted earnings per common share excludes the
potentially dilutive effect of both common stock equivalents (stock options
and warrants) and the impact of conversion of any debentures into the
Company's common stock since the impact would be anti-dilutive for both
1998 and 1997.
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
See accompanying notes.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-31-1998
<CASH> 347412
<SECURITIES> 161,975
<RECEIVABLES> 649164
<ALLOWANCES> (27467)
<INVENTORY> 511112
<CURRENT-ASSETS> 1716307
<PP&E> 138092
<DEPRECIATION> (83022)
<TOTAL-ASSETS> 1792727
<CURRENT-LIABILITIES> 518956
<BONDS> 947500
0
0
<COMMON> 809
<OTHER-SE> 420313
<TOTAL-LIABILITY-AND-EQUITY> 1792727
<SALES> 1892282
<TOTAL-REVENUES> 1992282
<CGS> 1263363
<TOTAL-COSTS> 1263363
<OTHER-EXPENSES> 846970
<LOSS-PROVISION> (138960)
<INTEREST-EXPENSE> 20909
<INCOME-PRETAX> (138960)
<INCOME-TAX> 0
<INCOME-CONTINUING> (138960)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (138960)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
