U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________
TO ____________
Commission File Number 1-12614
SEVENTH GENERATION, INC.
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(Exact name of small business issuer as specified in its charter)
Vermont 03-0300509
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1 Mill Street, Burlington, VT 05401
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(Address of principal executive offices)
(802) 658-3773
---------------------------
(Issuer's telephone number)
______________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares of Common Stock, $0.000333 par value, outstanding as of
October 31, 1998 was 2,428,791. The number of Redeemable Common Stock Purchase
Warrants outstanding as of October 31, 1998 was 1,540,869.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
TOTAL NUMBER OF PAGES: 26 EXHIBIT INDEX APPEARS ON PAGE: 22
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
ASSETS
September 30, December 31,
1998 1997
(Unaudited)
Current assets:
Cash and cash equivalents $ 562,393 $ 311,226
Short-term marketable securities 162,154 257,698
Accounts receivable-trade, net of
allowance for doubtful accounts of
$26,407 at September 30, 1998 and $25,000 at
December 31, 1997 704,602 911,320
Accounts receivable-other 3,625 39,856
Inventories 551,568 344,440
Other assets 67,191 54,278
----------- -----------
Total current assets 2,051,533 1,918,818
----------- -----------
Equipment:
Computer equipment 83,313 68,129
Equipment and furniture 59,899 33,863
----------- -----------
143,212 101,992
Less accumulated depreciation
and amortization 89,022 70,142
----------- -----------
Equipment and furniture, net 54,190 31,850
----------- -----------
Deposits and other assets 19,498 25,054
----------- -----------
Total assets $ 2,125,221 $ 1,975,722
=========== ===========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1998 1997
(Unaudited)
Current liabilities:
Current installments of subordinated
convertible debentures $ 100,000 $ 100,000
Current portion of capital leases 2,435 2,151
Accounts payable-trade 465,517 251,368
Other accrued expenses 205,557 160,095
----------- ------------
Total current liabilities 773,509 513,614
Long-term debt:
Obligations due under capital leases 4,501 6,365
Subordinated debentures,
excluding current installments, net of
unamortized discount of $59,659 at
September 30, 1998 1,012,841 847,500
----------- ------------
Total liabilities 1,790,851 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 12,327,123 12,264,623
Accumulated deficit (11,993,562) (11,657,189)
------------ ------------
Total stockholders' equity 334,370 608,243
------------ ------------
Total liabilities and stockholders' equity $ 2,125,221 $ 1,975,722
============ ===========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
For the Three Months Ended
September 30, September 30,
1998 1997
(Unaudited) (Unaudited)
Sales $ 2,113,825 $ 1,564,689
Cost of sales 1,413,814 1,095,947
---------- ----------
Gross profit 700,011 468,742
---------- ----------
Operating expenses:
Selling and marketing expenses 441,782 251,053
Operations and distribution expenses 155,107 116,127
General and administrative expenses 228,443 187,444
---------- ----------
Total operating expenses 825,332 554,624
---------- ----------
Other income (expense):
Interest income 9,223 13,144
Interest expense (31,303) (24,400)
Other (1,852) (238)
---------- ----------
Total other expense, net (23,932) (11,494)
---------- ----------
Net loss $ (149,253) $ (97,376)
========== ==========
Loss per common share: $ (0.06) $ (0.04)
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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
For the Nine Months Ended
September 30, September 30,
1998 1997
(Unaudited) (Unaudited)
Sales $ 6,293,809 $ 4,827,890
Cost of sales 4,290,539 3,367,560
---------- ----------
Gross profit 2,003,271 1,460,330
Other operating income 100,000 100,000
---------- ----------
2,103,271 1,560,330
---------- ----------
Operating expenses:
Selling and marketing expenses 1,206,480 835,305
Operations and distribution expenses 485,949 337,160
General and administrative expenses 686,608 549,047
---------- ----------
Total operating expenses 2,379,037 1,721,512
---------- ----------
Other income (expense):
Interest income 27,188 31,237
Interest expense (82,239) (66,055)
Other (5,556) (714)
---------- ----------
Total other expense, net (60,607) (35,532)
---------- ----------
Net loss $ (336,373) $ (196,714)
========== ==========
Loss per common share: $ (0.14) $ (0.08)
Weighted average shares outstanding during
the period 2,428,791 2,428,791
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
For the Nine Months Ended
September 30, September 30,
1998 1997
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (336,373) $ (99,339)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 21,721 5,562
Provision for doubtful accounts 1,407 500
Loss (gain) on short-term securities 544 (4,965)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable-trade 205,311 (399,833)
Decrease in accounts receivable-other 36,231 1,583
Increase in inventories (207,128) (42,445)
(Increase) decrease in other assets (12,913) 72,890
Decrease (increase) in deposits and other assets 5,556 (662)
(Decrease) increase in accounts payable-trade 214,149 33,826
Increase in accrued expenses 45,462 17,224
----------- ----------
Net cash used in operating activities (26,033) (415,659)
----------- ----------
Cash flows from investing activities:
Maturities of short-term securities 95,000
Purchases of short-term securities (500,000)
Purchases of equipment (41,220) (12,514)
----------- ----------
Net cash provided by (used in)
investing activities 53,780 (512,514)
----------- ----------
Cash flows from financing activities:
Proceeds from debenture offering 225,000 235,000
Increase in restricted cash - (236,108)
Principal payments on capital leases (1,580)
----------- ----------
Net cash provided by (used in)
financing activities 223,420 (1,108)
----------- ----------
Net increase (decrease) in cash
and cash equivalents 251,167 (1,062,400)
Cash and cash equivalents, beginning of period 311,226 1,233,006
----------- ----------
Cash and cash equivalents, end of period $ 562,393 $ 170,606
=========== ==========
See accompanying notes to financial statements
<PAGE>
SEVENTH GENERATION, INC.
Notes to Consolidated Financial Statements
September 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 nine month
period ended September 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 September 30, 1998
and 1997 were approximately $286,000 and $88,000,
respectively. Included in advertising, selling, and
marketing expenses for the three months ended
September 30, 1998 and 1997 was approximately $47,000
and $25,000, respectively, for co-op advertising with
distributors and retailers, and approximately $174,000 and
$53,000, respectively, for charge-backs related to
marketing promotions.
The amounts spent on advertising, selling and
marketing expenses for the nine months ended
September 30, 1998 and 1997 were approximately
$762,000 and $339,000, respectively. Included in
advertising, selling, and marketing expense for the nine
months ended September 30, 1998 and 1997 were
approximately $105,000 and $76,000, respectively, for co-
op advertising with distributors and retailers, and
approximately $291,000 and $175,000, respectively, for
charge-backs related to marketing promotions. Included in
advertising, selling, and marketing expense for the nine
months ended September 30, 1998 is approximately
$195,000 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 September 30, 1998,
Gaiam purchased approximately $277,140 of product at
cost plus 5%, yielding sales of approximately $291,000.
Gross margin from these sales was approximately 4.8%.
During the three months ended September 30, 1997,
Gaiam purchased approximately $138,000 of product at
cost plus 20% under the terms of the Supply Agreement,
yielding approximately $165,000 in sales, fulfilling its
$2,500,000 obligation under this Agreement. During the
three months ended September 30, 1997, Gaiam also
purchased approximately $133,000 of product at cost plus
5%, yielding sales of approximately $140,000. The
combined product purchase of approximately $271,000
yielded sales of approximately $305,000. The decrease in
gross profit for the three months ended September 30,
1998 due to the change in markup percentage was
approximately $20,000. During the nine months ended
September 30, 1998, Gaiam purchased approximately
$788,100 of product at cost plus 5%, yielding sales of
approximately $827,500. Gross margin from these sales
was approximately 4.8%. During the nine months ended
September 30, 1997, Gaiam purchased approximately
$810,900 of product, yielding sales of approximately
$954,000. Gross margin from these sales was
approximately 15.0%.
The following table summarizes sales to Gaiam and
other customers and the corresponding gross profit
percentages for the periods indicated. All sales are
approximate.
Gaiam Others Total
Three months ended September 30, 1998 $291,000 $1,822,800 $2,113,800
Gross profit percentage 4.8% 37.6% 33.1%
Three months ended September 30, 1997 $305,000 $1,259,000 $1,564,000
Gross profit percentage 11.1% 33.7% 30.0%
Percentage (decrease) increase in
sales from 1997 (4.6%) 44.8% 35.1%
Nine months ended September 30, 1998 $827,500 $5,466,300 $6,293,800
Gross profit percentage 4.8% 35.9% 31.8%
Nine months ended September 30, 1997 $954,000 $3,874,000 $4,828,000
Gross profit percentage 15.0% 34.0% 30.3%
Percentage (decrease) increase in
sales from 1997 (13.3%) 41.1% 30.4%
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
Generationr 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 requires 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 Generationr
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
September 30,1998 December 31, 1997
Variable rate subordinated debentures,
unsecured, due June 30, 2002 $ 847,500 $ 847,500
Variable rate subordinated debentures,
unsecured, due May 31, 2003 225,000
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 1,172,500 947,500
Less current installments (100,000) (100,000)
Less unamortized discount (59,659) -
---------- -----------
Subordinated debentures, less current
installments and unamortized discount $1,012,841 $ 847,500
========== ===========
The variable rate debentures due May 31, 2003, 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 yield 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. Accordingly,
a minimum of 225,000 shares of common stock are
reserved for the potential conversion of these debentures.
A portion of the proceeds in the amount of $62,500 from
the offering was allocated to paid in capital as a discount
on the debentures. The discount amount represents the
difference between the potential conversion price and the
fair market value of the Company's common stock at the
date of issuance of the debentures. This discount will be
amortized and recorded as interest expense over the term
of the debentures.
The variable rate debentures due June 30, 2002, 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 September 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 September 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 $330,000
during the first nine months of 1998, of which
approximately $130,000 was for reimbursements for radio
advertising air time purchased for the Company by KSV
Communicators.
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 86% of its
product from four suppliers during the nine months ended
September 30, 1998.
The Company had sales of approximately 56% to two
customers during the nine months ended September 30,
1998 and approximately 58% of accounts receivable were
due from two customers as of September 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 1998.
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 1998.
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
The Company has entered into an agreement with a
bank whereby the Company may elect to sell up to
$500,000 of eligible accounts receivable to the bank at the
Company's option. Under the agreement, the bank
purchases the receivables at face value, withholding 20%
as a reserve against uncollectable amounts. The reserve
is adjusted semi-monthly to reflect payments received by
the bank. In connection with this agreement, the
Company must pay the bank a service fee of $1.00 per
invoice plus a processing fee based upon the timeliness of
payments received by the bank. The processing fees
range from .47% to 2.04% of the face value of the invoice.
The Company is obligated to repurchase any invoices that
exceed 60 days in age. To date, the Company has not
elected to sell any of its accounts receivable to the bank.
The Boston Stock Exchange suspended the
Company's common stock and warrants from trading as of
the close of business on November 3, 1998 and filed for
delisting with the Securities and Exchange Commission.
The Company does not meet current minimum
maintenance requirements.
13. LITIGATION
An action entitled Venus Laboratories, Inc. v. Seventh
Generation, Inc. was commenced on September 10, 1998
in the United States District Court for the Northern District
of Illinois Eastern Division. The complaint alleges that the
Company unfairly competed with the plaintiff in violation of
the Lanham Act by distributing promotional materials
which falsely claimed that the plaintiff's product contained
petroleum-based surfactants according to independent
test results. The complaint seeks injunctive relief,
unspecified damages, trebled, and attorneys' fees. The
Company intends to defend this claim vigorously.
However, the Company does not believe that the final
disposition of this matter will have a material adverse
effect on the Company's financial condition or results of
operation.
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
previously tested an additional sales distribution channel
through its "Learning to Make a Difference" program and
has decided to discontinue this program after evaluating
the results. The Company's products are also marketed
through the Harmony mail order catalog, formerly the
Seventh Generationr 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, a
food freshness system for refrigerators, 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 and mail order catalogs. In addition,
the Company sells a limited number of privately labeled
products to a limited number of select major customers.
This approach is designed to reduce the Company's risks
by focusing sales efforts primarily on those accounts that
serve customers consistent with the Company's current
account base.
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 by testing direct
mail and local 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 considered successful, this marketing
program may serve as a model for initiating or expanding
grocery distribution in other select metropolitan markets
around the country. The Company has spent
approximately $195,000 on these activities in the second
and third quarters of 1998 and is currently analyzing the
results of this new marketing program.
During the third quarter of 1998, the Company
introduced a new performance-based cooperative
advertising and promotion strategy designed to increase
the number of the Company's products carried by retail
outlets. Retailers were given the opportunity to enter into
an agreement whereby the Company would financially
support their merchandising activities of the Company's
products. The key objective of the program is to expand
distribution and shelf presence for the Company's 37-item
product line. The agreement states that the retailer must
stock a minimum of 25 core products. The retailer also
must agree to give the Company's products an equal or
greater number of shelf facings as compared to the
Company's principal competitors. This additional shelf
space provides the Company with increased product
exposure that could, if successful, increase sales.
Through this new program, the Company will also receive
detailed information of product sales by these retailers.
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 nine
months ended September 30, 1998, the Company's sales
to the Natural Products Industry and supermarkets grew
significantly over sales in the three and nine months ended
September 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 September 30, 1998 Compared to
Three Months Ended September 30, 1997
Operations
Net sales increased $549,136, or 35.1%, during the
three months ended September 30, 1998 to $2,113,825,
compared to $1,564,689 during the three months ended
September 30, 1997. This favorable performance was
due primarily to the continued growth of sales of the
Company's products and the introduction of new products.
Gross profit was $700,011 in the three months ended
September 30, 1998, compared to $468,742 during 1997,
an increase of $231,269 over the same period in 1997, or
49.3%. Gross profit increased to 33.1% as a percentage
of sales in the 1998 period, compared to 30.0% in 1997,
due primarily to the changing mix of sales, 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 $20,000.
Operating expenses were $825,332 in the three
months ended September 30, 1998 compared to $554,624
during 1997, an increase of 3.6% as a percentage of sales
from 35.4% of sales in the 1997 period to 39.0% of sales
for the 1998 period.
Sales and marketing expenses were $441,782 in the
three months ended September 30, 1998, compared to
$251,053 in the 1997 period. Sales and marketing
expenses increased 4.9% as a percentage of sales from
16.0% in the three months ended September 30, 1997 to
20.9% in the three months ended September 30, 1998.
The increase in expenditures was primarily due to the new
performance based cooperative marketing program
described in the "Overview".
Operations and distribution expenses were $155,107
in the three months ended September 30, 1998, compared
to $116,127 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
decreased as a percentage of sales from 7.4% in the 1997
period to 7.3% in the 1998 period.
General and administrative expenses were $228,443
in the three months ended September 30, 1998, compared
to $187,444 in the 1997 period. The increase in expenses
incurred was primarily due to increased personnel costs.
General and administrative expenses decreased from
12.0% of sales in the 1997 period to 10.8% of sales in the
1998 period.
Net other expenses increased in 1998 as earnings on
funds invested decreased as a result of lower level of
funds invested in 1998 and of an increase in interest paid
resulting from the issuance of new debentures in the
fourth quarter of 1997 at a higher interest rate than was
paid on the debentures in 1997, and the issuance of new
debentures in the third quarter of 1998. See Footnote 5 of
the financial statements for a more complete description of
debenture activity.
The net loss in the 1998 period was $149,253,
compared to $97,376 in 1997, an increase of $51,877.
The increase in the loss was primarily due to the increased
sales and marketing expenditures for the new cooperative
marketing program described in the "Overview", the
decreased margin on sales to Gaiam, and other marketing
activities.
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 September 30, 1998, Gaiam
purchased approximately $277,140 of product at cost plus
5%, yielding sales of approximately $291,000. Gross
margin from these sales was approximately 4.8%. During
the three months ended September 30, 1997, Gaiam
purchased approximately $138,000 of product at cost plus
20% under the terms of the Supply Agreement, yielding
approximately $165,000 in sales, fulfilling its $2,500,000
obligation under this Agreement . During the three months
ended September 30, 1997, Gaiam also purchased
approximately $133,000 of product at cost plus 5%,
yielding sales of approximately $140,000. The combined
product purchase of approximately $271,000 yielded sales
of approximately $305,000. The decrease in gross profit
for the three months ended September 30, 1998 due to
the change in markup percentage was approximately
$20,000. During the nine months ended September 30,
1998, Gaiam purchased approximately $788,100 of
product at cost plus 5%, yielding sales of approximately
$827,500. Gross margin from these sales was
approximately 4.8%.
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
nine months ended September 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 September 30,
1998 were $2,113,825, an increase of $549,136, or
35.1%, from sales of $1,564,689 during the 1997 period.
Gross profits were $700,011 for the three months ended
September 30, 1998, an increase of $231,269, or 49.3%,
from $468,742 in the 1997 period. Gross profits were
33.1% of sales for the three months ended September 30,
1998, compared to 30.0% of sales in the 1997 period.
Operating expenses for the three months ended
September 30, 1998 were $825,332, or 39.0% of sales,
compared to $554,624, or 35.4% of sales in the 1997
period. The net loss for the three months ended
September 30, 1998 was $149,253, or 7.1% of sales
compared to $97,376, or 6.2% of sales in the 1997 period.
Nine months Ended September 30, 1998 Compared to
Nine months Ended September 30, 1997
Operations
Net sales increased $1,465,919, or 30.4%, during the
nine months ended September 30, 1998 to $6,293,809,
compared to $4,827,890 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. 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 $2,003,271 in the nine months ended
September 30, 1998, compared to $1,460,330 during the
same period in 1997, an increase of $542,941, or 37.2%.
Gross profits increased to 31.8% as a percentage of sales
in the nine months ended September 30, 1998, compared
to 30.3% during the same period in 1997, due primarily to
the changing mix of sales and an increase in purchase
discounts earned on the higher purchase and inventory
levels, despite the change in the markup percentage on
sales to Gaiam.
Operating expenses were $2,379,037 in the nine
months ended September 30, 1998 compared to
$1,721,512 during 1997, a increase of 2.1% as a
percentage of sales from 35.7% of sales in the 1997
period to 37.8% of sales for the 1998 period.
Sales and marketing expenses were $1,206,480 in
the nine months ended September 30, 1998, compared to
$835,305 in the 1997 period. Sales and marketing
expenses increased 1.9% as a percentage of sales from
17.3% in the nine months ended September 30, 1997 to
19.2% in the nine months ended September 30, 1998.
Included in the 1998 expenses is approximately $195,000
(approximately 3.1% of sales) for radio advertising in
Boston.
Operations and distribution expenses were $485,949
in the nine months ended September 30, 1998, compared
to $337,160 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 7.0% in the 1997
period to 7.7% in the 1998 period.
General and administrative expenses were $686,608
in the nine months ended September 30, 1998, compared
to $549,047 in the 1997 period. The additional expenses
incurred were primarily due to increased personnel costs.
General and administrative expenses decreased from
11.4% of sales in the 1997 period to 10.9% of sales in the
1998 period.
Net other expenses increased in 1998 due to the
issuance of debentures in the third quarter of 1998 and the
issuance of debentures in the fourth quarter of 1997. See
Footnote 5 of the financial statements for a more complete
description of debenture activity.
The net loss in the 1998 period was $336,373,
compared to $196,714 in 1997, an increase of $139,659.
The increased loss was primarily due to increased
marketing activities, primarily the radio advertising and the
new cooperative marketing program, as well as the
decrease in markup percentage applicable to sales to
Gaiam.
Transactions with Gaiam
During the nine months ended September 30, 1998,
Gaiam purchased approximately $788,100 of product at
cost plus 5%, yielding sales of approximately $827,500.
Gross margin from these sales was approximately 4.8%.
During the nine months ended September 30, 1997,
Gaiam purchased approximately $810,900 of product,
yielding sales of approximately $954,000. Gross margin
from these sales was approximately 15.0%.
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
nine months ended September 30, 1998 and 1997.
Summary
Sales during the nine months ended September 30,
1998 were $6,293,809, an increase of $1,465,919, or
30.4%, from the sales of $4,827,890 during the 1997
period. Gross profits were $2,003,271 for the nine months
ended September 30, 1998, an increase of $542,941, or
37.2%, from $1,460,330 in the 1997 period. Gross profits
were 31.8% of sales for the nine months ended
September 30, 1998, compared to 30.3% of sales in the
1997 period. Operating expenses, including
approximately $195,000 for radio advertising, for the nine
months ended September 30, 1998 were $2,379,037, or
37.8% of sales, compared to $1,721,512, or 35.7% of
sales in the 1997 period. The net loss for the nine months
ended September 30, 1998 was $336,373, or 5.3% of
sales compared to $196,714, or 4.1% of sales in the 1997
period.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1998,
the Company used approximately $26,000 of its available
cash balances through operations. The Company realized
approximately $205,000 as accounts receivable
decreased. The Company used approximately $207,000 of
cash as its inventories increased. The Company used
approximately $13,000 by increasing prepaid expenses.
Additionally, the Company has increased its accounts
payable by approximately $214,000, while increasing its
accrued liabilities by approximately $45,000. As of
September 30, 1998, the Company's primary sources of
liquidity were approximately $562,000 in cash,
approximately $162,000 in marketable securities, and
approximately $705,000 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 nine months
of 1998 and together accounted for 56% 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 nine
months of 1998, the Company's net loss was $336,373,
compared to $196,714 in 1997, an increase of $139,659.
The Company has, for the first time, used radio
advertising. The Company has also introduced a new
cooperative marketing program. These activities have
significantly increased its marketing expenses.
During 1997, the Company completed a debt offering
of privately placed subordinated debentures. These
variable rate debentures due June 30, 2002, bore 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 September 30, 1998 and
December 31, 1997. 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. See footnote 5 of the financial statements for
a complete description of these debentures.
During the third quarter of 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 yield 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. A portion of
the proceeds in the amount of $62,500 from the offering
was allocated to paid in capital as a discount on the
debentures. The discount amount represents the
difference between the fair market value and the potential
conversion price of the Company's common stock at the
date of issuance of the debentures. This discount will be
amortized and recorded as interest expense over the term
of the debentures.
The Company has entered into an agreement with a
bank whereby the Company may elect to sell up to
$500,000 of eligible accounts receivable to the bank at the
Company's option. Under the agreement, the bank
purchases the receivables at face value, withholding 20%
as a reserve against uncollectable amounts. The reserve
is adjusted semi-monthly to reflect payments received by
the bank. In connection with this agreement, the
Company must pay the bank a service fee of $1.00 per
invoice plus a processing fee based upon the timeliness of
payments received by the bank. The processing fees
range from .47% to 2.04% of the face value of the invoice.
The Company is obligated to repurchase any invoices that
exceed 60 days in age. To date, the Company has not
elected to sell any of its accounts receivable to the bank.
The Boston Stock Exchange suspended the
Company's common stock and warrants from trading as of
the close of business on November 3, 1998 and filed for
delisting with the Securities and Exchange Commission.
The Company does not meet current minimum
maintenance requirements. The Company's Common
Stock will continue to be available "over the counter" under
the symbol SVNG.
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 or
embedded micro-controllers may recognize a date using
"00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices,
or engage in other normal business activities.
During fiscal 1998, the Company completed an initial
review of its information and non-information technology
systems, including its existing and planned computer
software and hardware. After the initial review, the
Company has identified three areas of potential Year 2000
risk: financial and ancillary software, computers and
embedded-chip hardware and non-compliance of vendors
and customers.
As a result, a more in-depth analysis is currently
ongoing. Internally, this second analysis will include the
testing of internally developed systems. The internal
portion of the second analysis just recently commenced
and is not expected to be completed until the end of
calendar year 1998. The Company has, however,
implemented financial and operational software packages
that currently utilize six digits to identify the transaction
year and period. Additionally, the Company has been
actively upgrading its computers and embedded-chip
hardware to ensure Year 2000 compliance. Currently, the
Company estimates that 90% of its computers and
embedded-chip hardware are Year 2000 compliant. The
Company intends to reach 100% compliance by the end of
calendar year 1998. The Company presently believes that
with additional modifications to existing software and
conversions to new software and systems, the Year 2000
issue will not pose significant operational problems for its
computer and other information systems.
If required, the Company will utilize additional internal
and external resources to reprogram, replace (if
necessary), and test its software and systems for Year
2000 modifications. Externally, the Company's
preparations for the Year 2000 issue will consist of
soliciting and obtaining certification of Year 2000
compliance from third-party software vendors and
determining the readiness of its significant suppliers and
customers. This process is expected to be completed by
the end of the first quarter of calendar year 1999.
If such modifications, conversions and/or
replacements are not made, are not completed timely, or if
any of the Company's suppliers or customers do not
successfully deal with the Year 2000 issue, the Year 2000
issue could have material impact on the operations of the
Company. The Company could experience delays in
receiving or distributing products that would increase its
costs and that could cause the Company to lose business
and even customers and could subject the Company to
claims for damages. Problems with the Year 2000 issue
could also result in delays in the Company invoicing its
customers or in the Company receiving payments from
them. The severity of these possible problems would
depend on the nature of the problem and how quickly it
could be corrected or an alternative implemented, which is
unknown at this time. In the extreme, such problems
could bring the Company to a standstill.
While management has not yet specifically
determined the costs associated with its Year 2000
readiness efforts, monitoring and managing the Year 2000
issue will result in additional direct and indirect costs to the
Company. Direct costs include potential charges by third-
party software vendors for product enhancements, costs
involved in testing software products for Year 2000
compliance and any resulting costs for developing and
implementing contingency plans for critical software
products which are not enhanced. The Company
estimates the total cost for upgrading its computer system
and embedded-chip hardware will be approximately
$15,000. Indirect costs will principally consist of the time
devoted by existing employees in monitoring software
vendor progress, testing enhanced software products and
implementing any necessary contingency plans. Such
costs have not been material to date. Both direct and
indirect costs of addressing the Year 2000 issue will be
charged to earnings as incurred.
After evaluating its internal compliance efforts as well
as the compliance of third parties as described above, the
Company will develop during calendar year 1999
appropriate contingency plans to address situations in
which various systems of the Company, or of third parties
with which the Company does business, are not Year 2000
complaint. Some risks of the Year 2000 Issue, however,
are beyond the control of the Company and its suppliers
and customers. For example, no preparations or
contingency plan will protect the Company from a
downturn in economic activity caused by the possible
ripple effect throughout the entire economy caused by the
Year 2000 issue.
SUBSEQUENT EVENTS
The Company has entered into an agreement with a
bank whereby the Company may elect to sell up to
$500,000 of eligible accounts receivable to the bank at the
Company's option. Under the agreement, the bank
purchases the receivables at face value, withholding 20%
as a reserve against uncollectable amounts. The reserve
is adjusted semi-monthly to reflect payments received by
the bank. In connection with this agreement, the
Company must pay the bank a service fee of $1.00 per
invoice plus a processing fee based upon the timeliness of
payments received by the bank. The processing fees
range from .47% to 2.04% of the face value of the invoice.
The Company is obligated to repurchase any invoices that
exceed 60 days in age. To date, the Company has not
elected to sell any of its accounts receivable to the bank.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
An action entitled Venus Laboratories, Inc. v. Seventh
Generation, Inc. was commenced on September 10, 1998
in the United States District Court for the Northern District
of Illinois Eastern Division. The complaint alleges that the
Company unfairly competed with the plaintiff in violation of
the Lanham Act by distributing promotional materials
which falsely claimed that the plaintiff's product contained
petroleum-based surfactants according to independent
test results. The complaint seeks injunctive relief,
unspecified damages, trebled, and attorneys' fees. The
Company intends to defend this claim vigorously.
However, the Company does not believe that the final
disposition of this matter will have a material adverse
effect on the Company's financial condition or results of
operation.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
THE SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of
this Report:
EXHIBITS:
Exhibit # Description
(11) Statement re: Computation of Loss Per
Share
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the
quarter ended September 30, 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: November 13, 1998
By: /s/ Jeffrey A. Hollender
President and Chief Executive Officer
(Principal Executive & Financial Officer)
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Number Numbered Page
11 23
27 25
<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 September 30,
1998 1997
Loss applicable to common stockholders $(149,253) $(97,376)
Weighted average shares outstanding 2,428,791 2,428,791
Basic and diluted earnings per share $ (0.06) $ (0.04)
Nine Months Ended September 30,
1998 1997
Loss applicable to common stockholders $ (336,373) $ (196,714)
Weighted average shares outstanding 2,428,791 2,428,791
Basic and diluted earnings per share $ (0.14) $ (0.08)
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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
See accompanying notes.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 562393
<SECURITIES> 162154
<RECEIVABLES> 734634
<ALLOWANCES> (26407)
<INVENTORY> 551568
<CURRENT-ASSETS> 2051533
<PP&E> 143212
<DEPRECIATION> (89022)
<TOTAL-ASSETS> 2125221
<CURRENT-LIABILITIES> 773509
<BONDS> 1112841
0
0
<COMMON> 809
<OTHER-SE> 333561
<TOTAL-LIABILITY-AND-EQUITY> 2125221
<SALES> 2113825
<TOTAL-REVENUES> 2113825
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