<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 0-21550
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HARMONY BROOK, INC.
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1648132
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1030 LONE OAK ROAD, SUITE #110, EAGAN, MN 55121
------------------------------------------------
(Address of principal executive offices)
(612) 681-9000
--------------------------
(Issuer's telephone number)
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
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock - 8,045,161 shares, no par, outstanding as of May 10, 1996
This document contains 28 pages.
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HARMONY BROOK, INC.
FORM 10-QSB
Index
Page Number
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1996 and 1995 (Unaudited) 1
Condensed Consolidated Balance Sheets as of March 31, 1996
(Unaudited) and December 31, 1995 2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1996 and 1995 (Unaudited) 3
Notes to Financial Statements (Unaudited) 4
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Part II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 11
Item 6 - Exhibits and Reports on Form 8-K 13
<PAGE>
FORM 10-QSB
Part I - Financial Information
Item 1 - Financial Statements
HARMONY BROOK, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1996 1995
------ ------
<S> <C> <C>
Revenues:
Contracted revenue sharing $1,398 $1,079
Bottle sales 432 409
Equipment sales 52 74
------ ------
1,882 1,562
Cost of revenues:
Contracted revenue sharing 560 426
Bottle sales 282 277
Equipment sales 37 52
------ ------
Gross profit 1,003 807
Selling, general and administrative
expenses:
Field office 668 613
Corporate 390 398
Provision for doubtful accounts 3 126
------ ------
Operating loss (58) (330)
Other expense - net 168 126
------ ------
Net loss ($226) ($456)
------ ------
------ ------
Loss per share ($0.03) ($0.09)
------ ------
------ ------
Number of shares used to compute
per share amounts 7,791 4,799
------ ------
------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
1
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FORM 10-QSB
Part I - Financial Information
Item 1 - Financial Statements
HARMONY BROOK, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $770 $1,101
Accounts receivable, net 1,139 1,081
Inventories 401 424
Other current assets 38 55
-------------- -----------------
Total current assets 2,348 2,661
Property and equipment, net 9,504 9,394
Other assets 888 898
-------------- -----------------
Total assets $12,740 $12,953
-------------- -----------------
-------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital lease obligations $989 $912
Accounts payable 413 425
Accrued expenses 322 355
-------------- -----------------
Total current liabilities 1,724 1,692
Long-term debt and capitalized lease obligations,
less current portion 3,797 4,043
-------------- -----------------
Total liabilities 5,521 5,735
Shareholders' equity:
Common stock, no par value, 10,000,000 shares
authorized, 8,045,161 and 7,695,161 issued and
outstanding at March 31, 1996 and
December 31, 1995, respectively 11,321 11,091
Cumulative foreign currency translatio (421) (418)
Accumulated deficit (3,681) (3,455)
-------------- -----------------
Total shareholders' equity 7,219 7,218
-------------- -----------------
Total liabilities and shareholders' $12,740 $12,953
-------------- -----------------
-------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
2
<PAGE>
FORM 10-QSB
Part I - Financial Information
Item 1 - Financial Statements
HARMONY BROOK, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31
------------------
1996 1995
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($226) ($456)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 388 276
Amortization of deferred income - (10)
Provision for doubtful accounts 3 126
Provision for inventory obsolesence 9 4
Amortization of discount on note payable 6 6
Changes in operating assets and liabilities:
Accounts receivable (59) (28)
Inventories 14 63
Other current assets 17 7
Accounts payable (12) (123)
Accrued expenses (9) (1)
------ ------
Net cash provided (used) in operating
activities 131 (136)
------ ------
Cash flows from investing activities:
Purchase and manufacture of property and equipment (478) (821)
Increase in other assets (27) (13)
------ ------
Net cash used in investing activities (505) (834)
------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 1,015
Principal payments on long-term debt and note
payable, bank and capitalized lease obligations (174) (126)
Net proceeds from sales of common stock 230
------ ------
Net cash provided by financing activities 56 889
------ ------
Effect of exchange rate changes on cash (13) 17
------ ------
Net decrease in cash and cash equivalents (331) (64)
Cash and cash equivalents at beginning of period 1,101 64
------ ------
Cash and cash equivalents at end of period $770 $0
------ ------
------ ------
Supplemental cash flow information:
Cash paid during the quarter for interest charges $136 $80
------ ------
------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
3
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FORM 10-QSB
Part I - Financial Information
Item 1 - Financial Statements
Notes to Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements included in this Form 10-QSB have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed, or omitted,
pursuant to such rules and regulations. These consolidated financial statements
should be read in conjunction with the financial statements and related
footnotes included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995, previously filed with the Commission.
The consolidated financial statements presented herein for the three months
ended March 31, 1996 and 1995, reflect in the opinion of management, all
adjustments (which consist only of normal recurring adjustments) necessary for a
fair presentation of financial position and the results of operations for the
periods presented. The results of operations for the interim period are not
necessarily indicative of the operating results to be expected for the full
year.
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
standard costs, which approximate the first-in, first-out method. Inventories
at March 31, 1996 and December 31, 1995 consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Bottles $305 $346
Raw materials, expected to be sold to
customers as equipment sales 96 78
---- ----
Total $401 $424
---- ----
---- ----
</TABLE>
4
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3. SALES OF COMMON STOCK
On March 7, 1996 the Company closed on sales of 350,000 shares of its common
stock. The sale resulted in net proceeds to the Company of approximately
$230,000 after offering costs of approximately $32,500.
5
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FORM 10-QSB
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS - FIRST QUARTER
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
The following table sets forth, for the periods indicated, certain items in the
Company's Condensed Consolidated Statements of Operations as a percentage of
total revenues and also shows the percentage change in the dollar amounts of
those items from the first quarter of 1995 to the first quarter of 1996.
<TABLE>
<CAPTION>
Three months
ended March 31,
---------------------- Percentage
1996 1995 Change
------ ------ ----------
<S> <C> <C> <C>
PERCENTAGE OF TOTAL REVENUES:
Contracted revenue sharing 74.3% 69.1% 30%
Bottle sales 22.9 26.2 6
Equipment sales 2.8 4.7 (29)
------ ------
Total revenues 100.0% 100.0% 21
------ ------
------ ------
Gross margin 53.3% 51.7% 24
Field office S,G&A 35.5 39.3 9
Corporate S,G&A 20.7 25.5 (2)
Provision for doubtful accounts 0.2 8.0 nm
------ ------
Operating expenses 56.4 72.8 (7)
------ ------
Operating loss (3.1) (21.1) nm
Other expense, net 8.9 8.1 25
------ ------
Net loss (12.0%) (29.2%) nm
------ ------
------ ------
nm - not meaningful
GROSS MARGIN PERCENTAGE OF
RELATED REVENUES:
Contracted revenue sharing 59.9% 60.5%
Bottle sales 34.6% 32.2%
Equipment sales 29.8% 29.5%
</TABLE>
6
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REVENUES
Total revenues increased 21% in the first quarter of 1996 compared to the first
quarter of 1995. These revenues are realized from contracted revenue sharing,
bottle sales, and equipment sales.
The increase in contracted revenue sharing, the Company's largest business
segment, was related to an increase in the number of gallons of treated water
sold by the Company. The increase in the number of gallons of treated water
sold is driven both by the increase in the number of customer locations for the
Company's installed Harmony Brook-Registered Trademark- Premium Drinking systems
and the composite growth of its maturing system portfolio (revenues from
domestic customer locations in place at both March 31, 1995 and 1996 grew 11%).
At March 31, 1996 the Company had 1,594 customer locations versus 1,476 at March
31, 1994, an increase of eight percent. During the first quarter of 1996 a
grocery chain customer disposed of its southern California operations resulting
in the removal of 33 customer locations and the elimination of one service
route. In addition, the Company decided to close an unprofitable service route
in an eastern region resulting in the removal of 16 systems. These 49 removed
systems will be refurbished and reinstalled in new customer locations during the
remainder of 1996.
Revenues from bottle sales are a composite of field bottle sales and wholesale
bottle sales. Field bottle sales increased eight percent from $210,000 in the
first quarter of 1995 to $228,000 in the first quarter of 1996. This increase
is attributable to the increase in the number of contracted revenue sharing
customer locations to which field bottle sales are made. Wholesale bottles
increased four percent from $189,000 in the first quarter of 1995 to $196,000 in
the first quarter of 1996. In the first month of 1995, a sale of $36,000 was
made to a customer which became an uncollectible account during the first
quarter of 1995 (this sale was part of the $123,000 one-time bad debt charge
recorded in the first quarter of 1995). Adjusting first quarter 1995 wholesale
bottle revenues by this $36,000, the comparable revenue increase for the first
quarter of 1996 would be 28 percent.
Equipment sales, while contributing incremental revenue, continue to be a lower
priority for the Company. Management does not expect a significant contribution
from equipment sales in 1996.
GROSS MARGIN
The Company's total gross margin for the first quarter of 1996 increased one
percentage point over the first quarter of 1995. The gross margin for both
contracted revenue sharing and equipment sales remained essentially unchanged
for the first quarters of 1996 and 1995. The gross margin on bottle sales
increased three percentage points from the first quarter of 1995 to the first
quarter of 1996 due to a shift in product mix towards larger containers that
yield a higher margin.
7
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SELLING, GENERAL AND ADMINISTRATIVE (S,G & A) EXPENSES
Field office S,G & A expenses increased at slightly less than half the overall
revenue growth rate for the first quarter of 1996 compared to the first quarter
of 1995. Management's focus for the foreseeable future is to continuously
manage its discretionary expenses and increase market penetration in existing
geographic territories versus development of new geographic territories.
Corporate S,G & A expenses decreased due to a reduction in the number of senior
managers for the comparable first quarters of 1995 and 1996. The Company
intends to continue to manage its corporate discretionary overhead spending
closely.
The operating loss in the first quarter of 1996 was $58,000 compared to $330,000
in the first quarter of 1995. In the first quarter of 1995, the Company recorded
a one-time charge of $123,000, or $.03 per share, related to an uncollectible
account receivable due to insolvency of one of its largest wholesale bottle
customers. The Company's comparable operating loss in the first quarter of 1995
after adjusting for this one-time charge was $207,000.
Other expense, consisting primarily of interest expense for both periods
presented, increased from the first quarter of 1995 to 1996 due to higher levels
of debt financing employed during the first quarter of 1995.
The decrease in the net loss for the first quarter of 1996 compared to the first
quarter of 1995 reflected a reduction in the operating loss due to the factors
described above and the one-time charge of $123,000 in the first quarter of
1995. These improvements were slightly offset by the increase in interest
expense.
MEXICAN SUBSIDIARY
All of the information included in this Form 10-QSB reflect the results and
balances of the Company's Mexican Subsidiary unless explicitly stated
otherwise. The following table summarizes the Company's Mexican Subsidiary
results of operations in U.S. Dollars for the periods presented and the
percentage change from the first quarter of 1995 to the first quarter of 1996.
<TABLE>
<CAPTION>
First Quarter First Quarter Percentage
1996 1995 Change
------------- ------------- ----------
<S> <C> <C> <C>
Total revenues $99,000 $43,000 130%
Operating loss $(3,000) $(43,000) nm
</TABLE>
At March 31, 1996 the subsidiary had 96 customer locations installed compared to
60 at March 31, 1995, an increase of 60 percent. Instability still exists in
the Mexican economy, precluding management from devoting significant resources
to its Mexican subsidiary at this time. Despite
8
<PAGE>
this challenging economic environment, the Company continues to believe in this
subsidiary's ability to become a significant contributor to operating profits in
future periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net cash provided by operating activities of $131,000 in the
first quarter of 1996 versus $136,000 of net cash used by operating activities
in the first quarter of 1995. The primary contributor to the improvement in net
cash provided by operating activities in the first quarter of 1996 was the
reduction in the net loss. Also contributing to cash provided by operating
activities was increased depreciation in the first quarter of 1996 due primarily
to increased revenue sharing volumes. System depreciation is computed under a
units of production method based on the number of treated gallons of water sold.
Accounts payable also was a significant use of cash in the first quarter of 1995
due to the Company's efforts to reduce its balances owed to vendors resulting
from an accounts payable build up in 1994. This situation did not recur in 1995
and was not a factor in the first quarter of 1996.
The Company invested $478,000 in property and equipment in the first quarter of
1996, a decrease of 42 percent from the $821,000 invested in the first quarter
of 1995. The investment in the first quarter of 1996 includes $135,000 of
equipment purchased pursuant to the exercise of options under sale and leaseback
agreements which expired during the quarter. The remaining $343,000 ($478,000
less $135,000) investment consists of both the manufacture of new Harmony Brook-
Registered Trademark- Premium Drinking Water systems and the refurbishment of
existing systems. The decreased investment in property and equipment was due to
the Company's continued efforts to more properly align its investment strategies
with its cash flow availability. The Company expects its refurbishing and
redeployment activities to result in slightly less cash used in the level of
investment in property and equipment in the near term.
On March 11, 1996, the Company sold 350,000 shares of its common stock for
approximately $263,000. The net cash received after offering costs was
approximately $230,000.
The Company is adhering to its amended growth strategy implemented in mid-1995
to a target revenue growth of twice the market growth rate of the bottled water
market, with the bottled water market growth rate estimated at ten percent.
Management believes that the slower targeted growth rate will improve the
Company's ability to support itself through cash flows from operations and reach
profitability earlier than if it pursued aggressive new unit growth and capital
investment.
The Company currently does not have any borrowing capacity available under its
credit facilities, but the Company believes that the proceeds from the sale of
its common stock and restructuring of its debt in late 1995 will provide
sufficient capital to fund the Company's current growth strategy through 1996.
Management expects, however, that additional interim capital will be required in
1996 to primarily fund a summer cash need caused by the Company's normal
seasonal operating cycle. To pay the balance of its converted bridge loan and
maintain the Company's current growth strategy, management also believes the
Company will need to raise additional financing by early 1997. Management
estimates that these additional capital needs
9
<PAGE>
would be the last significant financing required under the Company's current
growth strategy. While the Company believes it will be able to obtain
additional financing, there can be no assurance that such financing will be
available or available on terms acceptable to the Company. In the event such
financing is not available, the Company has the ability to revise its growth
strategy to decrease or eliminate further investment in dispensing equipment
which is the primary use of the Company's cash flows.
10
<PAGE>
FORM 10-QSB
Part II - Other Information
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting of shareholders on
April 25, 1996. There were 4,509,568 shares present
individually or by proxy representing 58.6 percent of
the voting stock outstanding.
(b) Results of the matters submitted to shareholder vote were
as follows:
1. Election of directors. Each of the nominees,
Messrs. J.C. Hawley, D.R. Brattain, B.G. Johnson,
B.J. McGlynn, D.A. Henderson and G. F. Stofer received
at least 4,461,650 votes for.
2. To approve amending and restating the articles of
incorporation to increase the total number of shares
authorized to be issued from 10,000,000 to 20,000,000.
4,394,225 votes for
103,175 votes against
12,168 votes abstained
0 broker non-votes
3. To approve the Company's 1996 Stock Option Plan.
4,396,350 votes for
73,750 votes against
35,468 votes abstained
4,000 broker non-votes
4. To approve the selection of Coopers & Lybrand L.L.P.,
as independent auditors for the current fiscal year.
4,497,768 votes for
4,950 votes against
6,850 votes abstained
0 broker non-votes
11
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are included with this Quarterly Report on
Form 10-QSB (or incorporated by reference) as required by Item
601 of Regulation S-B.
Exhibit No. Description Page No.
----------- ----------- --------
3.1 Articles of Amendment of the Restated
Articles of Incorporation of Harmony
Brook, Inc. 13
10.2 1996 Stock Option Plan 15
27.1 Financial Data Schedule 22
(b) REPORTS ON FORM 8-K:
There were no reports on Frm 8-K filed during the quarter
ended March 31, 1996.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HARMONY BROOK, INC.
Date: May 10, 1995 By: /s/ James C. Hawley
--------------------------------
James C. Hawley
President
12
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EXHIBIT 3.1
ARTICLES OF AMENDMENT
OF THE
RESTATED ARTICLES OF INCORPORATION
OF
HARMONY BROOK, INC.
The undersigned corporation, for the purpose of amending its Articles of
Incorporation and pursuant to the provisions of Section 302A.139 of the
Minnesota Business Corporation Act, hereby executes the following Articles of
Amendment:
1. The name of the corporation is Harmony Brook, Inc.
2. On April 25, 1996, the shareholders of the Corporation duly amended
Article VIII of the Restated Articles of Incorporation of the Corporation as
follows:
ARTICLE VIII
The aggregate number of common shares which this Corporation shall have
authority to issue is 20,000,000 shares which shall be known as "Common Shares."
(a) The holders of Common Shares shall be entitled to receive, when
and as declared by the Board of Directors, out of earnings or
surplus legally available therefor, dividends, payable either in
cash, in property, or in shares of the capital stock of the
Corporation.
(b) The Common Shares may be allotted as and when the Board of
Directors shall determine, and, under and pursuant to the laws of
the State of Minnesota, the Board of Directors shall have the
power to fix or alter, from time to time, in respect to shares
then unallotted, any or all of the following: the voting rights;
the dividend rate; the redemption price; the liquidation price;
the liquidation rights and the sinking or purchase fund rights of
shares of any class, or of any series of any class. The Board of
Directors shall also have the power to fix the terms, provisions
and conditions of options to purchase or subscribe for shares of
any class or classes, including the price and conversion basis
thereof, and to authorize the issuance thereof.
(c) No holder of Common Shares of the Corporation shall be entitled
to any cumulative voting rights.
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(d) No holder of Common Shares of the Corporation shall have any
preferential, preemptive or other right of subscription to any
shares of any class of stock of the Corporation allotted or sold
or to be allotted or sold and now or hereafter authorized, or to
any right of subscription to any part thereof.
IN WITNESS WHEREOF, the undersigned Corporation has caused these Articles
of Amendment to be executed in its name by its Chief Executive Officer and
attested by its Secretary this 6th day of May, 1996.
HARMONY BROOK, INC.
By James C. Hawley
---------------------------------------
James C. Hawley,
Chief Executive Officer
ATTEST:
Nancy A. Quam
- ---------------------------------
Nancy A. Quam, Secretary
14
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EXHIBIT 10.2
HARMONY BROOK, INC.
1996 STOCK OPTION PLAN
1. PURPOSE. The purposes of this Plan are to encourage stock ownership by key
employees and officers of the Company through the granting of options to
purchase shares of Harmony Brook, Inc. Common Shares, to assure the close
identification of key employees' and officers' interests with those of the
Company by providing them a direct and substantial stake in its welfare,
thereby stimulating their efforts on behalf of the Company and
strengthening their desire to remain with the Company, to aid the Company
in competing for the services of desirable personnel, and to enhance
long-term shareholder value.
2. DEFINITIONS. Unless the context requires otherwise, the terms listed below
shall have the following meanings when used in the Plan:
a. "Code" shall mean the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
b. "Committee" shall mean the Harmony Brook, Inc. Compensation Committee
of the Board of Directors.
c. "Company" shall mean Harmony Brook, Inc.
d. "Fair Market Value" shall mean the market value of the Company's stock
on the relevant date, as such value is determined using procedures
established by the Committee.
e. "Incentive Stock Option" or "ISO" shall mean any option granted under
the Plan which is designated as an Incentive Stock Option by the
Committee and which is intended to qualify as such under Section 422
of the Code.
f. "Nonqualified Stock Option" or "NQSO" shall mean any option granted
under the Plan which is not an ISO.
g. "Option Participant" shall mean such officer, manager, professional or
other key employee of the Company selected by the Committee to receive
stock options under the Plan. No Committee member shall be eligible
to receive options under the Plan.
h. "Plan" shall mean the Harmony Brook, Inc. 1996 Stock Option Plan.
i. "Retirement" shall mean the time an Option Participant withdraws from
his or her principal business activity at the Company, and from active
employment generally.
j. "Significant Shareholder" shall mean an employee who owns more than
ten percent (10%) of the total combined voting power of all classes of
stock of the Company as
15
<PAGE>
of the date an option under the Plan is granted. The attribution of
stock ownership to an employee shall be determined in accordance
with the provisions of Section 424(d) of the Code.
k. "Stock" shall mean Harmony Brook, Inc. Common Shares.
3. ADMINISTRATION. The Plan shall be administered by the Committee as
appointed by the Board of Directors of the Company from time to time. The
Committee shall exercise such powers with respect to the Plan as are
delegated to it by the Board of Directors from time to time.
4. SHARES OF STOCK AVAILABLE FOR OPTION. Subject to Section 14, the maximum
number and kind of shares as to which options may at any time be granted
under the Plan is 350,000 shares of the Company's Stock.
Shares subject to option under the Plan which remain unpurchased on the
expiration or termination of an option shall again be available for option
grant under the Plan.
5. EFFECTIVE DATE AND PERIOD OF PLAN. Subject to approval by the shareholders
of the Company, the Plan will be effective April 25, 1996 and will
continue for a period of ten (10) years beginning on that date.
6. OPTION, TERMS AND CONDITIONS.
a. GRANT OF OPTION. Subject to the provisions of this Section 6 and any
limitations contained in the Code, options may be granted at any time
as determined by the Committee. Except as otherwise limited by the
Plan or the Company's Board of Directors, the Committee shall have
absolute discretion to determine the number of options to be granted
to any Option Participant, the type of option, and the terms and
conditions of such option.
b. EXERCISE LIMIT. To the extent the aggregate Fair Market Value of the
Stock underlying options designated as ISOs exercisable for the first
time by an Option Participant during any calendar year exceeds
$100,000, such options shall be treated as NQSOs in accordance with
Section 422(d) of the Code. In applying this limit, options shall be
taken into account in the order granted and the Fair Market Value of
such stock shall be determined as of the date the options with respect
to such Stock are granted.
c. OPTION PRICE.
i. ISOS. The exercise price of an ISO shall be no less than the
Fair Market Value of the Stock on the date the option is granted.
If an ISO is granted to a Significant Shareholder, the exercise
price shall not be less than 110% of the Fair Market Value
of the Stock on the date the option is granted.
16
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ii. NQSOS. The option price for an NQSO, which may be less than Fair
Market Value, shall be determined by the Committee at the time
the NQSO is granted.
d. TERM OF OPTION. Each option, regardless of type, shall expire at the
time specified by the Committee when granting the option. The
committee may not fix a term which is shorter than required under any
applicable state or federal statute or regulation, nor which is longer
than ten (10) years from the date the option is granted. The term of
an option may extend beyond the Plan's termination date.
e. MANNER OF EXERCISE. An Option Participant wishing to exercise an
option shall give written notice to the Company in the form and manner
as prescribed by the Committee. Options may be either completely or
partially exercised. Payment for the Stock to be acquired pursuant to
the exercise of an option, together with all applicable federal, state
and local withholding taxes, must accompany such written notice.
f. PAYMENT FOR OPTIONS.
i. GENERAL. Full payment for all Stock to be acquired pursuant to
the exercise of an option, and payment of all applicable
withholding taxes, shall be made at the time such option, or any
part thereof, is exercised. No certificate for the subject Stock
shall be issued to an Option Participant until payment has been
made. Payment shall be made in cash or in such other form as is
acceptable to the Committee, provided that in the case of an ISO,
no form of payment shall be allowed which would prevent the
option from qualifying as an ISO within the meaning of Section
422 of the Code.
ii. PAYMENT WITH OPTION SHARES. The Option Participant, in lieu of
or in combination with a payment in cash, and/or a payment in
Stock pursuant to Section 6.f.iii., may surrender to the Company,
at the time of exercise, a sufficient number of the Option
Participant's outstanding option shares to pay all or any part of
the exercise price, and any applicable state or federal
withholding tax liability incurred on the exercise of an option.
For this purpose, the Option Participant may use only option
shares having an exercise price less than the Fair Market Value
of the Stock subject to the option, determined as of the date
such option shares are surrendered or exercised. Surrender of an
option share FOR PAYMENT OF THE EXERCISE PRICE OR WITHHOLDING
TAXES SHALL BE TREATED AS AN EXERCISE OF THE SUBJECT OPTION AND A
SURRENDER OF THE UNDERLYING SHARES OF STOCK.
iii. PAYMENT WITH PREVIOUSLY ACQUIRED STOCK. The Option Participant,
in lieu of or in combination with a payment in cash, and/or a
payment in option shares pursuant to Section 6.f.ii., may
transfer to the Company a sufficient number of previously
acquired shares of Stock to satisfy all or any part of the
exercise
17
<PAGE>
price, and any applicable state or federal withholding tax
liability incurred on the exercise of an NQSO. For this
purpose, the value of the transferred Stock shall be the Fair
Market Value as of the date of exercise. Where payment is made
in whole or in part by previously acquired Stock, the Option
Participant may not transfer fractional shares of Stock, and the
Option Participant may not transfer a number of shares of Stock
which would have an aggregate Fair Market Value in excess of the
exercise price plus applicable withholding taxes.
iv. OTHER PAYMENT METHODS. The Committee may, in its sole
discretion, authorize payment by other methods or forms, within
the limitations imposed by this Section 6, by the Plan generally,
and any applicable state or federal laws or regulations.
g. NO TANDEM OPTIONS. No ISO granted under this Plan shall contain terms
which would limit or otherwise affect an Option Participant's right to
exercise any other option, nor shall an NQSO contain terms which limit
or otherwise affect the Option Participant's right to exercise any
other option in such a manner that the option intended to be an ISO
would be deemed a tandem stock option within the meaning of Section
422 of the Code.
7. ISSUANCE OF CERTIFICATE.
a. DELIVERY. As soon as practicable after the exercise of an option and
the delivery of payment therefore (including any amount required under
Section 6.g.), the Company shall deliver to the Option Participant a
certificate or certificates for the number of shares of Stock
acquired. Consistent with applicable state or federal laws and
regulations, the Committee may fix a minimum or maximum period of time
during which an Option Participant may not sell any such Stock.
b. DESIGNATION. Shares acquired pursuant to the exercise of an ISO shall
be designated as such on the stock transfer records of the Company, to
the extent the value of such shares does not exceed the $100,000
exercise limit contained in Section 6.b. Any shares acquired by the
exercise of an option which exceeds this $100,000 limit shall be
designated on the Company's stock transfer records as shares acquired
pursuant to an NQSO.
8. TERMINATION.
a. GENERAL RULE. Except as otherwise provided in the Plan, options may
be exercised only in accordance with the terms and conditions attached
by the Committee at the time the options are granted.
b. DEATH OF OPTION PARTICIPANT. In the event of death of an Option
Participant while in the employ of the Company, the Option
Participant's options outstanding as of the
18
<PAGE>
date of death shall be exercisable only within the next three
(3) months succeeding such death (but not after such options
expire by their terms), and then only (i) by the person or
persons to whom the Option Participant's rights under the
option shall pass by the Option Participant's will or the laws
of descent and distribution, and (ii) to the extent that the
Option Participant was entitled to exercise the option at the
date of his/her death.
c. DISABILITY OF OPTION PARTICIPANT. In the case of an Option
Participant whose employment is terminated due to disability, as
defined in Section 22(e)(3) of the Code, the Option Participant shall
have twelve (12) months after termination of employment in which to
exercise outstanding options that were otherwise exercisable at the
date of termination of employment (but not after such options expire
by their terms).
d. RETIREMENT OF OPTION PARTICIPANT. At the time of Retirement an Option
Participant may exercise outstanding options that are otherwise
exercisable at the date of Retirement, together with any options the
Committee may in its sole discretion accelerate, no later than thirty
(30) days following the date of Retirement (but not after such options
expire by their terms).
e. OTHER TERMINATION OF EMPLOYMENT.
i. TERMINATION NOT FOR CAUSE. In the event of a termination of
employment for reasons other than death, disability, or
retirement, outstanding options otherwise exercisable at the date
of termination of employment may be exercised no later than
thirty (30) days following such termination (but not after such
options expire by their terms).
ii. TERMINATION FOR CAUSE. In the event an Option Participant's
employment is terminated for cause, as determined by the
Committee in its absolute discretion, all options, to the extent
not already exercised, shall immediately terminate.
9. ACCELERATION OF BENEFITS. Upon the approval, by the Board of Directors or
Shareholders of the Company, as the case may be, of a merger or
consolidation in which the Company is not the surviving entity, or any sale
of all or substantially all of the Company's assets, all outstanding but
unexercised options shall automatically become immediately exercisable in
full, without action required on the part of the Committee.
At any time, the Committee shall have the discretion to accelerate the
exercise date of an option or to take any such similar action whenever it
may decide, in its absolute discretion, that such action is in the best
interests of the Company and is equitable to an Option Participant (or such
Option Participant's heirs or beneficiaries).
19
<PAGE>
10. SUBSTITUTION OF OPTIONS. In the event of a corporate merger or
consolidation, or the acquisition by the Company of property or stock of an
acquired corporation, or any reorganization or other transaction qualifying
under Section 424 of the Code, the Committee may, in accordance with the
provisions of that Code Section, substitute options under the Plan for
options under the plan of the acquired corporation provided (a) the ratio
of the excess of the aggregate Fair Market Value of the shares subject to
option immediately after the substitution over the aggregate exercise price
of such shares is not more than the similar ratio immediately before such
substitution, and (b) the new option does not give the Option Participant
additional benefits.
11. TRANSFERABILITY. Each option granted under the Plan shall be
nontransferable otherwise than by will or the laws of descent and
distribution on the death of the Option Participant, or the disposition of
options pursuant to a Qualified Domestic Relations Order as defined in the
Code or Title I of the Employee Retirement Income Security Act or the rules
thereunder.
12. MODIFICATION AND TERMINATION. The Committee, subject to limitations
imposed by the Company's Board of Directors, may amend or modify the Plan,
or any Section of the Plan, at any time to conform to any change in
applicable laws or regulations or in any other respect deemed to be in the
best interests of the Company. No such amendment shall, without
shareholder approval (i) materially increase the number of shares of Stock
as to which options may be granted under the Plan, (ii) materially modify
the requirements as to eligibility to receive options under the Plan, (iii)
materially increase the benefits accruing to Option Participants under the
Plan, (iv) reduce an ISO option price below the Fair Market Value on the
day the option is awarded, or (v) extend the termination date of the
provisions of the Plan which permit the granting of ISOs. No amendment or
modification of the Plan shall adversely affect any Option Participant
under the Plan, or any section thereof, without such Option Participant's
written consent.
13. INTERPRETATION OF PLAN. Full power and authority to construe, interpret,
modify and administer the Plan and all option contracts executed thereunder
shall be vested in the Committee, subject to any limitations imposed by the
Company's Board of Directors. Decisions of the Committee shall be final,
conclusive and binding upon all parties, including the Company, its
shareholders and the Option Participants.
14. ANTI-DILUTION. In the event that outstanding shares of Stock shall be
changed in number or class by reason of a division, combination, merger,
consolidation or recapitalization, or by reason of a stock dividend, the
number and class of shares as to which options may thereafter be granted,
and the number and class of shares then subject to outstanding options,
shall be changed and adjusted proportionately to the nearest whole share,
and the price per share payable upon exercise of each outstanding option
shall be adjusted proportionately to any change in the number of shares
subject to such option (without change in the aggregate exercise price
applicable to such option), all as determined by the Committee in its sole
discretion.
20
<PAGE>
15. EXPENSES OF ADMINISTRATION. The expenses of administering this Plan shall
be borne by the Company.
16. RIGHT OF ACTION. Every right of action by or on behalf of the Company or
by any shareholder against any past, present or future member of the
Company's Board of Directors, officer or employee of the Company arising
out of or in connection with this Plan shall, irrespective of the place of
residence of any such director, officer or employee, and irrespective of
the place where action may be brought, cease and be barred by the
expiration of three (3) years from the date of the act or omission in
respect of which such right of action arises.
17. TERMINATION OF EMPLOYMENT. The fact that an employee has been granted an
option under this Plan shall not affect or qualify the right of the Company
to terminate his or her employment at any time with or without notice or
cause.
18. GOVERNING LAW. To the extent not preempted by applicable federal law, this
Plan shall be construed and interpreted in accordance with the substantive
laws of the State of Minnesota without giving effect to the choice of law
provisions thereof.
IN WITNESS WHEREOF, this Plan has been executed this 25th day of April,
1996.
HARMONY BROOK, INC.
By James C. Hawley
---------------------------------
James C. Hawley, President
34985
21
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