<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 JUNE 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 0-21550
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 August 9, 1996
This document contains 10 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
and six months ended June 30, 1996 and 1995 (Unaudited) 1
Condensed Consolidated Balance Sheets as of June 30, 1996
(Unaudited) and December 31, 1995 2
Condensed Consolidated Statements of Cash Flows for the three
and six months ended June 30, 1996 and 1995 (Unaudited) 3
Notes to Financial Statements (Unaudited) 4
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition 5
Part II - OTHER INFORMATION
Item 4 - Submission of Matter to a Vote of Security Holders 9
Item 6 - Exhibits and Reports on Form 8-K 10
<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>
FOR THREE MONTHS FOR SIX MONTHS ENDED
ENDED JUNE 30 JUNE 30
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Contracted revenue sharing $1,498 $1,195 $2,896 $2,274
Bottle sales 480 490 912 899
Equipment sales 129 88 181 162
--------- --------- --------- ---------
2,107 1,773 3,989 3,335
Cost of revenues:
Contracted revenue sharing 564 477 1,125 903
Bottle sales 328 314 610 591
Equipment sales 102 76 139 128
--------- --------- --------- ---------
Gross profit 1,113 906 2,115 1,713
Selling, general and administrative expenses:
Field office 621 626 1,288 1,239
Corporate 400 426 790 824
Provision for doubtful accounts 3 3 6 129
Severance and other special charges -- 193 -- 193
--------- --------- --------- ---------
Operating profit (loss) 89 (342) 31 (672)
Other expense, net 162 170 330 296
--------- --------- --------- ---------
Net loss ($73) ($512) ($299) ($968)
--------- --------- --------- ---------
--------- --------- --------- ---------
Loss per share ($0.01) ($0.10) ($0.04) ($0.20)
--------- --------- --------- ---------
--------- --------- --------- ---------
Number of shares used to compute per share amounts 8,045 4,942 7,962 4,871
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
1
<PAGE>
FORM 10-QSB
Part I - Financial Information
Item 1 - Financial Statements
HARMONY BROOK, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 404 $ 1,101
Accounts receivable, net 1,191 1,081
Inventories, net 419 424
Other current assets 34 55
-------- -------
Total current assets 2,048 2,661
Property and equipment, net 9,421 9,394
Other assets 853 898
-------- -------
Total assets $12,322 $12,953
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital lease obligations $ 1,065 $ 912
Accounts payable 301 425
Accrued expenses 346 355
-------- -------
Total current liabilities 1,712 1,692
Long-term debt and capitalized lease obligations,
less current portion 3,460 4,043
-------- -------
Total liabilities 5,172 5,735
Shareholders' equity:
Common stock, no par value, 20,000 shares
authorized, 8,045 and 7,695 issued and
outstanding at June 30, 1996 and
December 31, 1995, respectively 11,321 11,091
Cumulative foreign currency translation adjustments (417) (418)
Accumulated deficit (3,754) (3,455)
-------- -------
Total shareholders' equity 7,150 7,218
-------- -------
Total liabilities and shareholders' equity $12,322 $12,953
-------- -------
-------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
2
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Form 10-QSB
Part I - Financial Information
Item 1 - Financial Statements
HARMONY BROOK, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THREE MONTHS FOR SIX MONTHS ENDED
ENDED JUNE 30 JUNE 30
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ($73) ($512) ($299) ($968)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 348 359 735 635
Amortization of deferred income -- (10) -- (20)
Provision for doubtful accounts 3 3 6 129
Provision for inventory obsolescence 8 38 17 42
Amortization of discount on note payable 6 6 12 12
Changes in operating assets and liabilities:
Accounts receivable (56) (78) (115) (106)
Inventories (26) (11) (12) 52
Other current assets 3 47 21 54
Accounts payable (111) (133) (124) (256)
Accrued expenses 29 75 21 74
----- ------ ------ -------
Net cash provided (used) in operating activities 131 (216) 262 (352)
----- ------ ------ -------
Cash flows from investing activities:
Purchase and manufacture of property and equipment (242) (546) (719) (1,366)
Increase in other assets (1) (4) (29) (18)
----- ------ ------ -------
Net cash used in investing activities (243) (550) (748) (1,384)
----- ------ ------ -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 974 -- 1,989
Principal payments on long-term debt and note payable,
bank and capitalized lease obligations (267) (191) (441) (317)
Net proceeds from sales of common stock -- -- 230 --
----- ------ ------ -------
Net cash provided (used) by financing activities (267) 783 (211) 1,672
----- ------ ------ -------
Effect of exchange rate changes on cash 13 (3) -- 14
----- ------ ------ -------
Net increase (decrease) in cash and cash equivalents (366) 14 (697) (50)
Cash and cash equivalents at beginning of period 770 -- 1,101 64
----- ------ ------ -------
Cash and cash equivalents at end of period $ 404 $ 14 $ 404 $ 14
----- ------ ------ -------
----- ------ ------ -------
Supplemental cash flow information:
Cash paid for interest charges $ 162 $ 165 $ 297 $ 245
----- ------ ------ -------
----- ------ ------ -------
</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 condensed 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
condensed 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 condensed consolidated financial statements presented herein for the
three months and six months ended June 30, 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, NET
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 June 30, 1996 and December 31, 1995 consisted of the following:
(IN THOUSANDS)
June 30, 1996 December 31, 1995
------------- -----------------
Bottles $317 $346
Raw materials, expected to be sold to
customers as equipment sales 102 78
---- ----
Total $419 $424
---- ----
---- ----
4
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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 - SECOND QUARTER AND FIRST SIX MONTHS
REVENUES
Revenues for the second quarter ended June 30, 1996 were $2,107,000 compared
with revenues of $1,773,000 for the quarter ended June 30, 1995, an increase
of 19 percent. For the first six months of 1996, revenues were $3,989,000,
an increase of 20 percent over revenues of $3,335,000 reported for the first
six months of 1995.
Contracted revenue sharing sales for the second quarter of 1996 were
$1,498,000. This represented a 25 percent increase over the prior year's
second quarter contracted revenue sharing sales of $1,195,000. For the first
six months of 1996, contracted revenue sharing sales were $2,896,000 versus
$2,274,000 for the comparable period of 1995, an increase of 27 percent.
These revenue increases represented 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 Water systems and the composite growth of its maturing
system portfolio. At June 30, 1996 the Company had 1,529 domestic customer
locations installed, compared with 1,429 at June 30, 1995. In addition, the
Company had 103 customer locations installed in Mexico at June 30, 1996
compared with 72 customer locations at June 30, 1995. The total customer
locations at June 30, 1996 was 1,632 compared with 1,501 customer locations
at June 30, 1995, a nine percent increase. Domestic revenues for customer
locations in place at both June 30, 1996 and 1995 grew 11 percent for the
first six months, while the increase in retail gallons dispensed increased 17
percent. This variation was due to volume related pricing and competitive
factors in certain markets.
Bottle sales decreased two percent in the second quarter of 1996 to $480,000
from $490,000 for the comparable second quarter of 1995. Conversely, bottle
sales increased one percent for the first six months of 1996 to $912,000
compared to $899,000 in the first six months of 1995. Bottle sales are
recognized from two different classes of customers, those customers who
purchase bottles in conjunction with having one of the Company's Harmony
Brook-Registered Trademark- Premium Drinking Water systems installed (Premium
Bottle Sales) and all other customers who purchase bottles typically on a
wholesale basis (Wholesale Bottle Sales). Premium Bottle Sales increased
five percent in the comparable second quarters from $265,000 in 1995 to
$277,000 in 1996. In the first six months Premium Bottle Sales increased six
percent from $485,000 in 1995 to $513,000 in 1996. Wholesale Bottle Sales
decreased by ten percent in the second quarter ($225,000 in 1995 to $203,000
in 1996) and four percent in the first six months ($414,000 in
5
<PAGE>
1995 to $399,000 in 1996). Wholesale bottle sales have been difficult for the
Company to grow due to a number of issues including a lack of Company
resources to aggressively pursue new customers and a lack of predictability
and loyalty in the customer base which is characteristic of the entire
market. Management expects, despite efforts to continue to build a broader
customer base, Wholesale Bottle Sales for 1996 to approximate 1995's
performance.
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 second quarter and first six months
of 1996 was 53 percent of revenues compared with 51 percent of revenues for
the second quarter and first six months of 1995. These increases reflected a
larger portion of revenues derived from contracted revenue sharing for the
comparable periods presented.
The gross margin for contracted revenue sharing for the second quarter of
1996 was 62 percent of related revenues and 61 percent of related revenues
for the first six months of 1996. The comparable gross margins for 1995 were
60 percent of related revenues for both the second quarter and first six
months. This slight improvement in gross margin is attributable to greater
coverage of certain fixed costs included in contract revenue sharing cost of
sales.
The gross margins for bottle sales were 32 percent of related revenues in the
second quarter of 1996 and 33 percent of related revenues in the first six
months of 1996. These margins compare to 36 percent of related revenues in
the second quarter of 1995 and 34 percent of related revenues in the first
six months of 1995. While the raw materials used to manufacture bottles have
experienced significant price increases which have been passed on to the
Company, the primary reason for the decline in the bottle sales gross margin
is product mix. Gross margins on bottle sales vary from five to 45 percent
of sales depending on the style and quantities of bottles sold.
The gross margin for equipment sales was 21 percent of related revenues in
the second quarter of 1996 compared to 14 percent of related revenues in the
second quarter of 1995. For the first six months of 1996 the gross margin
for equipment sales was 24 percent of related revenues compared to 21 percent
of related revenues for the first six months of 1995. The margins for
equipment sales reflect the mix of sales between complete systems sold
(typically a lower margin) versus sales of service parts (typically a higher
margin).
SELLING, GENERAL AND ADMINISTRATIVE (S,G & A) EXPENSES
Field office S,G & A expenses were $621,000 in the second quarter of 1996, a
one percent decrease from field office expense of $626,000 in the comparable
second quarter of 1995. For the first six months of 1996 and 1995 field
office expenses were $1,288,000 and $1,239,000, respectively, an increase of
four percent.
6
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Corporate S,G & A expenses were $400,000 in the second quarter of 1996, a six
percent decrease from $426,000 in the second quarter of 1995. For the first
six months of 1996 corporate S,G & A expenses were $790,000 compared to
$824,000 in the first six months of 1995, a four percent decrease.
The second quarter and first six month trends in S,G & A expenses reflect
management's continued emphasis on closely managing its discretionary
expenses. Management will continue its strategy to manage its discretionary
expenses, increase market penetration, and invest in field personnel in
existing geographic territories versus development of new geographic
territories for the foreseeable future.
During the second quarter of 1995 the Company recorded $193,000, or $.04 per
share, of officer severance and other special charges. For the first six
months of 1995 the company had $316,000, or $.06 per share, of one-time
charges related to an uncollectible accounts receivable, officer severance
and other special charges.
1996 OPERATING PROFIT
In the second quarter of 1996 the Company reported an $89,000 operating
profit compared to a $342,000 operating loss in the second quarter of 1995.
In addition, the Company reported an operating profit of $31,000 in the first
six months of 1996 compared to an operating loss of $672,000 in the first six
months of 1995. This is the first reporting of operating profits for both
the second quarter and the first six months in the Company's history. The
only other quarter which reported operating profits was the third quarter of
1995.
Without the one-time charges recorded in the second quarter and first six
months of 1995, the comparable operating losses would be $149,000 for the
second quarter of 1995 and $356,000 for the first six months of 1995.
NET LOSS
Due to the high levels of debt financing maintained by the Company, a net
loss was reported for the second quarter and first six months of 1996. Other
expense, the only line item between operating profit (loss) and net loss,
consisted primarily of net interest expense for all periods presented. The
comparable net loss amounts, excluding the one time charges recorded in the
second quarter and first six months of 1995, were $73,000 in the second
quarter of 1996 versus $319,000 in the second quarter of 1995, and $299,000
in the first six months of 1996 versus $652,000 in the first six months of
1995.
7
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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.
<TABLE>
<CAPTION>
Second Second
Quarter Quarter Percentage First Six First Six Percentage
1996 1995 Change Months 1996 Months 1995 Change
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Total Revenues $134,000 $76,000 76% $233,000 $124,000 88%
- -----------------------------------------------------------------------------------------------------
Operating Profit (loss) $ 13,000 ($17,000) nm $ 9,000 ($ 60,000) nm
- -----------------------------------------------------------------------------------------------------
</TABLE>
nm = not meaningful
LIQUIDITY AND CAPITAL RESOURCES
The Company had net cash provided by operating activities of $131,000 in the
second quarter of 1996 compared to $216,000 of net cash used by operating
activities in the second quarter of 1995. In the first six months of 1996
the Company had $262,000 of net cash provided by operations compared to
$352,000 of net cash used by operations in the first six months of 1995. The
primary contributor to the improvement in net cash provided by operating
activities in both the second quarter and first six months of 1996 was the
reduction in the net loss. Cumulative changes in all other operating
activity areas were small compared to the changes in the net loss for all
periods presented.
The Company invested $242,000 in property and equipment in the second quarter
of 1996, a decrease of 56 percent from the $546,000 invested in the second
quarter of 1995. For the first six months of 1996 the Company invested
$719,000 in property and equipment compared to $1,366,000 invested in the
first six months of 1995, a 47 percent decrease. The investment in property
and equipment for all periods presented consisted primarily 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 for both the second quarter and first six months of
1996 was due to the Company's continued efforts to more properly align its
investment strategies with its cash flow availability.
The Company is adhering to its amended growth strategy implemented in
mid-1995 to a targeted 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.
8
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The Company currently does not have any borrowing capacity available under
its credit facilities, but the Company believes that the proceeds from the
sales 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. To pay the balance of the Company's converted bridge loan and
maintain the current growth strategy, management believes the Company will
need to raise additional financing by early 1997. Management estimates that
these additional capital needs will 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.
FORWARD LOOKING STATEMENTS
In addition to the historical information contained herein, the foregoing
discussion includes forward looking statements that involve a number of risks
and uncertainties. Among the factors that could cause actual results to
differ materially are the following: changes in growth in the treated water
and specialty beverage industry; the condition of the general economy;
competitive factors such as aggressive pricing by regional competitors and
entry of well capitalized competitors into territories served by the Company;
increased local, state or federal regulation of the treated water industry;
changes in product mix; increases in the raw material costs related to the
Company's bottle business; and the risk factors listed from time to time in
the Company's reports filed with the Securities and Exchange Commission.
FORM 10-QSB
Part II - Other Information
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required to be included in this item,
with respect to the annual meeting of shareholders
which was held on April 25, 1996, was reported in the
Company's quarterly report on Form 10-QSB for the
quarter ended March 31, 1996, previously filed with the
Commission.
9
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibit is included with this Quarterly Report
on Form 10-QSB as required by Item 601 of Regulation S-B.
Exhibit No. Description Page No.
----------- ----------- --------
27.1 Financial Data Schedule 12
(B) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the quarter
ended June 30, 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: August 9, 1996 By: /s/ James C. Hawley
----------------------------
James C. Hawley
President
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 0 404
<SECURITIES> 0 0
<RECEIVABLES> 0 1223
<ALLOWANCES> 0 (32)
<INVENTORY> 0 419
<CURRENT-ASSETS> 0 2048
<PP&E> 0 12465
<DEPRECIATION> 0 (3044)
<TOTAL-ASSETS> 0 12322
<CURRENT-LIABILITIES> 0 1712
<BONDS> 0 3460
0 0
0 0
<COMMON> 0 11321
<OTHER-SE> 0 (417)
<TOTAL-LIABILITY-AND-EQUITY> 0 12322
<SALES> 2107 3989
<TOTAL-REVENUES> 2107 3989
<CGS> 994 1874
<TOTAL-COSTS> 2015 3952
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 3 6
<INTEREST-EXPENSE> 162 330
<INCOME-PRETAX> (73) (299)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (73) (299)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (73) (299)
<EPS-PRIMARY> (.01) (.04)
<EPS-DILUTED> (.01) (.04)
</TABLE>
