<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 September 30, 1997
[ ] 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 November 7, 1997
<PAGE>
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 nine months ended September 30, 1997 and 1996
(Unaudited) 2
Condensed Consolidated Balance Sheets as of September 30,
1997 (Unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Cash Flows for the
three and nine months ended September 30, 1997 and 1996
(Unaudited) 4
Notes to Condensed Consolidated Financial Statements
(Unaudited) 5
Item 2 - Management's Discussion and Analysis of Results of Operations
and Financial Condition 7
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
1
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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)
For Three Months For Nine Months
Ended September 30, Ended September 30,
-------------------- ----------------------
Revenues: 1997 1996 1997 1996
-------- -------- -------- ---------
Contracted revenue sharing $ 1,736 $ 1,631 $ 4,705 $ 4,527
Bottle sales 684 618 1,714 1,529
Equipment sales 35 39 212 221
-------- -------- -------- ---------
2,455 2,288 6,631 6,277
Cost of revenues:
Contracted revenue sharing 735 604 1,956 1,729
Bottle sales 460 409 1,151 1,019
Equipment sales 22 25 156 163
-------- -------- -------- ---------
Gross profit 1,238 1,250 3,368 3,366
Selling, general and
administrative expenses:
Field office 656 655 1,932 1,947
Corporate 420 427 1,253 1,220
-------- -------- -------- ---------
Operating income 162 168 183 199
Other expense - net 158 151 475 481
-------- -------- -------- ---------
Net income (loss) $4 $17 ($292) ($282)
-------- -------- -------- ---------
-------- -------- -------- ---------
Loss per share $0.00 $0.00 ($0.04) ($0.04)
-------- -------- -------- ---------
-------- -------- -------- ---------
Number of shares used to
compute per share amounts 8,045 8,045 8,045 7,961
-------- -------- -------- ---------
-------- -------- -------- ---------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED).
2
<PAGE>
FORM 10-QSB
Part I - Financial Information
Item 1 - Financial Statements
HARMONY BROOK, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(IN THOUSANDS)
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 360 $ 377
Accounts receivable, net 1,362 1,096
Inventories 560 435
Other current assets 46 46
------------------ ----------------
Total current assets 2,328 1,954
Property and equipment, net 9,091 9,251
Other assets 630 722
------------------ ----------------
Total assets $12,049 $11,927
------------------ ----------------
------------------ ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 966 $ 1,243
Accounts payable 750 474
Accrued expenses 349 410
Current portion of deferred income 25 16
------------------ ----------------
Total current liabilities 2,090 2,143
Long-term debt and capitalized lease
obligations, less current portion 3,141 2,800
Deferred income, less current portion 79 59
------------------ ----------------
Total liabilities 5,310 5,002
Shareholders' equity:
Common stock, no par value, 20,000
shares authorized, 8,045 issued
and outstanding at September
30, 1997 and December 31, 1996 11,427 11,321
Cumulative foreign currency
translation adjustments (460) (460)
Accumulated deficit (4,228) (3,936)
------------------ ----------------
Total shareholders' equity 6,739 6,925
------------------ ----------------
Total liabilities and
shareholders' quity $12,049 $11,927
------------------ ----------------
------------------ ----------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED).
3
<PAGE>
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 Nine Months
Ended September 30 Ended September 30
------------------ -------------------
1997 1996 1997 1996
------- ------- ------ -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4 $ 17 ($292) ($282)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on disposal of assets - (6) - (6)
Depreciation and amortization 396 371 1,098 1 ,107
Amortization of deferred income (6) (2) (14) (2)
Provision for doubtful accounts 4 3 14 9
Provision for inventory obsolesence 7 7 20 24
Amortization of discount on note payable 13 6 32 18
Changes in operating assets and liabilities:
Accounts receivable (78) (30) (292) (145)
Inventories (71) (74) (83) (86)
Other current assets 2 (4) - 17
Accounts payable 133 224 275 100
Accrued expenses (20) (35) (61) (15)
------ ------ ----- ------
Net cash provided by operating activities 384 477 697 739
------ ------ ----- ------
Cash flows from investing activities:
Purchase and manufacture of property and equipment (262) (245) (982) (964)
Other 11 (4) 3 (33)
------ ------ ----- ------
Net cash used in investing activities (251) (249) (979) (997)
------ ------ ----- ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and warrants - - 1,000 -
Principal payments on long-term debt
and capitalized lease obligations (189) (247) (862) (688)
Proceeds from sale/leaseback transaction 63 50 127 50
Net proceeds from sales of common stock - - - 230
------ ------ ----- ------
Net cash (used in) provided by financing activities (126) (197) 265 (408)
------ ------ ----- ------
Effect of exchange rate changes on cash - (4) - (4)
------ ------ ----- ------
Net increase (decrease) in cash and cash equivalents 7 27 (17) (670)
Cash and cash equivalents at beginning of period 353 404 377 1,101
------ ------ ----- ------
Cash and cash equivalents at end of period $ 360 $ 431 $ 360 $ 431
------ ------ ----- ------
------ ------ ----- ------
Supplemental cash flow information:
Cash paid for interest charges $ 160 $ 156 $ 412 $ 453
------ ------ ----- ------
------ ------ ----- ------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED).
4
<PAGE>
FORM 10-QSB
Part I - Financial Information
Item 1 - Financial Statements
Notes to Condensed Consolidated 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, 1996, previously filed with the Commission.
The consolidated financial statements presented herein for the three months and
nine months ended September 30, 1997 and 1996, 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 September 30, 1997 and December 31, 1996 consisted of the following:
(IN THOUSANDS)
September 30, 1997 December 31, 1996
------------------ -----------------
Bottles $417 $353
Raw materials, expected to be sold
to customers as equipment sales 143 82
---- ----
Total $560 $435
---- ----
---- ----
5
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3. EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE,
is effective for the Company for the periods ending after December 15, 1997.
The Company expects no material impact from the adoption of this financial
standard. The basic earnings per share computation, as defined by SFAS No. 128,
applied to all periods presented would yield the same result that is currently
reported within this Form 10-QSB. All common stock equivalents are currently
anti-dilutive.
6
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Form 10-QSB
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS - THIRD QUARTER AND FIRST NINE MONTHS
REVENUES
Revenues for the third quarter ended September 30, 1997 were $2,455,000 compared
with revenues of $2,288,000 for the quarter ended September 30, 1996, an
increase of seven percent. For the first nine months of 1997, revenues were
$6,631,000, an increase of six percent over revenues of $6,277,000 reported for
the first nine months of 1996.
Contracted revenue sharing sales for the third quarter of 1997 were $1,736,000.
This represented a six percent increase over the prior year's third quarter
contracted revenue sharing sales of $1,631,000. For the first nine months of
1997, contracted revenue sharing sales were $4,705,000 compared to $4,527,000
for the first nine months of 1996, an increase of four 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 increase in volume at existing customer locations. At September
30, 1997, the Company had 1,617 domestic customer locations installed, compared
with 1,561 at September 30, 1996. In addition, the Company had 110 customer
locations installed in Mexico at September 30, 1997 compared with 104 customer
locations at September 30, 1996. The total customer locations at September 30,
1997 was 1,727 compared with 1,665 customer locations at September 30, 1996, a
four percent increase. Domestic revenues for customer locations in place at
both September 30, 1997 and 1996 grew five percent in the first nine months,
while retail gallons dispensed increased seven percent. Growth rates for the
Company's number of customer locations, dispenser revenues and gallons dispensed
continue to be affected by instances of account turnover and price concessions
near the end of 1996 and start of 1997, which resulted from increased
competition in the Company's core Midwest markets.
Bottle sales increased 11 percent in the third quarter of 1997 to $684,000 from
$618,000 for the comparable third quarter of 1996. Bottle sales increased 12
percent for the first nine months of 1997 to $1,714,000 compared to $1,529,000
in the first nine months of 1996. 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 decreased one percent both in the comparable third
quarters, from $336,000 in 1996 to $332,000 in 1997, and in the first nine
months, from $849,000 in 1996 to $844,000 in 1997. The slight third quarter and
nine month decrease in Premium Bottle Sales is a result of certain routes being
open at times due to
7
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employee turnover. Wholesale Bottle Sales increased 25 percent in the
comparable third quarters, from $282,000 in 1996 to $352,000 in 1997, and 28
percent in the comparable first nine months, from $680,000 in 1996 to $870,000
in 1997. The increases in Wholesale Bottles sales were a result of continued
emphasis to rebuild and grow this business segment.
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 1997.
GROSS MARGIN
The Company's total gross margin for the third quarter of 1997 was 50 percent of
revenues compared with 55 percent of revenues for the third quarter 1996. For
the first nine months, the Company's total gross margin was 51 percent of
revenues for 1997 compared with 54 percent of revenues for 1996. These
decreases reflect primarily the impact of price competition, costs related to
increased product quality testing and equipment refurbishment in the Company's
core business segment, contracted revenue sharing. This refurbishment activity
results in a significant portion of the cost being expensed to the income
statement but does conserve cash when compared to building new equipment for new
customer locations.
The gross margin for contracted revenue sharing for both the third quarter and
first nine months of 1997 was 58 percent of related revenues. The comparable
gross margins for 1996 were 63 and 62 percent of related revenues for the third
quarter and first nine months, respectively. These decreases were related to
the same three factors cited above.
The gross margin for bottle sales were 33 percent of related revenues in both
the third quarter of 1997 and first nine months of 1997. These margins compare
to 34 percent of related revenues in the third quarter of 1996 and 33 percent of
related revenues in the first nine months of 1996. Gross margins on bottle
sales vary depending on the style and quantities of bottles sold.
The gross margin for equipment sales was 36 percent of related revenues in the
third quarter of 1997 compared to 37 percent of related revenues in the third
quarter of 1996. For the first nine months of 1996 and 1997 the gross margin
for equipment sales was 26 percent of related revenues. 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 $656,000 in the third quarter of 1997, a less
than one percent increase from field office S,G & A expense of $655,000 in the
third quarter of 1996. For the first nine months of 1997 and 1996 field office
expenses were $1,932,000 and $1,947,000, respectively, a decrease of one
percent. Compensation expense decreased due to employee turnover, but this
decrease was offset by increased vehicle expenses for the third quarter and
first nine months of 1997 due to the Company's aging fleet. No new geographic
territories were
8
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entered for all periods presented, although two service routes were added in
existing territories in the first half of 1997.
Corporate S,G & A expenses were $420,000 in the third quarter of 1997, a one
percent decrease from $427,000 in the third quarter of 1996. For the first nine
months of 1997 corporate S,G & A expenses were $1,253,000 compared to $1,220,000
in the first nine months of 1996, a three percent increase. This increase in
the first nine months of 1997 is primarily attributable to increased Mexican
subsidiary expenses related to added personnel to support its growth and a high
inflation environment.
OPERATING AND NET INCOME (LOSS)
Operating income is reported for all periods presented. Other expense, the only
line item between operating income and net income (loss), consisted primarily of
net interest expense for all periods presented. Both third quarters of 1996 and
1997 reported net income with the third quarter of 1996 being the first quarter
with net income in the Company's history. A net loss is reported for both the
first nine months of 1996 and 1997.
MEXICAN SUBSIDIARY
All of the information included in this Form 10-QSB reflects 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.
The Company does not allocate charges for financing or corporate administrative
support services to Mexico.
<TABLE>
<CAPTION>
Third Third First Nine First Nine
Quarter Quarter Percentage Months Months Percentage
1997 1996 Change 1997 1996 Change
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $159,000 $135,000 18% $445,000 $367,000 21%
- -----------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $6,000 ($4,000) nm ($1,000) $6,000 nm
- -----------------------------------------------------------------------------------------------------------
</TABLE>
nm = not meaningful
LIQUIDITY AND CAPITAL RESOURCES
The Company had net cash provided by operating activities of $384,000 in the
third quarter of 1997 compared to $477,000 of net cash provided by operating
activities in the third quarter of 1996. In the first nine months of 1997 the
Company had $697,000 of net cash provided by operating activities compared to
$739,000 of net cash provided by operating activities in the first nine months
of 1996. The primary decrease in net cash provided by operating activities for
both
9
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the third quarter and first nine months of 1997 was an increase in accounts
receivable. The increase in accounts receivable for the first nine months was
offset by an increase in accounts payable. Cumulative changes in all other
operating activity areas were small compared to the changes in accounts
receivable and accounts payable for all periods presented.
The Company invested $262,000 in property and equipment in the third quarter of
1997, an increase of seven percent from the $245,000 invested in the third
quarter of 1996. For the first nine months of 1997 and 1996 the Company
invested $982,000 and 964,000, respectively, in property and equipment, an
increase of two percent. The first nine months of 1996 included a $135,000
buy-out of leased equipment. After adjusting for this lease buy-out in the
first nine months of 1996, the remaining investment in property and equipment
for all periods presented consisted primarily of the manufacture of new Harmony
Brook-Registered Trademark- Premium Drinking Water systems and the refurbishment
of existing systems. The increase in investment in property and equipment is
primarily driven by the capitalized portion of refurbishment of the Company's
older systems.
On July 31, 1997, the Company entered into an agreement with a shareholder and
board member for the sale/leaseback of dispensing equipment; this was the second
such agreement in the first nine months of 1997.
Management of the Company estimates that under its current operating plan it
will require additional capital during the fourth quarter of 1997 and calendar
1998. Projections also indicate that during the fourth quarter the Company will
probably violate certain financial covenants contained in the loan agreement
with its principal bank lender. The Company is currently investigating
financing alternatives to meet its capital requirements and to eliminate
potential covenant defaults. Pending resolution of these issues, the Company
has requested that its two senior lenders agree to suspend principal payments
due for November and December 1997 and January 1998. The two senior lenders
have indicated their willingness to provide these accommodations to the Company
orally and the Company has obtained written agreement from its senior bank
lender and is proceeding to obtain written confirmation of these agreements from
its other principal lender. While management believes it will be successful in
discussions regarding additional capital, there can be no assurance that the
Company will be able to enter into transactions which will enable it to obtain
required additional capital or that such transactions will provide necessary
capital on terms acceptable to the Company.
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: THE COMPANY'S INABILITY TO PROCURE ADDITIONAL OR
REPLACEMENT FINANCING; 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 ALL
10
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SEGMENTS OF THE COMPANY'S BUSINESS; AND THE RISK FACTORS LISTED FROM TIME TO
TIME IN THE COMPANY'S REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
11
<PAGE>
FORM 10-QSB
Part II - Other Information
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
----------- -----------
27.1 Financial Data Schedule
(EDGAR filing only)
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the quarter ended
September 30, 1997 or during the period from September 30, 1997
to the date of this Quarterly Report on Form 10-QSB.
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: November 7, 1997 By: /s/James C. Hawley
------------------
James C. Hawley
President
12
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FORM 10-QSB
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
(EDGAR filing only)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 360
<SECURITIES> 0
<RECEIVABLES> 1,392
<ALLOWANCES> (30)
<INVENTORY> 560
<CURRENT-ASSETS> 2,328
<PP&E> 13,685
<DEPRECIATION> 4,594
<TOTAL-ASSETS> 12,049
<CURRENT-LIABILITIES> 2,090
<BONDS> 3,141
0
0
<COMMON> 11,427
<OTHER-SE> (460)
<TOTAL-LIABILITY-AND-EQUITY> 12,049
<SALES> 6,631
<TOTAL-REVENUES> 6,631
<CGS> 3,263
<TOTAL-COSTS> 6,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 475
<INCOME-PRETAX> (292)
<INCOME-TAX> 0
<INCOME-CONTINUING> (292)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (292)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
