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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, 1997
[ ] 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 May 10, 1997
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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, 1997 and 1996 (Unaudited) 1
Condensed Consolidated Balance Sheets as of March 31, 1997
(Unaudited) and December 31, 1996 2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 (Unaudited) 3
Notes to Condensed Consolidated 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 10
Item 6 - Exhibits and Reports on Form 8-K 10
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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)
Three Months
Ended March 31,
-----------------
Revenues: 1997 1996
------ ------
Contracted revenue sharing $1,443 $1,398
Bottle sales 465 432
Equipment sales 93 52
------ ------
2,001 1,882
Cost of revenues:
Contracted revenue sharing 577 560
Bottle sales 313 282
Equipment sales 70 37
------ ------
Gross profit 1,041 1,003
Selling, general and administrative expenses:
Field office 693 670
Corporate 394 391
------ ------
Operating loss (46) (58)
Other expense - net 153 168
------ ------
Net loss ($199) ($226)
------ ------
------ ------
Loss per share ($0.02) ($0.03)
------ ------
------ ------
Number of shares used to compute
per share amounts 8,045 7,791
------ ------
------ ------
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED 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)
March 31, 1997 December 31, 1996
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $603 $377
Accounts receivable, net 1,152 1,096
Inventories 420 435
Other current assets 48 46
-------------- -----------------
Total current assets 2,223 1,954
Property and equipment, net 9,252 9,251
Other assets 694 722
-------------- -----------------
Total assets $12,169 $11,927
-------------- -----------------
-------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital lease obligations $852 $1,243
Accounts payable 597 474
Accrued expenses 332 410
Deferred income 16 16
-------------- -----------------
Total current liabilities 1,797 2,143
Long-term debt and capitalized lease
obligations, less current portion 3,591 2,800
Deferred income, less current portion 55 59
-------------- -----------------
Total liabilities 5,443 5,002
Shareholders' equity:
Common stock, no par value, 20,000 shares
authorized, 8,045 issued and outstanding
March 31, 1997 and December 31, 1996 11,321 11,321
Cumulative foreign currency translation
adjustments (460) (460)
Accumulated deficit (4,135) (3,936)
-------------- -----------------
Total shareholders' equity 6,726 6,925
-------------- -----------------
Total liabilities and shareholders'
equity $12,169 $11,927
-------------- -----------------
-------------- -----------------
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED 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)
For Three Months
Ended March 31
-------------------
1997 1996
------- -------
Cash flows from operating activities:
Net loss ($199) ($226)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 338 388
Amortization of deferred income (4) -
Provision for doubtful accounts 5 3
Provision for inventory obsolesence 7 10
Amortization of discount on note payable 6 6
Changes in operating assets and liabilities:
Accounts receivable (46) (60)
Inventories 13 14
Other current assets (2) 17
Accounts payable 123 (12)
Accrued expenses (77) (9)
------ ------
Net cash provided by operating activities 164 131
------ ------
Cash flows from investing activities:
Purchase and manufacture of property and equipment (318) (478)
Increase in other assets (14) (27)
------ ------
Net cash used in investing activities (332) (505)
------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 825 -
Principal payments on long-term debt
and capitalized lease obligations (431) (175)
Net proceeds from sales of common stock - 230
------ ------
Net cash provided by financing activities 394 55
------ ------
Effect of exchange rate changes on cash - (13)
------ ------
Net increase (decrease) in cash and cash equivalents 226 (332)
Cash and cash equivalents at beginning of period 377 1,101
------ ------
Cash and cash equivalents at end of period $ 603 $ 769
------ ------
------ ------
Supplemental cash flow information:
Cash paid for interest charges $ 107 $ 136
------ ------
------ ------
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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FORM 10-QSB
Part I - Financial Information
Item 1 - Financial Statements
Notes to Condensed Consolidated 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, 1996, previously filed with the Commission.
The consolidated financial statements presented herein for the three months
ended March 31, 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 March 31, 1997 and December 31, 1996 consisted of the following:
(IN THOUSANDS)
March 31, 1997 December 31, 1996
-------------- -----------------
Bottles $332 $353
Raw materials, expected to be
sold to customers as equipment
sales 88 82
---- ----
Total $420 $435
---- ----
---- ----
4
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3. FINANCING ARRANGEMENTS
On February 18, 1997, the Company and its principal bank lender amended and
restated its term loan agreement. The agreement combined two outstanding term
loans into one term loan facility to be repaid in equal monthly principal
installments plus accrued interest at the bank's reference rate plus 3.75
percent, with a final principal payment plus accrued interest due in February
2000. Borrowings under the amended and restated term loan are collateralized by
substantially all of the Company's assets, subordinate to a leasing company's
collateral interest in certain leased dispensing equipment. The agreement also
contains a provision that if the Company did not obtain commitments for at least
$1,000,000 of new subordinated debt financing by March 1, 1997, and have
received proceeds of at least $1,000,000 by April 30, 1997, an event of default
would occur. The agreement also requires that 30 percent of the gross proceeds
of the subordinated debt are to be used to pay down the principal balance with
its bank lender. All conditions have been met (see following paragraph).
In February 1997, the Company obtained commitments for the purchase of a series
of subordinated notes payable from shareholders and accredited investors
sufficient to meet the provisions of the amended and restated term loan
agreement. The notes bear interest at 14 percent payable monthly and are due in
March 2000. In addition, warrants were offered in conjunction with the notes at
the rate of one warrant for each five dollars in notes payable. By April 30,
1997, the Company received $1,000,000 of proceeds from these subordinated notes
payable and paid down $300,000 of its amended and restated term loan agreement
with its principal bank lender.
4. EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE,
is effective for the Company for 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 per share result that is currently
reported within this Form 10-QSB. All common stock equivalents are currently
anti-dilutive.
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FORM 10-QSB
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS - FIRST QUARTER
REVENUES
Revenues for the first quarter ended March 31, 1997 were $2,001,000 compared
with revenues of $1,882,000 for the first quarter ended March 31, 1996, an
increase of six percent.
Contracted revenue sharing sales for the first quarter of 1997 were $1,443,000.
This represented a three percent increase over the prior year's first quarter
contracted revenue sharing sales of $1,398,000. This revenue increase
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 composite growth of its maturing system portfolio and the increase
in the number of customer locations for the Company's installed Harmony
Brook-Registered Trademark- Premium Drinking Water systems.
At March 31, 1997 the Company had 1,521 domestic customer locations installed,
compared with 1,498 at March 31, 1996. In addition, the Company had 105
customer locations installed in Mexico at March 31, 1997 compared with 96
customer locations at March 31, 1996. The total customer locations at March 31,
1997 was 1,626 compared with 1,594 customer locations at March 31, 1996, a two
percent increase. Domestic dispenser revenues and gallons for customer
locations in place at both March 31, 1997 and 1996 grew five percent. This
lower growth rate is due primarily to competitive factors in certain markets.
Bottle and accessory sales increased eight percent in the first quarter of 1997
to $465,000 from $432,000 for the comparable first quarter of 1996. Bottle
sales are recognized from two different classes of customers, those customers
who purchase bottles and accessories 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 11 percent from $235,000 in the first quarter of 1996 to $260,000 in
the first quarter of 1997 due to continued management emphasis to distribute
bottles to a greater share of the Company's contracted revenue sharing
customers. Wholesale Bottle Sales increased five percent from $197,000 in the
first quarter of 1996 to $205,000 in the first quarter of 1997 as the Company
continued to rebuild its wholesale bottle customer base. Management expects
Wholesale Bottle Sales for 1997 to approximate 1996's performance.
Equipment sales increased 77 percent in the first quarter of 1997 to $93,000
from $52,000 for the comparable first quarter of 1996. Equipment sales, while
contributing incremental
6
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revenue, continue to be a lower priority for the Company. Management expects
equipment sales for 1997 to approximate 1996's performance.
GROSS MARGIN
The Company's total gross margin for the first quarter of 1997 was 52 percent of
total revenues compared with 53 percent of revenues for the first quarter of
1996. This decrease reflected a larger portion of revenues derived from bottle
and equipment sales (typically a lower margin) than contracted revenue sharing
(typically a higher margin) for the comparable periods presented.
The gross margin for contract revenue sharing for the first quarters of 1996 and
1997 was 60 percent of related revenues.
The gross margin for bottle sales was 33 percent of related revenues in the
first quarter of 1997. This margin compares to 35 percent of related revenues
in the first quarter of 1996. 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 24 percent of related revenues in the
first quarter of 1997 compared to 30 percent of related revenues in the first
quarter of 1996. 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). During the first quarter of 1997 the
Company's equipment sales consisted primarily of complete systems.
SELLING, GENERAL AND ADMINISTRATIVE (S,G & A) EXPENSES
Field office S,G & A expenses were $693,000 in the first quarter of 1997, a 4%
increase from field office expense of $670,000 in the first quarter of 1996.
This increase relates primarily to increased vehicle operating costs associated
with maintaining the Company's vehicle fleet in a high mileage environment.
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.
Corporate S,G & A expenses were $394,000 in the first quarter of 1997, a less
than one percent increase from corporate S,G & A expenses of $391,000 in the
first quarter of 1996. The increase in corporate S,G & A expenses for all
periods presented was primarily driven by the Company's wholly-owned Mexican
subsidiary as the general Mexican economy is inflationary which has resulted in
increased wages, rents, utilities, fuels and various other expenses necessary to
operate the business.
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Other expense, the only line item between operating loss and net loss, consisted
primarily of net interest expense for all periods presented.
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.
First First
Quarter Quarter Percentage
1997 1996 Change
-------- ------- ----------
Total revenues $135,000 $99,000 37%
Operating loss ($9,000) ($3,000) 160%
LIQUIDITY AND CAPITAL RESOURCES
The Company had net cash provided by operating activities of $164,000 in the
first quarter of 1997, an increase of 20 percent compared to $131,000 of net
cash provided by operating activities in the first quarter of 1996. The primary
contributor to the improvement in net cash provided by operating activities in
the first quarter of 1997 was the reduction in the net loss.
The Company invested $318,000 in property and equipment in the first quarter of
1997, a decrease of 33 percent from the $478,000 invested in the first quarter
of 1996. The first quarter of 1996 included a $135,000 buy-out of leased
equipment. After adjusting for this lease buy-out in the first quarter of 1996
the remaining 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 Company will continue its efforts to more properly align its
investment strategies with its cash flow availability.
On February 18, 1997, the Company and its principal bank lender amended and
restated its term loan agreement. The agreement combined two outstanding term
loans into one term loan facility to be repaid in equal monthly principal
installments plus accrued interest at the bank's reference rate plus 3.75
percent, with a final principal payment plus accrued interest due in February
2000. Borrowings under the amended and restated term loan are collateralized by
substantially all of the Company's assets, subordinate to a leasing company's
collateral interest in certain leased dispensing equipment. The agreement also
contains a provision that if the Company did not obtain commitments for at least
$1,000,000 of new subordinated debt financing by March 1, 1997, and have
received proceeds of at least $1,000,000 by April 30, 1997, an event of default
would occur. The agreement also requires
8
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that 30 percent of the gross proceeds of the subordinated debt are to be used
to pay down the principal balance with its bank lender (see following
paragraph).
In February 1997, the Company obtained commitments for the purchase of a series
of subordinated notes payable from shareholders and accredited investors
sufficient to meet the provisions of the amended and restated term loan
agreement. The notes bear interest at 14 percent payable monthly and are due in
March 2000. In addition, warrants were offered in conjunction with the notes at
the rate of one warrant for each five dollars in notes payable. By April 30,
1997, the Company received $1,000,000 of proceeds from these subordinated notes
payable and paid down $300,000 of its amended and restated term loan with its
principal bank lender.
The Company currently does not have any borrowing capacity available under its
credit facilities. To maintain the Company's current growth strategy,
management believes the Company will need to raise additional financing by late
1997. 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: 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 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.
9
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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 24, 1997. There were 6,709,627 shares present
individually or by proxy representing 83.4 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, W. R. Griffin,
D. A. Henderson and G.F. Stofer received at least
6,675,004 votes for.
2. To approve the selection of Coopers & Lybrand L.L.P.,
as independent auditors for the current fiscal year.
votes for 6,667,477
votes against 38,550
votes abstained 3,600
broker non-votes 0
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.
10
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Exhibit No. Description
- ----------- -----------
4.1 Subordinated Note dated February 18, 1997, executed
by Harmony Brook, Inc. in favor of Donald R.
Brattain. Subordinated Notes were also entered into
with W. William Bednarczyk, Richard Nikolaev,
William Griffin, Alan Eidsness, Kenneth Macke,
Linnea Van Dyne, Patrick Norton, Kenneth Larson,
John Yeaman IRA, Mervin Kirluik, Cherry Tree
Ventures IV and Donald Brattain that were identical
with Mr. Brattain's note, except that the principle
amount of the loans were, respectively, $200,000 for
William Bednarczyk, $100,000 for Richard W.
Nikolaev, $50,000 for William Griffin, $50,000 for
Alan Eidsness, $50,000 for Kenneth Macke, $25,000
for Linnea Van Dyne, $100,000 for Patrick Norton,
$50,000 for Kenneth Larson, $25,000 for John Yeaman
IRA, $30,000 for Mervin Kirluik, $100,000 for Cherry
Tree Ventures IV and $20,000 for Donald R. Brattain.
4.2 Warrant dated February 18, 1997, granted to Donald R.
Brattain. Warrants that were identical to
Mr. Brattain's were also granted to other persons
referenced in the description of Exhibit 4.1 above,
except the number of Warrants granted were,
respectively, 40,000 for W. William Bednarczyk,
20,000 for Richard Nikolaev, 10,000 for William
Griffin, 10,000 for Alan Eidsness, 10,000 for
Kenneth Macke, 5,000 for Linnea Van Dyne, 20,000 for
Patrick Norton, 10,000 for Kenneth Larson, 5,000 for
John Yeaman IRA, 6,000 for Mervin Kirluik, 20,000
for Cherry Tree Ventures IV , and 4,000 for Donald R.
Brattain.
27.1 Financial Data Schedule (EDGAR filing only)
11
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(b) REPORTS ON FORM 8-K:
There were no reports on form 8-K filed during the quarter
ended March 31, 1997 or during the period from March 31,
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: May 12, 1997 By: /s/ James C. Hawley
----------------------------
James C. Hawley
President
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
4.1 Subordinated Note dated February 18, 1997, executed
by Harmony Brook, Inc. in favor of Donald R.
Brattain. Subordinated Notes were also entered into
with W. William Bednarczyk, Richard Nikolaev,
William Griffin, Alan Eidsness, Kenneth Macke,
Linnea Van Dyne, Patrick Norton, Kenneth Larson,
John Yeaman IRA, Mervin Kirluik, Cherry Tree
Ventures IV and Donald Brattain that were identical
with Mr. Brattain's note, except that the principle
amount of the loans were, respectively, $200,000 for
William Bednarczyk, $100,000 for Richard W.
Nikolaev, $50,000 for William Griffin, $50,000 for
Alan Eidsness, $50,000 for Kenneth Macke, $25,000
for Linnea Van Dyne, $100,000 for Patrick Norton,
$50,000 for Kenneth Larson, $25,000 for John Yeaman
IRA, $30,000 for Mervin Kirluik, $100,000 for Cherry
Tree Ventures IV and $20,000 for Donald R. Brattain.
4.2 Warrant dated February 18, 1997, granted to Donald R.
Brattain. Warrants that were identical to
Mr. Brattain's were also granted to other persons
referenced in the description of Exhibit 4.1 above,
except the number of Warrants granted were,
respectively, 40,000 for W. William Bednarczyk,
20,000 for Richard Nikolaev, 10,000 for William
Griffin, 10,000 for Alan Eidsness, 10,000 for
Kenneth Macke, 5,000 for Linnea Van Dyne, 20,000 for
Patrick Norton, 10,000 for Kenneth Larson, 5,000 for
John Yeaman IRA, 6,000 for Mervin Kirluik, 20,000
for Cherry Tree Ventures IV , and 4,000 for Donald R.
Brattain.
27.1 Financial Data Schedule (EDGAR filing only)
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THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER
EITHER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED,
PLEDGED OR OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS COVERING
SUCH SECURITIES, OR THE MAKER RECEIVES AN OPINION OF COUNSEL
ACCEPTABLE TO THE MAKER STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT,
OFFER, PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND SUCH
LAWS.
14% SUBORDINATED
SECURED NOTE
$200,000 February 18, 1997
FOR VALUE RECEIVED, the undersigned, HARMONY BROOK, INC., a Minnesota
corporation (the "Maker"), hereby promises to pay to the order of Donald R.
Brattain (the "Payee," which term includes any subsequent holder hereof) at such
place as the Payee may from time to time hereafter designate to the Maker in
writing the principal sum of TWO HUNDRED THOUSAND DOLLARS ($200,000).
The unpaid principal balance hereof from time to time outstanding shall
bear interest at a fixed rate of fourteen percent (14%) per annum. Interest
shall be computed on the basis of actual days elapsed and a year of 360 days.
Interest shall be payable monthly in arrears on the first day of each month for
the preceding month commencing April 1, 1997, and at maturity.
The principal hereof mature and is payable in full on March 1, 2000.
This Note is secured pursuant to a Security Agreement of even date herewith
(as the same may hereafter be amended, modified or supplemented, or any
agreement entered into in substitution or replacement therefor, the "Security
Agreement") given by the Maker to the Payee. This note is also subject to the
terms and conditions of the Subordination Agreement of even date herewith
between the Maker and First Bank National Association (the "Subordination
Agreement").
For purposes of this Note, an Event of Default shall be deemed to have
occurred if:
(i) the Maker fails to pay when due the full amount of any scheduled
interest and principal payment on this Note;
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(ii) the Maker makes an assignment for the benefit of creditors or admits
in writing its inability to pay its debts generally as they become due; or an
order, judgment or decree is entered adjudicating the Maker bankrupt or
insolvent; or any order for relief with respect to the Maker is entered under
the Federal Bankruptcy Code; or the Maker petitions or applies to any tribunal
for the appointment of a custodian, trustee, receiver or liquidator of the
Maker, or of any substantial part of the assets of the Maker, or commences any
proceeding (other than a proceeding for the voluntary liquidation and
dissolution of any subsidiary) relating to the Maker under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction; or any such petition or application is
filed, or any such proceeding is commenced, against the Maker and either (A) the
Maker by any act indicates its approval thereof, consent thereto or acquiescence
therein or (B) such petition, application or proceeding is not dismissed within
60 days; or
Subject to the terms of the Subordination Agreement, if an Event of Default
of the type described in (i) has occurred and continues for 10 days, the Payee
may demand (by written notice delivered to the Maker) immediate payment of all
or any portion of the outstanding principal amount of and interest accrued on
this Note. If an Event of Default of the type described in (ii) has occurred,
the outstanding principal amount of this Note (plus accrued interest thereon)
shall become immediately due and payable without demand therefor or notice
thereof. If the Payee demands immediate payment of all or any portion of this
Note or the principal amount of this Note becomes immediately due and payable,
the Maker shall promptly pay to Payee the principal amount of this Note
requested to be paid or which has become immediately due and payable (plus
accrued interest thereon).
Subject to the provisions of the Subordination Agreement, the Payee shall
also have any other rights which he may have been afforded under any contract or
agreement at any time and any other rights which he may have pursuant to
applicable law.
Except as otherwise expressly provided herein, the provisions of this Note
may be amended and the Maker may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Maker has
obtained the written consent of the Payee.
After all principal and accrued interest at any time owed on this Note has
been paid in full, this Note shall be surrendered to the Maker for cancellation
and shall not be reissued.
THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT
TO CONFLICT OF LAWS PRINCIPLES THEREOF.
The Maker hereby waives presentment for payment, notice of dishonor,
protest and notice of protest.
If this Note is not paid when due, the Maker shall pay all of the Payee's
costs of collection including reasonable attorneys' fees.
<PAGE>
THE INDEBTEDNESS CREATED HEREBY IS EXPRESSLY MADE SUBORDINATE TO CERTAIN
SENIOR DEBT OF FIRST BANK NATIONAL ASSOCIATION, A NATIONAL BANKING ASSOCIATION
(THE "BANK"), PURSUANT TO THE PROVISIONS OF A SUBORDINATION AGREEMENT OF EVEN
DATE HEREWITH AMONG THE MAKER, THE PAYEE AND THE BANK.
HARMONY BROOK, INC.
By /s/ JAMES C. HAWLEY
-------------------------------------
James C. Hawley, President
<PAGE>
Exhibit No. 4.2
WARRANT
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM.
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT") OR ANY APPLICABLE STATE SECURITIES LAWS. NEITHER THIS WARRANT NOR
THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF MAY BE TRANSFERRED TO ANYONE
UNTIL (I) A REGISTRATION STATEMENT UNDER THE ACT SHALL HAVE BECOME EFFECTIVE
WITH REGARD THERETO, OR (II) IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO
THE COMPANY, REGISTRATION UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS
IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER. INVESTORS SHOULD BE
AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME.
No. 1997A-2 Warrant to Subscribe for
40,000 Shares
STOCK SUBSCRIPTION WARRANT
To Subscribe For and Purchase Common Stock of
HARMONY BROOK, INC.
THIS WARRANT CERTIFIES THAT, for value received, Donald R. Brattain is
entitled to subscribe for and purchase from Harmony Brook, Inc., a Minnesota
corporation (the "Company"), an aggregate of 40,000 shares of Common Stock of
the Company at an exercise price of $.56 per share from the date hereof through
February 18, 2002.
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE OF WARRANT. The rights represented by this Warrant may be
exercised by the holder hereof, in whole or in part (but not as to a fractional
share of Common Stock), at any time through February 18, 2002, by written notice
of exercise delivered to the Company and by the surrender of this Warrant
(properly endorsed if required) on the exercise date at the principal office of
the Company accompanied by payment by certified check of the purchase price for
such shares. The Company agrees that the shares so purchased shall be and are
deemed to be issued to the holder
<PAGE>
hereof as the record owner of such shares as of the close of business on the
date on which this Warrant shall have been surrendered and payment made for
such shares as aforesaid.
2. EXERCISE PERIOD. Notwithstanding any other provision of this Warrant,
this Warrant may be exercised only at such time as the Common Stock issuable to
the holder hereof upon exercise may be issued to such holder pursuant to an
exemption from registration under federal or state securities laws.
3. RESTRICTIONS ON TRANSFER OF WARRANT AND COMMON STOCK. Neither this
Warrant nor the Common Stock purchasable upon the exercise of this Warrant have
been registered under the Securities Act of 1933, as amended, or state
securities laws. Neither this Warrant nor such Common Stock may be sold,
transferred, pledged or otherwise disposed of except pursuant to registration
under the Act and under applicable state securities laws, or until the Holder
has obtained an opinion of counsel satisfactory to the Company and its counsel
to the effect that such registration is not required. The Company will cause
the following legend or one similar thereto to be set forth on each certificate
representing shares of Common Stock issuable upon exercise of this Warrant:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT") OR ANY APPLICABLE STATE SECURITIES LAWS.
THESE SECURITIES MAY NOT BE TRANSFERRED TO ANYONE UNTIL (i) A
REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) IN THE
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, REGISTRATION
UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED
IN CONNECTION WITH SUCH PROPOSED TRANSFER. INVESTORS SHOULD BE AWARE
THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS
INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
4. DEMAND REGISTRATION. (a) Subject to subparagraphs (b) and (c) below,
the holders of not less than 75% of the shares issued or issuable upon exercise
of the Company's Series 1997A Warrants may request, in writing, registration
under the Act for resale of all, but not less than all, of the Common Stock
purchasable upon the exercise of such Warrants. The Company shall determine
which registration form to utilize.
(b) The holder hereof shall be entitled to one (1) such demand
registration pursuant to Section 4(a), which shall be requested no later than
March 15 of any year through 2001.
(c) The Company shall pay all costs and expenses of the registration
except for the fees of the holder's legal counsel and the payment of
underwriter's commissions and expenses relating to the registration of the
holder's Common Stock which costs and expenses shall be the responsibility of
the holder.
-2-
<PAGE>
5. PIGGYBACK REGISTRATION. (a) Subject to subparagraphs (b), (c) and
(d) below, if prior to December 31, 2001, the Company proposes to register
any of its Common Stock under the Act covering a public offering of such
Common Stock (other than on Forms S-4, S-8, S-15 or other similarly
inappropriate form or primarily a registration for Common Stock proposed to
be issued in exchange for securities or assets of, or in connection with a
merger or consolidation with another corporation), it shall promptly notify
the holder hereof prior to such filing and will include in such registration
(to the extent permitted by applicable state and federal regulations) resale
by the holder hereof of all or any part of the Common Stock purchasable upon
the exercise of this Warrant as requested by the holder hereof.
(b) If the offering to which the registration relates is to be
distributed by or through an underwriter or underwriters, then, at the option
of such underwriter or underwriters and as a condition to the inclusion of
all or any part of such Common Stock in such registration, the Common Stock
shall be sold through such underwriter or underwriters on the same terms and
conditions as the underwriter or underwriters agree to sell the shares of
Common Stock on behalf of the Company. The Company may, in its sole
discretion, withdraw any such registration and abandon the proposed offering
in which the holder hereof had requested to participate without the consent
of, or liability or obligation to, the holder hereof. If the registration
has not become effective within six (6) months following the date such notice
is given to the holder hereof, the Company must again notify the holder
hereof in the manner provided in subparagraph (a) above.
(c) the holder hereof shall be entitled to one (1) piggyback
registration at any time after the date hereof, and prior to February 18,
2002.
(d) The Company shall pay all costs and expenses of the registration
except for the fees of the holder's legal counsel, costs or expenses with
respect to the holder's compliance with the securities laws of any state
incurred as a direct result of any action or request of the holder hereof
which would not otherwise have been incurred by the Company, and the payment
of underwriter's commissions and expenses relating to the registration of the
subject Common Stock, and the Company shall not be responsible for such costs
and expenses.
6. DELIVERY OF STOCK CERTIFICATES. Certificates for the shares of
stock purchased pursuant to the exercise of this Warrant shall be delivered
to the holder hereof within a reasonable time, not exceeding thirty (30)
days, after the rights represented by this Warrant shall have been so
exercised and, unless this Warrant has expired, a new Warrant representing
the number of shares, if any, with respect to which this Warrant shall not
then have been exercised shall also be delivered to the holder hereof within
such time.
7. COVENANTS OF COMPANY. The Company covenants that all shares which
may be issued upon the exercise of the rights represented by this Warrant
will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof. The Company further covenants and agrees that during the
period within which the rights represented by this Warrant may be exercised:
-3-
<PAGE>
(a) the Company will at all times have authorized, and reserved for the
purpose of issue or transfer upon exercise of the subscription rights
evidenced by this Warrant, a sufficient number of shares of its Common Stock
to provide for the exercise of the rights represented by this Warrant;
(b) the Company shall, upon request, furnish the holder hereof annual
financial statements of the Company, including a balance sheet, statement of
profit and loss and statement of retained earnings, within ninety (90) days
following the end of the fiscal year of the Company and quarterly unaudited
financial statements of the Company within forty-five (45) days following the
end of each fiscal quarter; and
(c) that the holder hereof may reasonably examine the Company's books
and records at its principal place of business during normal business hours,
upon five (5) days notice.
8. ADJUSTMENTS. The above provisions are subject to the following:
(a) The warrant exercise price shall be subject to adjustment from time
to time as hereinafter provided. Upon each adjustment of the warrant
exercise price, the holder of this Warrant shall thereafter be entitled to
exercise, at the warrant exercise price resulting from such adjustment, the
number of shares obtained by multiplying the warrant exercise price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the warrant exercise price resulting from such adjustment.
(b) In case the Company shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares, the warrant exercise
price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares of
Common Stock of the Company shall be combined into a smaller number of
shares, the warrant exercise price in effect immediately prior to such
combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of Common Stock
shall be entitled to receive stock, securities or assets with respect to or
in exchange for Common Stock, then provision shall be made whereby the holder
hereof shall thereafter have the right to purchase and receive upon the basis
and upon the terms and conditions specified in this Warrant and in lieu of
the shares of the Common Stock of the Company immediately theretofore
purchasable and receivable upon the exercise of the rights represented
hereby, such shares of stock, securities or assets as may be issued or
payable with respect to or in exchange for a number of outstanding shares of
such Common Stock equal to the number of shares of such stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby had such reorganization, reclassification, consolidation,
merger or sale not taken place, and in any such case appropriate provision
shall be made with respect to the rights and interests of the holder of this
Warrant to the end that the provisions hereof (including without limitation
provisions for adjustments of the warrant exercise price and of the number of
shares purchasable upon the exercise
-4-
<PAGE>
of this Warrant) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise hereof.
(d) In case the Company shall pay or make a dividend or other
distribution on any class of capital stock of the Company in Common Stock,
the exercise price in effect at the opening of business on the day following
the record date for such dividend distribution shall be reduced by
multiplying the current exercise price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the record date and the denominator shall be the sum of such
number of shares and the total number of shares constituting the dividend or
other distribution.
(e) Upon any adjustment of the warrant exercise price, then and in each
such case, the Company shall give written notice thereof, by first class
mail, postage prepaid, addressed to the registered holder of this Warrant at
the address of such holder as shown on the books of the Company, which notice
shall state the warrant exercise price resulting from such adjustment and the
increase or decrease, if any, in the number of shares purchasable at such
price upon the exercise of this Warrant, setting forth in reasonable detail
the method of calculation and the facts upon which such calculation is based.
(f) In case any time:
(1) There shall be any capital reorganization, reclassification of
the capital stock of the Company, or consolidation or merger of the Company
with, or sale of all or substantially all of its assets to another
corporation; or
(2) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company.
then, in any one or more of said cases, the Company shall give written notice,
by first class mail, postage prepaid, addressed to the holder of this Warrant at
the address of such holder as shown on the books of the Company, of the date on
which the books of the Company shall close or a record of shareholders shall be
taken for such event. Such notice shall also specify the date as of which the
holders of Common Stock of record shall participate in such event.
(g) If any event occurs as to which in the opinion of the Board of
Directors the other provisions of this paragraph 8 are not strictly
applicable or if strictly applicable would not fairly protect the purchase
rights of the holder of this Warrant in accordance with the essential intent
and principles of such provisions, then the Board of Directors shall make an
adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such purchase rights as
aforesaid.
9. NO RIGHTS OF STOCKHOLDERS. This Warrant shall not entitle the
holder hereof to any voting rights or other rights as a stockholder of the
Company until the issuance of a certificate for Common Stock hereunder.
-5-
<PAGE>
10. REPRESENTATIONS OF WARRANT HOLDER. The holder hereof, by acceptance
of this Warrant represents and warrants as follows:
(a) the holder hereof is acquiring this Warrant and any shares of Common
Stock purchasable upon the exercise of this Warrant for his/her/its own account,
for investment purposes only and not with a view to resale or distribution, and
the holder hereof has no present intention of selling or otherwise disposing of
this Warrant or such shares of Common Stock.
(b) the holder hereof has had an opportunity to review the books and
records of the Company, has been furnished all documents, records or other
property of the Company, has had the opportunity to review the business and
operations of the Company and has been furnished access to any and all further
documents or officers of the Company for purposes of making its own
investigation into the affairs of the Company.
(c) the holder hereof is an accredited investor as that term is defined in
Regulation D under the Act.
11. NOTICES. All notices provided for hereunder shall be sent by first
class mail, if to the Company at:
Harmony Brook, Inc.
1030 Lone Oak Road
Suite 110
Eagan, MN 55121
Attn: President
with a copy to:
Alan C. Eidsness and Jeffrey N. Saunders
Henson & Efron, P.A.
1200 Title Insurance Building
400 Second Avenue South
Minneapolis, MN 55401
(or such other address as the Company may from time to time notify the holder of
this Warrant), and if to the holder of this Warrant, at the address appearing on
the warrant register maintained by the Company in accordance herewith.
12. GOVERNING LAW. The provisions of this Warrant shall be construed and
governed by the substantive laws of the State of Minnesota without giving effect
to the choice of law provisions thereof.
-6-
<PAGE>
IN WITNESS WHEREOF, HARMONY BROOK, INC. has caused this Warrant to be
signed by its duly authorized officer and this Warrant to be dated this 18th day
of February, 1997.
HARMONY BROOK, INC.
By: /s/ James C. Hawley
------------------------------
EX4-2.WP James C. Hawley, President
-7-
<PAGE>
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
TO: Harmony Brook, Inc., 1030 Lone Oak Road, Suite 110, Eagan, Minnesota
55121
The undersigned, being the owner of this Warrant, hereby irrevocably
elects to exercise the purchase rights represented by this Warrant for and to
purchase hereunder _____ shares of common stock of Harmony Brook, Inc. at a
price of $____ per share, and makes payment of $______ by certified check for
such shares. The undersigned requests that the certificate for such shares
be issued and delivered to the undersigned at the address set forth below.
If such shares purchased shall not be all of the shares purchasable
hereunder, the undersigned requests that a new Warrant of like tenor for the
balance of the shares purchased hereunder be delivered to the undersigned at
the address set forth below.
Dated: ________________
__________________________________
__________________________________
Address
__________________________________
Taxpayer Identification Number or
Social Security Number
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 603
<SECURITIES> 0
<RECEIVABLES> 1172
<ALLOWANCES> (20)
<INVENTORY> 420
<CURRENT-ASSETS> 2223
<PP&E> 13151
<DEPRECIATION> (3899)
<TOTAL-ASSETS> 12169
<CURRENT-LIABILITIES> 1797
<BONDS> 3646
0
0
<COMMON> 11321
<OTHER-SE> (460)
<TOTAL-LIABILITY-AND-EQUITY> 12169
<SALES> 2001
<TOTAL-REVENUES> 2001
<CGS> 960
<TOTAL-COSTS> 960
<OTHER-EXPENSES> 1087
<LOSS-PROVISION> 5
<INTEREST-EXPENSE> 153
<INCOME-PRETAX> (199)
<INCOME-TAX> 0
<INCOME-CONTINUING> (199)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (199)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
