<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, 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 August 8, 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 six months ended June 30, 1997 and 1996 (Unaudited) 1
Condensed Consolidated Balance Sheets as of June 30, 1997
(Unaudited) and December 31, 1996 2
Condensed Consolidated Statements of Cash Flows for the three
and six months ended June 30, 1997 and 1996 (Unaudited) 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2 - Management's Discussion and Analysis of Results of Operations
and Financial Condition 6
Part II - OTHER INFORMATION
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>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Contracted revenue sharing $ 1,526 $ 1,498 $ 2,969 $ 2,896
Bottle sales 565 480 1,030 912
Equipment sales 84 129 177 181
-------- -------- -------- --------
2,175 2,107 4,176 3,989
Cost of revenues:
Contracted revenue sharing 644 564 1,222 1,125
Bottle sales 378 328 690 610
Equipment sales 64 102 134 139
-------- -------- -------- --------
Gross profit 1,089 1,113 2,130 2,115
Selling, general and administrative expenses:
Field office 633 623 1,276 1,291
Corporate 390 401 833 793
-------- -------- -------- --------
Operating income 66 89 21 31
Other expense - net 163 162 317 330
-------- -------- -------- --------
Net loss ($97) ($73) ($296) ($299)
-------- -------- -------- --------
-------- -------- -------- --------
Loss per share ($0.01) ($0.01) ($0.04) ($0.04)
-------- -------- -------- --------
-------- -------- -------- --------
Number of shares used to compute
per share amounts 8,045 8,045 8,045 7,962
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to condensed consolidated
financial statements (unaudited).
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, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 353 $ 377
Accounts receivable, net 1,307 1,096
Inventories 438 435
Other current assets 48 46
----------------- -----------------
Total current assets 2,146 1,954
Property and equipment, net 9,275 9,251
Other assets 669 722
----------------- -----------------
Total assets $ 12,090 $ 11,927
----------------- -----------------
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital lease obligations $ 882 $ 1,243
Accounts payable 615 474
Accrued expenses 368 410
Current portion of deferred income 21 16
----------------- -----------------
Total current liabilities 1,886 2,143
Long-term debt and capital lease obligations,
less current portion 3,402 2,800
Deferred income, less current portion 67 59
----------------- -----------------
Total liabilities 5,355 5,002
Shareholders' equity:
Common stock, no par value, 20,000 shares
authorized, 8,045 issued and outstanding
at June 30, 1997 and December 31, 1996 11,427 11,321
Cumulative foreign currency translation adjustments (460) (460)
Accumulated deficit (4,232) (3,936)
----------------- -----------------
Total shareholders' equity 6,735 6,925
----------------- -----------------
Total liabilities and shareholders' equity $ 12,090 $ 11,927
----------------- -----------------
----------------- -----------------
</TABLE>
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 Statements of Cash Flows
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
For Three Months For Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ($97) ($73) ($296) ($299)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 364 348 702 735
Amortization of deferred income (4) - (8) -
Provision for doubtful accounts 4 3 9 6
Provision for inventory obsolesence 7 8 13 17
Amortization of discount on notes payable 13 6 19 12
Changes in operating assets and liabilities:
Accounts receivable (168) (56) (214) (115)
Inventories (25) (26) (12) (12)
Other current assets - 3 (2) 21
Accounts payable 18 (111) 142 (124)
Accrued expenses 36 29 (41) 21
------ ------ ------ ------
Net cash provided by operating activities 148 131 312 262
------ ------ ------ ------
Cash flows from investing activities:
Purchase and manufacture of property and equipment (400) (242) (719) (719)
Other assets 5 (1) (8) (29)
------ ------ ------ ------
Net cash used in investing activities (395) (243) (727) (748)
------ ------ ------ ------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and warrants 175 - 1,000 -
Principal payments on long-term debt
and capital lease obligations (242) (267) (673) (441)
Proceeds from sale/leaseback transaction 64 - 64 -
Net proceeds from sales of common stock - - - 230
------ ------ ------ ------
Net cash (used in) provided by financing activities (3) (267) 391 (211)
------ ------ ------ ------
Effect of exchange rate changes on cash - 13 - -
------ ------ ------ ------
Net decrease in cash and cash equivalents (250) (366) (24) (697)
Cash and cash equivalents at beginning of period 603 770 377 1,101
------ ------ ------ ------
Cash and cash equivalents at end of period $ 353 $ 404 $ 353 $ 404
------ ------ ------ ------
------ ------ ------ ------
Supplemental cash flow information:
Cash paid for interest charges $ 145 $ 162 $ 252 $ 297
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED).
3
<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
six months ended June 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 June 30, 1997 and December 31, 1996 consisted of the following:
(IN THOUSANDS)
June 30, 1997 December 31, 1996
------------- -----------------
Bottles $351 $353
Raw materials, expected to be sold
to customers as equipment sales 87 82
---- ----
Total $438 $435
---- ----
---- ----
4
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3. EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE,
is effective for the Company in the fourth quarter of 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.
5
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FORM 10-QSB
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, 1997 were $2,175,000 compared
with revenues of $2,107,000 for the quarter ended June 30, 1996, an increase of
three percent. For the first six months of 1997, revenues were $4,176,000, an
increase of five percent over revenues of $3,989,000 reported for the first six
months of 1996.
Contracted revenue sharing sales for the second quarter of 1997 were $1,526,000.
This represented a two percent increase over the prior year's second quarter
contract revenue sharing sales of $1,498,000. For the first six months of 1997,
contracted revenue sharing sales were $2,969,000 compared to $2,896,000 for the
first six months of 1996, an increase of three 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, 1997, the
Company had 1,557 domestic customer locations installed, compared with 1,529 at
June 30, 1996. In addition, the Company had 110 customer locations installed in
Mexico at June 30, 1997 compared with 103 at June 30, 1996. The total customer
locations at June 30, 1997 was 1,667 compared with 1,632 at June 30, 1996, a two
percent increase. Domestic revenues for customer locations in place at both
June 30, 1997 and 1996 grew four percent, while the increase in retail gallons
dispensed increased six percent. The Company has experienced increased
competition for customers in several of its key Midwest markets, primarily in
the form of pricing, which has contributed significantly to a slowing of growth
rates for customer locations and revenue from dispensed gallons of water.
Bottle sales increased 18 percent in the second quarter of 1997 to $565,000 from
$480,000 for the comparable second quarter of 1996. Bottle sales increased 13
percent for the first six months of 1997 to $1,030,000 compared to $912,000 in
the first six 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 nine percent in the comparable second quarters
from $277,000 in 1996 to $251,000 in 1997. In the first six months Premium
Bottle Sales decreased from $513,000 in 1996 to $512,000 in 1997. Wholesale
Bottle Sales increased by 55 percent in the second quarter ($203,000 in 1996 to
$314,000 in 1997) and 30 percent in the first six months ($399,000 in 1996 to
$518,000 in 1997) of 1997. The
6
<PAGE>
second quarter decrease in Premium Bottle Sales is due to changes in customer
locations that were precipitated by increased competition, as well as brief
periods when certain routes went uncovered as a result of changes in personnel.
The increases in Wholesale Bottles are 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 second quarter and first six months of
1997 was 50 and 51 percent, respectively, of revenues compared with 53 percent
of revenues for the second quarter and first six months of 1996. These
decreases reflect primarily the impact of competition and increased product
quality testing in the Company's core business segment, contracted revenue
sharing.
The gross margin for contracted revenue sharing for the second quarter of 1997
was 58 percent of related revenues and 59 percent of related revenues for the
first six months of 1997. The comparable gross margins for 1996 were 62 and 61
percent of related revenues for the second quarter and first six months,
respectively. These decreases are related to two factors. First, competition
has forced pricing concessions resulting in lower sales revenues per gallon.
Second, as a way to further assure product quality and distinguish itself from
competition, the Company has increased the frequency of water testing and its
related costs. The Company expects the margin in this segment to remain
relatively stable for the balance of 1997.
The gross margins for bottle sales were 33 percent of related revenues in both
the second quarter of 1997 and first six months of 1997. These margins compare
to 32 percent of related revenues in the second quarter of 1996 and 33 percent
of related revenues in the first six months of 1996.
The gross margin for equipment sales was 24 percent of related revenues in the
second quarter of 1997 compared to 21 percent of related revenues in the second
quarter of 1996. For the first six months of 1996 and 1997 the gross margin for
equipment sales was 24 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 $633,000 in the second quarter of 1997, a two
percent increase from field office expense of $623,000 in the comparable second
quarter of 1996. For the first six months of 1997 and 1996 field office
expenses were $1,276,000 and $1,291,000, respectively, a decrease of one
percent. Compensation expense decreased due to employee turnover offset by
increased vehicle expenses due to the Company's aging fleet for the second
7
<PAGE>
quarter and first six months of 1997. No new geographic territories were
entered for all periods presented, although two service routes were added in
existing territories.
Corporate S,G & A expenses were $390,000 in the second quarter of 1997, a three
percent decrease from corporate expenses of $401,000 in the second quarter of
1996. For the first six months of 1997 corporate S,G & A expenses were $833,000
compared to $793,000 in the first six months of 1996, a five percent increase.
This increase in the first six months of 1997 is primarily attributable to
increased Mexican subsidiary expenses related to added personnel and a high
inflation environment.
OPERATING INCOME AND NET LOSS
Operating income is reported for all periods presented. Other expense, the only
line item between operating profit 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 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.
<TABLE>
<CAPTION>
Second Second First Six First Six
Quarter Quarter Percentage Months Months Percentage
1997 1996 Change 1997 1996 Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $151,000 $134,000 13% $286,000 $233,000 23%
- -------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss) $2,000 $13,000 (85%) ($7,000) $9,000 nm
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
nm = not meaningful
LIQUIDITY AND CAPITAL RESOURCES
The Company had net cash provided by operating activities of $148,000 in the
second quarter of 1997 compared to $131,000 of net cash provided by operating
activities in the second quarter of 1996. In the first six months of 1997 the
Company had $312,000 of net cash provided by operations compared to $262,000 of
net cash provided by operating activities in the first six months of 1996. The
primary contributor to the improvement in net cash provided by operating
activities in both the second quarter and first six months of 1997 was an
increase in accounts payable. The increase in accounts payable was offset by an
increase in
8
<PAGE>
accounts receivable. Cumulative changes in all other operating activity areas
were small compared to the changes in accounts payable and accounts receivable
for all periods presented.
The Company invested $400,000 in property and equipment in the second quarter of
1997, an increase of 65 percent from the $242,000 invested in the second quarter
of 1996. For the first six months of 1996 and 1997 the Company invested
$719,000 in property and equipment. The first six months of 1996 included a
$135,000 buy-out of leased equipment. After adjusting for this lease buy-out in
the first six months 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 increase in investment of property and
equipment is primarily driven by extensive capital refurbishment of the
Company's older systems.
On June 30, 1997, the Company entered into a sale/leaseback agreement with a
shareholder and board member for dispensing equipment. Under the terms of the
agreement, ten systems were sold for $63,450 and were leased back by the Company
pursuant to a five-year operating lease for placement and operation in one
supermarket chain. This lease requires a monthly payment of $1,400 and requires
the Company to service and maintain the equipment. Deferred income of $21,000
is being amortized as a reduction of cost of revenues on a straight-line basis
over the lease term.
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 ALL 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.
9
<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 Page No.
----------- ----------- --------
27.1 Financial Data Schedule 11
(EDGAR filing only)
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the quarter
ended June 30, 1997 or during the period from June 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: August 8, 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-31-1997 DEC-31-1997
<PERIOD-START> MAR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 353 353
<SECURITIES> 0 0
<RECEIVABLES> 1307 1307
<ALLOWANCES> (21) (21)
<INVENTORY> 438 438
<CURRENT-ASSETS> 2146 2146
<PP&E> 9275 9275
<DEPRECIATION> (4207) (4207)
<TOTAL-ASSETS> 12090 12090
<CURRENT-LIABILITIES> 1886 1886
<BONDS> 3469 3469
0 0
0 0
<COMMON> 11427 11427
<OTHER-SE> (460) (460)
<TOTAL-LIABILITY-AND-EQUITY> 12090 12090
<SALES> 2175 4176
<TOTAL-REVENUES> 2175 4176
<CGS> 1086 2046
<TOTAL-COSTS> 2109 4155
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (3) (3)
<INTEREST-EXPENSE> 163 317
<INCOME-PRETAX> (97) (296)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (97) (296)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (97) (296)
<EPS-PRIMARY> (.01) (.04)
<EPS-DILUTED> (.01) (.04)
</TABLE>
