SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
(X) Preliminary Proxy Statement ( ) Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
( ) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
HARMONY PRODUCTS, INC.
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
(X) No fee required
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
( ) Fee paid previously with preliminary materials.
( ) Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule, or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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[HARMONY LETTERHEAD]
December __, 1996
Dear Shareholder:
Harmony Products, Inc. (the "Company") recently signed an agreement
with Environmental Fertilizer Corporation ("EFC"), under which EFC proposes to
acquire the Company through a merger that will provide to our shareholders $2.00
in cash for each share held by them. This transaction culminates a long and
intensive search by the Company's senior management and Board of Directors for a
suitable merger partner. Your Board of Directors has retained the investment
banking firm of Scott & Stringfellow, Inc. to act as its financial advisor in
connection with the proposed transaction with EFC. As discussed in the
accompanying Proxy Statement, Scott & Stringfellow has delivered to the Board of
Directors its written opinion that, as of this date, the terms of the
transaction are fair from a financial point of view to the Company's
shareholders.
The accompanying Proxy Statement describes the transaction in detail
and its effects on the Company's shareholders. The Proxy Statement also
describes in detail certain investments by members of the Company's Board of
Directors in non-voting preferred stock of EFC. A meeting of shareholders to
vote on the transaction will be held on December __, 1996. The notice of that
meeting is included with the Proxy Statement. You may participate in this
important meeting by promptly signing, dating and returning the accompanying
proxy card. The Board of Directors has recommended that you vote for the
approval of the transaction with EFC.
Please review the Proxy Statement and send in your proxy, indicating
your vote on the transaction, as soon as possible. Because the meeting is
scheduled for December __, 1996 and the solicitation of proxies will occur
during the holiday season, we request that you give this matter prompt attention
so that the transaction can be consummated as scheduled. We will communicate
with you later about the actual exchange of your stock certificates for your
cash payment. You do not need to do anything now, other than complete, sign,
date and return your proxy card in the accompanying envelope.
Very truly yours,
Gregory R. Gill
Director, President and Chief
Executive Officer
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Notice of Special Meeting of Shareholders
To Be Held on December __, 1996
To the Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the
"Special Meeting") of Harmony Products, Inc. (the "Company") will be held at
9:00 a.m., December __, 1996, at the Harbor Club, One Commercial Place, 21st
Floor, NationsBank Building, Norfolk, Virginia 23510 for the following purposes:
(1) To consider and vote upon the approval of a Plan and Agreement
of Merger dated as of November 21, 1996 (the "Merger
Agreement") between the Company and Environmental Fertilizer
Corporation, a newly formed Virginia corporation ("EFC"),
pursuant to which (a) the Company would be merged with and
into EFC, with EFC surviving and conducting future operations
under the name Harmony Products, Inc. (the "Merger"), and (b)
all issued and outstanding shares of common stock of the
Company ("Harmony Common Stock") (other than shares held by
EFC or its subsidiaries and shares held by persons who
properly perfect dissenters' rights under Virginia law) would
be converted into the right to receive $2.00 in cash, all as
more fully described in the accompanying Proxy Statement. A
copy of the Merger Agreement is attached as Exhibit A to the
Proxy Statement. For information regarding investments by
members of the Company's Board of Directors prior to the date
of this Proxy Statement in non-voting preferred stock of EFC,
see "Interests of Certain Persons in the Merger."
(2) To transact such other business as may properly come before
the meeting or any adjournment or adjournments thereof.
Only holders of record of Harmony Common Stock at the close of business
on November 22, 1996, the record date for determination of shareholders entitled
to notice of and to vote at the Special Meeting, are entitled to notice of and
to vote at the Special Meeting and any adjournment thereof. If the Merger is
consummated, shareholders who do not vote for the Merger and who comply with the
requirements of applicable Virginia law have the right to be paid the fair value
of their shares. The right of any such shareholder to receive such payment is
contingent upon strict compliance with the requirements set forth in Article 15
of the Virginia Stock Corporation Act, the full text of which is attached as
Exhibit B to the Proxy Statement. See "Rights of Dissenting Shareholders" in the
accompanying Proxy Statement.
Approval of the Merger will require the affirmative vote of more than
two-thirds of the votes entitled to be cast by the holders of Harmony Common
Stock. The Board of Directors of Harmony recommends that shareholders vote for
approval of the Merger. Whether or not you plan to attend the Special Meeting,
please complete, date, and sign the enclosed form of Proxy and return it
promptly in the enclosed postage paid return envelope in order to ensure that
your shares will be represented at the Special Meeting. Please do not send in
any certificates for your shares at this time.
--------------------------------
Raymond E. Grover, Secretary
December __, 1996
Chesapeake, Virginia
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PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
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Page
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INTRODUCTION........................................................................ 1
General.................................................................... 1
Matters to Be Considered at the Special Meeting............................ 1
Voting and Proxies......................................................... 1
INFORMATION INCORPORATED BY REFERENCE............................................... 3
DOCUMENTS DELIVERED WITH THIS PROXY STATEMENT....................................... 3
SUMMARY............................................................................. 4
The Special Meeting........................................................ 4
The Merger................................................................. 4
Effective Time............................................................. 5
Opinion of Financial Advisor............................................... 5
Consideration To Be Received by Company Shareholders....................... 5
Cancellation of Outstanding Stock Options.................................. 6
Conditions to the Merger................................................... 6
Interests of Certain Persons in the Merger................................. 6
Rights of Dissenting Shareholders.......................................... 7
Federal Income Tax Consequences of the Merger.............................. 7
Market Prices of and Dividends on the Common Shares........................ 8
Selected Financial Data.................................................... 8
Business of the Company.................................................... 8
Business of EFC............................................................ 8
THE MERGER.......................................................................... 9
Introduction............................................................... 9
Reasons for the Transaction................................................ 9
Opinion of Financial Advisor............................................... 11
Accounting Treatment....................................................... 14
THE MERGER AGREEMENT................................................................ 15
Consideration To Be Received by Company Shareholders....................... 15
Cancellation of Outstanding Stock Options.................................. 15
Dissenters' Rights......................................................... 15
The Effective Time......................................................... 15
Payment for Shares......................................................... 16
The Funds.................................................................. 16
Conditions and Covenants................................................... 16
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<CAPTION>
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Indemnification............................................................ 18
Termination of Merger Agreement............................................ 18
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER....................................... 19
RIGHTS OF DISSENTING SHAREHOLDERS................................................... 20
INTERESTS OF CERTAIN PERSONS IN THE MERGER.......................................... 21
EFC Preferred Stock........................................................ 21
Employment Agreements and Cancellation of Stock Options.................... 23
Ownership of Harmony Directors and Executive Officers of Harmony Common
Stock...................................................................... 24
MARKET PRICES OF AND DIVIDENDS ON THE COMMON SHARES................................. 24
SELECTED FINANCIAL DATA OF THE COMPANY.............................................. 26
BENEFICIAL OWNERSHIP OF THE COMPANY................................................. 27
INFORMATION CONCERNING THE COMPANY AND EFC.......................................... 28
Business of the Company.................................................... 28
Business of EFC............................................................ 28
PROXY SOLICITATION.................................................................. 28
SHAREHOLDER PROPOSALS............................................................... 28
INDEPENDENT ACCOUNTANTS............................................................. 29
ADDITIONAL INFORMATION.............................................................. 29
Exhibit A Plan and Agreement of Merger
Exhibit B Dissenters' Rights Provisions of Virginia Stock
Corporation Act
Exhibit C Fairness Opinion of Scott & Stringfellow, Inc.
</TABLE>
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PROXY STATEMENT
Special Meeting of Shareholders
To Be Held December __, 1996
INTRODUCTION
General
This Proxy Statement is being furnished to holders of shares of common
stock ("Harmony Common Stock") of Harmony Products, Inc., a Virginia corporation
(the "Company"), in connection with the solicitation of proxies by the Board of
Directors of the Company for use at the Special Meeting of Shareholders of the
Company (the "Special Meeting") to be held at the Harbor Club, One Commercial
Place, 21st Floor, NationsBank Building, Norfolk, Virginia 23510 on December __,
1996 at 9:00 a.m., and at any adjournment or adjournments thereof. This Proxy
Statement, the accompanying Notice and the enclosed form of Proxy are being
first mailed to shareholders of the Company on or about December __, 1996.
Matters to Be Considered at the Special Meeting
At the Special Meeting, the shareholders of the Company will be asked
to consider and vote upon a proposal to approve the Plan and Agreement of
Merger, dated as of November 21, 1996 (the "Merger Agreement"), between the
Company and Environmental Fertilizer Corporation, a newly formed Virginia
corporation ("EFC"). The Merger Agreement has been approved by the Board of
Directors of the Company, and the Board of Directors has recommended that the
Merger Agreement be adopted by shareholders. A copy of the Merger Agreement is
attached to this Proxy Statement as Exhibit A.
Pursuant to the Merger Agreement, and subject to shareholder approval,
(i) the Company will be merged with and into EFC, with EFC surviving and
conducting future operations under the name Harmony Products, Inc. (the
"Merger"), and (ii) holders of issued and outstanding shares of Harmony Common
Stock (except shares of Harmony Common Stock held by EFC or its subsidiaries and
shares held by shareholders who properly perfect dissenters' rights under
Virginia law) will be entitled to receive $2.00 per share in cash, without
interest. For information regarding investments by members of the Company's
Board of Directors prior to the date of this Proxy Statement in non-voting
preferred stock of EFC, see "Interests of Certain Persons in the Merger."
Voting and Proxies
The Board of Directors has fixed the close of business on November 22,
1996 as the record date for determination of shareholders entitled to notice of
and to vote at the Special Meeting (the "Record Date"). As of the Record Date,
there were 1,554,929 shares of Harmony Common Stock outstanding (the "Common
Shares"), held of record by approximately 550
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holders. Holders of record of Common Shares on the Record Date are entitled to
one vote per share, exercisable in person or by properly executed proxy, at the
Special Meeting. The presence, in person or by properly executed proxy, of the
holders of a majority of the outstanding Common Shares entitled to vote is
necessary to constitute a quorum at the Special Meeting. The affirmative vote of
the holders of at least two-thirds of all outstanding Common Shares entitled to
vote is required for approval of the Merger Agreement. Abstentions, broker
non-votes, and withheld votes will have the same effect as a vote against the
Merger Agreement. As of the Record Date, directors and executive officers of the
Company owned an aggregate of 1,377,478, or approximately 88.6%, of the
outstanding Common Shares. See "Beneficial Ownership of the Company."
All Common Shares represented at the Special Meeting by properly
executed proxies received prior to or at the Special Meeting, and not revoked,
will be voted at the Special Meeting in accordance with the instructions on the
proxies. If no instructions are indicated, properly executed proxies will be
voted to approve the Merger Agreement. The Board of Directors of the Company
does not know of any matters, other than as described in the Notice of Special
Meeting, which are to come before the Special Meeting. If any other matters are
properly presented to the Special Meeting for action, the persons named in the
enclosed form of proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment.
A proxy given pursuant to this solicitation may be revoked at any time
before it is voted. Proxies may be revoked by filing with the Secretary of the
Company written notice of revocation bearing a later date than the proxy, by
duly executing a subsequent proxy relating to the same Common Shares and
delivering it to the Secretary of the Company, or by attending the Special
Meeting and voting in person (although attendance at the Special Meeting will
not in and of itself constitute revocation of a proxy). Any written notice
revoking a proxy should be sent to the Company's principal executive offices at
808 Live Oak Drive, Suite 126, Chesapeake, Virginia 23320, Attention: Raymond E.
Grover, Secretary.
Shareholders who do not vote to approve the Merger Agreement and who
comply with the requirements of applicable Virginia law have the right to seek
statutory dissenters' rights. See "Rights of Dissenting Shareholders" for a
statement of the rights of dissenting shareholders and a description of the
procedures required to enforce such rights. Common Shares with respect to which
a demand for dissenters' rights has been perfected are sometimes referred to in
this Proxy Statement as "Dissenting Shares."
Except as otherwise expressly stated herein, all information in this
Proxy Statement concerning EFC has been supplied by EFC. Except as otherwise
indicated, all other information contained in this Proxy Statement has been
supplied by the Company. With respect to share information in this Proxy
Statement concerning Harmony Common Stock, all such information has been
adjusted to reflect the Company's one-for-four reverse stock split that became
effective May 6, 1996.
The Transactions To Be Considered at the Special Meeting Involve a
Matter of Great Importance to the Shareholders of the Company. If the Merger is
Consummated, a Cash Payment of $2.00 Per Common Share Will Be Made and
Shareholders' Equity Investment in the Company Will Cease. Accordingly,
Shareholders Are Urged To Read and Consider
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Carefully the Information Summarized Below and Presented Elsewhere in This Proxy
Statement.
INFORMATION INCORPORATED BY REFERENCE
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER THAN
EXHIBITS THERETO, ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS DELIVERED UPON WRITTEN OR ORAL
REQUEST TO HARMONY PRODUCTS, INC., 808 LIVE OAK DRIVE, SUITE 126, CHESAPEAKE,
VIRGINIA 23320, ATTENTION: GREGORY R. GILL, PRESIDENT, (757) 523-2849. IN ORDER
TO INSURE TIMELY DELIVERY OF SUCH DOCUMENTS A REQUEST MUST BE RECEIVED NO LATER
THAN DECEMBER 15, 1996.
The following Company documents filed with the Securities and Exchange
Commission are incorporated by reference herein (Commission File No. 0-19979):
1. Harmony Products, Inc.'s Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995.
2. Harmony Products, Inc.'s Quarterly Reports on Form 10-QSB for
the quarters ended March 31, 1996, June 30, 1996 and September 30, 1996.
3. Harmony Products, Inc.'s Reports on Form 8-K and 8-K/A filed January
11, 1996, April 26, 1996, August 23, 1996 and October 23, 1996.
All documents filed with the Securities and Exchange Commission by the
Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 prior to the date of the Special Meeting are incorporated
herein by reference and such documents will be deemed to be a part hereof from
the date of filing of such documents. Any statement contained in this Proxy
Statement or in a document incorporated or deemed to be incorporated by
reference herein will be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any statement so
modified or superseded will not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement.
DOCUMENTS DELIVERED WITH THIS PROXY STATEMENT
This Proxy Statement is delivered together with (i) the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995, and
(ii) the Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996.
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SUMMARY
The following summary is intended only to highlight certain information
contained in this Proxy Statement. This summary is not intended to be a complete
statement of all features of the Merger and is qualified in its entirety by more
detailed information contained elsewhere in this Proxy Statement, the Exhibits
hereto and other documents referred to in this Proxy Statement. Shareholders Are
Urged To Read This Proxy Statement and the Exhibits in Their Entirety.
The Special Meeting
A special meeting of shareholders of Harmony Products, Inc. (the
"Company") will be held at the Harbor Club, One Commercial Place, 21st Floor,
NationsBank Building, Norfolk, Virginia, 23510 on December __, 1996 at 9:00 a.m.
(the "Special Meeting"). At the Special Meeting, holders of record of the
Company's common stock ("Harmony Common Stock") will be asked to consider and
vote upon a proposal to approve a Plan and Agreement of Merger dated as of
November 21, 1996, (the "Merger Agreement") between the Company and
Environmental Fertilizer Corporation, a newly formed Virginia corporation
("EFC"). A copy of the Merger Agreement is attached to this Proxy Statement as
Exhibit A.
Only record holders of Harmony Common Stock at the close of business on
November 22, 1996 (the "Record Date") will be entitled to notice of and to vote
at the Special Meeting. As of the Record Date, there were 1,554,929 shares of
Harmony Common Stock ("Common Shares") outstanding and entitled to vote. The
presence, in person or by properly executed proxy, of the holders of a majority
of the outstanding Common Shares entitled to vote is necessary to constitute a
quorum at the Special Meeting. See "Introduction-Voting and Proxies."
The Merger
The Merger Agreement provides that, subject to the approval of the
Merger Agreement by the Company's shareholders, and the satisfaction of certain
other conditions, the Company would be merged with and into EFC, with EFC
surviving and conducting future operations under the name Harmony Products, Inc.
(the "Merger"). As a result of the Merger, all Common Shares would be converted
into the right to receive $2.00 in cash.
The Board of Directors has recommended the Merger following an
examination of alternative courses of action by the Company. The Board of
Directors has concluded that the Merger will provide a fair price for the Common
Shares, that the Merger can be concluded on a reasonably prompt basis and,
therefore, that the Merger is in the best interests of shareholders. See "The
Merger - Reasons for the Transaction."
The affirmative vote of the holders of at least two-thirds of all
outstanding Common Shares entitled to vote is required for approval of the
Merger Agreement. As of the Record Date, directors and executive officers of
the Company owned an aggregate of 1,377,478, or approximately 88.6% of the
outstanding Common Shares. See "Introduction-Voting and Proxies."
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Effective Time
The Merger will become effective on the day when a certificate of
merger is issued by the Virginia State Corporation Commission (the "Effective
Time"). The filing of articles of merger, which is necessary for the issuance of
a certificate of merger, will be made as promptly as practicable after the
Special Meeting, and EFC and the Company intend to cause the Effective Time to
be no later than the close of business on December 31, 1996. Such filing will be
made, however, only upon satisfaction (or waiver, where permissible) of certain
conditions contained in the Merger Agreement. See "The Merger Agreement-The
Effective Time," "The Merger Agreement-Conditions and Covenants" and "The Merger
Agreement-Termination of Merger Agreement."
Opinion of Financial Advisor
On November 21, 1996 Scott & Stringfellow, Inc. ("Scott &
Stringfellow"), financial advisor to the Company, delivered an opinion to the
Board of Directors of the Company that the Merger Consideration (as hereinafter
defined) to be received by the shareholders pursuant to the Merger is fair to
such shareholders from a financial point of view. For further information with
respect to Scott & Stringfellow's services as financial advisor, its opinion and
its fee arrangements, see "The Merger - Opinion of Financial Advisor."
Shareholders are urged to read the opinion of Scott & Stringfellow attached
hereto as Exhibit C in its entirety for a description of the procedures
followed, the factors considered and the assumptions made in rendering such
opinion.
Consideration To Be Received by Company Shareholders
As a result of the Merger, each Common Share outstanding immediately
prior to the Effective Time (other than Common Shares held by EFC or its
subsidiaries, and Common Shares held by persons who properly perfect dissenters'
rights under Virginia law ("Dissenting Shares")) will be converted into the
right to receive $2.00 in cash, without interest (the "Merger Consideration").
Promptly after the Effective Time, or at such earlier time as EFC
chooses, cash in an amount sufficient to pay all shareholders the amounts to
which they will become entitled as a result of the Merger will be deposited by
EFC with First Union National Bank of North Carolina, the Company's Transfer
Agent, as exchange agent (the "Exchange Agent"). As soon as practicable after
the Merger, the Exchange Agent will commence distributing cash to each
shareholder upon the surrender by such shareholder of certificates representing
Common Shares accompanied by a duly executed letter of transmittal. After the
Merger, each outstanding certificate which prior thereto represented issued and
outstanding Common Shares shall be deemed for all purposes to represent only the
right of the holder to receive the Merger Consideration (other than Common
Shares held by EFC or its subsidiaries and Dissenting Shares). See "The Merger
Agreement-General," "The Merger Agreement-Payment for Shares" and "Rights of
Dissenting Shareholders." Shareholders should not forward their stock
certificates
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with the enclosed Proxy Card. Transmittal materials and instructions relating to
Certificates will be mailed to shareholders as soon as practicable after the
Effective Time of the Merger.
Cancellation of Outstanding Stock Options
The Merger Agreement provides that all the Company's stock option plans
will be terminated and all options issued pursuant to such plans and not
exercised prior to the Effective Time will be canceled. As of November 15, 1996,
options to purchase a total of 21,937.5 shares of Harmony Common Stock had been
granted to a total of seven Company employees, including three
employee-directors, at exercise prices ranging from $5 to $16 per share pursuant
to the Company's 1991 Incentive Stock Option Plan and 1993 Long-Term Incentive
Plan. Each holder of these options agreed, prior to the date of the Merger
Agreement, to the cancellation of the options without payment of any
consideration therefor.
Conditions to the Merger
The consummation of the Merger is conditioned upon (i) approval of the
Merger Agreement by the shareholders of the Company, (ii) the absence of any
legal or administrative proceeding pending before any court or governmental
authority which seeks to challenge or prevent the Merger, and (iii) the receipt
of all consents from third parties necessary to consummate the transactions
contemplated by the Merger Agreement. See "The Merger Agreement-Conditions and
Covenants."
The obligation of EFC to consummate the Merger is subject to the truth,
in all material respects, of the representations and warranties of the Company,
and the performance by the Company, in all material respects, of all covenants
on its part to be performed under the Merger Agreement. The obligation of the
Company to consummate the Merger is also subject to the truth, in all material
respects, of the representations and warranties of EFC, and the performance by
EFC, in all material respects, of all covenants on its part to be performed
under the Merger Agreement, including the deposit of funds with the Exchange
Agent.
Interests of Certain Persons in the Merger
Effective prior to the date of the Merger Agreement, each director of
Harmony (individually a "Harmony Director" and collectively "Harmony Directors")
entered into a subscription agreement with EFC ("Subscription Agreement")
pursuant to which each Harmony Director agreed to purchase at a price of $2 per
share a number of shares of non-voting, non-convertible preferred stock of EFC
("EFC Preferred Stock") equal to the number of shares of Harmony Common Stock
owned by the Harmony Director. Accordingly, the aggregate purchase price of the
EFC Preferred Stock subscribed for by the Harmony Directors equals the Merger
Consideration to which they are entitled as holders of Harmony Common Stock. For
information on ownership of Harmony Common Stock by the Harmony Directors, see
"Beneficial Ownership of the Company." Pursuant to the terms of the Subscription
Agreement, the Harmony Directors
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paid for the EFC Preferred Stock by delivering to EFC a demand promissory note
(the "EFC Demand Notes") in an amount equal to the purchase price of the EFC
Preferred Stock. The EFC Demand Notes are payable upon the closing of the
Merger, but will be canceled if the Merger is not consummated. The fairness
opinion delivered to the Company by Scott & Stringfellow includes an opinion
that the purchase of EFC Preferred Stock by the Harmony Directors, and the
Merger itself, are fair to the Company. For a discussion of the terms of the EFC
Preferred Stock, see "Interests of Certain Persons in the Merger - EFC Preferred
Stock."
EFC is currently negotiating the terms of employment agreements
("Employment Agreements") with Gregory R. Gill, a Harmony Director and the
Company's President and Chief Executive Officer, Raymond E. Grover, a Harmony
Director and the Company's Executive Vice President and Secretary, and J. Mark
Nuzum, a Harmony Director and President, Plant Products Division. EFC
anticipates finalizing the terms of the Employment Agreements in the near future
and thereby employing these three individuals effective upon the consummation of
the Merger. For a discussion of the basic terms of the Employment Agreements
that have been agreed upon, see "Interests of Certain Persons in the Merger -
Employment Agreements and Cancellation of Stock Options." In addition, certain
employees of the Company, including three employees who are Harmony Directors,
have agreed to a cancellation of certain options to purchase Harmony Common
Stock that were granted under the Company's 1991 Incentive Stock Option Plan and
1993 Long-Term Incentive Plan. See "The Merger Agreement - Cancellation of
Outstanding Stock Options."
The directors and executive officers of the Company beneficially owned
at the Record Date an aggregate of 1,377,478, or 88.6%, of the outstanding
Common Shares. See "Beneficial Ownership of the Company."
Rights of Dissenting Shareholders
Holders of Common Shares who do not vote to approve the Merger
Agreement may dissent from the Merger ("Dissenting Shareholders") and make
written demand for payment in cash of the fair value of their shares of Harmony
Common Stock in lieu of participating in the Merger. Dissenting Shareholders who
do not strictly comply with the procedures set forth in the Virginia Stock
Corporation Act regarding dissenters' rights may lose such rights. See "Rights
of Dissenting Shareholders" and Exhibit B hereto.
Federal Income Tax Consequences of the Merger
The receipt of cash for Common Shares pursuant to the Merger or
pursuant to the exercise of statutory dissenters' rights will be a taxable
transaction for federal income tax purposes to shareholders receiving such cash
(and may be a taxable transaction for state, local and foreign tax purposes as
well). Each shareholder is urged to consult his own tax advisor with respect to
the federal, state, local or foreign tax consequences of the Merger to such
shareholder. See "Federal Income Tax Consequences of the Merger."
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Market Prices of and Dividends on the Common Shares
For information concerning historical market prices of Harmony Common
Stock, see "Market Prices of and Dividends on Common Shares".
Selected Financial Data
For certain financial information relating to the Company, see
"Selected Financial Data of the Company," as well as the Company's Form 10-KSB
for the year ended December 31, 1995 and Form 10-QSB for the quarter ended
September 30, 1996, both of which are being delivered by the Company with this
Proxy Statement.
Business of the Company
The Company was organized by a group of fertilizer executives to
develop, manufacture and market fertilizer and animal feed products. The
Company's management has long believed that a portion of the future growth in
the fertilizer market will be in efficient, slow release organic and organic
based products, as environmental concerns direct greater attention to their
beneficial efforts. The Company's fertilizer product lines range from 100%
organic (all natural) products to "Bridge" products, which have an organic base
and are enhanced with synthetic nutrients. Additionally, research efforts since
the founding of the Company have produced patented processes to convert poultry,
hatchery and slaughterhouse waste products, as well as manures, into animal feed
supplements. Since its inception, the Company has not been profitable and has
not generated sufficient cash flow from operations to fund itself. As a result,
since the Company's inception, members of the Board of Directors have from time
to time provided working capital, equity infusions and credit enhancement to the
Company. The members of the Board of Directors have informed management that
they will no longer provide any significant working capital or credit to the
Company. See "The Merger-Reasons for the Transaction." The Company's principal
executive office is located at 808 Live Oak Drive, Suite 126, Chesapeake,
Virginia 23320 and its telephone number is (757) 523-2849.
Business of EFC
EFC is a newly formed Virginia corporation that has been organized by a
small group of investors for the purpose of acquiring the Company. To date, EFC
has not conducted any business operations or generated any revenue. For
information regarding investments by members of the Company's Board of Directors
prior to the date of this Proxy Statement in non-voting preferred stock of EFC,
see "Interests of Certain Persons in the Merger." EFC's principal executive
office is located at 2540 Professional Road, Suite 5, Richmond, Virginia 23235
and its telephone number is (804) 272-4806.
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THE MERGER
Introduction
At the Special Meeting, a proposal will be submitted to approve the
Merger Agreement providing for the merger of EFC into the Company (the "Merger")
upon the terms, and subject to the conditions, contained in the Merger
Agreement. All references to the terms and conditions of the Merger Agreement in
this Proxy Statement are qualified in their entirety by reference to the Merger
Agreement, which is attached as Exhibit A hereto. Following the Merger, EFC will
conduct operations under the name Harmony Products, Inc. and the former
shareholders of the Company (other than EFC or its subsidiaries and dissenting
shareholders) will be entitled to receive cash in the amount of $2.00 per Common
Share. After the Merger, former Company shareholders will have no other interest
in the Company, other than such rights, if any, as the shareholders may have as
dissenting shareholders. See "Rights of Dissenting Shareholders."
Reasons for the Transaction
The Board of Directors has recommended the Merger following several
months of examination and pursuit of alternative courses of action. The Board of
Directors has concluded that the Merger will provide a fair price for the Common
Shares and that the Merger can be concluded on a reasonably prompt basis and,
therefore, that the Merger is in the best interests of shareholders. The basis
and terms of the Merger were arrived at as a result of arm's-length negotiations
between the managements of EFC and the Company.
Since commencing operations in 1990, the Company has not been
profitable and has not generated sufficient cash flow from operations to fund
itself. As a result, directors of the Company have from time to time been
required to provide working capital and credit enhancement to the Company in
order for the Company to conduct operations. During 1994, directors purchased
$1.2 million of Harmony Common Stock for use as working capital. During 1995,
directors purchased an additional $3.1 million of Harmony Common Stock in an
effort to reduce the Company's debt burden and provide sufficient working
capital. Certain directors of the Company have purchased $466,000 of Harmony
Common Stock during 1996 for use as additional working capital.
The Company's management believes that the equity infusions made to
date by certain of the Company's directors, an additional infusion of
approximately $76,000 expected to be made by certain directors in December 1996
(for which the directors will receive shares of Harmony Common Stock based on
fair market value), and cash generated from operations will provide the Company
with sufficient sources of cash flow until December 31, 1996. However, the
members of the Company's Board of Directors have informed management that the
directors will not contribute any significant additional capital to the Company,
nor will they guarantee any debt financing that the Company may obtain. As a
result, management does not believe that the Company will be able to generate
sufficient cash from any sources to operate the Company
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beyond the end of 1996, nor has management been able to locate any available
alternative methods of financing pursuant to which the Company could continue to
conduct operations.
The Board of Directors has considered pursuing merger negotiations with
third parties ever since directors have been forced to provide working capital
to fund Company operations. As a result of the growing financial crisis facing
the Company, the Board of Directors directed management in early 1996 to begin
negotiations with potential merger partners. After preliminary discussions with
several potential merger partners, the Company entered into a non-binding letter
of intent with Cypress Chemical Company, a privately owned Arkansas corporation
("Cypress") on August 14, 1996. Pursuant to the terms of the letter of intent,
shareholders of the Company were to receive preferred and common stock of
Cypress ("Cypress Stock") valued at $3.45 million. Shareholders of the Company
who were also directors of the Company were to receive Cypress Stock equal to
10.5% of the fully diluted equity of Cypress at closing. Shareholders of the
Company who were not directors were to receive Cypress Stock equal to 5% of the
fully diluted equity of Cypress as of closing. Accordingly, close to one-third
of the consideration in the transaction was to be allocated to non-director
shareholders of the Company even though at the time directors owned over 85% of
the then outstanding shares of Harmony Common Stock. The execution of a
definitive merger agreement between the Company and Cypress was conditioned upon
both parties' business, legal and financial review of the other party. After
extending the due diligence period until September 23, 1996, the Company and
Cypress subsequently agreed on October 4, 1996 to terminate negotiations, and
accordingly, the letter of intent expired. After commencing negotiations on the
terms of a definitive agreement, the Company and Cypress concluded that they
would not be able to complete the transaction on terms consistent with the
letter of intent.
Following the termination of negotiations with Cypress, the Company's
management continued to seek other suitable merger partners. Management and the
Board of Directors ultimately concluded that the proposed transaction with EFC
for a $2.00 per share cash-out merger was the best alternative available to the
Company. The Company's Board of Directors evaluated various financial, legal and
market considerations, both from a short term and a long term perspective, in
determining whether to recommend to the shareholders approval of the Merger
Agreement. The factors considered by the Board of Directors included, among
other things, the consideration per share for Harmony Common Stock to be
received by shareholders pursuant to the Merger Agreement in relation to the
historical trading prices and book value of shares of the Harmony Common Stock;
the illiquidity of Harmony Common Stock as a result of its delistment from
NASDAQ in May 1996 (see "Market Prices of and Dividends on the Common Shares");
the current financial condition of the Company as discussed above; the lack of
any sources of third party financing or commitments from the Board of Directors
to provide significant additional capital to the Company; the opinion of Scott &
Stringfellow that the transaction is fair to the Company's shareholders from a
financial point of view; the terms and conditions of the Merger Agreement; the
risks to consummation of the Merger; and the absence of alternative transactions
that the Company could pursue. The Board of Directors did not assign any
relative or specific weights to the factors considered in reaching its
determination.
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The Board of Directors also considered the form of consideration in the
transaction. The Board of Directors concluded that, while the cash consideration
would eliminate shareholders' equity investment in the Company, result in a
taxable transaction to shareholders, and require shareholders to find
alternative investments for the cash received, cash would give the shareholders
immediate liquidity and eliminate any uncertainty as to the future value of the
consideration which could exist in a stock-for-stock transaction. The Board of
Directors also carefully reviewed the fairness of the Merger and Merger
Consideration in light of the subscriptions of the directors to purchase shares
of EFC Preferred Stock as well as the principal terms of the Employment
Agreements being negotiated by EFC with three employee-directors of the Company.
See "Interests of Certain Persons in the Merger." During negotiations, EFC made
it clear to the Company's management that commitments to subscriptions to EFC
Preferred Stock by directors of the Company were conditions precedent to EFC's
signing of the Merger Agreement. Accordingly, absent these subscriptions, the
Company does not believe that an alternative agreement could have been reached
with EFC or any other merger partner quickly enough to consummate a transaction
in 1996. As indicated above, management does not believe that the Company will
be able to generate sufficient cash from any sources to operate the Company
beyond the end of 1996. As conditions to the Merger, members of the Board of
Directors have also agreed to personally pay the Company's professional fees and
expenses, including the fees of Scott & Stringfellow, incurred by the Company
prior to the Merger, and to repay $750,000 previously drawn by the Company under
a line of credit with its lender.
As a result of the foregoing, the Board of Directors of the Company has
determined that the proposed Merger is advisable on the terms and conditions set
forth in the Merger Agreement and recommends that the Merger Agreement be
approved by the shareholders of the Company.
Opinion of Financial Advisor
Scott & Stringfellow, Inc. ("Scott & Stringfellow") has acted as
financial advisor to the Company since early July 1996 and has been retained by
the Company to opine as to the fairness to the Company's shareholders of the
consideration to be received by them in the Merger. Scott & Stringfellow is a
regionally recognized independent investment banking firm and engages in the
valuation of businesses and their securities in connection with such matters as
mergers and acquisitions, private placements, underwritings, distributions of
listed and unlisted securities and valuations for estate, corporate and other
purposes.
Scott & Stringfellow delivered an opinion to the Board of Directors on
November 21, 1996 stating that the Merger Consideration to be received by the
Company's shareholders in connection with the Merger is fair to such
shareholders from a financial point of view. The opinion also provides that the
purchase of EFC Preferred Stock by directors of the Company effective prior to
the date of the Merger Agreement, and the Merger itself, are fair to the
Company. See "Interests of Certain Persons in the Merger." For its services,
Scott & Stringfellow will receive a fee of $55,000, and will be reimbursed for
certain of its expenses. The Company is also obligated to indemnify Scott &
Stringfellow against certain liabilities,
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including liabilities under the federal securities laws, relating to or arising
out of services performed by Scott & Stringfellow as financial advisor to the
Company.
The full text of the Scott & Stringfellow opinion, which sets forth
certain assumptions made, matters considered, and limitations of the review
undertaken, attached as Exhibit C to this Proxy Statement, is incorporated
herein by reference and should be read carefully and in its entirety in
connection with this Proxy Statement. The summary of the Scott & Stringfellow
opinion set forth in this Proxy Statement is qualified in its entirety by
reference to the opinion. The Scott & Stringfellow opinion is directed only to
(i) the fairness, from a financial point of view, as of the date of the opinion,
of the Merger Consideration to be received by the holders of Harmony Common
Stock and (ii) the fairness, from a financial point of view, to the Company of
(x) the purchase of EFC Preferred Stock by the Harmony Directors (see "Interests
of Certain Persons in the Merger") and (y) the Merger, and does not constitute a
recommendation to any holders of Harmony Common Stock as to how such holders of
Harmony Common Stock should vote with respect to the Merger or with respect to
any other matter.
In developing its opinion, Scott & Stringfellow, among other things,
reviewed and analyzed: (i) the Merger Agreement; (ii) the Company's annual
reports to shareholders for the five years ended December 31, 1995 and annual
reports on Form 10-KSB and related audited financial statements for the five
years ended December 31, 1995; (iii) the Company's quarterly reports on Form
10-QSB and related unaudited financial statements for the periods ended March
31, 1996, June 30, 1996, and September 30, 1996; (iv) certain other internal
information, primarily financial in nature, concerning the business and
operations of the Company furnished to Scott & Stringfellow by the Company for
purposes of its analysis; (v) certain publicly available information regarding
the trading market for Harmony Common Stock and the price range within which the
stock has traded; (vi) certain publicly available information with respect to
certain other companies that Scott & Stringfellow believes to be comparable to
the Company and the trading markets for certain of such other companies'
securities; and (vii) certain publicly available and other information
concerning the nature and terms of certain other transactions that Scott &
Stringfellow considers relevant to its inquiry. Scott & Stringfellow also met
with certain officers and employees of the Company to discuss the foregoing as
well as other matters it believed relevant to its inquiry. Finally, Scott &
Stringfellow conducted such other studies, analyses and investigations and
considered such other information as it deemed appropriate.
In conducting its review and arriving at its opinion, Scott & Stringfellow
relied upon and assumed the accuracy and completeness of the information
furnished to it by and on behalf of the Company. Scott & Stringfellow did not
attempt independently to verify such information, nor did it make any
independent appraisal of the assets of the Company. Scott & Stringfellow took
into account its assessment of general economic, financial market and industry
conditions as they exist and can be evaluated at the date hereof, as well as its
experience in business valuation in general. In addition, although Scott &
Stringfellow discussed the prospects of the Company with certain representatives
of its management, Scott & Stringfellow was provided with only limited financial
projections and other similar analyses prepared by the Company's management with
respect to the Company.
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In connection with rendering its opinion to the Company's Board of
Directors, Scott & Stringfellow performed a variety of financial analyses. The
summary of the analyses, as set forth below, does not purport to be a complete
description of such analyses. The preparation of fairness opinions is a complex
process involving various determinations as to the most appropriate and relevant
methods of financial analysis and the application of those methods in particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Moreover, the evaluation of the
fairness, from a financial point of view, as of the date of the opinion, of (i)
the Merger Consideration to be received by the holders of Harmony Common Stock
and (ii) the fairness, from a financial point of view, to the Company of (x) the
purchase of the EFC Preferred Stock by the Harmony Directors and (y) the Merger
was to some extent a subjective one based on the experience and judgment of
Scott & Stringfellow and not merely the result of mathematical analysis of
financial data. Accordingly, notwithstanding the separate factors summarized
below, Scott & Stringfellow believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors considered
by it, without considering all analyses and factors, could create an incomplete
view of the processes underlying the analyses conducted by Scott & Stringfellow
and its opinion.
The ranges of valuations resulting from any particular analysis described
below should not be taken to be Scott & Stringfellow's view of the actual value
of the Company. Scott & Stringfellow's analyses involved numerous assumptions
with respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of the Company. Any estimates
contained in the analyses performed by Scott & Stringfellow are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than suggested by such analyses. In addition, analyses
relating to the values of businesses do not purport to be appraisals or to
reflect the prices at which businesses actually may be sold. Because such
estimates involve complex considerations and are inherently subject to
uncertainty, Scott & Stringfellow does not assume responsibility for their
accuracy. The Scott & Stringfellow opinion is just one of the factors taken into
consideration by the Company's Board of Directors in determining to approve the
Merger Agreement. The following is a brief summary of some of the analyses
performed by Scott & Stringfellow in connection with its opinion.
Financial Multiple Analysis - Scott & Stringfellow compared the per share
value of cash consideration to be received by the holders of Harmony Common
Stock to the sales, earnings before interest, taxes, depreciation and
amortization ("EBITDA"), net income and book value of the Company on a per share
basis. The Merger Consideration to be received by the holders of Harmony Common
Stock is over 2.5 times estimated revenues, approximately 2 times 1995 revenues
and approximately 1.5 times the highest level of sales ever achieved by the
Company. Scott & Stringfellow does not believe that multiples of EBITDA and net
income are meaningful as the Company has never been profitable and indeed has
never produced a positive gross margin. The consideration to be received by the
holders of Harmony Common Stock represents approximately 4.3 times book value
and over 15 times tangible book value.
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Alternative Financing - Scott & Stringfellow also reviewed the availability
of additional financing for the Company once the members of the Company's Board
of Directors decided that it would no longer provide financing or personal
guarantees for additional financing. Numerous discussions and inquiries led
Scott & Stringfellow to conclude that without a personal guarantee by the
individual Board members or other additional collateral no additional financing
was available for the Company. Since no personal guarantees or outside
collateral were available to secure financing, efforts were made to secure a
purchaser or merger partner for the Company who could provide the necessary
capital to continue operations.
Sale or Merger Proposals - The Company discussed and pursued sale or merger
proposals with a number of parties, none of which advanced beyond preliminary
discussions. The Company did enter into a non-binding letter of intent with
Cypress Chemical Company (see "The Merger - Reasons for the Transaction") but
was unable to consummate a merger. No parties other than EFC have been located
with an interest in pursuing a merger with or purchase of the Company.
Purchase of the EFC Preferred Stock; Fairness of Merger to the Company -
Scott & Stringfellow has reviewed the terms of the Subscription Agreements for
EFC Preferred Stock. The EFC Preferred Stock purchased by Harmony Directors is
non-voting, non-convertible and carries a non-cumulative dividend that is the
lesser of (x) 15% of the net after tax earnings of EFC in excess of $250,000 per
year determined in accordance with generally accepted accounting principles or
(y) 6% of the stated value of the outstanding shares of EFC Preferred Stock. The
ultimate value of EFC Preferred Stock is dependent on the success of a start-up
corporation with no operating history and minimal financial resources. The EFC
Preferred Stock has a minimal dividend that is noncumulative, no conversion
rights should EFC prove successful and liquidation rights only superior to stock
ranking junior to the EFC Preferred Stock. The Harmony Directors will have
little influence on the corporate affairs of EFC following the closing of the
Merger, including the election of directors. On a discounted cash flow basis the
value of the EFC Preferred Stock is considerably less than the $2.00 per share
cash consideration that is to be paid to all holders of Harmony Common Stock.
Scott & Stringfellow has opined that the purchase of EFC Preferred Stock by the
Harmony Directors and the Merger itself are both fair from a financial point of
view under Section 13.1-691.A.3. of the Virginia Stock Corporation Act. Section
13.1-691.A.3. of the Virginia Stock Corporation Act concerning director conflict
of interests provides that the Merger is not voidable solely because of the
Harmony Directors' interest in EFC Preferred Stock if the transaction is fair to
the Company.
Accounting Treatment
The Merger is expected to be accounted for by EFC under the "purchase"
method of accounting in accordance with generally accepted accounting
principles. As such, all assets and liabilities of the Company will be recorded
at their fair market value at the Effective Time.
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THE MERGER AGREEMENT
Consideration To Be Received by Company Shareholders
As a result of the Merger, each Common Share outstanding immediately prior
to the consummation of the Merger (other than Common Shares held by EFC or its
subsidiaries and Dissenting Shares) will be converted into the right to receive
$2.00 in cash, without interest (the "Merger Consideration").
Cancellation of Outstanding Stock Options
The Merger Agreement provides that all of the Company's stock option plans
will be terminated and all options granted pursuant to such plans that have not
been exercised prior to the Effective Time will be canceled. As of November 15,
1996, options to purchase a total of 21,937.5 shares of Harmony Common Stock had
been granted to a total of seven Company employees, including three
employee-directors, at exercise prices ranging from $5 to $16 per share pursuant
to the Company's 1991 Incentive Stock Option Plan and 1993 Long-Term Incentive
Plan. The options previously granted to the employee-directors were as follows:
(i) Gregory R. Gill, options to purchase 1,125 shares at $5 per share; (ii) J.
Mark Nuzum, options to purchase 12,500 shares at $16 per share and options to
purchase 1,500 shares at $10 per share; and (iii) J. Samuel Roady, options to
purchase 2,000 shares at $16 per share. Prior to the execution of the Merger
Agreement, each holder of these options agreed to the cancellation of the
options without the payment of any consideration therefor.
Dissenters' Rights
Holders of Common Shares who do not vote to approve the Merger Agreement
may dissent from the Merger ("Dissenting Shareholders") and make written demand
for payment in cash of the fair value of their shares of Harmony Common Stock in
lieu of participating in the Merger. Dissenting shareholders who do not strictly
comply with the procedures set forth in the Virginia Stock Corporation Act
regarding dissenters' rights may lose such rights. See "Rights of Dissenting
Shareholders." After the Merger, holders of Common Shares will possess no
interest in, or rights as beneficial shareholders of, the Company.
The Effective Time
The Merger will become effective on the day when a certificate of merger is
issued by the Virginia State Corporation Commission (the "Effective Time"). The
filing of articles of merger, which is necessary for the issuance of a
certificate of merger, will be made as promptly as practicable after the Special
Meeting, and EFC and the Company intend to cause the Effective Time to be no
later than the close of business on December 31, 1996. Such filing will be made,
however, only upon satisfaction (or waiver) where permissible, of certain
conditions contained in the Merger Agreement. See " - Conditions and Covenants"
and " - Termination of Merger Agreement" below.
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Payment for Shares
In order to receive the Merger Consideration to which Company shareholders
will be entitled as a result of the Merger, each holder of Common Shares will be
required to surrender his stock certificate or certificates, together with a
duly executed letter of transmittal, to First Union National Bank of North
Carolina, the Company's Transfer Agent, as exchange agent (the "Exchange
Agent"). Upon receipt of such certificate or certificates, together with a duly
executed letter of transmittal, the Exchange Agent will mail a check or draft to
the person or persons entitled thereto in an amount equal to the Merger
Consideration to which such shareholder is entitled. If any payment for Common
Shares is to be made in a name other than that in which the certificate or
certificates for such Common Shares surrendered for payment are registered on
the stock transfer books of the Company as of the Effective Time, it will be a
condition of such payment that the certificate or certificates so surrendered
shall be properly endorsed or otherwise in proper form for transfer and that the
person requesting such payment shall pay to the Exchange Agent any transfer or
other taxes required by reason of the payment to a person other than the
registered owner of the certificate or certificates surrendered or shall
establish to the satisfaction of the Company that such tax has been paid or is
not applicable. No interest will be paid or accrued on amounts payable upon the
surrender of stock certificates.
Instructions with regard to the surrender of certificates, together with a
letter of transmittal to be used for this purpose, will be forwarded to
shareholders as promptly as practicable after the Effective Time. Shareholders
should surrender certificates for Common Shares only after receiving a letter of
transmittal. Shareholders Should Not Send Any Stock Certificates with the
Enclosed Proxy Card.
The Funds
The Merger Agreement provides that, prior to or promptly after the
Effective Time, cash in an amount sufficient to pay to the Company's
shareholders the Merger Consideration to which they are entitled will be
deposited by EFC with the Exchange Agent. Pending payments of Merger
Consideration, such funds shall be held and invested by the Exchange Agent as
directed by the Company and any earnings with respect to such funds shall be
paid to the Company when requested by the Company.
Conditions and Covenants
The consummation of the Merger is conditioned upon (i) approval of the
Merger Agreement by the shareholders of the Company, (ii) the absence of any
legal or administrative proceeding pending before any court or governmental
authority which seeks to challenge or prevent the Merger, and (iii) the receipt
of all consents by third parties necessary to consummate the transactions
contemplated by the Merger Agreement. Other than the mailing of this Proxy
Statement pursuant to rules and regulations of the Securities and Exchange
Commission, and the filing of articles of merger with the Virginia State
Corporation Commission, no federal or state
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regulatory requirements must be complied with, or approvals obtained, in
connection with the Merger.
The obligation of EFC to consummate the Merger is subject to the truth, in
all material respects, of the representations and warranties of the Company made
in the Merger Agreement, and the performance by the Company, in all material
respects, of all covenants on its part to be performed under the Merger
Agreement. In addition to other conditions customary for transactions of a
similar nature, the obligation of EFC to consummate the Merger is also
conditioned upon (i) the payment by members of the Company's Board of Directors
of the Company's professional fees and expenses, including the fees of Scott &
Stringfellow, incurred by the Company prior to the Merger, and (ii) the payment
by members of the Company's Board of Directors of approximately $750,000 drawn
by the Company under a line of credit with its lender.
The obligation of the Company to consummate the Merger is also subject to
the truth, in all material respects, of the representations and warranties of
EFC made in the Merger Agreement, and the performance by EFC, in all material
respects, of all covenants on its part to be performed under the Merger
Agreement, including the deposit of funds with the Exchange Agent.
In the Merger Agreement, the Company has agreed that prior to the
consummation of the Merger, the Company shall: (i) conduct its business only in
the ordinary course and consistent with past practices; (ii) keep in full force
and effect its corporate existence; (iii) comply with its material contracts;
(iv) use reasonable efforts to retain its employees and maintain its business
relationships with customers and suppliers; (v) use, operate and maintain, in
all material respects, its properties as presently used, operated and
maintained; and (vi) not grant any increase in the compensation or rate of
compensation payable to any of its employees, except for increases in the
ordinary course of business and consistent with past practices.
In addition, without the prior written consent of EFC, the Company has
agreed that prior to the consummation of the Merger it will not: (i) amend its
articles of incorporation or bylaws; (ii) declare or pay any dividends or make
any distributions to shareholders, or repurchase or redeem any shares of its
capital stock; (iii) issue or otherwise permit to become outstanding any
additional shares of its capital stock, other than shares of Harmony Common
Stock to be issued to certain directors in connection with a contribution of
capital of approximately $76,000 by such directors anticipated to be made in
mid-December 1996; (iv) enter into any agreements or commitments not in the
ordinary course of business; (v) incur any indebtedness other than indebtedness
incurred in the ordinary course of business; or (vi) make any new commitments
for capital expenditures exceeding $25,000 per item or $50,000 in the aggregate.
Finally, the Company has also agreed that it will not, without the prior written
approval of EFC, initiate, solicit or encourage, or enter into discussions or
negotiations with any third parties regarding, any "Competing Transaction."
Under the Merger Agreement, Competing Transaction is defined as any of the
following involving the Company: (i) any merger, business combination or similar
transaction; (ii) any sale or other disposition of 5% or more of the assets of
the Company; (iii) any tender offer or exchange offer for any of the outstanding
shares of capital stock of the
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Company; or (iv) any person having acquired beneficial ownership of 5% or more
of the outstanding shares of capital stock of the Company other than members of
the Company's Board of Directors. However, under the terms of the Merger
Agreement, the Company is free to participate in any discussions or negotiations
regarding any Competing Transaction to the extent the fiduciary duties of the
members of the Board of Directors may require. See " - Termination of Merger
Agreement" below.
Indemnification
Under the terms of the Merger Agreement, EFC has agreed that it will not
take any action after the consummation of the Merger to alter or impair any
exculpatory or indemnification provisions now existing in the articles of
incorporation or bylaws of the Company for the benefit of any individual who
served as a director or officer of the Company at any time prior to the
Effective Time. The Company's articles of incorporation and bylaws provide for
indemnification of directors and officers and elimination of liability to
shareholders to the full extent allowed by Virginia law.
The Merger Agreement also provides that the members of the Company's Board
of Directors will personally indemnify EFC following the consummation of the
Merger under certain terms and conditions. Specifically, the directors have
agreed to indemnify EFC for any adverse consequences EFC suffers within six
months after the Effective Time as a result of (i) any breach of a
representation or warranty by the Company in the Merger Agreement, or (ii) any
liability incurred by EFC in connection with the exercise of dissenters' rights
by shareholders of the Company. See "Rights of Dissenting Shareholders."
However, the directors will not have any obligation to indemnify EFC until EFC
has suffered adverse consequences in excess of a $50,000 aggregate deductible.
In the event that the directors have any indemnity obligation to EFC pursuant to
the Merger Agreement, EFC's sole remedy in connection with the recovery of any
adverse consequences will be to proceed against and recover shares of EFC
Preferred Stock owned by the directors of the Company, which shares, in such
event, will be valued at $2.00 per share without discount for any reason. See
"Interests of Certain Persons in the Merger."
Termination of Merger Agreement
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, notwithstanding approval by the Company's
shareholders, as follows: (i) by the written consent of the Company and EFC;
(ii) by EFC, if there is a material misrepresentation in the Merger Agreement by
the Company or a material breach by the Company of any of its warranties or
covenants set forth therein, or the failure of any condition to which the
obligations of EFC under the Merger Agreement are subject; (iii) by the Company,
in writing, if there is a material misrepresentation in the Merger Agreement by
EFC, or a material breach by EFC of any of the warranties or covenants of EFC
set forth in the Merger Agreement, or a failure of any condition to which the
obligations of the Company under the Merger Agreement are subject; (iv) by
either the Company or EFC, in writing, if the Effective Time shall not have
occurred by December 31, 1996, for any reason other than the failure of the
party seeking to terminate the
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Merger Agreement to perform its obligations thereunder, or a misrepresentation
or breach or warranty by such party thereunder; (v) by either the Company or EFC
in writing, in the event the fairness opinion of Scott & Stringfellow is
withdrawn; (vi) by either the Company or EFC in writing, in the event the Merger
does not receive the requisite shareholder vote under Virginia law; or (vii) by
the Company in writing, at any time prior to the Effective Time, in the event
the Company's Board of Directors concludes that termination is required as a
result of the Board of Directors' fiduciary duties. However, if the Company
terminates the Merger Agreement solely pursuant to an exercise of its fiduciary
duties, or if the Merger does not receive the requisite shareholder approval as
a result of directors of the Company voting against the Merger, then the Company
will be obligated to pay EFC a $150,000 breakup fee.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a brief summary of the material federal income
tax consequences to holders of Harmony Common Stock that will occur as a result
of the Merger. The discussion set forth below is based upon applicable federal
law and judicial and administrative interpretations on the date of this Proxy
Statement, all of which is subject to change at any time.
The receipt of cash for Harmony Common Stock pursuant to the Merger will be
a taxable transaction for federal income tax purposes to shareholders receiving
such cash (and may be a taxable transaction for state, local and foreign tax
purposes as well). A holder of Harmony Common Stock will recognize gain or loss
measured by the difference between such shareholder's tax basis for the shares
of Harmony Common Stock owned at the time of the Merger and the amount of cash
received. A holder of shares of Harmony Common Stock who elects to exercise
dissenters' rights will receive payment of the fair value of his shares. See
"Rights of Dissenting Shareholders." The receipt of cash by a dissenting
shareholder will be a taxable transaction to the dissenting shareholder for
federal income tax purposes.
The amount of any gain or loss and its character as ordinary or capital
gain or loss will be determined in accordance with applicable provisions of the
Internal Revenue Code of 1986, as amended. In general, if the shares of Harmony
Common Stock are held by a shareholder as a capital asset at the effective date
of the Merger, such shareholder will recognize capital gain or loss measured by
the difference between the amount of cash received by such shareholder and the
basis of his shares.
The cash payments due to the holders of Harmony Common Stock (other than
certain exempt entities and persons) upon the exchange thereof pursuant to the
Merger, or upon exercise of dissenters' rights, will be subject to a 31% backup
withholding tax by the Exchange Agent under federal income tax law unless
certain requirements are met. Generally, the Exchange Agent will be required to
deduct and withhold the tax if (i) the shareholder fails to furnish a taxpayer
identification number ("TIN") to the Exchange Agent or fails to certify under
penalty of perjury that such TIN is correct, or (ii) the Internal Revenue
Service ("IRS") notifies the Exchange Agent that the TIN furnished by the
shareholder is incorrect. Any amounts withheld by the Exchange Agent in
collection of the backup withholding tax will reduce the federal income tax
liability of
19
<PAGE>
the shareholder from whom such tax was withheld. The TIN of an individual
shareholder is that shareholder's Social Security Number.
No ruling has been or will be requested from the IRS as to any of the tax
effects to shareholders of the Company of the transactions discussed in this
Proxy Statement, and no opinion of counsel has been or will be rendered to the
Company's shareholders with respect to any of the tax effects of the Merger.
THE FOREGOING SUMMARY DOES NOT ADDRESS STATE, LOCAL OR FOREIGN TAX
CONSEQUENCES OF THE MERGER. AS A RESULT OF THE COMPLEXITY OF THE TAX LAWS, AND
BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR SHAREHOLDER OF THE COMPANY MAY BE
AFFECTED BY MATTERS NOT DISCUSSED IN THIS PROXY STATEMENT, SHAREHOLDERS OF THE
COMPANY ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER.
RIGHTS OF DISSENTING SHAREHOLDERS
Each holder of Harmony Common Stock is entitled to exercise the rights of a
dissenting shareholder under Title 13.1, Article 15 of Chapter 9 ("Article 15")
of the Virginia Stock Corporation Act ("Virginia Act") and to make written
demand for payment in cash of the fair value of his shares of Harmony Common
Stock in lieu of participating in the Merger. The following summary of
dissenters' rights does not purport to be a complete statement of Article 15 and
is qualified in its entirety by reference to the specific statutory provisions
of Article 15 as set forth in Exhibit B to this Proxy Statement.
A record holder of shares of Harmony Common Stock may exercise dissenters'
rights with respect to less than all shares held of record so long as he
dissents with respect to all shares beneficially owned by any one person and
provides the Company with the name and address of the beneficial owner. A
beneficial holder of shares of Harmony Common Stock may exercise dissenters'
rights if he provides the Company with the record shareholder's written consent
not later than the date he asserts his dissenters' rights, and he dissents with
respect to all shares of which he is the beneficial owner or has the power to
vote.
A dissenting shareholder must deliver to the Company, before the vote on
the Merger is taken at the Special Meeting, a written notice of his intent to
demand payment, and he must not vote his shares of Harmony Common Stock in favor
of the Merger. Any such written notice should be sent to: Harmony Products,
Inc., 808 Live Oak Drive, Suite 126, Chesapeake, Virginia 23320, Attention:
Gregory R. Gill, President.
The Company will deliver dissenters' notices to its dissenting shareholders
within 10 days of the effective date of the Merger. The dissenters' notices will
state where the demand for payment must be made and the procedure for depositing
certificated shares. The dissenters' notices will
20
<PAGE>
also include a form for demand for payment and will fix a date for receipt of
any such demand, which will not be less than thirty and not more than sixty days
after the date of delivery of the notice. Dissenting shareholders must, in turn,
return the demand for payment and deposit any certificated shares in accordance
with the dissenters' notices.
Within thirty days of receipt of a demand for payment from a dissenting
shareholder, the Company must pay the estimate of the fair value of the shares
of Harmony Common Stock held by the dissenting shareholder plus interest.
Upon tendering any payment to a dissenting shareholder, the Company will
provide (i) its most recent year-end and interim financial statements, (ii) an
explanation of how the fair value of the shares and interest were calculated,
(iii) a statement of the dissenting shareholder's right to continue to demand
fair value for his shares and (iv) a copy of the dissenters' rights provisions
of the Virginia Act. If the Company fails to make a required payment of its
estimate of fair value, the Virginia Act provides that a Virginia circuit court
can enforce that obligation on an expedited basis.
A dissenting shareholder of the Company who is not satisfied with the
amount paid or offered for his shares must notify the Company of his estimate of
the fair value of his shares and the amount of interest due. This notice must be
given in writing within thirty days of the date that the Company makes or offers
to make payment for a dissenting shareholder's shares.
If a dissenting shareholder's demand for payment remains unsettled, the
Company will be obligated to commence a judicial proceeding to determine the
fair value of the shares and accrued interest within sixty days of the receipt
of the dissenting shareholder's payment demand.
DISSENTING SHAREHOLDERS OF THE COMPANY WHO DO NOT STRICTLY COMPLY WITH THE
PROCEDURE SET FORTH IN ARTICLE 15 OF THE VIRGINIA ACT MAY LOSE THEIR DISSENTERS'
RIGHTS. ANY SHAREHOLDERS WHO WANT TO EXERCISE DISSENTERS' RIGHTS ARE ADVISED TO
CONSULT THEIR OWN COUNSEL TO ENSURE THAT THEY PROPERLY COMPLY WITH ARTICLE 15.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
EFC Preferred Stock
Effective prior to the date of the Merger Agreement, each director of
Harmony (individually a "Harmony Director" and collectively "Harmony Directors")
entered into a subscription agreement with EFC ("Subscription Agreement")
pursuant to which each Harmony Director agreed to purchase at a price of $2 per
share a number of shares of non-voting, non-convertible preferred stock of EFC
("EFC Preferred Stock") equal to the number of shares of Harmony Common Stock
then owned by the Harmony Director, exclusive of 3,000 shares of Harmony Common
Stock owned by a minor child of a Harmony Director and 313 shares owned by an
IRA of a Harmony Director. Accordingly, the aggregate purchase price of the EFC
Preferred Stock subscribed for by the Harmony Directors equals the Merger
Consideration to which they are
21
<PAGE>
entitled as holders of Harmony Common Stock. For information on ownership of
Harmony Common Stock by the Harmony Directors, see "Beneficial Ownership of the
Company." Pursuant to the terms of the Subscription Agreement, the Harmony
Directors paid for the EFC Preferred Stock by delivering to EFC a demand
promissory note (the "EFC Demand Notes") in an amount equal to the purchase
price of the EFC Preferred Stock. The EFC Demand Notes are payable upon the
closing of the Merger, but will be canceled if the Merger is not consummated.
The fairness opinion delivered to the Company by Scott & Stringfellow includes
an opinion that the purchase of EFC Preferred Stock by the Harmony Directors,
and the Merger itself, are fair to the Company. The general terms of the EFC
Preferred Stock are as follows:
o No Conversion Rights. The EFC Preferred Stock is not convertible under
any conditions into common stock or any other class of capital stock of
EFC.
o Voting Rights. Generally, holders of EFC Preferred Stock will not have
the right to vote on matters submitted to a vote of the shareholders of
EFC. However, as long as any shares of EFC Preferred Stock are
outstanding, the approval of the holders of shares constituting a
majority of the outstanding shares of EFC Preferred Stock will be
required before EFC may (i) liquidate, dissolve or wind up, (ii) merge
with or sell substantially all of its assets to an entity of which the
shareholders of EFC will not, by at least 67% ownership, control after
the transaction; provided, however, that the holders of EFC Preferred
Stock will not have the right to vote on any merger, sale of assets or
similar transaction that provides that the holders of EFC Preferred
Stock will be entitled to receive as consideration an amount of cash at
least equal to $2 per share of EFC Preferred Stock, together with any
accrued but unpaid dividends, (iii) amend EFC's Articles of
Incorporation, (iv) amend EFC's Bylaws in a manner that adversely
affects the holders of EFC Preferred Stock, or (v) issue any class of
stock on a parity with or senior to, the EFC Preferred Stock.
o Dividends. Holders of EFC Preferred Stock will be entitled to receive
(in preference to holders of common stock of EFC) non-cumulative
quarterly dividends equal to the lesser of (x) 15% of the net after tax
earnings of EFC in excess of $250,000 per year determined in accordance
with generally accepted accounting principles or (y) 6% of the stated
value of the outstanding shares of EFC Preferred Stock.
o Redemption. Not later than seven years from the consummation of the
Merger, EFC will be required to redeem the EFC Preferred Stock at a
redemption price of $2 per share payable in cash.
o Liquidation. Upon any liquidation, dissolution or winding up of EFC,
the holders of EFC Preferred Stock will first be entitled, before any
distributions to holders of stock ranking junior to the EFC Preferred
Stock, to be paid an amount equal to the stated value of the EFC
Preferred Stock.
22
<PAGE>
Because the Harmony Directors generally will not have the right to vote
with respect to their shares of EFC Preferred Stock, the Harmony Directors will
have little influence on the corporate affairs of EFC following the closing of
the Merger, including the election of directors.
In addition to the EFC Preferred Stock subscribed for by Harmony Directors
effective prior to the date of the Merger Agreement, certain Harmony Directors
anticipate subscribing for additional shares of EFC Preferred Stock in
mid-December in an amount equal to the capital contribution of approximately
$76,000 (for which shares of Harmony Common Stock will be issued on a fair
market value basis) anticipated to be made by these Harmony Directors to the
Company in mid-December.
During negotiations, EFC made it clear to the Company's management that
commitments to subscriptions to EFC Preferred Stock by Harmony Directors were
conditions precedent to EFC's signing of the Merger Agreement. Accordingly,
absent these subscriptions, the Company does not believe that an alternative
agreement could have been reached with EFC or any other merger partner quickly
enough to consummate a transaction in 1996. Management does not believe that the
Company will be able to generate sufficient cash from any sources to operate the
Company beyond the end of 1996. See "The Merger - Reasons for the Transaction."
Employment Agreements and Cancellation of Stock Options
EFC is currently negotiating the terms of one year employment agreements
("Employment Agreements") with Gregory R. Gill, a Harmony Director and the
Company's President and Chief Executive Officer, Raymond E. Grover, a Harmony
Director and the Company's Executive Vice President and Secretary, and J. Mark
Nuzum, a Harmony Director and President, Plant Products Division. EFC
anticipates finalizing the terms of the Employment Agreements in the near future
and thereby employing these three individuals effective upon the consummation of
the Merger. The general terms of the Employment Agreements are anticipated to be
as follows, although all of the Employment Agreements are subject to further
negotiation.
o Gregory R. Gill will receive an annual compensation of $73,000,
contingent upon EFC's attainment of certain cash flow objectives.
o Raymond E. Grover will receive an annual compensation of $60,000,
contingent upon EFC's attainment of certain cash flow objectives.
o J. Mark Nuzum will receive an annual compensation of $80,000.
EFC anticipates adopting some form of long-term incentive and bonus plan
following the Merger, and also anticipates that the foregoing persons will be
eligible to participate in this plan.
In addition, certain employees of the Company, including three employees
who are Harmony Directors, have agreed to a cancellation of certain options to
purchase Harmony Common Stock
23
<PAGE>
that were granted under the Company's 1991 Incentive Stock Option Plan and 1993
Long-Term Incentive Plan. The options previously granted to the Harmony
Directors were as follows: (i) Gregory R. Gill, options to purchase 1,125 shares
at $5 per share; (ii) J. Mark Nuzum, options to purchase 12,500 shares at $16
per share and options to purchase 1,500 shares at $10 per share; and (iii) J.
Samuel Roady, options to purchase 2,000 shares at $16 per share
Ownership of Harmony Directors and Executive Officers of Harmony Common Stock
The directors and executive officers of the Company beneficially owned at
the Record Date an aggregate of 1,377,478, or 88.6%, of the outstanding Common
Shares. See "Beneficial Ownership of the Company."
MARKET PRICES OF AND DIVIDENDS ON THE COMMON SHARES
Certain historical trading information is set forth below for Harmony
Common Stock. All prices shown below have been adjusted to reflect the Company's
one-for-four reverse stock split the became effective May 6, 1996. Prior to May
9, 1996, Harmony Common Stock traded on the NASDAQ SmallCap Market. Effective
May 9, 1996, Harmony Common Stock was delisted from NASDAQ as a result of the
Company's inability to comply with certain of NASDAQ's listing standards. Since
this delisting, Harmony Common Stock has traded on the NNOTC Bulletin Board, an
NASD sponsored and operated quotation system for equity securities not included
in the NASDAQ Stock Market. The inability of the Company to list its Common
Stock on NASDAQ since May 9, 1996, has materially adversely affected the
liquidity of Harmony Common Stock, which is very thinly traded.
The following table sets forth the high and low bid prices for Harmony
Common Stock on the NASDAQ SmallCap Market for the periods shown.
High Low
1994:
First Quarter $11.00 $3.75
Second Quarter 10.50 5.50
Third Quarter 9.50 5.00
Fourth Quarter 5.50 2.50
1995:
First Quarter $ 5.50 $3.00
Second Quarter 5.50 1.50
Third Quarter 6.50 1.50
Fourth Quarter 5.50 2.00
24
<PAGE>
1996:
First Quarter 4.00 2.50
April 1 through May 8 3.50 2.75
The following table sets forth the high and low bid prices for Harmony
Common Stock on the NNOTC Bulletin Board for the periods shown.
High Low
1996:
May 9 through June 30 $1.50 $1.50
Third Quarter 1.50 1.25
October 1 through __ ____ ____
The bid prices set forth above reflect inter-dealer quotations, without
retail mark-up, markdown or commission and do not necessarily represent actual
transactions. The closing bid price of Harmony Common Stock on the NNOTC
Bulletin Board on the day prior to the announcement of the Merger was $______.
On December __, 1996, the last trading day prior to the date of this Proxy
Statement, the closing bid price on the NNOTC Bulletin Board was $________.
Shareholders are urged to obtain current market quotations for the Common
Shares. The Company did not pay any dividends during the periods for which
trading information is provided above. As of November 22, 1996, there were
approximately 550 holders of record of Harmony Common Stock, not including the
number of persons or entities whose stock is held in nominee or street name
through various brokerage firms or banks.
25
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
The selected financial data set forth below is derived from the Company's
financial statements and should be read in conjunction with the financial
statements and related notes included in the Company's Form 10-KSB for the year
ended December 31, 1995, and Form 10-QSB for the nine months ended September 30,
1996, which are being delivered by the Company with this Proxy Statement. The
results of operations for the nine months ended September 30, 1996 are
unaudited; however, in the opinion of the Company's management, such unaudited
results reflect all material adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the results of operations and
summarized financial position for the nine months ended September 30, 1995 and
1996, respectively. The unaudited results of operations for the nine months
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the full fiscal year.
<TABLE>
<CAPTION>
Nine months ended
Years ended December 31, September 30,
------------------------ -------------
SELECTED STATEMENTS OF 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C>
OPERATIONS DATA
(In thousands, except for per share data) (unaudited)
---------------------------------------- ---------
Net Sales $1,370 905 2,127 2,124 1,771 $1,495 984
Other operating revenues -- -- 1,127 570 107 11 33
------- ------- ------ ------ ------ ------- ------
Total net revenue 1,370 905 3,254 2,694 1,878 1,506 1,017
Cost of goods sold 1,768 1,728 2,863 2,541 2,245 1,919 1,172
------- ------ ------ ------ ------ ------- ------
Gross income (loss) (398) (823) 391 153 (367) (413) (155)
Operating expenses:
Marketing and promotion 100 596 618 541 369 307 137
Research and development 181 283 47 59 22 19 16
General and administrative 278 547 473 375 380 330 375
Royalties 62 78 82 113 42 39 3
Loss on disposal of fixed assets -- -- -- -- 1,863 1,879 --
------- ------- ------ ------ ------- -------- -----
Total operating expense 621 1,504 1,220 1,088 2,676 2,574 531
Loss from operations (1,019) (2,327) (829) (935) (3,043) (2,987) (686)
Other Income (expense):
Interest expense (285) (213) (211) (291) (251) (184) (57)
Interest income 11 60 52 47 -- (2) --
-------- ------- ------ ------- ------ -------- -----
Net loss $(1,293) (2,480) (988) (1,179) (3,294) $(3,173) (743)
======== ======= ====== ======= ======= ======== ======
Net loss per share (1) $ (9.95) (7.23) (2.88) (2.90) (3.63) $ (4.08) (0.52)
======== ======= ====== ======= ======= ======== ======
Weighted average common shares 130 343 343 406 907 778 1,431
outstanding (1)
SELECTED BALANCE SHEET
DATA
Working capital $2,942 393 110 388 487 $141 266
Property, plant and equipment (net) 3,858 3,592 3,524 3,181 602 631 539
Total assets 7,995 6,284 5,616 5,406 2,106 2,084 1,827
Long-term debt less current portion 2,835 2,488 2,117 1,772 15 35 11
Shareholders' equity 4,692 2,207 1,219 1,245 1,052 773 699
</TABLE>
- - ----------------
(1) Net loss per share is computed by dividing net loss by the weighted
average number of shares of Common Stock outstanding during the period,
giving retroactive recognition for a 1 for 4 reverse stock split in May
1996.
26
<PAGE>
BENEFICIAL OWNERSHIP OF THE COMPANY
The following table sets forth as of November 22, 1996, certain information
relating to the beneficial ownership of Harmony Common Stock by (i) each of the
Company's directors and executive officers who own Harmony Common Stock, (ii)
each person (or group of affiliated persons), who is known by the Company to own
beneficially more than 5% of the Harmony Common Stock, and (iii) all of the
Company's directors and executive officers as a group. The individuals listed
below receive mail at the offices of the Company. Unless otherwise noted, the
persons named in the table have sole voting and investment power with respect to
all shares of Harmony Common Stock shown as beneficially owned by them.
Beneficial Ownership
--------------------
Name Shares Percent
---- ------ -------
W. Reginald Powell(1) 303,419 19.51%
James A. Shirley 427,104 27.47
Gregory R. Gill(2) 116,862 7.52
Raymond E. Grover(3) 310,613 19.98
J. Mark Nuzum 8,747 *
J. Samuel Roady(4) 118,250 7.60
John W. Dibble 92,483 5.95
Directors and Executive Officers
as a group (7 persons) 1,377,478 88.59
- - ---------------
* Indicates less than 1% beneficial ownership.
(1) Owned jointly with Mr. Powell's wife.
(2) Includes 3,000 shares gifted by Mr. Gill to his minor daughter.
(3) Owned jointly with Mr. Grover's wife.
(4) Does not include 9,000 shares owned by Mr. Roady's wife, for which Mr. Roady
disclaims beneficial ownership.
27
<PAGE>
INFORMATION CONCERNING THE COMPANY AND EFC
Business of the Company
The Company was organized by a group of fertilizer executives to develop,
manufacture and market fertilizer and animal feed products. The Company's
management has long believed that a portion of the future growth in the
fertilizer market will be in efficient, slow release organic and organic based
products, as environmental concerns direct greater attention to their beneficial
efforts. The Company's fertilizer product lines range from 100% organic (all
natural) products to "Bridge" products, which have an organic base and are
enhanced with synthetic nutrients. Additionally, research efforts since the
founding of the Company have produced patented processes to convert poultry,
hatchery and slaughterhouse waste products, as well as manures, into animal feed
supplements. Since its inception, the Company has not been profitable and has
not generated sufficient cash flow from operations to fund itself. As a result,
since the Company's inception, members of the Board of Directors have from time
to time provided working capital and credit enhancement to the Company. The
members of the Board of Directors have informed management that they will no
longer provide any significant working capital or credit to the Company.
Business of EFC
EFC is a newly formed Virginia corporation that has been organized by a
small group of investors for the purpose of acquiring the Company. To date, EFC
has not conducted any business operations or generated any revenue. For
information regarding investments by members of the Company's Board of Directors
prior to the date of this Proxy Statement in non-voting preferred stock of EFC,
and for information regarding other interests of directors and officers of the
Company in EFC following the Merger, see "Interest of Certain Persons in the
Merger".
PROXY SOLICITATION
In addition to the use of the mails, proxies may be solicited by directors,
officers and employees of the Company by telephone, telegram or personal
contact. Such persons will receive no additional compensation for such services.
The Company will bear all costs of soliciting proxies. Copies of solicitation
materials will be furnished to fiduciaries, custodians, nominees and brokerage
houses for forwarding to beneficial owners of the Common Shares held in their
names, and the Company will reimburse such brokers and other fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
SHAREHOLDER PROPOSALS
In the event that the Merger is not consummated, the Company must be
notified by January 3, 1997, of any proposals to be presented by a shareholder
at the 1997 Annual Meeting if that proposal is to be set forth in the proxy
soliciting material for such meeting.
28
<PAGE>
INDEPENDENT ACCOUNTANTS
The Company does not expect that any representatives of KPMG Peat Marwick
LLP, the Company's independent accountants, will be present at the Special
Meeting.
ADDITIONAL INFORMATION
The Company is presently subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements and other information are
available for inspection and copying at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, NY 10048; and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60621. Copies of such
material may be obtained upon payment of the Commission's customary charges by
writing to the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. With respect to certain reports
filed by the Company with the Commission that are incorporated by reference into
this Proxy Statement, see "Information Incorporated by Reference" on page 3 of
this Proxy Statement.
By Order of the Board of Directors
----------------------------
Raymond E. Grover, Secretary
29
<PAGE>
EXHIBIT A
PLAN AND AGREEMENT OF MERGER
This PLAN AND AGREEMENT OF MERGER (this "Agreement") is made as of
November 21, 1996 among HARMONY PRODUCTS, INC., a Virginia corporation
("Harmony"), ENVIRONMENTAL FERTILIZER CORPORATION ("EFC"), a Virginia
corporation. Harmony and EFC are sometimes referred to herein as the
"Constituent Corporations," and EFC is sometimes referred to herein as the
"Surviving Corporation." This Agreement is also being entered into by Gregory R.
Gill, W. Reginald Powell, Raymond E. Grover, J. Mark Nuzum, J. Samuel Roady,
John W. Dibble and James A. Shirley (collectively the "Harmony Directors") for
the sole purpose of indemnifying EFC under the terms and conditions of Section
7.10(b).
RECITALS
A. EFC is a corporation duly organized and existing under the
laws of the Commonwealth of Virginia, having been incorporated on October 18,
1996.
B. Harmony is a corporation duly organized and existing under the
laws of the Commonwealth of Virginia, having been incorporated in August 1989
under the name Natural Sciences/Harmony Products, Inc., which name was
subsequently changed in October 1989 to Harmony Products, Inc.
C. The respective Boards of Directors of EFC and Harmony have
approved the business combination of EFC and Harmony.
D. The respective Boards of Directors of EFC and Harmony, have
approved this Agreement and deem it advisable and in the best interests of their
respective corporations and shareholders that Harmony merge with and into EFC
(the "Merger"), subject to the approval and adoption of this Agreement by the
shareholders of Harmony, pursuant to the terms and subject to the conditions of
this Agreement.
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained, the parties hereto agree as follows:
ARTICLE 1
MERGER OF HARMONY INTO EFC
Section 1.1. Merger. Upon the approval and adoption of this Agreement
by the shareholders of Harmony in accordance with the law of the Commonwealth of
Virginia, and the satisfaction or waiver of the conditions set forth herein to
the obligations of the parties hereto, articles of merger shall be filed with
the Secretary of State of the Commonwealth of Virginia in accordance with the
law of the Commonwealth of Virginia. Effective on the date and at the time on
which a certificate of merger containing the provisions required by, and
executed in
<PAGE>
accordance with, Article 12 of the Virginia Stock Corporation Act (the
"Certificate of Merger") shall have been issued by the Virginia State
Corporation Commission (or such later date and time as may be specified in such
Certificate of Merger) (the "Effective Time"), Harmony shall merge with and into
EFC which, as the Surviving Corporation, shall continue its corporate existence
under the law of the Commonwealth of Virginia under the name of Harmony
Products, Inc. Unless otherwise mutually agreed upon in writing by the parties
to this Agreement, subject to the terms and conditions hereof, the Effective
Time shall occur on the first business day following the last to occur of (i)
the effective date of the last order, approval, or exemption of any federal or
state regulatory agency approving or exempting the Merger if such action is
required and (ii) the date on which the shareholders of Harmony shall have
approved this Agreement.
Section 1.2. The Closing. The Merger and the other transactions
contemplated by this Agreement shall be effected at a closing (the "Closing") at
the offices of Kaufman & Canoles, One Commercial Place, Norfolk, Virginia 23514
at 11:00 a.m. local time, on the date that the Effective Time occurs, or on such
other date or in such other place to which the parties shall mutually agree (the
"Closing Date").
Section 1.3. Change in Structure of Transaction. Notwithstanding
anything in this Agreement to the contrary, if at any time after the date
hereof, it shall appear that any change or changes in the structure of the
transactions contemplated hereby shall be necessary or desirable to comply with
applicable law or the requirements of regulatory authorities having jurisdiction
over the transactions or for any other reason, the parties hereto agree to
cooperate in making such changes in this Agreement, and other documents
contemplated hereby and in taking such other actions as may be required to
effect such changes; provided however, that in no event shall any of the parties
hereto be required by this Section 1.3 to agree to any change in the amount or
form of consideration set forth herein or to any other material term hereof.
ARTICLE 2
CERTIFICATE OF INCORPORATION, BY-LAWS,
DIRECTORS AND OFFICERS, AND STOCK OPTIONS
Section 2.1. Articles of Incorporation. The articles of incorporation
of EFC in effect at the Effective Time shall be the articles of incorporation of
the Surviving Corporation until amended as provided by law, subject to Section
7.10 of this Agreement.
Section 2.2. By-Laws. The by-laws of EFC in effect at the Effective
Time shall be the by-laws of the Surviving Corporation until amended or repealed
as provided by law, subject to Section 7.10 of this Agreement.
Section 2.3. Stock Options. At and with effect from the Closing Date,
all stock option, restrictive stock and other long-term incentive programs of
Harmony shall be terminated and any options issued pursuant to such plan(s)
(collectively, the "Harmony Options") not exercised prior to the Effective Time
shall be canceled.
2
<PAGE>
ARTICLE 3
CONVERSION OF SHARES
Section 3.1. Conversion of Shares. The manner and basis of converting
the shares of each Constituent Corporation shall be as follows:
(a) Subject to the provisions of paragraphs (b) and (c) below,
each share of common stock, no par value per share, of Harmony (the "Harmony
Common Stock") outstanding immediately prior to the Effective Time (other than
shares of Harmony Common Stock held by EFC or its subsidiaries) will be
converted into and represent the right to receive $2.00 in cash (the "Merger
Consideration").
(b) In the event that Harmony changes the number of shares of
Harmony Common Stock issued and outstanding prior to the Effective Time as a
result of a stock split, stock dividend, recapitalization or other similar
transaction, the Merger Consideration shall be proportionately adjusted.
(c) Any shares of Harmony Common Stock held by each
shareholder of Harmony who has not voted such shares in favor of the Merger and
with respect to which the holder thereof has properly exercised the right to
dissent and demand the fair value thereof (the "Dissenting Shares") in
accordance with Article 15 of the Virginia Stock Corporation Act (the "Virginia
Act"), will not be converted into and represent the right to receive payment as
provided by paragraph (a) hereof and, instead, will have the right to receive
payment therefor pursuant to and in accordance with said Article 15 of the
Virginia Act.
(d) In the event any certificate representing shares of
Harmony Common Stock shall have been lost, stolen or destroyed, upon the making
of any affidavit of that fact by the person claiming such certificate to be
lost, stolen or destroyed, the Surviving Corporation will issue in exchange for
such lost, stolen or destroyed certificate the Merger Consideration.
(e) From and after the Effective Time, holders of
certificates, instruments, agreements or other documents theretofore evidencing
Harmony Common Stock or Harmony Options shall cease to have any rights as
security holders of Harmony, except as provided herein or by law.
(f) The Merger shall effect no change in any of the shares of
common stock, $1.00 par value per share, of EFC (the "EFC Common Stock")
outstanding at the Effective Time, and no such shares shall be converted as a
result of the Merger and following the consummation of the Merger all of the
outstanding shares of EFC Common Stock will be held by the same parties holding
those shares before the Effective Time.
(g) Promptly after the Effective Time, EFC shall cause First
Union National Bank of North Carolina (the "Exchange Agent") to mail appropriate
transmittal materials to the
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former shareholders of Harmony. Each holder of record at the Effective Time of
shares of Harmony Common Stock shall be entitled, upon the surrender to EFC or
its transfer agent of the certificate(s) for its shares of Harmony Common Stock
for cancellation and other appropriate transmittal materials, to receive the
Merger Consideration, together with all declared but unpaid dividends in respect
of such shares.
(h) After the Effective Time, there shall be no registration
of transfers on the stock transfer books of Harmony of shares of Harmony Common
Stock or exercise or transfer of Harmony Options which were outstanding
immediately prior to the Effective Time.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF HARMONY
Harmony hereby represents and warrants that as of the date of this
Agreement.
Section 4.1. Organization; Authority. Harmony is a corporation
organized and existing in good standing under the laws of the Commonwealth of
Virginia. Harmony is duly authorized to conduct business and is in good standing
under the laws of each jurisdiction where such qualification is required. No
jurisdiction in the United States in which Harmony is not now qualified has
asserted to Harmony that Harmony is required to be qualified to do business
therein.
Harmony has all necessary power and authority to own or to lease, and
to operate, its properties and assets and to carry on its business as it is now
being conducted.
Section 4.2. Capitalization of Harmony. The authorized capital stock of
Harmony consists of 2,500,000 shares of common stock, no par value per share, of
which 1,554,929 shares are outstanding and have been duly authorized and validly
issued and are fully paid and nonassessable and 100,000 shares of preferred
stock, no par value per share, of which no shares are outstanding. There are no
options, warrants, rights, calls, commitments or agreements of any character
obligating Harmony to issue any shares of capital stock or any security
representing the right to purchase or otherwise receive any such shares, except
for options to purchase shares of Harmony Common Stock pursuant to the Harmony
Options granted under the 1991 Incentive Stock Option Plan and 1993 Long-Term
Incentive Plan, which have been canceled with the consent of the holders of the
Harmony Options (the "Option Plan"). Schedule 4.2 contains a complete and
accurate list of the following with respect to each employee stock option
outstanding under the Option Plan: the name of the holder of such option, the
number of shares of Common Stock covered by such option and the exercise price
of such option. Except for restrictions on transfer arising under applicable
federal and state securities laws, there are no existing restrictions imposed by
Harmony or by its affiliates on the transfer of any outstanding shares of
capital stock of Harmony and there are no registration covenants with respect
thereto. None of the outstanding shares of Harmony was issued in violation of
the preemptive rights of any present or former shareholder.
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Section 4.3. Charter Documents. The copies of the articles of
incorporation and by-laws of Harmony which have previously been delivered to EFC
are complete and correct.
Section 4.4. Binding Obligation; Consents; Litigation. The execution
and delivery of this Agreement by Harmony does not, and the consummation of the
transactions contemplated hereby will not, violate (i) any provision of the
articles of incorporation or by-laws of Harmony or (ii) any provision of, or
result in a breach of any of the terms or provisions of, or result in the
acceleration of any obligation under, or constitute a default under, any
mortgage, lien, lease, agreement, instrument, order, arbitration award, judgment
or decree to which Harmony is a party, or to which Harmony is, or the assets,
properties or business of Harmony are, subject, which would have a material
adverse effect on the business, operations or financial condition of Harmony.
The Board of Directors of Harmony has approved this Agreement, has authorized
the execution and delivery hereof and has directed that this Agreement be
submitted to the shareholders of Harmony for adoption at a special meeting of
such shareholders (the "Special Meeting"). Harmony has full power, authority and
legal right to enter into this Agreement and, upon appropriate vote of its
shareholders in accordance with law, to consummate the transactions contemplated
hereby. Except for the approval of its shareholders, and the mailing of a Proxy
Statement that complies with the rules and regulations promulgated by the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934, Harmony has taken all action required by law, its articles of
incorporation, its by-laws or otherwise to authorize and to approve the
execution and delivery of this Agreement and the documents, agreements and
certificates executed and delivered by Harmony in connection herewith and the
consummation by Harmony of the transactions contemplated hereby. This Agreement
has been duly executed and delivered by Harmony and constitutes a valid and
legally binding obligation of Harmony, enforceable against Harmony in accordance
with its terms, except as enforceability may be subject to or affected by any
bankruptcy, reorganization, insolvency, moratorium or similar laws of general
application from time to time in effect and relating to or affecting the rights
or remedies of creditors generally ("Creditor Exception"). Other than in
connection with the Virginia Act the Securities Exchange Act of 1934 and any
applicable state securities laws, no consent, action, approval or authorization
of, or registration, declaration or filing with, any governmental authority is
required to be obtained by Harmony in order to authorize the execution and
delivery by Harmony of this Agreement or the consummation by Harmony of the
Merger.
Section 4.5. Financial Statements. Harmony has filed quarterly reports
on Form 10- QSB pursuant to the Securities Exchange Act of 1934 ("Exchange Act")
for the fiscal quarters ended March 31, 1996, June 30, 1996, and September 30,
1996, and has filed an Annual Report on Form 10-KSB pursuant to the Exchange Act
for the fiscal year ended December 31, 1995 (the balance sheet included in the
Form 10-QSB for the quarter ended September 30, 1996 and the notes thereto are
referred to herein as the "Harmony Balance Sheet"). The financial statements
included in or incorporated by reference into these reports (including the
related notes and schedules) have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the periods covered thereby, and present fairly, in all material respects, the
financial position of Harmony as of the indicated dates and the
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results of operations of Harmony for the indicated periods; provided, however,
that the interim, unaudited financial statements in the Form 10-Qs are subject
to normal year-end adjustment.
Section 4.6. Public Reports. Harmony has made all filings with the
Securities and Exchange Commission ("SEC") that is has been required to make in
the past three years under the Securities Act of 1933 ("Securities Act"), and
the Exchange Act (collectively the "Public Reports"). Each of the Public Reports
has complied with the Securities Act and the Exchange Act in all material
respects. None of the Public Reports, as of their respective dates, contained
any untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
Section 4.7. Real Property. Except as set forth on Schedule 4.7,
Harmony does not own, have legal or equitable title in, or have a leasehold
interest in, any real property (the "Harmony Real Property"). Except for (i)
mechanics' and similar liens arising by operation of law or in the ordinary
course of business in respect of obligations not yet due, (ii) liens for taxes
not yet due and payable or that are being contested in good faith by appropriate
proceedings and for which adequate reserves have been established and (iii) as
set forth on Schedule 4.7, the Harmony Real Property is free and clear of all
mortgages, liens, pledges, charges, deeds of trust, security interests,
conditional sales contracts, adverse interests in property, leases or other
encumbrances of any kind.
Section 4.8. Employee Benefits.
(a) Set forth on Schedule 4.8 is a correct and complete list
of all funded or unfunded, written or oral, employee benefit plans within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended and the rules and regulations thereunder (collectively, "ERISA") and
all other contracts, agreements, incentives, salary, wages or other compensation
plans or arrangements, including but not limited to all pension and profit
sharing plans, savings plans, bonus, deferred compensation, incentive
compensation, supplemental retirement, severance or termination pay,
hospitalization, medical, life insurance, dental, disability, salary
continuation, vacation, or supplemental unemployment benefit programs, policies,
plans, or arrangements, union contracts, retiree benefits and agreements,
severance agreements and each other employee benefit program, plan, policy or
arrangement, at any time maintained, contributed to, or required to be
contributed to by Harmony or an ERISA Affiliate for the benefit of present or
former employees, directors, agents or consultants, or for which Harmony may be
responsible or with respect to which it may have any liability, whether or not
subject to ERISA and whether legally binding or not (each, a "Harmony Plan").
"ERISA Affiliate" means any trade or business, whether or not incorporated, that
together with Harmony would be deemed a single employer under Section 414(b),
(c), (m), (n) or (o) of the Internal Revenue Code of 1986, as amended (the
"Code") or Section 4001 of ERISA. Each Harmony Plan intended to be qualified
under Section 401(a) of the Code (a "Tax-Qualified Plan") is identified as a
Tax-Qualified Plan in such Schedule 4.8 and is so qualified.
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(b) Harmony has heretofore delivered to EFC true and
complete copies of each Harmony Plan listed on Schedule 4.8.
(c) Harmony and its employees do not participate in any
Tax-Qualified Plan.
(d) In addition, with respect to all Harmony Plans,
except as set forth on Schedule 4.8, (i) other than routine claims for benefits,
there are no material actions, suits or claims pending or threatened against any
Harmony Plan or the fiduciaries thereof, or against the assets of any Harmony
Plan and (ii) on and after January 1, 1975, neither Harmony nor any of its ERISA
Affiliates, nor any plan fiduciary of any Harmony Plan, has engaged in any
prohibited transaction within the meaning of Title I of ERISA or Section 4975 of
the Code and no imposition of excise tax penalties has occurred with respect
thereto.
(e) Each "group health plan" (within the meaning of
Section 4980B of the Code) maintained by Harmony has been administered in
material compliance with the coverage continuation requirements contained in the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and any
regulations promulgated or proposed under the Code.
Harmony does not maintain, sponsor or contribute to any plan or program
providing retiree medical or life insurance benefits.
Section 4.9. Litigation.
(a) Except as set forth on Schedule 4.9, there is no (i)
action, suit, claim, proceeding or investigation pending or, to the knowledge of
Harmony or any officer of Harmony, threatened against or affecting Harmony or
its assets, Employees or properties, at law or in equity, or before or by any
court or governmental authority, (ii) arbitration proceeding relating to Harmony
or its assets, Employees or properties or (iii) governmental inquiry pending or,
to the knowledge of Harmony or any officer of Harmony, threatened relating to or
involving Harmony, its assets or properties or the business of Harmony or the
transaction contemplated by this Agreement (including inquiries as to the
qualification of Harmony to hold or receive any permit) and Harmony does not
know of any basis for any of the foregoing. Except for actions brought to
collect accounts receivable in the ordinary course of Harmony's business, there
are no pending actions, suits, claims or proceedings brought by Harmony against
others.
(b) Harmony has not received any written opinion, memorandum,
legal advice or notice from legal counsel to the effect that they are exposed,
from a legal standpoint, to any liability or disadvantage which may be material
to its respective businesses and which would continue past the Closing Date.
Harmony is not in default with respect to any order, writ, injunction or decree
known to or served upon Harmony of any court or of any governmental authority.
(c) Harmony knows of no pending or threatened action, suit,
proceedings, investigation, order or injunction before or by any court or
governmental body that seeks to
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restrain or to prevent the consummation of the Merger or the other transactions
contemplated by this Agreement.
Section 4.10. Material Contracts and Agreements. Harmony has described
all material contracts of Harmony now in effect to which Harmony is a party or
by which it or its properties or assets may be bound or affected, under which
the total obligation of Harmony is in excess of $50,000 or which is otherwise
material to Harmony on Schedule 4.10 (the "Harmony Material Contracts"). No
default, alleged default or anticipatory breach exists on the part of Harmony
or, to the best knowledge of Harmony, on the part of any other party, under any
Harmony Material Contract, and there are no material agreements of the parties
relating to any Harmony Material Contract that have not been disclosed to EFC.
Except as set forth on Schedule 4.10, as of the Closing Date, Harmony will not
be a party to any transaction with any officer or director of Harmony, any
member of the family of any such officer or director or any corporation,
partnership, trust or other entity in which any such officer or director has a
substantial interest or is an officer, director, trustee or partner.
Section 4.11. Labor Matters. Harmony is not a party to any collective
bargaining agreement with any labor organization. There is not pending or, to
the knowledge of Harmony, threatened any labor dispute, strike or work stoppage
involving the employees of Harmony.
Section 4.12. Tax Matters.
(a) Harmony has filed all tax returns required to be filed
by it under the laws of the United States of America, the jurisdiction of its
incorporation, and each state or other jurisdiction in which it conducts
business activities and is required to file. Harmony has paid or set up an
adequate reserve in respect of all taxes for the periods covered by such
returns. Harmony does not have any tax liability for which no tax reserve has
been made in respect of any jurisdiction in which Harmony has business
activities and is required to file. Harmony has set up as provisions for taxes
on the Harmony Balance Sheet amounts sufficient for all accrued and unpaid
federal, state, county and local taxes of Harmony, whether or not disputed,
including any interest and penalties in connection therewith, for all fiscal
periods ending on or before the date of the Harmony Balance Sheet.
(b) Harmony's federal income tax returns have been examined
by the IRS (or closed by applicable statutes) for all years to and including the
fiscal year ended December 31, 1992 and no such examinations are in progress.
Any deficiencies proposed as a result of said audits have been paid or finally
settled and no issue has been raised in any such examinations which, by
application of similar principles, reasonably can be expected to result in the
assertion of a deficiency for any other year not so examined. The results of any
settlements and any necessary adjustments in state income tax resulting
therefrom are properly reflected in Harmony's financial statements referred to
in Section 4.5. Harmony is not aware of any fact which would constitute grounds
for any further tax liability with respect to the years which have not been
examined. No agreements or waivers have been made by or on behalf of Harmony for
the extension of time for the assessment of any tax or for any applicable
statute of limitations.
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(c) Except for taxes for the payment of which an adequate
reserve has been established on the Harmony Balance Sheet, there are no tax
liens, whether imposed by any federal, state or local taxing authority,
outstanding against any of the assets, properties or business of Harmony.
(d) All taxes and assessments that Harmony is required to
withhold or to collect have been duly withheld or collected and all withholdings
and collections have either been duly and timely paid over to the appropriate
governmental authority or are, together with the payments due or to become due
in connection therewith, duly reflected on the Harmony Balance Sheet in
accordance with GAAP.
Section 4.13. Absence of Undisclosed Liabilities. Harmony does not have
any indebtedness, liability, or obligation of any character whatsoever, whether
or not accrued and whether or not fixed or contingent, in excess of $100,000,
other than (i) liabilities reflected in the Harmony Balance Sheet, (ii)
liabilities incurred in the ordinary course of business (or pursuant to the
liquidation) of Harmony since the date of the Harmony Balance Sheet, (iii)
indebtedness, liability and obligations listed on Schedule 4.13 hereto, and (iv)
liabilities incurred in connection with the performance of this Agreement.
Harmony has described all material indebtedness, liabilities or obligations of
Harmony known to it on Schedule 4.13 (the "Harmony Scheduled Liabilities").
Section 4.14. Insurance. All significant policies of insurance,
together with the premiums currently paid thereon, providing for business
interruption, personal, employee, product or public liability coverage with
respect to the business of Harmony are described on Schedule 4.14. The copies of
such policies which have previously been delivered to EFC are complete and
correct. There are no claims, actions, suits or proceedings arising out of or
based upon any of such policies of insurance, and, so far as is known to Harmony
or any of its officers, no basis for any such claim, action, suit or proceeding
exists. There are no notices of any pending or threatened terminations with
respect to any of such policies and Harmony is in compliance with all conditions
contained therein.
Section 4.15. No Material Adverse Change. Since the date of the Harmony
Balance Sheet, Harmony has not experienced any damage, destruction or loss
(whether or not covered by insurance) to its assets or material adverse change
in the business, financial condition, operations, or results of operations of
Harmony.
Section 4.16. Required Consents. There have been or will be timely
filed, given, obtained or taken all applications, notices, consents, approvals,
orders, registrations, qualifications, waivers or other actions of any kind
required by virtue of the execution and delivery of this Agreement by Harmony or
the consummation by Harmony of the Merger or any of the transactions
contemplated hereby.
Section 4.17. Registration Statements; Proxy Statement/Prospectus.
The Proxy Statement (as such term is defined in Section 6.1(b) of this
Agreement), on the date on which
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the Proxy Statement is mailed to the shareholders of Harmony in connection with
the Special Meeting with respect to all information set forth therein furnished
by Harmony and relating to Harmony (i) will comply as to form in all material
respects with the provisions of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder, as applicable, and (ii) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading. In no event, however, shall Harmony be liable for any
untrue statement of a material fact or omission to state a material fact in the
Proxy Statement made in reliance upon, and in conformity with, information
concerning EFC furnished by EFC specifically for use therein.
Section 4.18. Disclosure; Representations and Warranties. Harmony has
made true and complete responses in all material respects to all EFC's requests
for information, documents, contracts, agreements and records of Harmony
relating to the business of Harmony. Neither this Agreement nor any statement,
certificate, writing or document furnished to EFC by Harmony in connection with
this Agreement contains, as of the dates of such documents, any untrue statement
of a material fact or omits to state a material fact necessary to make the
statements contained therein not misleading.
Section 4.19. Finders or Brokers. Harmony has not utilized the services
of any investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to a fee or commission in
connection with this Agreement or upon consummation of the transactions
contemplated hereby, other than Scott & Stringfellow, Inc., which has been
engaged to render a fairness opinion with respect to the Merger.
Section 4.20. Patents, Trademarks, etc.
(a) Schedule 4.20 lists all patents and pending applications
therefor, all material registered and unregistered trademarks and copyrights,
and pending applications therefor, and technology licenses and material software
licenses presently used by Harmony, divided into items owned by Harmony and
items licensed from third parties. The items listed on Schedule 4.20, together
with all other inventions, processes, know-how, trade secrets and other
intellectual property currently owned or used by Harmony are referred to as the
"Harmony Intellectual Property."
(b) Harmony owns or has the valid right to use the Harmony
Intellectual Property to the extent used in its current operations, and, the
consummation of the Merger and the other transactions contemplated by this
Agreement will not alter or impair any such rights.
(c) To Harmony's knowledge, the current operations of
Harmony do not infringe any valid foreign or U.S. patent, trademark, copyright
or trade name. The Harmony Intellectual Property and the know-how possessed by
Harmony are collectively sufficient to carry on the operations of Harmony as
presently conducted. No claim by any third party contesting
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the validity, enforceability, use or ownership of the Harmony Intellectual
Property has been made, is currently outstanding or, to Harmony's knowledge,
threatened.
Section 4.21. Environmental.
(a) The following terms shall have the following
meanings:
(i) "Environmental Compliance Action" means any
expenditure or action necessary to cause any equipment, structure, facility,
device or process which is located at the Effective Time at any of the Harmony
Facilities, and subject to regulation pursuant to Environmental Laws, to be in
compliance with Applicable Environmental Laws in effect on or before the
Effective Time. Environmental Compliance Action may include relaxation in
Environmental Laws subsequent to the Effective Time, but shall not include any
Remedial Action.
(ii) "Environmental Losses" means any and all
claims, damages, losses, expenses, costs, and liabilities of any kind imposed or
incurred pursuant to Environmental Laws, including without limitation remedial,
removal, response, restoration, abatement, investigative, testing, monitoring,
personal injury, death and property damage costs.
(iii) "Environmental Laws" means applicable
federal, state, local and foreign laws, statutes, regulations, ordinances and
rules now in force, relating to pollution or the protection, cleanup or
restoration of the environment, or to safety or health, including, but not
limited to, any of the same relating to (a) generation, treatment, storage,
disposal or transportation of wastes, emissions or discharges or protection of
the environment from the same; (b) noise; (c) exposure to Hazardous Substances;
or (d) regulation of the manufacture, processing, distribution in commerce or
use of chemical substances, food and drug products, ingredients and additives,
insecticides and pesticides, including without limitation the Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act ("RCRA"), the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
the Oil Pollution Act, and the Occupational Safety and Health Act, in each case
as amended and including their comparable state and local laws.
(iv) "Environmental Permit" means any approval,
license, order, permit or other similar authorization of or with any
governmental authority (or any other persons) necessary for the ownership and
operation of any of the Harmony Facilities required by applicable Environmental
Laws.
(v) "Harmony Facilities" means the property
subject to leases described on Schedule 4.7.
(vi) "Hazardous Substance" means any toxic
substance or waste, pollutant, hazardous substance or waste, contaminant,
insecticide, pesticide, special waste, infectious waste, industrial substance or
waste, or any constituent of any such substance or waste to the extent regulated
under or defined by or pursuant to any Environmental Law, and includes,
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without limitation, asbestos, petroleum (including crude oil or any fraction
thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic
gas usable for fuel, or any mixture thereof), polychlorinated biphenyls, urea,
formaldehyde, radon gas, radioactive matter, and chemicals which are regulated
as potentially causing cancer or reproductive toxicity.
(vii) "Release" means any release, spill,
emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal,
leaching or migration into the environment or into or out of any property,
including the movement of Hazardous Substances through or in the air, soil,
surface water, ground water or property.
(viii) "Remedial Action" means all actions, whether
undertaken pursuant to judicial or administrative order or otherwise, reasonably
necessary to comply with applicable Environmental Laws, to (a) clean up,
remediate, remove, treat, cover or in any other way adjust Hazardous Substances
in the environment; or (b) perform remedial studies, investigations, restoration
and post-remedial studies, investigations and monitoring on, about or in any
environmental media; and (c) restore the Harmony Facilities to substantially the
same condition they were in prior to commencing such Remedial Action.
(b) Except for violations which individually or in the
aggregate would not have a material adverse effect, Harmony has obtained all
Environmental Permits necessary for the current use and operation of the Harmony
Facilities in accordance with Applicable Environmental Laws and the Harmony
Facilities are owned and are being operated in compliance with applicable
Environmental Laws, in each case as in effect and as interpreted by the relevant
judicial and regulatory authorities as of the Closing Date ("Applicable
Environmental Law").
(c) There are no lawsuits, written claims or written
demands from governmental agencies, actions, proceedings or administrative
enforcement or environmental cleanup proceedings pending or, to Harmony's
knowledge, threatened, with respect to the condition or operation of the Harmony
Facilities. To Harmony's knowledge: (i) none of the Harmony Facilities have been
placed on, or proposed to be placed on, the National Priorities List or its
state equivalents pursuant to CERCLA or analogous state laws, including laws
which establish registers of historically contaminated sites; and (ii) none of
the Harmony Facilities include underground storage tanks subject to regulation
under RCRA or state laws aimed at the protection of waters or at hazardous waste
disposal, from which there has been a Release of Hazardous Substances and all
underground storage tanks now or previously located at the Harmony Facilities
have either been removed in accordance with all then applicable laws, including
but not limited to Environmental Laws, or if still present, have been permitted
in accordance with applicable Environmental Laws.
(d) There has been no Release of Hazardous Substances in,
on, under or at the Harmony Facilities in violation of then applicable
Environmental Law.
(e) Harmony is not subject to any order requiring cleanup
or remedial action with respect to any of the Harmony Facilities. Harmony has
not received any notice that they
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might be a potentially responsible party as defined in CERCLA with respect to
the operations and activities of Harmony.
(f) The execution, delivery and performance of this
Agreement and the other documents and instruments referred to herein or
contemplated hereby, the consummation of the transactions contemplated thereby
and the performance by Harmony of its obligations thereunder do not and will not
violate any applicable Environmental Law or any Environmental Permit.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF EFC
EFC represents and warrants that as of the date of this Agreement:
Section 5.1. Organization; Authority. EFC is a corporation organized
and existing in good standing under the laws of the Commonwealth of Virginia.
EFC is duly authorized to conduct business and is in good standing under the
laws of the Commonwealth of Virginia. No jurisdiction in the United States in
which EFC is not now qualified has asserted that EFC is required to be qualified
to do business therein.
EFC has all necessary power and authority to own or to lease, and to
operate, its properties and assets and to carry on its business as it is now
being conducted.
Section 5.2. Capitalization of EFC. The authorized capital stock of EFC
is as set forth on Schedule 5.2 hereto which also sets forth the number of
shares of each class of capital stock outstanding as of the date of this
Agreement. At the Effective Time, all outstanding shares of capital stock of EFC
will have been duly authorized and validly issued and will be fully paid and
nonassessable. No shares of EFC's capital stock are held in treasury. Except as
set forth on Schedule 5.2, there are, as of the date of this Agreement, no
options, warrants, rights, calls, commitments or agreements of any character
obligating EFC to issue any shares of capital stock or any security representing
the right to purchase or otherwise receive any such shares. Except for
restrictions on transfer arising under applicable federal and state securities
laws, there are no existing restrictions imposed by EFC or by their respective
affiliates on the transfer of any outstanding shares of capital stock of EFC and
there are no registration covenants with respect thereto. At the Effective Time,
none of the outstanding shares of EFC will have been issued in violation of the
preemptive rights of any present or former shareholder.
Section 5.3. Charter Documents. The copies of the articles of
incorporation and by-laws of EFC which have previously been delivered to Harmony
are complete and correct.
Section 5.4. Binding Obligation; Consents; Litigation. The execution
and delivery of this Agreement by EFC does not, and the consummation of the
transactions contemplated hereby will not, violate (i) any provision of the
articles of incorporation of EFC or (ii) any provision of, or result in a breach
of any of the terms or provisions of, or result in the acceleration of any
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obligation under, or constitute a default under, any mortgage, lien, lease,
agreement, instrument, order, arbitration award, judgment or decree to which EFC
is a party, or to which EFC is, or the assets, properties or business of EFC
are, subject, which would have a material adverse effect on EFC or any of its
assets. The Board of Directors and the shareholders of EFC have approved this
Agreement and authorized the execution and delivery hereof. EFC has full power,
authority and legal right to enter into this Agreement and to consummate the
transactions contemplated hereby. EFC has taken all action required by law, its
articles of incorporation, its by-laws or otherwise to authorize and to approve
the execution and delivery of this Agreement and the documents, agreements and
certificates executed and delivered by it in connection herewith and the
consummation by it of the transactions contemplated hereby. This Agreement has
been duly executed and delivered by EFC and constitutes a valid and legally
binding obligation of EFC, enforceable against EFC in accordance with its terms,
subject to the Creditor Exception. Other than in connection with the Virginia
Act, no consent, action, approval or authorization of, or registration,
declaration or filing with, any governmental authority is required to be
obtained by EFC in order to authorize the execution and delivery by EFC of this
Agreement or the consummation of the Merger.
Section 5.5. Real Property. EFC does not own, have legal or equitable
title in, or have a leasehold interest in, any real property (the "EFC" Real
Property").
Section 5.6. Litigation.
(a) There is no (i) action, suit, claim, proceeding or
investigation pending or, to the knowledge of EFC or any officer of EFC,
threatened against or affecting EFC or its assets, employees or properties, at
law or in equity, or before or by any court or governmental authority, (ii)
arbitration proceeding relating to EFC or its assets, employees or properties or
(iii) governmental inquiry pending or, to the knowledge of EFC or any officer of
EFC, threatened relating to or involving EFC, its assets or properties or the
business of EFC or the transactions contemplated by this Agreement (including
inquiries as to the qualification of EFC to hold or receive any permit) and EFC
does not know of any basis for any of the foregoing. There are no pending
actions, suits, claims or proceedings brought by EFC against others.
(b) EFC has not received any written opinion, memorandum,
legal advice or notice from legal counsel to the effect that they are exposed,
from a legal standpoint, to any liability or disadvantage which may be material
to their respective businesses and which would continue past the Effective Time.
EFC is not in default with respect to any order, writ, injunction or decree
known to or served upon EFC of any court or of any governmental authority.
(c) EFC knows of no pending or threatened action, suit,
proceeding, investigation, order or injunction before or by any court or
governmental body that seeks to restrain or to prevent the consummation of the
Merger or the other transactions contemplated by this Agreement.
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Section 5.7. Material Contracts and Agreements. No default, alleged
default or anticipatory breach exists on the part of EFC or, to the best
knowledge of EFC or any of its officers, on the part of any other party, under
any material agreement, written or oral, relating to the business of EFC.
Section 5.8. Labor Matters. EFC is not a party to any collective
bargaining agreement with any labor organization. There is not pending, or to
the knowledge of EFC threatened, any labor dispute, strike or work stoppage
involving the employees of EFC.
Section 5.9. Absence of Undisclosed Liabilities. EFC does not have any
material indebtedness, liability or obligation of any character whatsoever,
whether or not accrued and whether or not fixed or contingent, other than (i)
liabilities incurred in the ordinary course of business of EFC, (ii)
indebtedness, liabilities and obligations listed on Schedule 5.9 hereto, and
(iii) liabilities incurred in connection with the performance of this Agreement.
EFC has described all material indebtedness, liabilities or obligations of EFC
known to it on Schedule 5.9 (the "EFC Scheduled Liabilities").
Section 5.10. Required Consents. There have been or will be timely
filed, given, obtained or taken all applications, notices, consents, approvals,
orders, registrations, qualifications, waivers or other actions of any kind
required by virtue of the execution and delivery of this Agreement by EFC or the
consummation by EFC of any of the transactions contemplated hereby.
Section 5.11. Proxy Statement. The Proxy Statement (as such term is
defined in Section 6.1(b) of this Agreement), on the date on which the Proxy
Statement is mailed to the shareholders of Harmony in connection with the
Special Meeting, with respect to all information set forth therein furnished by
EFC and relating to EFC (i) will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations of the SEC
thereunder, as applicable, and (ii) will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements contained therein not misleading. In no event,
however, shall EFC be liable for any untrue statement of a material fact or
omission in the Proxy Statement made in reliance upon, and in conformity with,
information concerning Harmony furnished by Harmony specifically for use
therein.
Section 5.12. Disclosure; Representations and Warranties. EFC has made
true and complete responses in all material respects to all of Harmony's
requests for information, documents, contracts, agreements and records of EFC
relating to the business of EFC. Neither this Agreement nor any statement,
certificate, writing or document furnished to Harmony by EFC in connection with
this Agreement contains, as of the dates of such documents, any untrue statement
of a material fact or omits to state a material fact necessary to make the
statements contained therein not misleading.
Section 5.13. Finders or Brokers. EFC has not utilized the services
of any investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby
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who might be entitled to a fee or commission in connection with this Agreement
or upon consummation of the transactions contemplated hereby.
Section 5.14. Nature of EFC's Business. EFC represents and warrants
that it is a start-up business that has never conducted, and will not conduct
prior to the Closing, any business operations. In connection therewith, and as a
result thereof, EFC (i) has never had prepared any financial statements, (ii)
has no employee benefit or other similar plans of any nature whatsoever, and
(iii) has never been required to file any tax returns of any type whatsoever.
ARTICLE 6
TRANSACTIONS PRIOR TO THE EFFECTIVE TIME OF THE MERGER
Section 6.1. Special Meeting.
(a) Subject to its fiduciary responsibilities and the
provisions of the Virginia Act, the Board of Directors of Harmony will submit
this Agreement to its shareholders for their adoption and will solicit proxies
in favor of and recommend to its shareholders such adoption at a meeting thereof
to be duly called and held as soon as practicable.
(b) The parties hereto shall cooperate with each other in
every way in carrying out the transactions contemplated herein, including, but
not limited to, (i) in obtaining all required approvals and authorizations, (ii)
in furnishing information required for use in a proxy statement (the "Proxy
Statement") complying with the requirements of applicable state and federal law
and regulations for use in connection with the Special Meeting to be held for
the purpose of considering the transactions contemplated by this Agreement, and
(iii) in executing and delivering all documents, instruments or copies thereof
deemed necessary or useful by either party. Should the appearance of any of the
officers, directors, employees or counsel of any of the parties hereto be
requested by any of the parties or by any governmental agency at any hearing in
connection with any such application or in connection with any such agency's
review of the transactions contemplated hereby, or the Proxy Statement, such
party promptly shall use its best efforts to arrange for such appearance.
Harmony and EFC each promptly shall provide the other with copies of all such
applications and all amendments and supplements thereto filed or made in
connection with the transactions contemplated hereby and promptly shall advise
the other of the substance of all oral or written comments received thereon from
applicable regulatory authorities.
(c) Submission to Shareholders. Harmony shall take all such
actions as may be required to submit the Merger and the other transactions
contemplated by this Agreement at the earliest practicable date for the approval
of its shareholders. The Board of Directors of Harmony shall recommend such
approvals by the shareholders at the Special Meeting as are required to
effectuate the Merger and the other transactions contemplated hereby.
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ARTICLE 7
CERTAIN COVENANTS AND AGREEMENTS
Section 7.1. Approvals; Consents. Harmony will obtain or cause to be
obtained all consents, approvals and authorizations required by any applicable
requirement of law or by any contract or agreement to be obtained by Harmony in
connection with the consummation of the Merger. EFC will obtain or cause to be
obtained all consents, approvals and authorizations required by any applicable
requirement of law or by any contract or agreement to be obtained by EFC in
connection with the consummation of the Merger.
Section 7.2. Conduct of Business Prior To Effective Time. Except as
otherwise provided in this Agreement, Harmony shall: (i) conduct its business
only in the ordinary course and consistent with past practices; (ii) keep in
full force and effect its corporate existence; (iii) comply with the Material
Contracts and other agreements by which it is bound; (iv) use reasonable efforts
to retain its employees and maintain its business relationships with customers
and suppliers; (v) use, operate and maintain in all material respects its Real
Property and other properties, as presently used, operated and maintained,
except for ordinary wear and tear; and (vi) except for increases in the ordinary
course of business and consistent with past practices, not grant any increase in
the compensation or rate of compensation payable or to become payable to any of
its employees. Without the prior written consent of EFC, Harmony will not: (i)
amend its charter or by-laws, (ii) except as expressly permitted by this
Agreement, declare, set aside or pay any dividend or distribution with respect
to its capital stock, or repurchase, redeem or otherwise acquire or exchange,
directly or indirectly, any shares of its capital stock or any securities
convertible into any shares of its capital stock, (iii) except as expressly
permitted by this Agreement, issue, sell or otherwise permit to become
outstanding any additional shares of its capital stock, or any option, warrant,
conversion, or other right to acquire any such stock or any security convertible
into any such stock, or enter into an agreement or commitment with respect to
the foregoing, other than shares of Harmony Common Stock to be issued to certain
Harmony Directors in connection with a contribution of capital of approximately
$76,000 by such Harmony Directors anticipated to be made in mid-December 1996, a
condition to which shall be subscription by Harmony Directors for shares of
preferred stock of EFC on terms consistent with prior subscriptions by such
Harmony Directors, (iv) enter into any other agreement or commitment not in the
ordinary course of business, including without limitation an agreement or
commitment to acquire direct or indirect control over any third party or to sell
or otherwise dispose of any substantial part of its assets or any asset other
than in the ordinary course of business for reasonable and adequate
consideration; (v) incur any indebtedness, other than indebtedness incurred in
the ordinary course of business; or (vi) make any new commitments for capital
expenditures exceeding Twenty-Five Thousand Dollars ($25,000) per item or Fifty
Thousand Dollars ($50,000) in the aggregate.
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Section 7.3. Access to Information and Documents.
(a) From the date hereof to the Closing Date, Harmony shall
give to, or cause to be made available for, and EFC shall give to, or cause to
be made available for, Harmony and their respective counsels, accountants and
other representatives full access during normal business hours to all
properties, documents, contracts, employees and records of Harmony or EFC and
furnish the other party with copies of such documents and with such information
as such party from time to time reasonably may request. Each party will make
available to the other for examination correct and complete copies of all
Federal, state, local and foreign tax returns filed together with all available
revenue agents' reports, all other reports, notices and correspondence
concerning tax audits or examinations and analyses of all provisions for
reserves or accruals of taxes, including deferred taxes.
(b) Until the Closing Date (and, if this Merger Agreement is
terminated prior to the Closing Date, at all times after such termination), the
parties will not disclose or use any confidential information obtained in the
course of their respective investigations, except to the extent that any such
confidential information subsequently becomes public knowledge.
(c) If the Merger is not consummated and this Agreement is
terminated, then EFC promptly shall return all documents, contracts, records or
properties of Harmony furnished by Harmony to EFC and all copies thereof, and
Harmony promptly shall return all documents, contracts, records or properties of
EFC furnished by EFC to Harmony, and all copies thereof.
Section 7.4. Periodic Information.
(a) From the date hereof to the Closing Date, Harmony shall
furnish EFC with such additional financial and operating data and other
information regarding its business, reasonably available to Harmony, as EFC
shall from time to time reasonably request.
(b) From the date hereof to the Closing Date, EFC shall
furnish Harmony with such additional financial and operating data and other
information regarding its business, reasonably available to EFC as Harmony shall
from time to time reasonably request.
Section 7.5. Representations. Each of the parties to this Agreement (a)
will take all action necessary to render accurate as of the Closing Date their
respective representations and warranties contained herein, (b) will refrain
from taking any action which would render any such representation or warranty
inaccurate in any material respect as of such time, and (c) will perform or
cause to be satisfied each covenant or condition to be performed or satisfied by
them under this Agreement.
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Section 7.6. Information.
(a) Harmony will furnish EFC with all information concerning
Harmony reasonably required by any governmental or regulatory body in connection
with the transactions contemplated by this Agreement.
(b) EFC will furnish Harmony with all information concerning
EFC reasonably required for inclusion in the Proxy Statement and any other
registration statement, application or filing made by Harmony to the SEC, Nasdaq
or any other governmental or regulatory body in connection with the transactions
contemplated by this Agreement.
Section 7.7. Notice of Breach.
(a) EFC will immediately give notice to Harmony of the
occurrence of any event or the failure of any event to occur that results in a
breach of any representation or warranty by EFC or a failure by EFC to comply
with any covenant, condition or agreement contained herein.
(b) Harmony will immediately give notice to EFC of the
occurrence of any event or the failure of any event to occur that results in a
breach of any representation or warranty by Harmony or a failure by Harmony to
comply with any covenant, condition or agreement contained herein.
Section 7.8. Negotiations with Third Parties. Harmony will not, without
the prior written approval of EFC, initiate, solicit or encourage (including by
way of furnishing information or assistance), or take any other action to
facilitate, any inquiries or the making of any proposal relating to, or that may
reasonably be expected to lead to, any Competing Transaction (as defined below),
or enter into discussions or negotiate with any person or entity in furtherance
of such inquiries or to obtain a Competing Transaction, or agree to or endorse
any Competing Transaction, or authorize or permit any of the officers, directors
or employees of Harmony or any investment banker, financial advisor, attorney,
accountant or other representative retained by Harmony to take any such action.
For purposes of this Agreement, "Competing Transaction" shall mean any of the
following (other than the transactions contemplated by this Agreement) involving
Harmony: (i) any merger, consolidation, share exchange, business combination or
similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition of 5% or more of the assets of Harmony, taken as a whole;
(iii) any tender offer or exchange offer for any of the outstanding shares of
capital stock of Harmony or the filing of a registration statement under the
Securities Act in connection therewith; (iv) any person having acquired
beneficial ownership of, or any group (as such term is used in Section 13(d) of
the Exchange Act and the rules and regulations promulgated thereunder) having
been formed which beneficially owns or has the right to acquire beneficial
ownership of, 5% or more of the outstanding shares of capital stock of Harmony
other than the Inside Shareholders; or (v) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing provided, however, that Harmony and its officers
and directors
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will remain free to participate in any discussions or negotiations regarding,
furnish any information with respect to, assist or participate in, or facilitate
in any other manner any efforts or attempts by any person to do or seek any of
the foregoing to the extent their fiduciary duties may require.
Section 7.9. Fairness Opinion. Harmony will deliver to EFC on or
before the date the Proxy Statement is mailed to the shareholders of Harmony an
opinion of Scott & Stringfellow, Inc. as to the fairness of the Merger to
Harmony's shareholders from a financial point of view ("Fairness Opinion").
Section 7.10. Indemnification.
(a) EFC will not take any action to alter or impair any exculpatory or
indemnification provisions now existing in the articles of incorporation or
by-laws of Harmony for the benefit of any individual who served as a director or
officer of Harmony at any time prior to the Effective Time.
(b) In the event (i) Harmony breaches (or in the event any third party
alleges facts that, if true, would mean Harmony has breached) any of its
representations or warranties contained in this Agreement, or (ii) the Surviving
Corporation incurs any obligations or liabilities in connection with the
exercise of dissenters' rights by holders of Harmony Common Stock pursuant to
Article 15 of the Virginia Stock Corporation Act ("Dissenters' Liabilities") and
if EFC makes a written claim for indemnification against Harmony within six (6)
months of the Effective Time, then the Harmony Directors shall indemnify EFC
from and against the entirety of all amounts incurred in connection with all
actions, proceedings, suits, hearings, investigations, charges, complaints,
claims, demands, injunctions, judgments, orders, decrees, rulings, including all
damages, dues, penalties, fines, costs, liabilities, obligations, taxes, liens,
losses, expenses, and fees, including court costs and reasonable attorneys' fees
and expenses ("Adverse Consequences") EFC may suffer through and after the date
of the claim for indemnification (but excluding any Adverse Consequences EFC may
suffer after the end of the six (6) month survival period, other than Adverse
Consequences suffered in connection with Dissenters' Liabilities) resulting
from, arising out of, relating to, in the nature of, or caused by the breach (or
the alleged breach) or the Dissenters' Liabilities. Notwithstanding anything
herein to the contrary, the Harmony Directors shall not have any obligation to
indemnify EFC from and against any Adverse Consequences caused by the breach of
any representation and warranty of Harmony contained in this Agreement or for
any Dissenters' Liabilities until EFC has suffered Adverse Consequences in
excess of a $50,000 aggregate deductible (after which point the Harmony
Directors will be obligated only to indemnify EFC from and against further such
Adverse Consequences). In addition, in the event the Harmony Directors have any
indemnity obligation to EFC pursuant to this Section 7.10(b), EFC's sole remedy
in connection with the recovery of any Adverse Consequences shall be to proceed
against and recover shares of preferred stock of EFC owned by the Harmony
Directors, which shares, in such event, shall be valued at $2.00 per share
without discount for any reason, including without limitation any calculations
based on a time value of money theory. Accordingly, the Harmony Directors shall
not be liable for any monetary damages whatsoever
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in connection with their indemnity obligations hereunder. Further, it is
understood and agreed by EFC, Harmony and the Harmony Directors that the
foregoing indemnification provisions are in addition to any statutory,
equitable, or common law remedy EFC may have for a breach of any representation
or warranty. With respect to any third party claims pursuant to the foregoing
indemnity provisions, such third party claims shall be resolved as follows:
(i) If any third party shall notify EFC (the "Indemnified
Party") with respect to any matter ("Third Party Claim") which may give rise to
a claim for indemnification against the Harmony Directors ("Indemnifying Party")
under this Section 7.10(b) then the Indemnified Party shall promptly notify the
Indemnifying Party thereof in writing.
(ii) The Indemnifying Party will have the right to assume and
thereafter conduct the defense of the Third Party Claim with counsel of its
choice reasonably satisfactory to the Indemnified Party; provided, however, that
the Indemnifying Party will not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of the Indemnified Party (not to be withheld unreasonably)
unless the judgment or proposed settlement involves only the payment of money
damages and does not impose an injunction or other equitable relief upon the
Indemnified Party.
(iii) Unless and until the Indemnifying Party assumes the defense
of the Third Party Claim as provided in (ii) above, the Indemnified Party may
defend against the Third Party Claim in any manner it reasonably may deem
appropriate.
(iv) In no event will the Indemnified Party consent to the entry
of any judgment or enter into any settlement with respect to a Third Party Claim
without the prior written consent of the Indemnifying Party, not to be withheld
unreasonably.
Section 7.11. Payment to Exchange Agent. Promptly after the Closing, or
at such earlier time as EFC chooses, cash in an amount sufficient to pay all
shareholders of Harmony the Merger Consideration to which they are entitled,
less any debt of Harmony shareholders to EFC, will be deposited by EFC with
First Union National Bank of North Carolina, as exchange agent (the "Exchange
Agent").
ARTICLE 8
CONDITIONS TO OBLIGATIONS OF THE PARTIES
The obligations of the parties under this Agreement are subject to the
fulfillment and satisfaction of each of the following conditions:
Section 8.1. Shareholder Approvals. At or before the Effective Time,
the shareholders of Harmony holding more than two-thirds of the outstanding
shares of Harmony Common Stock shall have adopted this Agreement ("Requisite
Shareholder Approval").
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Section 8.2. Regulatory Approvals. At or before the Effective Time, all
applicable approvals of governmental regulatory authorities of the United States
of America or of any state or political subdivision thereof required to
consummate the Merger shall have been obtained.
Section 8.3. Pending Litigation. No legal, administrative,
arbitrational, investigatory or other proceeding shall be pending before any
court, tribunal or governmental authority at the Closing Date which seeks to
challenge or prevent the Merger or any transaction contemplated by this
Agreement or which seeks to obtain a remedy at law in connection therewith.
Section 8.4. Third Party Consents. At or before the Effective Time, all
consents from third parties necessary to consummate the transactions
contemplated by this Agreement shall have been obtained.
ARTICLE 9
CONDITIONS TO EFC'S OBLIGATIONS
The obligations of EFC hereunder are subject to the satisfaction, at or
before the Closing Date, of the following conditions (any of which may be
waived, in whole or in part, by EFC):
Section 9.1. Representations and Warranties. The representations and
warranties of Harmony contained in this Agreement (including the Schedules and
Exhibits hereto), or in any certificate or document delivered to EFC in
connection herewith, shall be true in all material respects on the Closing Date
as if made again on and as of the Closing Date. Harmony shall have duly
performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed or complied with by
Harmony at or before the Closing Date. EFC shall have been furnished with
certificates of appropriate officers of Harmony, dated the Closing Date,
certifying in such detail as EFC may reasonably request to the fulfillment of
the foregoing conditions.
Section 9.2. Authority. All action required to be taken by, or on the
part of Harmony to authorize the execution, delivery and performance of this
Agreement by Harmony and the consummation of the transactions contemplated
hereby shall have been duly and validly taken by the Board of Directors and
shareholders of Harmony.
Section 9.3. Opinion of Harmony's Counsel. Kaufman & Canoles, counsel
to Harmony, shall have delivered to EFC a reasonable and customary opinion,
dated the Closing Date and addressed to EFC, substantially in the form agreed to
by Kaufman & Canoles and EFC.
Section 9.4. Legal Matters Satisfactory. All legal matters, and the
form and substance of all documents to be delivered by Harmony to EFC at the
Closing, shall have been approved by, and shall be satisfactory to, counsel to
EFC.
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Section 9.5. No Material Adverse Change. There shall not have been any
material adverse change in the business or financial condition of Harmony from
that disclosed in the Harmony Balance Sheet for the period from the date of the
Harmony Balance Sheet to the Closing Date.
Section 9.6. Payment of Debt. Harmony Directors shall have repaid all
amounts previously drawn by the Company under its $750,000 line of credit with
NationsBank, N.A.
Section 9.7. Professional Expenses. Harmony Directors shall have paid
the Company's professional expenses, including fees and disbursements of legal
counsel, accountants, and Scott & Stringfellow, Inc., incurred by the Company
prior to the Merger.
ARTICLE 10
CONDITIONS TO HARMONY'S OBLIGATIONS
The obligations of Harmony hereunder are subject to the satisfaction,
at or before the Closing Date, of the following conditions (any of which may be
waived, in whole or in part, by Harmony):
Section 10.1. Representations and Warranties. The representations and
warranties of EFC contained in this Agreement, or in any certificate or document
delivered to Harmony in connection herewith, shall be true in all material
respects at the Closing Date as if made again on and as of the Closing Date. EFC
shall have duly performed and complied in all material respects with all
agreements and conditions required by this Agreement to be performed or complied
with by EFC at or before the Closing Date. Harmony shall have been furnished
with certificates of appropriate officers of EFC, dated the Closing Date,
certifying in such detail as Harmony may reasonably request to the fulfillment
of the foregoing conditions. In addition, EFC shall have delivered a certificate
containing a representation and warranty stating the number of shares of each
class of capital stock of EFC that is outstanding as of the Effective Time, and
that except as set forth on such certificate, and at the Effective Time, there
will be no options, warrants, rights, calls commitments or agreements of any
character obligating EFC to issue any shares of capital stock or any security
representing the right to purchase or otherwise receive any such shares.
Section 10.2. Authority. All action required to be taken by, or on the
part of EFC to authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby shall
have been duly and validly taken by their respective shareholders and Board of
Directors.
Section 10.3. Opinion of Counsel for EFC. Mezzullo & McCandlish,
counsel for EFC, shall have delivered to Harmony a reasonable and customary
opinion, dated the Closing Date and addressed to Harmony, substantially in the
form of agreed to by Mezzullo & McCandlish and Harmony.
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Section 10.4. Legal Matters Satisfactory. All legal matters, and the
form and substance of all documents to be delivered by EFC to Harmony at the
Closing, shall have been approved by, and shall be satisfactory to, counsel to
Harmony.
Section 10.5. No Material Adverse Change. There shall not have been any
material adverse change in the business or financial condition of EFC from that
disclosed in the EFC Balance Sheet for the period from the date of the EFC
Balance Sheet to the Closing Date.
Section 10.6. Capitalization. EFC shall be sufficiently capitalized
to pay, and shall pay, the Merger Consideration, less any liability of
shareholders of Harmony to EFC.
ARTICLE 11
TERMINATION
Section 11.1. Termination. This Agreement may be terminated and the
Merger abandoned at any time before the Closing Date:
(a) by the written consent of Harmony and EFC;
(b) by EFC, in writing, if there has been a material
misrepresentation in this Agreement by Harmony, or a material breach by Harmony
of any of its warranties or covenants set forth herein, or a failure of any
condition to which the obligations of EFC hereunder are subject;
(c) by Harmony, in writing, if there has been a material
misrepresentation in this Agreement by EFC, or a material breach by EFC of any
of the warranties or covenants of EFC set forth herein, or a failure of any
condition to which the obligations of Harmony hereunder are subject;
(d) by either Harmony or EFC, in writing, if the Effective
Time shall not have occurred before December 31, 1996, for any reason other than
the failure of the party seeking to terminate this Agreement to perform its
obligations hereunder or a misrepresentation or breach of warranty by such party
herein;
(e) by either Harmony or EFC, in writing, in the event the
Fairness Opinion is withdrawn;
(f) by either Harmony or EFC, in writing, in the event the
Merger does not receive the Requisite Shareholder Approval from Harmony's
shareholders.
(g) by Harmony, in writing, at any time prior to the Effective
Time, in the event Harmony's Board of Directors concludes that termination is
required as a result of the Board of Directors' fiduciary duties.
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ARTICLE 12
MISCELLANEOUS
Section 12.1. Expenses. Except as expressly provided in Section 9.7 or
elsewhere herein, each party hereto shall pay its own costs and expenses
incident to its negotiation and preparation of this Agreement and to its
performance of and compliance with all agreements and conditions contained
herein to be performed or complied with by it. The parties further agree that
costs and expenses in connection with obtaining approval of the transactions
contemplated by this Agreement, including, but not limited to, any SEC filing
fees and expenses, and the printing of the Proxy Statement, shall be paid by
Harmony. Harmony shall also pay all proxy solicitation costs in connection with
its special meeting of shareholders to vote on this Agreement.
Section 12.2. Survival of Representations and Warranties; Obligation.
(a) Except as provided in Section 7.10(b) or otherwise below,
the representations and warranties of Harmony contained in Article 4 and the
representations and warranties of EFC contained in Article 5 shall terminate
upon (i) the Closing, or (ii) the date of termination of this Agreement and
abandonment of the Merger pursuant to the provisions of Section 11.1(a),
11.1(d), 11.1(e), 11.1(f) or 11.1(g) (except for the agreements as to as to
expenses contained in Section 12.1), and the parties hereto shall have no
continuing obligations or liabilities with respect thereto.
(b) If either EFC or Harmony shall have the right to terminate
this Agreement and abandon the Merger pursuant to the provisions of Section
11.1(b) or Section 11.1(c), then the party which does not have the right so to
terminate this Agreement will use its reasonable efforts to cure the condition
giving rise to such right. If such party is unable to cure the condition giving
rise to such right, the other may exercise its right under Section 11.1(b) or
Section 11.1(c) to terminate this Agreement and abandon the Merger, or may waive
such right and proceed to consummate the Merger. In any such event, the
representations, warranties, covenants and agreements (except for the agreements
as to expenses contained in Section 12.1) of the parties shall terminate, and
the parties hereto shall have no continuing obligations or liabilities with
respect thereto, except as set forth in this Section 12.2(b).
(c) If Harmony terminates this Agreement solely pursuant to
Section 11.1(g), or if the Merger does not receive the Requisite Shareholder
Approval as a result of directors of Harmony voting against the Merger (and the
Merger would have been approved had such directors voted in favor of the
Merger), then Harmony shall pay to EFC $150,000 in cash within thirty (30) days
of such termination.
Section 12.3. Governing Law; Jurisdiction and Venue. THIS AGREEMENT
SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF
THE COMMONWEALTH OF VIRGINIA APPLICABLE TO CONTRACTS MADE
25
<PAGE>
AND TO BE PERFORMED WITHIN SUCH STATE. EACH PARTY AGREES THAT THE FEDERAL COURTS
OF THE UNITED STATES SHALL HAVE THE EXCLUSIVE JURISDICTION FOR ANY DISPUTE UNDER
THIS AGREEMENT. EFC AND HARMONY HEREBY CONSENT TO PERSONAL JURISDICTION IN THE
UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT SITTING IN NORFOLK,
VIRGINIA WITH RESPECT TO CLAIMS ARISING UNDER THIS AGREEMENT.
Section 12.4. Notices. All notices, consents, requests, instructions,
approvals and other communications provided for herein shall be deemed validly
given, made or served if in writing and delivered personally (as of such
delivery) or sent by certified mail (as of two days after deposit in a United
States post office), or sent by overnight courier service (as of two days after
delivery to an internationally recognized courier service), or by facsimile
(upon receipt), in any case, postage and charges prepaid,
(a) if to EFC, addressed to:
Mr. Thomas W. McCandlish
2540 Professional Road, Suite 5
Richmond, Virginia 23235
Telephone: (804) 272-4806
Facsimile: (804) 320-2100
with copies to:
Mezzullo & McCandlish
1111 E. Main Street, Suite 1500
Post Office Box 796
Richmond, Virginia 23218
Telephone: (804) 775-3100
Facsimile: (804) 775-3800
Attention: Genevieve K. Dybing
(b) if to Harmony, addressed to:
Harmony Products, Inc.
808 Live Oak Drive, Suite 126
Chesapeake, Virginia 23320
Telephone: (804) 523-2849
Facsimile: (804) 523-9567
Attention: Mr. Gregory R. Gill
26
<PAGE>
with a copy to:
Kaufman & Canoles
One Commercial Place
P.O. Box 3037
Norfolk, Virginia 23514
Telephone: (757) 624-3000
Facsimile: (757) 624-3169
Attention: John Paris, Esq.
or such other address as shall be furnished in writing by either party to the
other.
Section 12.5. Press Releases. Harmony will provide any press releases
issued in connection with the transactions contemplated by this Agreement to EFC
prior to the issuance thereof.
Section 12.6. Assignment; Amendments, Waivers.
(a) No party to this Agreement may assign any of its rights
or obligations under this Agreement without the prior written consent of the
others.
(b) This Agreement shall be binding upon and shall inure to
the benefit of the parties and their respective successors and permitted
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement.
(c) No provision of this Agreement may be amended, modified
or waived except by written agreement duly executed by each of the parties. No
waiver by either party of any breach of any provision hereof shall be deemed to
be a continuing waiver thereof in the future or a waiver of any other provision
hereof; nor shall any delay or omission of either party to exercise any right
hereunder in any manner impair the exercise of any such right accruing to it
thereafter.
Section 12.7. Entire Agreement. This Agreement represents the entire
agreement between the parties and supersedes and cancels any prior oral or
written agreement, letter of intent or understanding related to the subject
matter hereof.
Section 12.8. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect, unless such action would substantially impair the benefits to either
party of the remaining provisions of this Agreement.
Section 12.9. Headings. The headings herein are for convenience only,
do not constitute a part of this Agreement, and shall not be deemed to limit or
affect any of the provisions hereof.
27
<PAGE>
Section 12.10. Counterparts. This Agreement may be executed in one or
more counterparts which, taken together, shall constitute one and the same
instrument, and this Agreement shall become effective when one or more
counterparts have been signed by each of the parties.
Section 12.11. No Third Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any person other than the parties to this
Agreement and their respective successors and permitted assigns.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto on the day and year first above written.
ENVIRONMENTAL FERTILIZER HARMONY PRODUCTS, INC.
CORPORATION
By: /s/ Environmental Fertilizer Corporation By: /s/ Harmony Products, Inc.
----------------------------------------- --------------------------
Name: Name:
------------------------------------ ------------------------
Title: Title:
------------------------------------ ------------------------
The undersigned are entering into this Agreement solely to evidence
their obligations under Section 7.10(b) and for no other purpose.
DIRECTORS:
/s/ Gregory R. Gill
- - -------------------------
Gregory R. Gill
/s/ W. Reginald Powell
- - -------------------------
W. Reginald Powell
/s/ Raymond E. Grover
- - -------------------------
Raymond E. Grover
/s/ J. Mark Nuzum
- - -------------------------
J. Mark Nuzum
28
<PAGE>
/s/ J. Samuel Roady
- - -------------------------
J. Samuel Roady
/s/ John W. Dibble
- - -------------------------
John W. Dibble
/s/ James A. Shirley
- - -------------------------
James A. Shirley
29
EXHIBIT B
VIRGINIA STOCK CORPORATION ACT
Dissenters' Rights Provisions
ss. 13.1-729. Definitions. In this article:
"Corporation" means the issuer of the share held by a dissenter before
the corporate action, except that (i) with respect to a merger, "corporation"
means the surviving domestic or foreign corporation or limited liability company
by merger of that issuer, and (ii) with respect to a share exchange,
"corporation" means the acquiring corporation by share exchange, rather than the
issuer, if the plan of share exchange places the responsibility for dissenters'
rights on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss. 13.1-730 and who exercises that right when and in the
manner required by ss. 13.1-732 through ss. 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial
shareholder.
ss. 13.1-730. Right to dissent.
A. A shareholder is entitled to dissent from, and obtain
payment of the fair value of his shares in the event of, any of the following
corporate actions:
1. Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by ss. 13.1-718 or
the articles of incorporation and the shareholder is entitled to vote on the
merger or (ii) if the corporation is a subsidiary that is merged with its parent
under ss. 13.1-719;
<PAGE>
2. Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation if the shareholder was entitled to vote
on the sale or exchange or if the sale or exchange was in furtherance of a
dissolution on which the shareholder was entitled to vote, provided that such
dissenter's rights shall not apply in the case of (i) a sale or exchange
pursuant to court order, or (ii) a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to
the extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment
for his shares under this article may not challenge the corporate action
creating his entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
C. Notwithstanding any other provision of this article,
with respect to a plan of merger or share exchange or a sale or exchange of
property there shall be no right of dissent in favor of holders of shares of any
class or series which, at the record date fixed to determine the shareholders
entitled to receive notice of and to vote at the meeting at which the plan of
merger or share exchange or the sale or exchange of property is to be acted on,
were (i) listed on a national securities exchange or on the National Association
of Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at
least 2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such
shares provide otherwise;
2. In the case of a plan of merger or share exchange, the holders
of the class or series are required under the plan of merger or share exchange
to accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or
membership interests and cash in lieu of fractional shares (i) of the surviving
or acquiring corporation or limited liability company or (ii) of any other
corporation or limited liability company which, at the record date fixed to
determine the shareholders entitled to receive notice of and to vote at the
meeting at which the plan of merger or share exchange is to be acted
2
<PAGE>
on, were either listed subject to notice of issuance on a national securities
exchange or held of record by at least 2,000 record shareholders or members; or
c. A combination of cash and shares or
membership interests as set forth in subdivisions 2 a and 2 b of this
subsection, or
3. The transaction to be voted on is an "affiliated transaction"
and is not approved by a majority of"disinterested directors" as such terms are
defined in ss. 13.1-725.
D. The right of a dissenting shareholder to obtain
payment of the fair value of his shares shall terminate upon the occurrence of
any one of the following events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside
the corporate action: or
3. His demand for payment is withdrawn with the written consent
of the corporation.
ss. 13.1-731. Dissent by nominees and beneficial owners.
A. A record shareholder may assert dissenters' rights as
to fewer than all the shares registered in his name only if he dissents with
respect to all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose behalf he
asserts dissenters' rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he dissents and his other
shares were registered in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights
as to shares held on his behalf only if:
1. He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights: and
2. He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote.
ss. 13.1-732. Notice of dissenters' rights.
A. If proposed corporate action creating dissenters'
rights under ss. 13.1-730 is submitted to a vote at a shareholders' meeting, the
meeting notice shall state
3
<PAGE>
that shareholders are or may be entitled to assert dissenters' rights under this
article and be accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under
ss. 13.1-730 is taken without a vote of shareholders, the corporation, during
the ten-day period after the effectuation of such corporate action, shall notify
in writing all record shareholders entitled to assert dissenters' rights that
the action was taken and send them the dissenters' notice described in ss.
13.1-734.
ss. 13.1-733. Notice of intent to demand payment.
A. If proposed corporate action creating dissenters'
rights under ss. 13.1-730 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights (i) shall deliver to the
corporation before the vote is taken written notice of his intent to demand
payment for his shares if the proposed action is effectuated and (ii) shall not
vote such shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of
subsection A of this section is not entitled to payment for his shares under
this article.
ss. 13.1-734. Dissenters' notice.
A. If proposed corporate action creating dissenters'
rights under ss. 13.1-730 is authorized at a shareholders' meeting, the
corporation, during the ten-day period after the effectuation of such corporate
action, shall deliver a dissenters' notice in writing to all shareholders who
satisfied the requirements of ss. 13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and
when certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting dissenters'
rights certify whether or not he acquired beneficial ownership of the shares
before or after that date
4. Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty days after
the date of delivery of the dissenters' notice; and
4
<PAGE>
5. Be accompanied by a copy of this article.
ss. 13.1-735. Duty to demand payment.
A. A shareholder sent a dissenters' notice described in
ss. 13.1-734 shall demand payment, certify that he acquired beneficial ownership
of the shares before or after the date required to be set forth in the
dissenters' notice pursuant to subdivision 3 of subsection B of ss. 13.1-734,
and, in the case of certificated shares, deposit his certificates in accordance
with the terms of the notice.
B. The shareholder who deposits his shares pursuant to
subsection A of this section retains all other rights of a shareholder except to
the extent that these rights are canceled or modified by the taking of the
proposed corporate action.
C. A shareholder who does not demand payment and deposits
his share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his shares under this article.
ss. 13.1-736. Share restrictions.
A. The corporation may restrict the transfer of
uncertificated shares from the date the demand for their payment is received.
B. The person for whom dissenters' rights are asserted as
to uncertificated shares retains all other rights of a shareholder except to the
extent that these rights are canceled or modified by the taking of the proposed
corporate action.
ss. 13.1-737. Payment.
A. Except as provided in ss. 13.1-738,within thirty days
after receipt of a payment demand made pursuant to ss. 13.1-735, the corporation
shall pay the dissenter the amount the corporation estimates to be the fair
value of his shares, plus accrued interest. The obligation of the corporation
under this paragraph may be enforced (i) by the circuit court in the city or
county where the corporation's principal office is located, or if none in this
Commonwealth, where its registered office is located or (ii) at the election of
any dissenter residing or having its principal office in the Commonwealth, by
the circuit court in the city or county where the dissenter resides or has its
principal office. The court shall dispose of the complaint on an expedited
basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the effective date of the corporate
action creating dissenters' rights, an income statement for that year, a
statement of changes in
5
<PAGE>
shareholders' equity for that year, and the latest available interim financial
statements, if any;
2. An explanation of how the corporation estimated the fair value
of the shares and of how the interest was calculated
3. A statement of the dissenters' right to demand payment under
ss. 13.1-739;
and
4. A copy of this article.
ss. 13.1-738. After-acquired shares.
A. A corporation may elect to withhold payment required by
ss. 13.1-737 from 2 dissenter unless he was the beneficial owner of the shares
on the date of the first publication by news media or the first announcement to
shareholders generally, whichever is earlier, of the terms of the proposed
corporate action as set forth in the dissenters' notice.
B. To the extent the corporation elects to withhold
payment under subsection A of this section, after taking the proposed corporate
action it shall estimate the fair value of the shares, plus accrued interest,
and shall offer to pay this amount to each dissenter who agrees to accept it in
full satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under ss. 13.1-739.
ss. 13.1-739. Procedure if shareholder dissatisfied with payment or offer.
A. A dissenter may notify the corporation in writing of
his own estimate of the fair value of his shares and amount of interest due, and
demand payment of his estimate (less any payment under ss. 13.1-737), or reject
the corporation's offer under ss. 13.1-738 and demand payment of the fair value
of his shares and interest due, if the dissenter believes that the amount paid
under ss. 13.1-737 or offered under ss. 13.1-738 is less than the fair value of
his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under
this section unless he notifies the corporation of his demand in writing under
subsection A of this section within thirty days after the corporation made or
offered payment for his shares.
6
<PAGE>
ss. 13.1-740. Court action.
A. If a demand for payment under ss. 13.1-739 remains
unsettled, the corporation shall commence a proceeding within sixty days after
receiving the payment demand and petition the circuit court in the city or
county described in subsection B of this section to determine the fair value of
the shares and accrued interest. If the corporation does not commence the
proceeding within the sixty-day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
B. The corporation shall commence the proceeding in the
city or county where its principal office is located, or, if none in this
Commonwealth, where its registered office is located. If the corporation is a
foreign corporation without a registered office in this Commonwealth, it shall
commence the proceeding in the city or county in this Commonwealth where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
C. The corporation shall make all dissenters, whether or
not residents of this Commonwealth, whose demands remain unsettled parties to
the proceeding as in an action against their shares and all parties shall be
served with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
D. The corporation may join as a party to the proceeding
any shareholder who claims to be a dissenter but who has not, in the opinion of
the corporation, complied with the provisions of this article. If the court
determines that such shareholder has not complied with the provisions of this
article, he shall be dismissed as a party.
E. The jurisdiction of the court in which the proceeding
is commenced under subsection B of this section is plenary and exclusive. The
court may appoint one or more persons as appraisers to receive evidence and
recommend a decision on the question of fair value. The appraisers have the
powers described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.
F. Each dissenter made a party to the proceeding is
entitled to judgment (i) for the amount, if any, by which the court finds the
fair value of his shares, plus interest, exceeds the amount paid by the
corporation or (ii) for the fair value, plus accrued interest, of his
after-acquired shares for which the corporation elected to withhold payment
under ss. 13.1-738.
7
<PAGE>
ss. 13.1-741. Court costs and counsel fees.
A. The court in an appraisal proceeding commenced under
ss. 13.1-740 shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court. The
court shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court finds
equitable, to the extent the court finds the dissenters did not act in good
faith in demanding payment under ss. 13.1-739.
B. The court may also assess the reasonable fees and
expenses of experts, excluding those of counsel, for the respective parties, in
amounts the court finds equitable:
1. Against the corporation and in favor of any or all dissenters
if the court finds the corporation did not substantially comply with the
requirements of ss.ss. 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed did not act in good faith with respect to the rights
provided by this article.
C. If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly situated,
the court may award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefitted.
D. In a proceeding commenced under subsection A of ss.
13.1-737 the court shall assess the costs against the corporation, except that
the court may assess costs against all or some of the dissenters who are parties
to the proceeding, in amounts the court finds equitable, to the extent the court
finds that such parties did not act in good faith in instituting the proceeding.
8
<PAGE>
EXHIBIT C
Opinion of Scott & Stringfellow, Inc.
November 21, 1996
Board of Directors
Harmony Products, Inc.
808 Live Oak Drive, Suite 126
Chesapeake, Virginia 23320
Gentlemen:
You have asked Scott & Stringfellow, Inc. ("S&S") to render our opinion
relating to the fairness, from a financial point of view, of the consideration
to be received by the shareholders of Harmony Products, Inc. ("Harmony")
pursuant to the Plan and Agreement of Merger, (the "Merger Agreement") between
Environmental Fertilizer Corporation, a newly formed Virginia Corporation
("EFC"), and Harmony, dated November 21, 1996. The Merger Agreement provides for
the merger of Harmony with and into EFC (the "Merger"). The Merger Agreement
further provides that each share of Harmony Common Stock which is issued and
outstanding immediately prior to the Effective Time (as defined in the Merger
Agreement) shall be converted into the right to receive $2.00 in cash. You have
also asked us to render our opinion relating to the fairness to Harmony, from a
financial point of view, of the purchase by the members of the Board of
Directors of Harmony of preferred stock of EFC (the "EFC Preferred") and the
Merger under the provisions of Section 13.1-691A.3. of the Code of Virginia.
As part of its investment banking business, S&S is regularly engaged in
the valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. In the ordinary course of
our business as a broker-dealer, we may, from time to time, have a long or short
position in, and buy or sell, securities of Harmony for our own account or for
the accounts of our customers. S&S will also receive a fee from the Directors of
Harmony for rendering this opinion.
In developing our opinion, we have, among other things, reviewed and
analyzed: (i) the Plan and Agreement of Merger dated November 21, 1996; (ii)
Harmony annual reports to shareholders for the five years ended December 31,
1995 and annual reports on Form 10-KSB and related audited financial statements
for the five years ended December 31, 1995; (iii) Harmony's quarterly reports on
Form 10-QSB and related unaudited financial statements for the periods ended
March 31, 1996, June 30, 1996, and September 30, 1996; (iv) certain other
internal information, primarily financial in nature, concerning the business and
operations of Harmony
<PAGE>
furnished to us by Harmony for purposes of our analysis; (v) certain publicly
available information regarding the trading market for the common stock of
Harmony and the price range within which the stock has traded; (vi) certain
publicly available information with respect to certain other companies that we
believe to be comparable to Harmony and the trading markets for certain of such
other companies' securities; and (vii) certain publicly available and other
information concerning the nature and terms of certain other transactions that
we consider relevant to our inquiry. We have also met with certain officers and
employees of Harmony to discuss the foregoing as well as other matters we
believe relevant to our inquiry. Finally, we have conducted such other studies,
analyses and investigations and considered such other information as we deemed
appropriate.
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the information furnished to
us by and on behalf of Harmony. We have not attempted independently to verify
such information, nor have we made any independent appraisal of the assets of
Harmony. We have taken into account our assessment of general economic,
financial market and industry conditions as they exist and can be evaluated at
the date hereof, as well as our experience in business valuation in general. In
addition, although we have discussed the prospects of Harmony with certain
representatives of its management, we have been provided with only limited
financial projections and other similar analyses prepared by Harmony's
management with respect to Harmony.
Our opinion is necessarily based upon market, economic and other
conditions as they exist and can be evaluated on the date hereof and the
information made available to us through the date hereof. Our opinion is
directed only to the fairness, from a financial point of view, of the merger
consideration to be received by the holders of Harmony Common Stock and to the
fairness to Harmony, from a financial point of view, of the purchase by members
of the Harmony Board of Directors of the EFC Preferred and the Merger, and does
not constitute a recommendation to any shareholder of Harmony as to how such
shareholder should vote with respect to the Merger.
It is understood that this opinion may be included in its entirety in
the Proxy Statement. This opinion may not, however, be summarized, excerpted
from or otherwise publicly referred to without our prior written consent.
On the basis of our analysis and review and in reliance on the accuracy
and completeness of the information furnished to us and subject to the
conditions noted above, it is our opinion that, as of the date hereof, the
Merger is fair from a financial point of view to the holders of Harmony Common
Stock and that the purchase of the EFC Preferred and the Merger are fair from a
financial point of view to Harmony under the provisions of Section 13.1-691A.3.
of the Code of Virginia.
Very truly yours,
/s/ SCOTT & STRINGFELLOW, INC.
------------------------------
SCOTT & STRINGFELLOW, INC.
<PAGE>
HARMONY PRODUCTS, INC.
Chesapeake, Virginia
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD
DECEMBER __, 1996
The undersigned acknowledges receipt of the Notice of Special Meeting
and Proxy Statement dated December __, 1996, and revoking all prior proxies,
hereby appoints Gregory R. Gill and James A. Shirley (each with power to act
alone) as proxies, with full power of substitution, and hereby authorizes them
to represent and vote, as directed below, all the stock of Harmony Products,
Inc. held of record by the undersigned on November 22, 1996, at the Special
Meeting of Shareholders to be held on December __, 1996, and at any adjournment
thereof.
(1) To approve the Plan and Agreement of Merger dated November 21,
1996, between Harmony Products, Inc. and Environmental
Fertilizer Corporation
[ ] IN FAVOR [ ] AGAINST [ ] ABSTAIN
(2) IN THEIR DISCRETION, on such other matters as may properly
come before the Special Meeting.
This proxy is revocable at any time prior to its exercise. This proxy, when
properly executed, will be voted as directed. Where no direction is given, this
proxy will be voted for Proposal 1.
Please sign your name(s) exactly as
they appear hereon. If signer is a
corporation, please sign the full
corporate name by a duly authorized
officer. If an attorney, guardian,
administrator, executor, or trustee,
please give full title as such. If a
partnership, sign in partnership
name by authorized person.
Date ________________, 1996
---------------------------
---------------------------
Please complete, date, sign and
return this proxy promptly in the
accompanying envelope.
<PAGE>
U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _________ to __________
Commission file number 0-19979
Harmony Products, Inc.
(Name of small business issuer in its charter)
Virginia 54-1529382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
808 Live Oak Drive, Suite 126
Chesapeake, Virginia 23320
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 804-523-2849
Securities registered under Sections 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
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 __.
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [x]
State issuer's revenues for its most recent fiscal year. $1,771,247
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) $745,594
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity as of March 8, 1996: 5,555,722 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement previously filed
pursuant to Regulation 14A and certain exhibits to the Registrant's Registration
Statement No. 33-43827, as amended filed November 7, 1991, are incorporated by
reference in Part III of this report. Other documents incorporated by reference
are listed on the Exhibits Index.
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INDEX
PART I
Item 1. Description of Business..........................................1
Item 2. Description of Property.........................................13
Item 3. Legal Proceedings...............................................14
Item 4. Submission of Matters to a Vote of Security Holders.............14
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters........................................15
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............16
Item 7. Financial Statements............................................20
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................20
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons, Compliance With Section 16 (a)
of the Exchange Act........................................21
Item 10. Executive Compensation..........................................21
Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................21
Item 12. Certain Relationships and Related Transactions..................21
Item 13. Exhibits and Reports on Form 8-K................................21
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Part I
Item 1. Description of Business
General
Harmony Products, Inc., a Virginia corporation (the "Company"), was organized by
a group of fertilizer executives to develop, manufacture, and market fertilizer
and animal feed products. The Company was incorporated in August 1989, as
Natural Sciences/Harmony Products, Inc., and the name was subsequently changed
in October 1989 to Harmony Products, Inc. The Company was inactive until
February 1990, when the Company was capitalized and certain patent rights were
acquired. The Company sold 720,000 shares of Common Stock in December 1991 in an
initial public offering which, after expenses, netted approximately $4.1
million.
The founders of the Company had been shareholders and/or employees of Western
Branch Holding Company d/b/a Nitrex ("Nitrex"), a nitrogen fertilizer
manufacturer. Nitrex owned two plants, employed approximately 300, and had
annual sales of over $100 million to national and international customers.
Nitrex purchased the plants from W.R. Grace and Company, Inc., in April 1988,
and sold them to Arcadian Corporation ("Arcadian") in July 1989. Prior to the
formation of Nitrex, most of the Company's management team operated a phosphate
fertilizer manufacturer that during the management team's tenure had operations
in over 20 states primarily in the eastern portion of the United States,
employed over 1,300 and had annual sales of over $300 million to national and
international customers.
The Company's management has long believed that a portion of the future growth
in the fertilizer market will be in efficient, slow-release organic and organic
base products, as environmental concerns direct greater attention to their
beneficial effects. The Company's founders, while owners of Nitrex, with
Agri-Nutrients Co., Inc. ("AGT") began research and development of organic
products and processes to recycle animal (primarily poultry) wastes into
fertilizers. After Arcadian purchased Nitrex, Arcadian sold to the Company all
of its rights, title and interest in and to a consulting agreement and exclusive
relationship with Dr. Benjamin Wilson and William H. Moore (the "Inventors"),
including technical information, know-how, formulations, methods and inventions
to which Nitrex had been entitled. This acquisition was necessary in order that
the Company would have the right to purchase the patents and technology involved
in the Company's manufacturing process. In February 1990, the Company purchased
patent rights to the technology and products from AGT's principals, the
Inventors. See "Research and Development" and "Patents, Licenses and
Trademarks."
The Company's management team and directors, with more than 160 years of
combined experience in the fertilizer industry, founded the Company to develop
effective organic base fertilizer products for sale to turf professionals and
retail consumers. The Company's fertilizer product lines range from 100% organic
(all-natural) products to "Bridge(R)" products, which have an organic base and
are enhanced with synthetic nutrients. Additionally, research efforts since the
founding of the Company have produced patented processes to convert poultry,
hatchery and slaughterhouse waste products as well as manures into animal feed
supplements.
Two separate environmental trends may provide the impetus for the Company's
business plan. Many state and local governments are composting municipal solid
waste as well as biosolids and encouraging more poultry producers and
municipalities to recycle or compost their organic wastes out of concern for
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groundwater pollution. In addition, consumers and turf care professionals have a
heightened awareness of the potential harmful effects of chemical applications
on lawns and gardens. Retail consumers and turf care professionals have used
chemical fertilizers in increasing quantities since World War II, but are
beginning to explore the use of organic and organic base fertilizers as an
environmentally friendly alternative. Interest in organic and organic base
fertilizers has been prompted by an increased awareness of the high nitrate
levels in the groundwater and run off of nitrates to surface waters. Organic and
organic base fertilizers leach into the groundwater and run off to surface
waters at a significantly lower rate than most chemical fertilizers. The Company
intends to continue to license its patented technology internationally and
domestically to various entities, including poultry processors and
municipalities, to enable them to convert organic wastes into useful,
environmentally friendly products that the entities will use either in their
businesses, sell to third parties or be purchased by Harmony to market to its
own customers.
Although chemical fertilizers provide plants the pure concentrated amounts of
the nutrients they need, these fertilizers do not provide natural organic
compounds such as carbohydrates, proteins and enzymes that the soil organisms
need. Chemically fertilized plants may appear healthy, but the soil environment
underneath is depleted, leading to weaker plants that are susceptible to
drought, disease, insects and fungus. Organic base fertilizers, on the other
hand, benefit both plants and the soil environment.
Currently, the majority of the raw materials for the Company's products are
organic wastes that are produced in poultry and biosolid operations. In the
past, much of these wastes have been buried or deposited in landfills or applied
in a raw form on farmers' fields. Recent studies have indicated that such
landfills and raw field applications pollute groundwater by increasing the
nitrates to unsafe levels. Also, surface run off is a major contributor to
pollution of lakes, streams and rivers. Accordingly, management believes that
state and local governments will eventually further curtail landfill disposal
opportunities as well as application of manures in raw form for agricultural
purposes in the future and that the producers of these wastes will need to seek
alternative disposal or recycling methods.
Although hampered by its liquidity concerns, the Company has devoted significant
resources to research and product development. See "Research and Development."
These efforts have resulted in new products and uses of the Company's
manufacturing processes which management believes will benefit the Company over
time. The Company has initiated agricultural tests of its products that have
provided further opportunities for sales growth. Additionally, Harmony continues
to examine the export market for areas and customers to which the Company can
provide product and to whom it can license its technology. With the trend in
local government towards composting municipal solid wastes and biosolids and the
push for increasing levels of recycling, management believes that Harmony's
proprietary technology provides a natural extension of this process by
converting compost into an upgraded and valuable fertilizer product.
Product Technology
Until the advent of Harmony's Bridge technology, turf managers, lawn care
operators and do-it-yourself consumers had to choose between chemical
fertilizers and 100% natural organics, each with its own set of strengths and
weaknesses. Chemical fertilizers provide an appealing quick green-up, but they
do not provide natural organic complexes that help build a healthy soil base for
plants. Overuse of chemical fertilizers often results in an
application-dependent lawn. In addition, these chemicals leach through the soil
into the groundwater and run off to surface waters.
Organic base fertilizers, on the other hand, are derived from plant and animal
products and feed both plants and soil microbes, refurbishing the turf with
necessary nutrients and the soil with organic matter. Organics generally release
nutrients slowly, efficiently feeding plants over long periods of time and
significantly reducing harmful leaching. A plant cannot distinguish between
chemically derived and naturally derived nutrients, however the soil can. Soil
and its microbial populations directly benefit from carbon-based organic matter.
The various proteins, carbohydrates and sugars in organics feed the
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micro-organisms and macro-organisms in the soil. This feeding stimulates the
multiplying organisms that act upon the soil making soil-born primary, secondary
and minor elements available to the plant. Nutrients in organic fertilizers are
released slowly and steadily, eliminating the risk of plant burn. Additionally,
the low salt index of the Company's fertilizers eliminates plant burn and has
important agricultural implications as crops fertilized with the Company's
products may be lower in sodium than crops fertilized with conventional
fertilizers.
While typical 100% natural organic fertilizers possess many benefits, they also
have significant drawbacks. Ordinarily, they are low analysis, dusty, difficult
to spread evenly and have offensive odors. Turfgrass demands high nitrogen, and
though sufficient amounts of nitrogen can be added in a natural form, it is an
expensive and labor intensive process. In many instances, natural organic
nitrogen sources are very slow to release their nitrogen and need a chemical
nutrient enhancement to provide the green-up effect that consumers demand.
The Company's principal products are organic and organic base fertilizers
manufactured from poultry and biosolid by-products. The Company's unique
patented manufacturing processes produce a homogeneous granular fertilizer of
consistent particle size, providing even spreading and, in contrast to many
other organic fertilizers, the Company's products are generally free of dust,
pathogens, and unpleasant odors. In addition, the Company's Bridge products --
organic base fertilizers that are enhanced with a moderate amount of chemical
materials -- fill the need for environmentally friendly, high-performing
fertilizers. Bridge products contain the benefits of both organic and chemical
materials, resulting in a fertilizer that is superior in many ways to either one
alone. In sum, the Company's unique patented processes result in products that
produce an initial green-up, increase soil microbial activity, and provide
valuable soil micronutrients. Over time, organic base fertilizers will rebuild
the quality of existing soil and lead to better turf and plants with fewer
chemical inputs and, consequently, result in less leaching of chemicals into the
groundwater.
In tests carried out by the crop science department at a leading state
university regarding the leaching of various fertilizers, the Company's organic
and organic base products leached at a far lower rate than most chemical
fertilizers manufactured by the Company's competitors. In fact, the organic base
Bridge product leached at almost the same rate as the Company's 100% organic
product. This test buttresses the Company's claims regarding the low leach rate
associated with its natural and Bridge products. Further, university tests
conducted using Harmony fertilizer versus a synthetic on field crop tomatoes
resulted in a 26% yield increase two years in a row. Management believes that
these outstanding results were due to the organic base and low salt index of the
Harmony product.
Distribution and Marketing
Management's efforts to distribute and market its products have been severely
limited by the small amount of cash available for this purpose given the
Company's liquidity concerns. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." Management continues to focus the Company's distribution and
marketing resources primarily on the private label, professional and retail
markets ("do-it-yourself" lawn and garden centers and mass merchandisers).
During 1995, the private label market represented approximately 64% of the
Company's sales as compared to 53% in 1994, and 47% in 1993.
The Company's specific marketing strategies are as follows:
Private Label Market. In this market, the Company produces and packages
fertilizer for fertilizer marketers that have their own established distribution
system and under the marketers' name. In a typical arrangement, the Company
produces the fertilizer to specification, arranges quality control, packages the
fertilizer, places it on pallets and stretch wraps it for shipping.
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One of the Company's major private label customers is O.M. Scott & Sons, Inc.
(Scotts), for whom the Company has produced a number of products over the past
several years. In 1990, the Company entered into a supply agreement (the "Supply
Agreement") which, as amended, provided Scotts with production of 5,700 tons of
fertilizer during the four year period expiring September 30, 1994. Over the
past several years, the Company and Scotts have worked together to find products
which would satisfy Scotts desire to market a high quality organic product as
well as satisfy the terms of the Supply Agreement. During this time, Harmony
produced Scotts feathermeal-based 100% organic fertilizer products as well as
Scotts "All Natural Turf Builder, 11-2-4" product, and began bagging commodity
small package goods for Scotts including bloodmeal, bonemeal and all natural
potassium.
During 1993, the Supply Agreement was renegotiated. For an upfront payment of
$151,500 and an agreement that all of Scotts natural and organic based
fertilizer requirements be purchased from Harmony through September 1996, the
Company agreed to waive its rights under the liquidated damages provisions in
the original Supply Agreement. At the request of Scotts, and as the Company has
successfully completed 1996 orders, the contract was canceled by the Company on
February 29, 1996. The Company anticipates continuing to do business with Scotts
without a supply contract. Sales to Scotts for the year ended 1995 were related
to bagging bloodmeal and bonemeal and were approximately $472,000 or 709 tons
(27% of the Company's 1995 sales); as compared to 1994's levels of approximately
$312,000 or 700 tons . Sales in 1993 were $300,000 or 700 tons.
In 1993 the Company entered into a Joint Marketing/Manufacturing Agreement
("Agreement") with Earthgro, Inc. ("Earthgro"), a composting and natural
horticultural products company headquartered in Connecticut who distributes
bagged soil, natural fertilizer and bark products from Virginia to Maine. The
Agreement was for a five year term and included certain performance requirements
on both companies. Under the Agreement, Harmony was the sole manufacturer of
Earthgro's natural fertilizer products in a defined territory roughly equivalent
to the Mid-Atlantic and Northeast portions of the United States. Earthgro was
the primary distributor of Harmony's high analysis, slow release organic base
turf and garden fertilizers for Harmony's retail markets in the Northeast.
With Earthgro's experienced sales force and established distribution network,
the Company was able to initially leverage off Earthgro's expertise to increase
sales in the defined territory. In 1995, Harmony's reputation had become better
known throughout the defined territory, thanks in part to Earthgro, but Harmony
found that it was no longer enjoying any significant sales from this
arrangement. Accordingly, Harmony and Earthgro determined to informally cancel
the Agreement and continue to work together as circumstances allow. Harmony
continues to manufacture product for Earthgro and the two companies continue to
work together in the environmental movement. Sales to Earthgro for the year
ended 1995 were approximately $153,000 or 557 tons as compared to 1994 totals of
approximately $143,000 or 560 tons. Sales in 1993 were $440,000 or 1,600 tons as
Earthgro bought much of its spring 1994 needs in the fourth quarter of 1993.
Future sales to Earthgro are expected to remain at a fairly constant level
depending on the success of their marketing efforts of the Earthgro brand
organic products and Harmony successfully retaining the business.
During 1995, the Company continues to produce fertilizer products under a
private label with several other leading marketers of lawn and garden products.
These include Agway, Roots, Earthworks, Lyndale Garden Centers and others.
Management intends to continue to aggressively market and price both its organic
fertilizers and organic Bridge products to these and other major fertilizer
marketers to take advantage of their established distribution systems.
Private label sales in 1995 totaled approximately $1,141,000 (3,030 tons and 64%
of total sales) as compared to 1994 totals of approximately $1,118,000 (3,870
tons and 53% of total sales). In 1993, private label sales were $1,003,000
(3,300 tons) or 47% of total sales.
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Professional and Agriculture/Commodity Markets - Harmony Brand. Harmony's
"Professional Turf Food" is a 14-3-6 Bridge fertilizer specially designed for
the professional lawn care operator and golf courses. This product is packaged
in 50 pound bags, the size preferred by most professionals. The 14-3-6 Bridge
product is formulated from poultry manure, potash, ferrous sulphate and
methylene urea and is designed to combine the benefits of natural organic and
chemical fertilizers. Urea and methylene urea are organic compounds which boost
the nitrogen analysis in order that the professional need not dispense as many
pounds of fertilizer as would be required with lower analysis natural organics.
In addition, Harmony's patented processes produce a high integrity granule with
low dust which makes for easy spreading and low odor. Many professional lawn
care companies use this product on private home, institutional and government
lawns.
The Company has developed a high organic turf food designed for use in slow
growth periods with a 6-2-12-3% iron analysis. The high potash will help build
heat and drought resistance within the plant while increased iron uptake greens
the turf.
During 1996, the Company will introduce to the professional market, a biosolid
based line of fertilizer products. These products include "4-2-0 Topcoat" and
the Company's new "Complete" line which includes a 14-3-6 and 6-2-12 fertilizer
all biosolid based. With the push towards the effective use of biosolids in the
United States, Harmony will be concentrating professional marketing efforts on
these new products. The higher analysis products will be produced on behalf of
NEFCO by third parties ("tollers") who will produce the product and possibly bag
the product for shipping. A toller is a third party manufacturing facility that
manufactures product on behalf of a buyer generally at a set rate per ton.
Harmony will act as agent selling these products and receive a commission for
its efforts. Since Harmony will be relying on third parties to produce a portion
of its products, the Company will be unable to exercise complete control over
its manufacturing. The Company may experience delays in manufacturing due to
capacity constraints at the third party or the third party may not be able to
produce the mix of products Harmony needs when it needs them.
The Company's products are being recommended to customers using organics by many
of the major professional lawn care companies, including TruGreen (formerly
Chemlawn), Davey Tree Experts and Spring Green. In addition to lawn care
companies the Company has made strides in the golf course market. Golf courses
primarily in the Mid-Atlantic marketplace have begun using Harmony products and
have reported superior results.
Harmony has 78 professional distributors with Harmony's market area coverage
from Maine to Florida and as far west as Texas. Management plans to continue to
monitor and evaluate current distributors and make further increases to our
covered market area. Additionally, the Company uses manufacturer's
representatives who earn commissions based on sales made in their defined
territory. Currently, Harmony has one professional sales representative.
Professional sales totaled approximately $238,000 (1,200 tons or 14% of total
sales) in 1995 as compared to 1994's totals of approximately $379,000 (972 tons
or 18% of total sales). In 1993, professional sales totaled $432,000 (1,200
tons) or 20% of total sales in 1993. The decline in professional sales was
primarily due to the loss of a key professional sales representative at one of
Harmony's professional distributors who was not replaced.
In 1993, Harmony introduced an organic based product for agricultural use which
was sold in rail cars to Florida growers for blending to be used on citrus,
vegetables and turf. Of the 1993 totals described above, the Company sold in
bulk approximately $370,000 of this product (1,400 tons or 17% of total sales).
During 1994, however, sludge based products entered the agricultural marketplace
in larger quantities than ever before and essentially replaced the need for this
type of product. Because of this shift in the marketplace, Harmony turned its
attention to sludge products and entered into a licensing and marketing
agreement with New England Fertilizer Company in 1994. No sales of this product
occurred in 1994 or 1995.
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Retail Market - "Harmony Brand". The Company produces products to be sold in
"do-it-yourself" retail outlets such as hardware stores, large home centers
(mass merchandisers) and lawn and garden centers. These products bear the
Harmony brand name and are marketed as premium fertilizers. "Harmony Lawn Food"
is the same 14-3-6 fertilizer that is sold to professionals, but is packaged in
an attractive five-color, 25-pound bag targeted to the do-it-yourself customer.
In 1995 the Company expanded its lawn food selection to include 12-3-3 Quick
Green and 15-2-5 Weed & Feed. The Company's 5-5-5 Vegetable Food, 4-6-4
Evergreen Food and 3-6-3 Flower Food are sold in convenient 4-pound bags.
Additional products include a 20-pound 5-5-5 All-natural Vegetable Food, a
20-pound 4-6-4 All-natural Azalea, Camellia, Rhododendron and Holly (acid-loving
plant) Food and a 4-pound 3-5-6 Tomato Food. Each year the Company has attempted
to meet the needs of its retail customers by adding products to its line to
further enhance the Harmony line of organic base fertilizers. Although these
products are considered premium fertilizers with superior performance, they are
priced competitively with conventional synthetic fertilizers. Because many mass
merchandisers have their own distribution network and are sold direct
(eliminating one step in the distribution chain) these products are also
competitively priced. Because of this, consumers have the ability to choose an
environmentally friendly and superior performing fertilizer at a similar cost of
a conventional synthetic. Retail products are produced at either of three
locations: at Harmony's facility in Chesapeake VA, at co-producers or at third
party tolling facilities. Harmony expects to be able to utilize the most
cost-effective production method beginning in 1996.
Harmony has 6 retail distributors and has retail coverage from Maine to Texas
with its network. Some of Harmony's more recognized retail customers include
Home Quarters, Payless Cashways and Sunbelt Nurseries. Management intends to
continue to expand its distributor base. All manufacturer's representatives earn
commissions based on sales made in their defined territory. Currently, Harmony
has 11 retail sales representatives.
Sales of Harmony retail brand products in 1995 totaled approximately $392,000
(1,1160 tons or 22% of total sales) as compared to 1994's totals of
approximately $537,000 (1,500 tons or 25% of total sales). In 1993, retail sales
totaled $258,000 (675 tons or 13% of total sales).
Export Markets. The Company continues to explore opportunities to sell its
products into the export market; however, the extent of this interest is not yet
known. Generally, the Company must provide product for testing by government
regulators in the export country as well as provide certain certifications
regarding the patented process in which the products are made. Many countries
are concerned about the presence of pathogens in organic import products.
Because Harmony's technology successfully destroys pathogens and can be
certified "pathogen-free," the Company feels that it could make its fertilizer
available for sale in these markets with relative ease. Because freight costs
can be substantial here, in most cases the Company would refer any overseas
sales orders to its Ukraine licensee.
Licensing
Foreign
Ukraine
During 1992 the Company entered into a Licensing, Equipment Purchase and
Consulting Agreement with a venture located in Ukraine ("Enagro") comprised of a
poultry cooperative, a construction company and a steel metallurgical facility.
During 1993 and 1994, the Company expended considerable time and effort
designing a facility and in assisting in construction of that facility. In
December 1994, Enagro notified the Company that it had achieved start up of the
facility and that the facility had achieved the warranted production rate. The
Enagro facility converts poultry manure and other waste products into fertilizer
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and feed supplements. The resultant products are marketed into the Eastern
European community to generate hard currency for Ukraine.
Cash payments to the Company under the arrangement totaled $2.95 million. Total
net revenues since inception of the contract were approximately $1.05 million
($70,000 in 1994 and $975,000 in 1993) All of the Company's obligations under
the arrangement have been satisfied and all revenues have been recognized.
Australia
On December 31, 1995 the Company entered into a Licensing and Consulting
Agreement ("Agreement") with Bio-Recycle (Aust.) Pty. Ltd. ("Bio-Recycle"), an
Australian company that specializes in the recycling of organic waste streams.
Under the provisions of the Agreement, Harmony licenses to Bio-Recycle the
rights to the Company's patents and know how for an exclusive territory that
includes Australia, Malaysia, Indonesia, Vietnam and New Zealand. The Agreement
requires Harmony to provide certain technical, engineering and equipment design
consulting services for a fee if Bio-Recycle constructs a facility employing the
Harmony technology. Finally, the Agreement licenses to Bio-Recycle the right to
use certain Harmony trademarks, trade names and copyrighted materials.
Bio-Recycle does not plan to begin construction of a facility incorporating
Harmony's patented technology immediately; however, under provisions of the
Agreement, they must meet certain plant construction thresholds in order to
maintain their rights under the Agreement. Under the terms of the Agreement, the
Company recognized $85,000 (net of royalties) in other operating income and a
corresponding licensing receivable - short term for the year ended December 31,
1995.
Other
Management has received other indications of interest internationally with
regard to its manufacturing process. Countries such as Ukraine have over-farmed
their land such that their soils have been depleted. Additionally, these
countries recognize the nutrient value in waste materials and that they now
believe that they cannot afford to throw these nutrients away. Harmony's process
capitalizes on these waste streams by retaining the nutrient value already
contained in the materials. Additional nutrients are added as needed and,
because the nitrogen is slow-release, does not pose further environmental
threat. Other countries have environmental regulations that are becoming
increasingly more stringent. Localities (including those in the U.S.) have
turned to composting as a means to dispose of waste streams including municipal
solid waste. Now, the compost has become as big a problem as the original waste
stream. Most compost can only be sold as a soil amendment as it is low analysis,
hard to handle and generally not suitable for mulch. Harmony's process can
successfully upgrade the compost into a valuable fertilizer product. Because the
interest expressed by each prospect varies, any new agreement would be of
different dollar amounts dependent upon several factors including: type and
amount of equipment to be purchased, if any; extent of consulting services
provided; warranties; exclusivity; royalties; use of trademarks; etc. Currently,
management is working with individuals on a preliminary basis representing
ventures located in Russia and China.
Domestic
New England Fertilizer
In October 1994, the Company entered into a Master License Agreement and a
Marketing Agreement with New England Fertilizer Company ("NEFCO"). NEFCO
operates a sludge management facility in Quincy, Massachusetts for the
Massachusetts Water Resources Authority. This facility, which is one of the
largest such facilities in the world, produces a mechanically dried sewage
sludge which it converts to an environmentally safe product termed
"fertilizer-grade biosolids."
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Under the Master License Agreement, NEFCO has an exclusive license for the
exploitation of biosolids in all states east of the Mississippi River for
Harmony's patented processes. The resultant product is an enhancement of the
generally low analysis biosolids to produce virtually any formulation desired.
NEFCO intends to utilize Harmony's technology and know-how to upgrade the
biosolids produced at the Quincy plant and to utilize the combination of the
Harmony process and mechanical drying to offer sludge management programs to
other generators in the United States. NEFCO also expects to utilize the Harmony
process to offer product management services to others who may already
mechanically dry sludges.
Under the Master License Agreement, NEFCO paid Harmony $250,000 upon signing.
Each year, for four years, on the anniversary date of the Master License
Agreement, NEFCO will pay to Harmony $70,000. In addition, NEFCO must meet
certain minimum performance requirements for it to retain its right to
sub-license the technology over time. Harmony will receive a fee equaling 1/2%
of the total cost of any facility which employs Harmony technology. Under the
Marketing Agreement, Harmony will receive a marketing fee of 15% of the net
invoiced sales by NEFCO for each location operated by NEFCO. This percentage
will subsequently decrease to 10% after three years. During 1994, the Company
recognized $500,000 in other operating income on this licensing arrangement. For
the year ended December 31, 1995, no other operating income for licensing fees
related to NEFCO were recognized by the Company.
Under the Marketing Agreement, Harmony acts as NEFCO's sales agent for both
enhanced and unenhanced biosolids. The Company receives a commission for its
work as sales agent. In this regard, Harmony was instrumental in the signing of
a supply agreement between NEFCO and a large fertilizer company located in the
Midwest (the "third party"). This five-year agreement commits NEFCO to supplying
and the third party to buying 2,500 tons of biosolids per year. Harmony, as
sales agent, will receive its commission for these sales. While commission
revenue on this contract is not expected to be significant, Harmony is pleased
to have been instrumental in the signing of this agreement. Harmony recognized
no net commission revenues for the year ended December 31, 1994 but recognized
$21,600 in other operating income from net commissions for the year ended
December 31, 1995.
Other
Domestically, interest in the Company's technology has been at a slower pace
than internationally. However, management feels if state and local regulation
regarding the disposal of organic wastes increases in the future, the producers
of these types of wastes will seek alternative methods of disposal. In June
1995, the Company sublicensed certain of its patent rights with regard to animal
feed supplements back to the Inventors. As consideration of the sublicense, the
Inventors reduced its current royalty structure with the Company. See "Research
and Development." Management is currently discussing licensing opportunities of
the Company's patented technology to various handlers of sewage sludge. The
Company would expect to market some of the fertilizer and other products that
are manufactured through its own distribution system.
Management anticipates that domestic licensing fees paid by these processors
could be modest and that the majority of its return would come from royalty
payments made to the Company based on various measurement criteria including the
sale of products produced by these ventures. Ideally, the Company will enter
into arrangements with these processors at sites strategically located near
areas with demand for the Company's products.
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Manufacturing Facility
During the second quarter of 1995, for financial and strategic reasons,
management of the Company decided to close its batch oriented primary production
line at its manufacturing facility in Chesapeake Virginia. Management believes
that new advancements in the Company's technology permit it to utilize other
manufacturers to produce its products at lower manufacturing costs than those
associated with its Chesapeake facility.
After completing construction of the primary line in the Chesapeake facility in
1991, the Company developed the continuous process method of manufacturing its
products as well as the ability to make its organic based Bridge products in
conventional fertilizer granulation facilities. The Company has had operational
success manufacturing both its poultry manure and biosolid based high analysis
fertilizer products at conventional fertilizer granulators and currently intends
to call on these facilities as needed for future fertilizer needs. As the
Company does not expect to enter into any binding arrangements with the owners
of these facilities, the Company cannot offer any assurance that these
facilities will have the capacity available for production when Harmony needs
it. This presents a significant challenge to management for the 1997 selling
season.
Many low analysis products not requiring the Harmony technology are already
being manufactured at co-producers. As is common in the fertilizer industry,
demand for product typically peaks during the January to June time frame. In
order to more efficiently and cheaply produce products during this period, the
Company enlisted the aide of several co-producers who help level out the demand
peaks and valleys and who provide Harmony with the flexibility it needs during
the peak manufacturing season. These co-producers are strategically located from
a geographical perspective in order that Harmony can also take advantage of
favorable freight costs.
In connection with the shut down and dismantling of its primary line at its
Chesapeake facility, the Company has accrued an estimated loss on the disposal
of certain fixed assets (comprised primarily of production equipment) of
approximately $1,863,000 for the year ended December 31, 1995. This estimated
loss on disposal represents a write-off of the book value of the equipment
expected to be disposed of, net of any estimated salvage value, as well as an
accrual for the costs that will be incurred to dismantle and sell the equipment.
No similar charges were incurred during 1994.
Although the primary line is in process of shutdown, the Company intends to
continue to manufacture and package certain organic products at the facility.
The packaging operation can handle open mouth bags from three to 50 pounds.
In connection with the shut down of the primary production line, the Company
released approximately one-half of its leased space (used primarily for finished
goods storage) back to the lessor. This reduced the leased space to
approximately 20,000 square feet. The Company's facility is located in a leased
building at the Elizabeth River Terminals - a deep water 90-acre bulk shipping
terminal located on the southern branch of the Elizabeth River in Chesapeake,
Virginia, which has provided the Company with many benefits, including low cost
raw materials, maintenance back-up and extra labor and equipment if needed. The
facility has immediate access to the interstate system and can also serve or be
served by rail and ship with both bulk and bagged product.
The original build-out of the plant was completed in February 1991, at a cost of
approximately $3.4 million, $2.5 million of which was financed by an industrial
development bond issuance. The industrial development bonds bore interest at a
floating rate determined weekly by a bidding process. The bonds were secured by
a bank letter of credit, which itself was secured by the assets of the
manufacturing facility and the personal guarantees of the Company's directors.
This letter of credit was paid off in June 1995 out of the proceeds received
from an investment by members of the Company's board of directors. See
"Management's Discussion and Analysis - Liquidity and Capital Resources."
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Research and Development
On February 14, 1990, the Company purchased from Dr. Benjamin Wilson and William
H. Moore (the "Inventors") all of the rights to all of the technology related to
the formulation, processing, manufacturing, storage and end use of products and
technology in the fields of organic base fertilizers and plant nutrients and
animal protein feed supplements and all patent rights and improvements thereto.
Under the terms of the contract evidencing this purchase (the "Purchase
Agreement"), the Company has the exclusive right to make, use or sell all
products resulting from this technology and the exclusive control of technical
information, patent rights and improvements.
For these rights, the Company paid $500,000 and, until 1995, was subject to an
annual royalty as follows:
4 1/2% of Net Sales....First $2.0 million in Net Sales of patented
products sold in the United States;
3% of Net Sales....Next $8.0 million in Net Sales of patented
products sold in the United States; and
2% of Net Sales....Net Sales in excess of $10.0 million of
patented products sold in the United States.
In addition, the Purchase Agreement provided that the Company pay the Inventors
a minimum annual royalty of $50,000 beginning on February 14, 1993, and
continuing throughout the life of the patents and the patent applications.
In June 1995, the Company sublicensed certain of its patent rights with regard
to animal feed supplements back to the Inventors. As consideration for the
sublicense, the Inventors eliminated its current royalty structure with the
Company. A flat royalty of $20,000 was due to the Inventors for calendar year
1995 with no royalties due in the years thereafter.
The terms of the Purchase Agreement span the life of the patents. In July, 1990,
the Agreement was amended to provide a means of paying the Inventors in the
event that the Company licenses either the fertilizer and/or feed technologies
to third parties. Additionally, the Company has entered into an agreement for
technology transfer arrangements outside the US and Canada. Agreements are
prepared on a case by case basis for instances where, for legal or other
reasons, a licensee is not restricted in a legal or practical sense from
utilizing the Company's patents. Each agreement provides that certain differing
percentages of the upfront technology licensing fees from others will be paid to
the Inventors.
Originally, the Company utilized the Inventors for continued research and
development in the fields of organic base fertilizer and animal feeds. In 1992
the Company moved many research and development activities in house. In 1995,
1994 and 1993, the Company spent $22,000, $59,000 and $47,000 for all research
and development activities, respectively. Ultimately, the Company hopes to
recoup its investment in research and development activities through increased
sales of product and technology licensing.
Continuous Process
The Company, through its inventors, applied for patent coverage regarding its
continuous process which was refined during 1992. The U.S. Patent Office issued
patent number 5,240,490 in August 1993. Additionally, foreign patent coverage
has been applied for on certain of the Company's patents and is pending in
Japan, Canada, Europe and South Africa. Australian patents have been issued.
The continuous process, as its name implies, allows for continuous processing of
most waste materials into fertilizers and feed supplements. The process
increases production volumes four to five fold over the first generation batch
technology. For entities interested primarily in the conversion of poultry
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wastes into fertilizers and feeds, the continuous process presents a lower cost
and higher capacity alternative. The continuous process is being employed at the
Ukraine facility.
Conventional Process
In May 1994, the Company through its Inventors submitted an patent application
for the Company's third generation of its technology. This patent, issued May
1995, number 5,411,568 entitled "Highly Available Waste Based Fertilizer"
provides the ability to transform organic matter into slow release Bridge
fertilizers at existing conventional fertilizer granulators. These existing
facilities have substantially lower manufacturing costs per ton than Harmony's
former batch technology which was employed at its Chesapeake site. This provides
Harmony with alternative production sites with fertilizers with substantially
lower manufacturing costs.
The Company's products have been or are under study by research facilities at
major universities including the North Carolina State University, Virginia
Polytechnic Institute and Clemson in order to provide scientific documentation
to demonstrate that the products leach less nitrates into the groundwater,
increase microbial populations in the soil and keep plants green and healthy.
Government Regulation and Product Registration
Government regulation in the United States and other countries is a significant
factor in the research, development, production and marketing of fertilizers.
The fertilizer products marketed by the Company are currently regulated by
individual state departments of agriculture, and requirements for obtaining
registration to sell fertilizers vary between localities. Every fertilizer
product must be registered and licensed in each state where it is sold, and a
registration or license fee to maintain the registration must be paid on an
annual basis. In addition, each product package or bag, along with all claims
made thereon, must be approved in each state. The Company's fertilizer products
are currently registered in 31 states under the Harmony label.
Some states have laws imposing liability on certain parties for the release of
fertilizers into the environment in a manner or in concentrations not permitted
by law. Such liability could include, among other things, responsibility for
cleaning up the damage resulting from such a release. In addition, the
Comprehensive Environment Response, Compensation and Liability Act, commonly
known as The Federal Superfund Law, imposes liability on certain parties for the
release into the environment of hazardous substances, which might include
fertilizers under certain circumstances. As the Company's products are low in
analyses (nitrogen, phosphorus and potassium) and the nitrogen in the products
is generally 60% water insoluble, management believes the products have a
minimal effect on the environment. Accordingly, the Company believes that it
does not need, and it does not maintain, insurance for any environmental claims
which might result from the release of its products into the environment in a
manner or in concentrations not permitted by law.
The Company's products will also be subject to regulation by agencies of foreign
countries in which the products are tested, sold or used. The Company's
activities may be subject to regulation under various other federal and
international laws, regulations and guidelines, and state and local regulatory
requirements, including those requiring approvals prior to shipping the products
into a country, state or locality for either experimental or commercial
purposes. The Company cannot predict the effect of future legislation and
regulation on the Company's operations.
The 1990 Farm Bill passed by U.S. Congress contained legislation which will
regulate what foods can be called "organic." The Farm Bill is designed to
establish standards restricting the synthetic materials that can be applied to
crops that are sold as organic. Although management has always believed that
this law would result in increased demand for organic fertilizers by farmers and
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increase the general public's awareness of organic consumables, this law has not
had as positive an impact on the demand for the Company's products as management
originally envisioned.
Management anticipates that states will continue to pass legislation designed to
better define the terms "organic base" and "natural" (as it applies to
fertilizer). Management believes that the Company will benefit from these
efforts as the Company's products fit within the most restrictive currently
contemplated definitions. Costs associated with compliance with state
legislation are minimal for the Company and generally require registration fees
for states in which the Company intends to sell product and constant monitoring
of new regulations and how they could affect Harmony's bag copy.
The Commonwealth of Virginia and several other states have mandated that an
increasing percentage of their solid waste must be recycled. The mandated rates
in Virginia were 10% by 1991, 15% by 1993 and 25% by 1995. This move to recycle
is likely to affect the Company's business in various ways. First, by increasing
the awareness of recycling, it may encourage consumers to buy items made of
recycled materials such as the Company's fertilizers. Second, there is
increasing pressure for producers of organic wastes which may burden the
environment to recycle these wastes. This pressure is likely to result in a less
expensive and more reliable supply of raw materials. All of these initiatives
will affect the lawn and garden market by increasing awareness of the
environmental impact of the use of lawn and garden chemicals.
Competition
The Company faces significant competition in the fertilizer industry from
numerous manufacturers and suppliers, several of which significantly dominate
their respective markets and many of which have substantially greater financial,
technical, marketing and other resources than the Company. The principal
competitive factors in the Company's markets are efficacy, ease of application,
price, health and environmental compatibility, name recognition, and marketing
ability. The Company has reduced its pricing to be more in line with
conventional synthetics; however, Harmony's products will never be as low cost
as certain synthetics and therefore will never be able to compete on price
alone.
The natural/environmentally compatible/organic "NECO" product market consists of
several national manufacturers like Scotts and Northrop King Company, which are
developing NECO product lines; and a number of smaller mainly regional, local
and mail order oriented firms. Other companies in the NECO market are: Ringer;
Milorganite; Earthgro; Greenview; Vigoro; Espoma and Pennington. Management
feels the growing number of entrants into the organic fertilizer market may
offer the Company various private label opportunities in the future. The current
industry leader is Ringer Corporation, which sells NECO fertilizer, pest control
and composting products. Because of the freight cost involved in shipping bulk
fertilizer products across the country, the Company has many regional and local
competitors in addition to the national competitors.
Seasonality
Sales of the Company's products are highly seasonal, with shipments of
fertilizers being heavily concentrated in the late fall and spring. This results
in the Company's need for a flexible line of credit facility and strains the
Company's cash on a regular basis. See "Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Patents, Licenses and Trademarks
The Company aggressively protects its intellectual, trade and operational
property through the use of patents, trademarks, copyrights and other prudent
protection means. The Company requires all of its employees to execute
confidentiality agreements. Further, all potential customers or licensees are
required to sign confidentiality agreements.
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The patents owned by the Company are as follows:
U.S. Patent 4,109,019 - Process for Improved Ruminant Feed
Supplements, dated February 8, 1977;
U.S. Patent 4,997,469 - High Integrity, Low Odor Natural Based
Nitrogenous Granules For Agriculture,
dated January 11, 1990;
U.S. Patent 5,021,077 - High Integrity Natural Nitrogenous Granules For
Agriculture, dated January 10, 1990;
U.S. Patent 5,021,247 - High Integrity Natural Nitrogenous Granules
for Agriculture - animal feeds
supplement granules, dated June 1,
1990;
U.S. Patent 5,087,474 - Feed Supplements from Abattoir Sludge,
dated February 11, 1992;
U.S. Patent 5,240,490 - Non-Destructive Recovery of Natural
Nitrogenous Products, dated August 31,
1993; and,
U.S. Patent 5,411,568 - Highly Available Waste Based Nitrogen
Fertilizer, dated May 2, 1995.
The Company has applied for protection corresponding to certain of its patents
in Japan, Europe, Canada and South Africa. Patents have been issued in
Australia.
The Company has trademark protection for "Harmony" and the slogan "Harmony In
Tune With Nature." Trademark protection has also been obtained for the term
"Bridge" product.
Employees
During the selling season, the Company has approximately 15 full-time employees;
6 are engaged in manufacturing, 4 in sales and marketing, 2 in process
development and licensing and 3 in finance and administration. The Company's
employees are not represented by any collective bargaining organization, and the
Company has never experienced a work stoppage. The Company believes that its
employee relations are excellent. Seasonal layoffs may occur in the
manufacturing area during the third quarter.
Item 2. Description of Property
The Company's business office is leased office space at 808 Live Oak Drive,
Suite 126, Chesapeake, Virginia.
The Company's manufacturing facility consists of approximately 20,000 square
feet at the location of, and leased from, Elizabeth River Terminals, Inc., 4100
Buell Street, Chesapeake, Virginia. In August 1995, the landlord in this
facility released the Company from its lease obligation as to approximately
one-half of its leased space which had been used primarily for finished product
storage. See "Item 1 - Description of Business - Manufacturing Facility."
The Company entered into an operating lease for the building in which the
manufacturing equipment was operated and finished goods were stored. The base
rents on the lease for the manufacturing space and finished goods storage was
$93,600 for fiscal 1993, increasing to $119,700 for 1995. Base rents then
increased to $142,200 beginning July 1995 through the year 2000. Because the
Company negotiated the return of certain of the leased space, annual base rents
have decreased to approximately $58,800. In addition, the lease includes
incentives to be paid to the lessor based on shipping levels.
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Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company is subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company through
the solicitation of proxies or otherwise during the fourth quarter of the fiscal
year ended December 31, 1995.
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Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock began trading in the over-the-counter market on
December 23, 1991 and currently trades on the NASDAQ Small Cap Market under the
symbol "HRMY" although the Company recently received a notice from the NASDAQ
Small Cap Market that, due to the Company's inability to consistently maintain
the listing standards on the market, effective March 28, 1996, the Company's
common stock will be delisted. Although the Company intends to appeal this
determination, it is extremely unlikely this determination will be revised.
Accordingly, the Company intends to apply for listing of the common stock on the
NASDAQ Bulletin Board. However, none of the Company's market-makers have agreed
to back this application as of yet; accordingly management cannot offer any
assurance that its common stock will be available to trade on the Bulletin
Board. In any event, regardless of whether the Company's common stock is quoted
on the Bulletin Board or not, it will be subject to the SEC "penny stock" rules,
which by their nature, reduce the liquidity of the Company's common stock.
The following table sets forth the high and low closing bid prices of Harmony
Products, Inc. common stock for the period shown.
Fiscal 1993: High Low
---- ---
First quarter 2.125 0.625
Second quarter 1.625 0.875
Third quarter 1.500 0.875
Fourth quarter 1.125 0.250
Fiscal 1994: High Low
---- ---
First quarter 2.750 0.938
Second quarter 2.625 1.375
Third quarter 2.375 1.250
Fourth quarter 1.375 0.625
Fiscal 1995: High Low
---- ---
First quarter 1.375 0.750
Second quarter 1.375 0.375
Third quarter 1.625 0.375
Fourth quarter 1.375 0.500
The NASDAQ bid prices reflect inter-dealer quotations, without retail mark-up,
mark-down or commission and do not necessarily represent actual transactions.
No dividends were paid during fiscal 1993, 1994 or 1995.
There were approximately 650 holders of record of the Company's shares as of
February 15, 1996, not including the number of persons or entities whose stock
is held in nominee or "street" name through various brokerage firms or banks.
The Company's registrar and transfer agent is First Union National Bank of North
Carolina.
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Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operations for the Year Ended December 31, 1995 v. Year Ended December
31, 1994
Sales. For the year ended December 31, 1995, sales declined to approximately
$1,771,000, as compared to the prior year's level at $2,124,000. This decrease
was primarily attributable to the loss of sales to a large retail customer who
failed to reorder product during the first quarter of 1995 and a large customer
located on the west coast that, due to freight considerations, discontinued
purchasing products. It is unlikely that the Company will recapture these sales
in the foreseeable future. Sales to private label customers increased to
$1,141,000 (3,030 tons) in 1995 as compared to $1,118,000 (3,900 tons) in 1994.
As a percentage of total sales, 64% were private label sales as compared to 53%
in 1994. Retail sales totaled $392,000 (1,160 tons) or 22% of total sales
compared to sales of $537,000 (1,500 tons) or 25% of total sales for 1994.
Professional sales were $238,000 (1,200 tons) in 1995 or 14% of total sales as
compared to $469,000 (1,600 tons or 22%) in 1994.
Gross Margin. Gross margin for the year ended December 31, 1995 was negative at
$474,000 compared to a negative $417,000 in 1994. Negative gross margins are due
to the mix of products sold during the year and the low sales volume causing
higher production costs. The determination to close down the Company's primary
production line at its Chesapeake facility and subsequent use of lower cost
alternative production methods should, over time, improve the Company's gross
margins although management cannot predict when, or if, this will contribute to
an improvement in the Company's operating results.
Operating Expenses. Operating expenses for the year ended December 31, 1995,
were $2,676,000, as compared to $1,088,000 in 1994. This increase of $1,588,000
or 146% was primarily attributable to an accrual for the estimated loss on
disposal of the Company's primary processing equipment of $1,863,000 for the
year ended December 31, 1995. Without regard to this charge, operating expenses
were $813,000 for the year ended December 31, 1995 and decreased by $275,000 or
25% as compared to the year ended December 31, 1994.
During the second quarter of 1995, management of the Company decided to close
its batch oriented primary production line at its manufacturing facility in
Chesapeake Virginia. Management believes that new advancements in the Company's
technology permit it to utilize other manufacturers to produce its products at
lower manufacturing costs than those associated with its Chesapeake facility.
After completing construction of the primary line in 1991, the Company developed
the continuous process method of manufacturing its products as well as the
ability to make its organic based Bridge products in conventional fertilizer
granulation facilities. The Company has had operational success manufacturing
both its poultry manure and biosolid based high analysis fertilizer products at
conventional fertilizer granulators and expects that the Company will be able to
call on these facilities as needed for future fertilizer needs. As mentioned
above, in connection with the shut down and dismantling of its primary line, the
Company accrued an estimated loss on the disposal of certain fixed assets
(comprised primarily of production equipment) of $1,863,000 for the year ended
December 31, 1995. This estimated loss on disposal represents a write-off of the
book value of the equipment expected to be disposed of, net of any estimated
salvage value, as well as an accrual for the costs that will be incurred to
dismantle and sell the equipment. No similar charges were incurred during 1994.
Marketing and promotion expenses decreased from $541,000 in 1994 to $369,000, a
decrease of $172,000 or 32% in 1995. This decrease is primarily the result of
the Company's need to conserve cash. These expenses would increase in the future
should the Company's cash flow position improve.
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General and administrative expenses increased slightly from $375,000 in
1994 to $380,000 in 1995. This increase was primarily attributable to the
timing of certain expenditures.
Research and development activities decreased from $59,000 in 1994 to $22,000 in
1995. This decrease occurred because 1994's research and development efforts
were related to the Company's newest patent issued in 1995. Research and
development is expected to continue over time, but not at the levels experienced
during the early stages of the Company's operating history.
Royalties and commissions decreased from $113,000 in 1994 to $42,000 in 1995.
This decrease was due to several factors including the decline in sales volume,
the renegotiation of the royalties paid to the Inventors of the Company's
patented technology and the fact that many sales in 1995 were due to in-house
sales efforts not requiring the payment of a commission. Commissions are
directly related to sales volume as well.
Other Operating Income. Income from the Company's licensing contract with the
Ukraine totaled approximately $70,000 in 1994 and since the contract was
complete no revenues were recorded in 1995.
Also included in other operating income in 1994 is $500,000 recognized on a
domestic licensing contract the Company entered into in 1994 with New England
Fertilizer Company, Inc. Since this portion of the contract was complete as to
revenue recognition in 1994, no revenues were recorded in 1995. However, the
Company began marketing product on behalf of NEFCO during 1995 and recorded
commission revenues under this agreement. Other operating income related to
commission revenues totaled $21,600 in 1995; there were no such revenues in
1994. In the future, the Company expects to continue recognizing commission
revenues under the contract. Additionally, there are certain other actions
required on the part of NEFCO in order to maintain their licensing rights which
may provide income to the Company in the future.
Finally, the Company signed a licensing agreement with an Australian company
late in 1995. Revenues under this licensing agreement totaled $85,000 (net of
royalties) in 1995, with no such revenues in 1994.
Net Loss and Loss Per Share. For the year ended December 31, 1995 the net loss
was approximately $3,295,000 or $0.91 per share, while the loss for the year
ended December 31, 1994 was approximately $1,179,000 or $0.73 per share.
Weighted average shares outstanding at December 31, 1994 and 1995 were 1,624,404
and 3,627,934, respectively.
Manufacturing Plant Enhancements. No significant improvements were made to
the Company's manufacturing facility during 1995 or 1994.
Operations for the Year Ended December 31, 1994
Sales. For the year ended December 31, 1994, sales were relatively flat at
approximately $2,124,000, as compared to the prior year's level at $2,127,000.
This decrease was due in part to two large sales that occurred in 1993 but that
did not occur again in 1994. First, sales of EnviroBase 75 totaling $370,000 in
1993 did not occur in 1994 and second, Earthgro took much of their spring 1994
needs in 1993 totaling approximately $300,000. Management is encouraged that
these sales were replaced with general growth in another areas. In spite of the
timing differences in Earthgro sales, sales to private label customers increased
slightly to $1,118,000 (3,900 tons) in 1994 as compared to $1,003,000 (3,300
tons) in 1993. As a percentage of total sales, 53% were private label sales up
slightly from 47% in 1993. Retail sales totaled $537,000 (1,500 tons) or 25% of
total sales compared to sales of $258,000 (675 tons) or 13% of total sales for
1993. Professional sales were $469,000 (1,600 tons) in 1994 or 22% of total
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sales as compared to $866,000 (3,100 tons) in 1993. Included in the 1993 total
for professional sales are agriculture sales totaling $370,000 (1,400 tons)
which were not repeated in 1994.
Gross Margin. Gross margin for the year ended December 31, 1994 was negative at
$417,000 compared to a negative $737,000 in the prior year reflecting continued
sales volumes at less than break-even and the reduction of large beginning
inventory levels. Gross margin would become positive if sales volumes increased
substantially and production volumes remained high.
Operating Expenses. Operating expenses for the year ended December 31, 1994,
were $1,088,000, as compared to $1,220,000 in 1993. This decrease of $132,000 or
11% was due to several factors. First, marketing and promotion expenses
decreased from $618,000 in 1993 to $541,000 in 1994. General and administrative
expenses were closely monitored and cost cutting measures were initiated during
1993 and 1994 which caused decreases in general and administrative expenses from
$473,000 in 1993 to $375,000 in 1994. Research and development activities
increased modestly from $47,000 in 1993 to $59,000 in 1994. Research and
development is expected to continue over time, but not at the levels experienced
during the early stages of the Company's operating history. Royalties and
commissions increased from $82,000 in 1993 to $113,000 in 1994 as the mix of
products sold in 1994 was weighted more heavily toward those sales for which the
Company pays a commission.
Other Operating Income. Income from the Company's licensing contract with the
Ukraine totaled approximately $70,000 in 1994 and $975,000 in 1993. As this
contract is now complete, the Company will not generate any further revenues on
this contract. Included in other operating income in 1993 is $151,500 from the
renegotiation of a supply agreement. In 1989, the Company entered into the
Supply Agreement with Scotts that, as amended, required Scotts to take a minimum
of 5,700 tons of products from August 31, 1990 through September 30, 1994 at
slightly discounted rates. Prior to year end 1994, the contract was
renegotiated. For an upfront payment of $151,500, certain guaranteed product
take, an extension of the supply agreement until September 1996 and an agreement
that the Company be the sole manufacturer of any organic or organic based
product sold by Scotts through September 1996, the liquidated damages provision
in the original agreement was canceled. Also included in other operating income
in 1994 is $500,000 recognized on a domestic licensing contract the Company
entered into in 1994 with New England Fertilizer Company, Inc.
Net Loss and Loss Per Share. For the year ended December 31, 1994 the net loss
was approximately $1,179,000 or $0.73 per share, while the loss for the year
ended December 31, 1993 was approximately $988,000 or $0.72 per share. Weighted
average shares outstanding at December 31, 1993 and 1994 were 1,373,500 and
1,624,404, respectively.
Manufacturing Plant Enhancements. No significant improvements were made to the
Company's manufacturing facility during 1994. During 1993 improvements included
changes to the drying system, which included the installation of a drum dryer
cutting down on batch time in the reactor as well as drying the product more
thoroughly and more quickly than the curing belt handling system. The fluid bed
dryer was converted to a cooler and now thoroughly cools the product prior to
bagging. Additionally, improvements to the facility's granulation capabilities
were made.
Effects of Inflation
The Company believes that, during the periods discussed above, inflation has not
had a material impact on the Company's business, and will not have a material
impact in the foreseeable future.
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Liquidity and Capital Resources
Since inception, the Company has not been profitable and has not generated
sufficient cash flow from operations to fund itself. Additionally, since its
inception, the Directors have, from time to time, provided working capital and
credit enhancement to the Company. During 1995, the Directors purchased an
additional $3.1 million of common stock. From the proceeds of these stock sales,
the Company paid off Industrial Development Bonds with an outstanding balance of
approximately $1.42 million, reduced its operating line of credit by $1.0
million, paid off certain term debt by an additional $250,000 and provided
working capital.
Management continues to struggle with the Company's inability to increase its
sales volumes in a manner that will enable the Company to break-even on a gross
margin basis and to provide cash from operations. Management determined during
1995 to take advantage of technology developments by closing its primary
production line at its manufacturing facility in Chesapeake, VA and contracting
out its fertilizer production needs. Management believes that advances in the
Company's fertilizer technology will permit the Company to reduce the costs
associated with manufacturing its products. Management expects to take advantage
of these cost reductions by utilizing alternative production sites thereby
eventually improving gross margins on products manufactured at these alternative
sites. However, the Company will experience some loss of control over its
manufacturing as it turns to third parties. The Company cannot be assured that
it will have the production time it needs when it needs it, or that the third
parties will be able to manufacture the right mix of products. This could
present an impediment to the Company's ability to manufacture an acceptable
volume of products at the appropriate time during the 1997 selling season.
While these advances in technology address certain of the Company's margin
issues, a substantial increase in sales volume will not occur until the Company
can generate a greater demand for its products by investing in increased
marketing and advertising dollars. To further break into the mass merchandiser
market, the Company must be able to help support and pull through its product
with advertising campaigns that are sponsored by both the retailer and the
manufacturer. Large advertising campaigns, however, require a large financial
commitment. At Harmony's current sales volume, the size campaign needed is not
possible. This provides a significant impediment to the Company's ability to
operate its business plan.
For this reason, Harmony has committed itself to seeking other large sources of
capital. Two major efforts are underway. First, primary attention has been given
to potential technology arrangements that could provide the Company with larger
and more immediate payoffs. As evidenced by the Company's licensing arrangement
with the Ukraine venture, these agreements have the potential of providing
additional sources of cash flow. As such, the Company continues to work those
arrangements felt to be of the highest quality. As with any such endeavor,
management cannot give any assurances as to if or when a technology arrangement
would fund or provide any revenue to the Company.
Secondly, management of the Company purchased $3.1 million of stock during 1995.
The proceeds of this stock purchase were used to reduce the Company's
substantial debt load. The members of the Board of Directors of Harmony have
been committed to the Company's success as evidenced by their level of financial
support since the inception of the Company. At this time, the Board continues to
look for methods to continue financing the Company until it can stand on its
own. The sale of the Company's primary processing line at the Chesapeake
facility and the debt reduction will help position the Company to be profitable
in the future.
Management believes that recent equity infusions by certain of the Company's
Directors plus cash generated from future operations including any cash
generated from potential licensing arrangements will provide the Company with
sufficient sources of cash flow to conduct its operations during 1996. If 1996
operations, including licensing arrangements, do not materialize as expected,
the Company will be unable to fund its operations and will be forced to look to
any available alternative methods of financing, including relying on the
financial support of certain members of the Board of Directors, who have
committed to provide certain levels of working capital to the Company, if
required.
19
<PAGE>
The Company has been notified by NASDAQ that the Company's shares will be
removed from the NASDAQ Small Cap Market on March 28, 1996. The common stock
will still be available to trade on the NASDAQ Bulletin Board. This could affect
the liquidity of the Company's common stock. The Company will appeal NASDAQ's
decision to delist the Company's common stock.
The Company believes that consumers and professionals will eventually purchase
more organic and organic base fertilizers over time. Further, the Company
expects that its products and technology will benefit from the continued
attention and adverse publicity received by the mismanagement of waste streams.
If this occurs, the Company's technology and products should experience
increased demand. If this does not occur, the Company may continue to experience
difficulty in selling its products in significant volumes.
Item 7. Financial Statements
Refer to the index to Financial Statements for the required information.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
20
<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance With Section 16(a) of the Exchange Act
There is hereby incorporated by reference the information appearing under the
caption "Election of Directors" in the Company's definitive proxy statement for
its 1996 Annual Meeting of Shareholders.
Item 10. Executive Compensation
There is hereby incorporated by reference the information appearing under the
captions "Executive Officers" and "Executive Compensation" in the Company's
definitive proxy statement for its 1996 Annual Meeting of Shareholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management
There is hereby incorporated by reference the information appearing under the
caption "Security Ownership of Management" in the Company's definitive proxy
statement for its 1996 Annual Meeting of Shareholders.
Item 12. Certain Relationships and Related Transactions
There is hereby incorporated by reference the information appearing under the
caption "Certain Relationships and Related Transactions" in the Company's
definitive proxy statement for its 1996 Annual Meeting of Shareholders.
Item 13. Exhibits and Reports on Form 8-K
(a)(1) and (2) Financial Statements
The financial statements listed in the accompanying Index to the Financial
Statements are filed as part of this annual report on Form 10-KSB.
(a)(3) Exhibits
Exhibit Number Description of Exhibit
3.1* Amended and Restated Articles of Incorporation
of Harmony Products, Inc.
3.2* Bylaws of Harmony Products, Inc.
10.1* Promissory Note dated September 17, 1990, Security
Agreement dated September 1, 1990, Guaranty Agreement
dated September 1, 1990, Reimbursement Agreement
dated September 1, 1990, Pledge Security and Option
Agreement dated September 1, 1990, in connection with
the Industrial Development Authority of the City of
Chesapeake $2,500,000 Floating Rate Demand Industrial
Development Revenue Bonds, Series 1990.
21
<PAGE>
Exhibit Number Description of Exhibit
10.2* Modification Agreement to Industrial Development
Revenue Bonds agreement dated September 1, 1992.
10.3* Incentive Stock Option Plan of Harmony Products, Inc., dated
September 6, 1991.
10.4* Incentive Stock Option Plans dated September 6, 1991 between
Harmony Products, Inc. and J. Mark Nuzum, Gregory R. Gill,
Raymond E. Grover and J. Samuel Roady.
10.5* 1993 Long-term Incentive Plan of Harmony Products, Inc.,
dated February 25, 1993.
10.6* Contract and Technology Assignment and Assumption
Agreement dated February 14, 1990, between Arcadian
Corporation and Harmony Products, Inc., including
Exhibit A, Consulting Agreement dated May 25, 1989,
between Nitrex and Agri-Nutrients Technology Group,
William P. Moore and Benjamin B. Wilson.
10.7* Consulting Agreement dated August 1, 1990 between
Harmony Products, Inc., and Agri-Nutrients Technology
Group, Inc.
10.8* Agreement dated February 14, 1990 between Harmony
Products, Inc., William P. Moore and Benjamin B.
Wilson relating to the assignment of certain patents
and technologies, as amended July 18, 1990, July 30,
1990 and July 31, 1990.
10.9* $100,000 Promissory Note dated February 14, 1991 made by
Harmony Products, Inc. to Benjamin B. Wilson.
10.10* $50,401.37 Promissory Note dated February 14, 1991
made by Harmony Products, Inc. to Benjamin B. Wilson.
10.11* $100,000 Promissory Note dated February 14, 1991 made by
Harmony Products, Inc. to William Moore.
10.12* $50,401.37 Promissory Note dated February 14, 1991 made by
Harmony Products, Inc. to William Moore.
10.13* Agreement on Foreign Rights to the Natural
Fertilizers and Protein Supplements Patents and
Technologies dated February, 1990, between Harmony
Products, Inc., William P. Moore and Benjamin B.
Wilson.
10.14* Supply Agreement dated August 31, 1990 between The
O.M. Scott & Sons Company and Harmony Products, Inc.
and amended sections thereto dated September 26,
1991.
10.15* Amendment to Supply Agreement dated March 8, 1993
between O.M. Scott & Sons and Harmony Products, Inc.
22
<PAGE>
Exhibit Number Description of Exhibit
10.16* Lease Agreement dated July 1, 1990 between Elizabeth
River Terminals, Inc. and Harmony Products, Inc. and
related addenda to such lease Agreement.
10.17* Amendment to Lease Agreement dated July 1, 1990
between Elizabeth River Terminals, Inc. and Harmony
Products, Inc. dated January 13, 1993.
10.18* Deed dated July 19, 1990, Deed of Trust dated July,
1990, Deed of Trust Note dated July 24, 1990, and
Security Agreement dated July 24, 1990, relating to
purchase of office building located at 2121 Old
Greenbrier Road, Chesapeake, Virginia.
10.19* Waiver by Dominion Bank, National Association of
certain covenants in connection with the Industrial
Development Authority of the City of Chesapeake
$2,500,000 floating Rate Demand Industrial
Development Revenue Bonds, Series 1990.
10.20* Loan Agreement dated October 25, 1991 evidencing
$1,000,000 line of credit extended to Harmony
Products, Inc. by James A. Shirley,
Raymond E. Grover, Gregory R. Gill, W. Reginald
Powell, John W. Dibble and J. Samuel Roady.
10.21* First Amendment to the Loan Agreement dated October
25, 1991, between Harmony Products, Inc., by James A.
Shirley, Raymond E. Grover, Gregory R. Gill, W.
Reginald Powell, John W. Dibble and J. Samuel Roady,
which Amendment is dated November 6, 1991.
10.22* $830,000 Commercial Note and Security Agreement
between Harmony Products, Inc. and Dominion Bank,
National Association.
10.23* $220,000 Commercial Note and Security Agreement
between Harmony Products, Inc. and Dominion Bank,
National Association.
10.24* Unconditional Continuing Guaranties of John W.
Dibble, James A. Shirley, William R. Powell, Raymond
E. Grover, J. Samuel Roady, Gregory R. Gill and J.
Mark Nuzum relating to the $830,000 Dominion Bank
Commercial Note and the $220,000 Dominion Bank
Commercial Note between Harmony Products, Inc. and
Dominion Bank, National Association.
10.25* $750,000 Commercial Note and Security Agreement
between Harmony Products, Inc. and NationsBank.
10.26* Unconditional Continuing Guaranties of John W.
Dibble, James A. Shirley, William R. Powell, Raymond
E. Grover, J. Samuel Roady, Gregory R. Gill and J.
Mark Nuzum relating to the $750,000 NationsBank
Commercial Note between Harmony Products, Inc. and
NationsBank.
23
<PAGE>
Exhibit Number Description of Exhibit
10.27* U.S. Patent No. 4,109,019.
10.28* U.S. Patent No. 4,997,469.
10.29* U.S. Patent No. 5,021,077.
10.30* U.S. Patent No. 5,021,247.
10.31* U.S. Patent Application Serial No. 7/665094.
10.32* U.S. Patent Application Serial No. 7/851063.
10.33* Confidentiality Agreements of Raymond E. Grover, J.
Samuel Roady, Gregory R. Gill and J. Mark Nuzum.
10.34* Licensing, Equipment Purchase and Consulting
Agreement between Harmony Products, Inc. and Enakievo
State Metallurgical Facility dated May 23, 1992.
10.35* $250,000 Term Note between Central Fidelity Bank and
James A. Shirley, Martha Shirley, Raymond E. Grover,
Georgiann K. Grover, J. Samuel Roady, Susan M. Roady,
Gregory R. Gill, John W. Dibble, W. Reginald Powell
Shirley Powell, J. Mark Nuzum and Sandra P. Nuzum
dated November 5, 1993.
10.36* $250,000 Term Note between James A. Shirley, Martha
Shirley, Raymond E. Grover, Georgiann K. Grover, J.
Samuel Roady, Susan M. Roady, Gregory R. Gill, John
W. Dibble, W. Reginald Powell, Shirley Powell, J.
Mark Nuzum and Sandra P. Nuzum and Harmony Products,
Inc. dated November 5, 1993.
10.37* Deed of Trust dated January 1994 and Deed of Trust
Note dated January 3,1994 relating to refinance of
office building located at 2121 Old Greenbrier Road,
Chesapeake, Virginia.
10.38* Amendment to Supply Agreement dated September 17,
1993 between O.M. Scott & Sons and Harmony Products,
Inc.
10.39* $500,000 line of credit dated January 26, 1994
between NationsBank and Harmony Products, Inc.
10.40* Joint Marketing/Manufacturing Agreement by and
between Harmony Products, Inc. and Earthgro, Inc.
dated August 9, 1993.
24
<PAGE>
Exhibit Number Description of Exhibit
10.41* U.S. Patent No. 5,240,490.
10.42* U.S. Patent No. 5,087,474.
10.43* U.S. Patent Application No. 08/249,223.
10.44* Master License Agreement dated October 31, 1994
between New England Fertilizer Company and Harmony
Products, Inc.
10.45* Marketing Agreement dated October 31, 1994 between
New England Fertilizer Company and Harmony Products,
Inc.
10.46** Sales Agreement of Company's office building between
Harmony Products, Inc. and William G. Colby dated May
31, 1995.
10.47** North American Agreement; License of Natural Protein
Supplements, Patents and Technologies by Harmony
Products, Inc. to William P. Moore and Benjamin B.
Wilson dated June 15, 1995.
10.48** Letter of Amendment to lease agreement originally
dated July 1, 1990 between Harmony Products, Inc. and
Elizabeth River Terminals dated June 28, 1995.
10.49** Exclusive Licensing and Consulting Agreement dated
December 31, 1995 between Bio-Recycle (Aust.) Pty.
Ltd. and Harmony Products, Inc.
10.50** U.S. Patent No. 5,411,568.
24 Powers of Attorney (appears on page 26 herein).
* Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
Regulations under the Securities Exchange Act of 1934, reference is made to the
document previously filed with the Commission, which is incorporated herein by
reference.
** Filed herewith.
(b) Reports on Form 8-K filed in the Fourth Quarter 1995.
On December 21, 1995 the Company filed Form 8-K, as amended by Form 8-K/A filed
January 5, 1996 pursuant to Rule 13a-11 under the Securities Exchange Act of
1934, as amended, and General Instruction E to Form 8K/A, each under Item 5 and
describing the private placement of stock with certain members of the Company's
Board of Directors on December 13, 1995.
25
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the registrant has duly caused this report to be signed on
their behalf by the undersigned, there unto duly authorized.
HARMONY PRODUCTS, INC.
By /s/ Gregory R. Gill Date: March 17, 1996
---------------------- ----------------
Gregory R. Gill
President and
Treasurer
In accordance with the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/ W. Reginald Powell Chairman of the Board March 17, 1996
- - -----------------------
W. Reginald Powell
Chairman of the Board
/s/ Gregory R. Gill President, Director March 17, 1996
- - ------------------- and Treasurer
Gregory R. Gill
President and
Treasurer
/s/ Raymond E. Grover Executive Vice President March 17, 1996
- - ---------------------- Secretary and Director
Raymond E. Grover
Executive Vice President
and Secretary
/s/ J. Mark Nuzum President Plant Products Division March 17, 1996
- - ------------------ and Director
J. Mark Nuzum
President Plant Products
/s/ J. Samuel Roady Vice President Special Projects March 17, 1996
- - -------------------- and Director
J. Samuel Roady
Vice President Special Projects
/s/ John W. Dibble Director March 17, 1996
- - -------------------
John W. Dibble
/s/ James A. Shirley Director March 17, 1996
- - ---------------------
James A. Shirley
26
<PAGE>
This page intentionally left blank.
27
<PAGE>
FINANCIAL INFORMATION
<PAGE>
HARMONY PRODUCTS, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report...............................F-1
Balance Sheets - December 31, 1994 and 1995................F-2
Statements of Operations for the Years Ended
December 31, 1993, 1994 and 1995 ........................F-3
Statements of Shareholders' Equity for the Years Ended
December 31, 1993, 1994 and 1995 ........................F-4
Statements of Cash Flows for Years Ended
December 31, 1993, 1994 and 1995 ........................F-5
Notes to Financial Statements .............................F-6
F-index
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Harmony Products, Inc.:
We have audited the financial statements of Harmony Products, Inc. as listed in
the accompanying index. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Harmony Products, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
---------------------------------
Norfolk, Virginia
March 15, 1996
<PAGE>
HARMONY PRODUCTS, INC.
Balance Sheets
December 31, 1994 and 1995
</TABLE>
<TABLE>
<CAPTION>
Assets 1994 1995
------ ---- ----
<S> <C>
Current assets:
Cash and cash equivalents $ 58,888 101,810
Trade accounts receivable, net (note 6) 261,345 176,727
Licensing receivable, short term (note 7) 67,500 163,800
Inventories (notes 3 and 6) 472,439 258,540
Restricted bond funds (note 8) 312,900 -
Prepaid expenses and other assets 201,651 108,540
------- -------
Total current assets 1,374,723 809,417
Licensing receivable, long term (note 7) 182,500 118,700
Property, plant and equipment, net (notes 4 and 8) 3,181,479 601,532
Patent rights, net of accumulated amortization of
$154,311 in 1994 and $197,877 in 1995 (note 5) 574,297 536,020
Other assets, net 92,586 40,800
------ ------
$ 5,405,585 2,106,469
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt (note 8) $ 361,242 13,135
Notes payable to shareholders (note 6) - 13,000
Trade accounts payable and accrued expenses 625,935 296,063
------- -------
Total current liabilities 987,177 322,198
Notes payable to shareholders (note 6) 250,000 -
Notes payable to bank (note 6) 1,151,307 717,651
Long-term debt, excluding current installments (note 8) 1,772,014 15,034
--------- ------
Total liabilities 4,160,498 1,054,883
--------- ---------
Shareholders' equity:
Preferred stock, no par value. Authorized 1,000,000 shares;
no shares issued and outstanding - -
Common stock, no par value. Authorized 10,000,000 shares;
shares issued and outstanding - 2,099,566 in 1994 and
5,555,722 in 1995 (notes 10 and 11) - -
Additional paid-in capital 7,885,938 10,987,100
Accumulated deficit (6,640,851) (9,935,514)
----------- -----------
Total shareholders' equity 1,245,087 1,051,586
Commitments and contingencies
(notes 4, 5, 7, 8, 9, 11, 12 and 13)
$ 5,405,585 2,106,469
========= =========
</TABLE>
See accompanying notes to financial statements
F-2
<PAGE>
HARMONY PRODUCTS, INC.
Statements of Operations
Years Ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C>
Net sales $ 2,126,544 2,124,345 1,771,247
Cost of goods sold 2,863,100 2,540,859 2,245,218
--------- --------- ---------
Gross loss (736,556) (416,514) (473,971)
------- ------- -------
Other operating income (note 7) 1,126,500 570,395 106,611
Operating expenses:
Marketing and promotion 618,032 541,291 368,910
Research and development 47,409 59,421 22,194
General and administrative 472,518 375,159 380,098
Royalties and commissions 81,691 112,534 42,296
Loss on disposal of fixed assets (note 4) - - 1,862,763
--------- --------- ---------
1,219,650 1,088,405 2,676,261
--------- --------- ---------
Loss from operations (829,706) (934,524) (3,043,621)
------- ------- --------
Other income (expense):
Interest expense (210,772) (291,459) (250,832)
Other income (expense) 52,410 46,926 (210)
------ ------ -----
Net loss $ (988,068) (1,179,057) (3,294,663)
========= =========== ===========
Loss per share $ (.72) (.73) (.91)
===== ===== =====
Weighted average common shares outstanding 1,373,500 1,624,404 3,627,934
========= ========= =========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
HARMONY PRODUCTS, INC.
Statements of Shareholders' Equity
Years Ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
Additional Total
Common Stock paid-in Accumulated shareholders'
Shares Amount capital deficit equity
------ ------ ---------- ----------- -------------
<S> <C>
Balance at December 31, 1992 1,373,500 $ - 6,680,917 (4,473,726) 2,207,191
Net loss for the year ended
December 31, 1993 - - - (988,068) (988,068)
--------- -------- ---------- ---------- ---------
Balance at December 31, 1993 1,373,500 $ - 6,680,917 (5,461,794) 1,219,123
Common stock issued
(note 10) 726,066 - 1,205,021 - 1,205,021
Net loss for the year ended
December 31, 1994 - - - (1,179,057) (1,179,057)
Balance at December 31, 1994 2,099,566 $ - 7,885,938 (6,640,851) 1,245,087
========= ====== ========= ========== =========
Common stock issued
(note 10) 3,456,156 - 3,101,162 - 3,101,162
Net loss for the year ended
December 31, 1995 - - - (3,294,663) (3,294,663)
Balance at December 31, 1995 5,555,722 $ - 10,987,100 (9,935,514) 1,051,586
========= ====== ========== ========== =========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
HARMONY PRODUCTS, INC.
Statements of Cash Flows
Years Ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C>
Net cash provided by (used in) operating activities:
Net loss $ (988,068) (1,179,057) (3,294,663)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, amortization and loss on asset writeoffs 440,785 478,257 2,124,569
Changes in current assets and liabilities providing (using) cash:
Trade accounts receivable (225,331) 64,022 84,618
Licensing receivable - short term - (67,500) (96,300)
Inventories 124,312 112,306 213,899
Prepaid expenses 68,096 (108,002) 122,384
Trade accounts payable 251,001 61,512 (291,925)
Licensing contract liabilities, net (462,247) (332,040) -
Accrued expenses 3,285 (5,175) (12,751)
----- ------- --------
Net cash used in operating activities (788,167) (975,677) (1,150,169)
--------- --------- -----------
Cash flows from investing activities:
Proceeds from disposals of building, plant and equipment - - 531,723
Increase (decrease) in licensing receivable - long term - (182,500) 63,800
Purchase and construction of property, plant and
equipment, including interest capitalized (333,474) (71,803) (19,285)
Decrease in restricted bond funds, net - - 312,900
Other (30,862) (7,147) (2,146)
-------- ------- -------
Net cash provided by (used in) investing activities (364,336) (261,450) 886,992
--------- --------- -------
Cash flows from financing activities:
Net borrowings (repayments) on note payable to bank 750,000 401,307 (433,656)
Borrowings on notes payable to shareholders 148,330 (21,408) 13,000
Repayments on notes payable to shareholders - - (250,000)
Principal payments on long-term debt (358,655) (350,173) (2,098,948)
Proceeds from issuance of common stock - 1,205,021 3,101,162
Other (11,619) (12,348) (25,459)
-------- ------ ------
Net cash provided by financing
activities 528,056 1,222,399 306,099
------- --------- -------
Net increase (decrease) in cash (624,447) (14,728) 42,922
Cash and cash equivalents at beginning of year 698,063 73,616 58,888
------- ------ ------
Cash and cash equivalents at end of year $ 73,616 58,888 101,810
====== ====== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 168,676 219,904 197,655
======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
December 31, 1995
1. Organization and Basis of Presentation
Harmony Products, Inc., a Virginia corporation, was organized by a group of
fertilizer executives to develop, manufacture, and market fertilizer and
animal feed products as well as license the patented technology involved. The
Company was incorporated on August 31, 1989, as Natural Sciences/Harmony
Products, Inc., and the name subsequently changed to Harmony Products, Inc.
on October 23, 1989. The Company was inactive until February 9, 1990 (date of
inception), when the Company was capitalized, certain patent rights were
acquired, and the planning for the construction of the manufacturing facility
began. The manufacturing facility was partially complete in December 1990 and
production of product was underway on a test basis. In February 1991, the
manufacturing facility became operational. At this time, the Company ceased
to be a developmental stage enterprise.
In December 1991, the Company issued 720,000 shares of common stock in a public
offering with net proceeds of approximately $4,078,000. The proceeds were
used for repayment of bank debt, repayment of notes to shareholders and
working capital.
2. Summary of Significant Accounting Policies
(a) Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or
less to be cash equivalents.
(b) Fair Value of Financial Instruments
The Company's financial statements approximate fair value because of the
short maturity of the instruments or because the interest rates associated
with the financial instruments approximate fair value.
(c) Inventories
Inventories are stated at the lower of cost (average cost method) or market
value (replacement cost for raw materials and net realizable value for all
other inventory). Cost includes material, labor and manufacturing costs.
(d) Deferred Turnaround
Included in prepaid assets at December 31, 1994 were charges incurred for
plant turnaround. These charges were incurred during a concentrated repair
and maintenance period for the Company's manufacturing facility and were
timed to coincide with the off-season when manufacturing was at its lowest
level. Those 1994 turnaround expenses are fully amortized at December 31,
1995 and were approximately $106,000 at December 31, 1994. Included in
prepaid assets at December 31, 1995 are approximately $32,000 in 1995
turnaround costs incurred during months of July through September 1995. The
Company's policy is to capitalize these costs after the off-season period and
amortize the costs over the subsequent sales and manufacturing season of
October through June.
(continued)
F-6
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
2. Summary of Significant Accounting Policies, continued
(e) Property, Plant and Equipment
Property, plant and equipment is carried at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets. The
Company uses the following periods for depreciating and amortizing property,
plant and equipment:
Buildings 10-30 years
Autos 3 years
Furniture, fixtures and equipment 5 years
Manufacturing equipment 10 years
Leasehold improvements 15 years
(f) Patent Rights
Patent rights are amortized using the straight-line method over the lives of
the patents which is seventeen years.
(g) Impairment of Assets
The Company assesses the recoverability of certain assets by determining
whether the balance of the asset can be recovered over its remaining life
through undiscounted futures operating cash flows. The assessment of the
recoverability will be impacted if estimated future operating cash flows are
not achieved.
(h) Revenue Recognition
The Company recognizes sales revenue upon transfer of title to the customer,
which generally occurs upon shipment of the product from the Company's
warehouse. Revenue from technology licensing agreements is recognized on the
percentage completion method and is included in other operating income.
(i) Research and Development
Research and development costs are charged to expense in the period incurred.
(j) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(k) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(l) Loss Per Share
Loss per share is based upon the weighted average number of common shares
outstanding.
HARMONY PRODUCTS, INC.
F-7
<PAGE>
Notes to Financial Statements
3. Inventories
Inventories at December 31, 1994 and 1995 consist of the following:
1994 1995
---- ----
Finished products $ 319,721 77,960
Raw materials 40,259 24,250
Packaging materials 112,459 156,330
------- -------
$ 472,439 258,540
======= =======
4. Property, Plant and Equipment, net
Property, plant and equipment at December 31, 1994 and 1995 consists of the
following:
1994 1995
---- ----
Land $ 190,000 -
Buildings 210,208 9,704
Leasehold improvements 333,892 333,892
Autos - 11,711
Furniture, fixtures and equipment 50,548 51,871
Manufacturing equipment 3,923,728 589,167
Construction in progress - 10,150
--------- ---------
4,708,376 1,006,495
Less accumulated depreciation
and amortization 1,526,897 404,963
--------- -------
Property, plant and equipment, net $ 3,181,479 601,532
========= =======
The Company entered into an operating lease for a building in which the
manufacturing equipment is operated with an initial lease term for five years
through July 1995. The Company had two options to extend each lease term an
additional five years. In January 1993, an addendum to the lease was signed
which required base rents of $93,600 for fiscal 1993, increasing to $119,700
for 1995. In January 1995, the first option to extend the lease for an
additional five years was exercised by the Company and accepted by the
lessor. In addition, the lease includes incentives to be paid to the lessor
based on shipping levels. Annual base rents were to increase to $142,200
beginning July 1995 continuing through the year 2000.
In August 1995, the landlord in this facility released the Company from its
lease obligation as to warehouse space primarily used for storage of finished
good inventory. The Company currently occupies roughly one-half of the space
that was originally being leased. Annual base rents have decreased to
approximately $58,800.
During the second quarter of 1995, management of the Company determined to close
its primary production line at its manufacturing facility in Chesapeake
Virginia. Advancements in the Company's technology permit it to utilize other
manufacturers to produce its products at lower manufacturing costs than those
associated with its Chesapeake facility. Accordingly, the Company accrued in
its second quarter of 1995 an estimated loss on the disposal of certain fixed
assets (comprised primarily of production equipment) of approximately
$1,863,000. This estimated loss on disposal represents a write-off of book
value of the equipment expected to be disposed of, net of any estimated
salvage value, as well as an accrual for the costs that will be incurred to
dismantle and sell the equipment.
In June 1995, the Company entered into an agreement with a buyer to sell its
corporate office facility for $375,000. A loss on this sale of approximately
$15,300 was recorded in 1995. The Company currently leases office space that
is more suitable for its needs with annual rents of approximately $25,000.
F-8
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
5. Patent Rights
In February 1990, the Company obtained from another company for $170,000, the
rights, title and interest in a consulting agreement and exclusive
relationship with the inventors of the proprietary fertilizer manufacturing
process, including technical information, know-how, formulation, methods and
inventions. This purchase afforded the Company the right to purchase all of
the technology related to the formulation, processing, manufacturing and
storage of products in the fields of natural-based fertilizers and plant
nutrients from the inventors of the process. Under the terms of this
purchase, the Company has the exclusive right to make, use or sell all
products resulting from this technology and exclusive control of technical
information patent rights and improvements.
For this technology and the related patent rights, the Company paid the
inventors $500,000. In addition, under the agreement, the Company was
committed to pay royalties on sales of patented product in North America to
the inventors as follows: 4-1/2% on the first $2.0 million in sales, 3% on
the next $8.0 million in sales; and 2% on sales in excess of $10.0 million. A
portion of revenues received by the Company in certain licensing arrangements
is paid to the inventors depending upon the identity and place of business of
the licensee.
In June 1995, the Company sublicensed certain of its patent rights with regard
to animal feed supplements back to the inventors. As consideration for the
sublicense, the inventors reduced its current royalty structure with the
Company. A flat royalty of $20,000 is due to the inventors for calendar year
1995 with no royalties due in years thereafter (note 7).
6. Notes Payable
Notes payable to bank
In January 1993, the Company secured a $750,000 line of credit at prime plus
one-half percent with a bank, secured by inventory and receivables and
guaranteed and fully collateralized by certain members of the Board of
Directors.
In January 1994, the line of credit was increased by $500,000, secured by
inventory and receivables and was guaranteed by the Directors of the Company.
The $500,000 increase to the line bore interest at prime plus 2%.
In January 1995, the line of credit was increased by another $500,000, secured
by inventory and receivables and was guaranteed by the Directors. The entire
balance of the line of credit ($1,750,000) bore interest at prime plus
1.375%, and expired in July 1995.
In June 1995, the uncollateralized portion of the line ($1,000,000) was paid off
from the proceeds of stock purchases by certain Directors (note 10). The
remaining balance on the line of $750,000 was renewed for one year in October
1995 at prime plus 1.375%. At December 31, 1994 and 1995, $1,151,307 and
$717,651 was outstanding on the line of credit, respectively. The line of
credit is not due as long as certain members of the Board of Directors fully
collateralize the line of credit, therefore the line of credit is classified
as long term.
(continued)
F-9
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
6. Notes Payable (continued)
Notes payable to shareholders
In November 1993, members of the Board authorized a term loan of $250,000 to the
Company. This note was interest only for the first two years at prime with
the outstanding principal balance fully amortized over the following three
years. This amount was included in Notes payable to shareholders - long term.
In June 1995, this debt was paid off by the Company from the proceeds of the
issuance of common stock to certain Directors (note 10).
During 1995, certain Directors advanced the Company approximately $213,000,
payable on demand and at 9% interest. Certain of the Company's Directors
converted $200,350 of this note to 244,329 shares of common stock prior to
year end (note 10). The remaining $13,000 is included in notes payable to
shareholders - short term.
7. Licensing Contracts
Ukraine
The Company entered into a Licensing, Equipment Purchase and Consulting
Agreement with a venture located in Ukraine in 1992. During 1993 and 1994,
the Company incurred a total of $1.9 million in expenditures under the
contract and recognized a total of $1.045 million in other operating income
from the licensing agreement. Cash payments to the Company under the
arrangement totaled $2.95 million. All of the Company's obligations under the
arrangement have been satisfied and all revenues have been recognized. Other
operating income of approximately $70,000 was recognized under this
arrangement for the year ended December 31, 1994. No other operating income
related to the Ukraine contract was recognized for the year ended December
31, 1995.
New England Fertilizer
In October 1994, the Company entered into a Master License Agreement and a
Marketing Agreement with New England Fertilizer Company ("NEFCO"). NEFCO
operates a sludge management facility in Quincy, Massachusetts for the
Massachusetts Water Resources Authority. This facility produces a
mechanically dried sewage sludge which it converts to an environmentally safe
product termed "fertilizer-grade biosolids."
Under the Master License Agreement, NEFCO has an exclusive license in all states
east of the Mississippi River for Harmony's patented processes. The resultant
product is an enhancement of the generally low analysis biosolids to produce
virtually any formulation desired. NEFCO intends to utilize Harmony's
technology and know-how to upgrade the biosolids produced at the Quincy plant
and to utilize the combination of the Harmony process and mechanical drying
to offer sludge management programs to other generators in the United States.
NEFCO also expects to utilize the Harmony process to offer product management
services to others who may already mechanically dry sludges.
F-10
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
7. Licensing Contracts (continued)
New England Fertilizer (continued)
Under the Marketing Agreement, Harmony will act as NEFCO's sales agent for both
enhanced and unenhanced biosolids. All fertilizer grade biosolid products
marketed under this agreement will be sold under NEFCO-owned or licensed
brand names; Harmony's existing brand names will be applied only to poultry
manure.
Under the Master License Agreement, NEFCO paid Harmony $250,000 upon signing.
Each year, for four years, on the anniversary date of the Master License
Agreement, NEFCO will pay to Harmony $70,000. This receivable has been
discounted: $63,800 is included on the balance sheet as Licensing receivable
- short term and $118,700 is included in Licensing receivable - long term.
NEFCO must meet certain minimum performance requirements to retain its right
to sub-license the technology over time. Harmony will receive a fee equaling
1/2% of the total cost to build a facility which employs Harmony technology.
Under the Marketing Agreement, Harmony will receive a marketing fee of 15% of
the net invoiced sales by NEFCO for each location operated by NEFCO. This
percentage will subsequently decrease to 10% after three years. No other
operating income was recognized under the NEFCO licensing arrangement for the
year ended December 31, 1994. For the year ended December 31, 1995, the
Company recognized other operating income for net commissions accrued under
the Marketing Agreement of $21,600.
Animal Feed Sublicense
In June 1995 the Company sublicensed to the inventors of its technology the
Harmony technology expressly related to animal nutrition in North America for
the life of the related patents. In consideration for the sublicense,
certain, reductions were made to the existing royalty structure with the
inventors (note 5).
Australia
On December 31, 1995 the Company entered into a Licensing and Consulting
Agreement ("Agreement") with Bio-Recycle (Aust.) Pty. Ltd. ("Bio-Recycle"), an
Australian company that specializes in the recycling of organic waste streams.
Under the provisions of the Agreement, Harmony licenses to Bio-Recycle the
rights to the Company's patents and know how for an exclusive territory that
includes Australia, Malaysia, Indonesia, Vietnam and New Zealand. The Agreement
requires Harmony to provide certain technical, engineering and equipment design
consulting services after a facility fee has been paid. Finally, the Agreement
licenses to Bio-Recycle the right to use certain Harmony trademarks, tradenames
and copyrighted materials.
Bio-Recycle does not plan to begin construction of a facility incorporating
Harmony's patented technology immediately; however, under provisions of the
Agreement, Bio-Recycle must meet certain plant construction thresholds in order
to maintain its rights under the Agreement.
As of December 1995, the Company has no further obligations under the agreement
and has recorded other operating income $85,000 (net of royalties due to the
Inventors) and a corresponding short term receivable of $100,000 for the
Australian licensing Agreement.
F-11
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
8. Long-term Debt
Long-term debt at December 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C>
Industrial Development Bonds, due in annual amounts
of $350,000 from March 1, 1993 to 1998; final amount of
$400,000 due on March 1, 1999; the interest rate floats with
market rates, has a maximum interest rate of 15% and is
due monthly; the average interest rate during 1994 and 1995
was 3.17% and 4.25%, respectively. Paid off June 30, 1995. $ 1,800,000 -
7.75% mortgage note payable in monthly installments of
$2,918, including interest, due January 1999; secured by
property. Property sold and debt repaid August 31, 1995. 298,948 -
7-1/2% to 12% capitalized leases and 12% to 13% vehicle
loans; payable in monthly installments, including interest,
secured by equipment and vehicles; final payment due
January 1999. 34,308 28,169
------ ------
Total long-term debt 2,133,256 28,169
Less current installments 361,242 13,135
--------- ------
Long-term debt, excluding current
installments $ 1,772,014 15,034
========= ======
</TABLE>
Industrial Development Bonds
On June 30, 1995, the Company repaid the entire balance due on the Industrial
Development Bonds from the proceeds of a stock sale to certain Directors
(note 10). The Company entered into a bond issuance agreement on September 1,
1990 in the amount of $2,500,000 with the Industrial Development Authority of
the City of Chesapeake, Virginia. The bonds were used for the acquisition and
construction of a fertilizer and animal feed manufacturing facility and for
the costs of issuing the bonds. The indenture created restricted bond funds
which were in the custody of a trustee. Such restricted bond funds totaled
$312,900 for construction costs and sinking fund requirements at December 31,
1994 and are included in the accompanying balance sheets as restricted bond
funds. These funds were invested in short-term interest bearing accounts.
There were no restricted bond funds at December 31, 1995.
The bonds were secured by a letter of credit in the amount of approximately
$1,516,000 and the fertilizer and animal feed manufacturing facility with a
cost of $3,923,728 at December 31, 1994. The letter of credit fee of 1-1/4%
of the available amount was prepaid monthly. Certain members of the Board of
Directors had guaranteed the letter of credit, which would have expired in
September 1995 had the Company not repaid the balance due on the Industrial
Development Bonds.
Mortgage Note Payable
On January 13, 1994, the Company refinanced its mortgage note payable on its
home office building with a bank. The mortgage had a fixed interest of 7.75%
with a 15 year amortization and had a 5 year call option for the bank. The
mortgage was guaranteed by certain members of the Board of Directors. As
discussed in note 4, the Company sold its office building during the third
quarter of 1995.
F-12
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
9. Income Taxes
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1994
and 1995 are presented below:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C>
Deferred tax assets and (liabilities):
Net operating loss carryforwards $ 1,315,000 1,959,000
Prepaid expenses, due to differences
in amortization 25,000 14,000
Allowance for doubtful accounts - 1,000
Research and development credits - 43,000
Start-up costs capitalized for tax purposes 7,000 -
Intangible assets, due to differences
in basis and amortization (3,000) (7,000)
Property, plant and equipment, due to
differences in basis and depreciation (34,000) 1,000
Less: valuation allowance (1,310,000) (2,011,000)
--------- ---------
Net deferred taxes $ - -
========= =========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1994 was
$1,310,000. The net change in the total valuation allowance for 1995 was an
increase of $701,000 and for 1994 was an increase of $224,000.
At December 31, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $8.2 million which are available
to offset federal taxable income, if any, through 2009.
F-13
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
10. Common Stock
The following shares of stock were purchased by certain of the Company's Board
of Directors during 1994:
Date Shares Amount Price
---- ------ ------ -----
June 9 242,669 $ 455,004 $ 1.88
August 5 137,933 250,004 1.81
September 16 145,458 250,006 1.72
December 1 200,006 250,007 1.25
------- ---------
Total 726,066 $ 1,205,021
======= =========
In all cases the price paid for the stock represented the prior thirty day
average of the closing bid and closing ask prices for the stock or the
average of the closing bid and closing ask price on the day of the
subscription, whichever was greater.
The following shares of stock were purchased or exchanged for debt by certain of
the Company's Board of Directors during 1995:
Date Shares Amount Price
---- ------ ------ -----
June 30 2,967,925 $ 2,700,812 $ 0.91
December 13 488,231 400,350 0.82
------- -------
Total 3,456,156 $ 3,101,162
========= =========
On June 30, 1995, certain of the Company's Board of Directors determined to
recapitalize the Company by purchasing common stock (notes 6 and 8). The
share price of $0.91 for the shares issued in this recapitalization was
determined by averaging the closing bid and closing ask price of the stock
for the thirty days prior to June 30, 1995. The Company and the Board had
agreed to increase the purchase price per share, and accordingly reduce the
number of shares purchased, had the average of the closing bid and closing
ask price of the stock for the 30 days after June 30, 1995 been higher. As
this average was lower, the stock was valued by reference to the higher June
prices.
On December 13, 1995, the Company converted a $200,350 loan to shareholders into
common stock as well as an additional purchase of $200,000 in common stock.
The price paid for the stock represented the prior thirty day average of the
closing bid and closing ask prices for the stock or the average of the
closing bid and closing ask price on the day of the subscription, whichever
was greater.
F-14
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
11. Incentive Stock Option Plans
Incentive Stock Option Plan -1991
In September 1991, the Company adopted an Incentive Stock Option Plan (the
Plan). The Plan provides, in the aggregate, for the grant of incentive stock
options to selected employees and officers to purchase up to 100,000 shares.
The Plan has 79,500 stock options outstanding at exercise prices ranging from
$1-1/4 to $5-1/4 per share. Options must be exercised within five to ten
years from the date granted. Generally, unless the compensation committee
grants special concessions, options may be exercised only when the optionee
is in the employment of the Company, except in the case of death of the
employee, in which case unexpired, unexercised options may be exercised
within six months of death, by the optionee's estate.
Long-term Incentive Plan - 1993
In April 1993, the Shareholders approved the 1993 Long-term Incentive Plan (the
1993 Plan). The purpose of the 1993 Plan is to enable the Company to reward
existing directors for guaranteeing certain debts of the Company and lending
money directly to the Company during 1992, to attract and retain qualified
directors and employees, and increase the proprietary interest of such
persons in the Company in order to provide such persons with additional
motivation to continue serving the Company and to further its growth and
achieve profitability. The 1993 Plan is intended to provide the Company with
greater flexibility to address the compensation needs of employees.
Under the 1993 Plan, 20,000 options have been earmarked to be distributed to the
Directors; the remaining 80,000 options are to be distributed to employees
and employee-directors at the discretion of the Company's Option Committee.
On April 23, 1993 the Board decided to indefinitely postpone the granting of
20,000 options to the Directors. The Board will readdress the issuance of
these options in the future. A total of 37,500 options have been granted to
employees at exercise prices ranging between $1 3/8 and $2 1/2. Options
granted must be exercised within ten years from the date granted. Generally,
unless the compensation committee grants special concessions, options may be
exercised only when the optionee is in the employment of the Company, except
in the case of death of the employee, in which case unexpired, unexercised
options may be exercised within six months of death, by the optionee's
estate.
F-15
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
12. Liquidity and Capital Resources
Since inception, the Company has not been profitable and has not generated
sufficient cash flow from operations to fund itself. Additionally, since its
inception, the Directors have, from time to time, provided working capital
and credit enhancement to the Company. During 1994, the Directors purchased
an additional $1.2 million of common stock. During 1995 certain of the
Company's Board of Directors purchased $3.1 million of common stock in an
effort to reduce the Company's debt load and provide working capital.
The Company has been notified by NASDAQ that the Company's shares will be
removed from the NASDAQ Small Cap Market on March 28, 1996. The common stock
will still be available to trade on the NASDAQ Bulletin Board. This could
affect the liquidity of the Company's common stock. The Company will appeal
NASDAQ's decision to delist the Company's common stock.
Management believes that recent equity infusion by certain of the Company's
Directors plus cash generated from future operations including any cash
generated from potential licensing arrangements will provide the Company with
sufficient sources of cash flow during 1996. If 1996 operations, including
licensing arrangements, do not materialize as expected, the Company will be
unable to fund its operations and will be forced to look to any available
alternative methods of financing, including relying on the financial support
of certain members of the Board of Directors, who have committed to provide
certain levels of working capital to the Company if required.
13. Contingencies
As the Company's products are low in analyses (nitrogen, phosphorus and
potassium) and the nitrogen in the products is generally 60% water insoluble,
management believes the products have a minimal effect on the environment.
Accordingly, the Company believes that it does not need, and it does not
maintain, insurance for any environmental claims which might result from the
release of its products into the environment in a manner or in concentrations
not permitted by law.
F-16
<PAGE>
HARMONY PRODUCTS, INC.
<TABLE>
<S> <C>
BOARD OF DIRECTORS Harmony Products, Inc.
W. Reginald Powell 808 Live Oak Drive, Suite 126
Chairman of the Board Chesapeake, Virginia 23320
804-523-2849
Gregory R. Gill
President, Chief Executive Officer and ANNUAL MEETING
Treasurer - Harmony Products, Inc. The 1995 Annual Meeting of Shareholders
of Harmony Products, Inc. will be held at
Raymond E. Grover 9:00 a.m. on Thursday, May 3, 1996 in
Executive Vice President, Secretary, Chesapeake, Virginia.
Harmony Products, Inc.
COMMON STOCK TRANSFER
J. Mark Nuzum AGENT AND REGISTRAR
President, Plant Products Division, First Union National Bank of
Harmony Products, Inc. North Carolina
Shareholder Services Group
J. Samuel Roady Two First Union Center
Vice President Special Projects, 301 South Tryon Street
Harmony Products, Inc. Charlotte, NC 28288-1154
John W. Dibble FORM 10-KSB EXHIBITS
Upon written request, Harmony
James A. Shirley Products, Inc. will furnish
any exhibits to its Form 10-KSB
upon the payment of the Company's
COMMON STOCK reasonable expenses in furnishing
The common stock of Harmony such exhibits. Send requests to:
Products, Inc. is traded in the over- Gregory R. Gill
the-counter (OTC) market and is quoted President and Treasurer
Harmony Products, Inc. 808 Live Oak Drive, Suite 126
on the National Association of Securities Chesapeake, Virginia
Dealers Automated Quotation (NASDAQ) 23320
under the trading symbol "HRMY."
</TABLE>
<PAGE>
This report has been filed with the Securities and Exchange Commission via Edgar
Form 10-QSB - Quarterly or Transitional Report
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to __________
Commission file number 0-19979
Harmony Products, Inc.
(Exact name of small business issuer as specified in its charter)
Virginia 54-1529382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
808 Live Oak Drive Suite 126 Chesapeake, Virginia 23320
(Address of principal executive office)
757-523-2849
(Issuer's telephone number)
Indicate 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: 1,516,929 shares of common
stock.
<PAGE>
HARMONY PRODUCTS, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets - December 31, 1995 and
September 30, 1996 (unaudited)...............................1
Statements of Operations for the Three and Nine Months
ended September 30, 1995 and 1996 (unaudited)................2
Statement of Shareholders' Equity for the Nine
Months ended September 30, 1996 (unaudited)..................3
Statements of Cash Flows for the Three and Nine Months
ended September 30, 1995 and 1996 (unaudited)................4
Notes to Financial Statements ...............................5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............15
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................18
SIGNATURE ............................................................19
<PAGE>
HARMONY PRODUCTS, INC.
Balance Sheets
December 31, 1995 and September 30, 1996
<TABLE>
<CAPTION>
Assets December 31, September 30,
1995 1996
(unaudited)
<S> <C>
Current assets:
Cash and cash equivalents $ 101,810 72,157
Trade accounts receivable, net (note 6) 176,727 138,994
Licensing receivable, short term (note 7) 163,800 97,800
Inventories (notes 3 and 6) 258,540 233,920
Prepaid expenses and other assets 108,540 90,515
------- ------
Total current assets 809,417 633,386
Licensing receivable, long term (note 7) 118,700 118,700
Property, plant and equipment, net (notes 4 and 8) 601,532 538,635
Patent rights, net of accumulated amortization of
$197,877 in 1995 and $230,422 in 1996 (note 5) 536,020 503,475
Other assets, net 40,800 32,331
------ ------
$ 2,106,469 1,826,527
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt (note 8) $ 13,135 13,144
Notes payable to shareholders (note 6) 13,000 13,000
Trade accounts payable and accrued expenses 296,063 340,913
------- -------
Total current liabilities 322,198 367,057
Notes payable to bank (note 6) 717,651 749,311
Long-term debt, excluding current installments (note 8) 15,034 11,164
------ ------
Total liabilities 1,054,883 1,127,532
--------- ---------
Shareholders' equity:
Preferred stock, no par value. Authorized 100,000 shares;
no shares issued and outstanding - -
Common stock, no par value. Authorized 2,500,000 shares;
shares issued and outstanding - 1,388,931 in 1995 and
1,516,929 in 1996 (notes 10 and 11) - -
Additional paid-in capital 10,987,100 11,377,100
Accumulated deficit (9,935,514) (10,678,105)
----------- ------------
Total shareholders' equity 1,051,586 698,995
Commitments and contingencies
(notes 4, 5, 7, 8, 9, 11, 12 and 13)
--------- ---------
$ 2,106,469 $ 1,826,527
========= =========
</TABLE>
See accompanying notes to financial statements
1
<PAGE>
HARMONY PRODUCTS, INC.
Statements of Operations
Three Months and Nine Months ended September 30, 1995 and 1996
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C>
Net sales $ 239,241 213,785 1,494,727 983,611
Other operating income (expense) (1,039) 5,846 11,754 33,127
----- ----- ------ ------
Total net revenue 238,202 219,631 1,506,481 1,016,738
Cost of goods sold 242,475 374,727 1,919,153 1,171,834
------- ------- --------- ---------
Gross loss (4,273) (75,207) (412,672) (155,096)
Operating expenses:
Marketing and promotion 87,311 43,801 306,917 137,379
Research and development 5,701 7,877 19,437 16,038
General and administrative 99,522 138,003 329,902 374,455
Royalties and commissions 5,346 20 39,132 2,972
Loss on disposal of fixed assets (note 4) - - 1,878,602 -
197,880 189,701 2,573,990 530,844
------- ------- --------- -------
Loss from operations (202,153) (264,908) (2,986,662) (685,940)
Other income (expense):
Interest expense (25,774) (18,782) (183,765) (56,956)
Other income (expense) (11,647) - (2,850) 305
Net loss $ (239,574) (283,690) (3,173,277) (742,591)
========= ========= =========== =========
Loss per share $ (.19) (.19) (4.08) (.52)
==== ===== ====== =====
Weighted average common shares outstanding 1,266,873 1,472,581 777,654 1,431,121
========= ========= ======= =========
</TABLE>
See accompanying notes to financial statements
2
<PAGE>
HARMONY PRODUCTS, INC.
Statement of Shareholders' Equity
Nine Months ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Additional Total
Common Stock paid-in Accumulated shareholders'
Shares Amount capital deficit equity
<S> <C>
Balance at
December 31, 1995 1,388,947 $ - 10,987,100 (9,935,514) 1,051,586
Common stock issued
(note 10) 127,982 - 390,000 390,000
Net loss for the nine months
ended September 30, 1996 - - - (742,591) (742,591)
--------- -------- ---------- ------------ ---------
Balance at
September 30, 1996 1,516,929 $ - 11,377,100 (10,678,105) 698,995
========= ======== ========== =========== ========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
HARMONY PRODUCTS, INC.
Statements of Cash Flows
Three Months and Nine Months ended September 30, 1995 and 1996
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30
1995 1996 1995 1996
---- ---- ---- ----
<S> <C>
Net cash provided by (used in) operating activities:
Net loss $ (239,574) (283,690) (3,173,277) (742,591)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 39,080 37,631 272,386 107,512
Changes in assets and liabilities providing (using) cash:
Trade accounts receivable 128,914 31,781 58,238 72,882
Licensing receivable - 33,000 - 66,000
Inventories 102,374 70,804 194,988 24,620
Prepaid expenses (25,206) (7,740) 117,440 (17,124)
Trade accounts payable and accrued expenses (294,962) (54,273) (230,025) 44,850
--------- -------- --------- --------
Net cash used in operating activities (289,374) (172,487) (2,760,250) (443,851)
--------- --------- ----------- ---------
Cash flows from investing activities:
Building, plant and equipment disposals 440,909 - 2,319,511 -
Purchase and construction of property, plant and
equipment, including interest capitalized (9,279) (40) (21,109) (12,070)
Decrease (increase) in restricted bond funds, net - - 312,900 -
Other (811) 1,515 5,374 8,469
----- ----- ----- -----
Net cash provided by (used in) investing activities 430,819 1,475 2,616,676 (3,601)
------- ----- --------- -------
Cash flows from financing activities:
Net repayments on notes payable to shareholders 26,000 - (80,650) -
Net borrowings (repayments) on note payable to bank 37,410 45,360 (401,307) 31,660
Principal payments on long-term debt (294,012) - (2,098,948) -
Proceeds from issuance of common stock - 200,000 2,700,812 390,000
Other (3,848) (3,899) (33,611) (3,861)
------- ------- -------- -------
Net cash provided by (used in)
financing activities (234,450) 241,461 86,296 417,799
--------- ------- ------ -------
Net increase (decrease) in cash (93,005) 70,449 (57,278) (29,653)
Cash and cash equivalents at beginning of period 94,615 1,708 58,888 101,810
------ ----- ------ -------
Cash and cash equivalents at end of period $ 1,610 72,157 1,610 72,157
===== ====== ===== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 32,485 17,216 177,029 56,474
====== ====== ======= ======
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
September 30, 1996
(unaudited)
1. Organization and Basis of Presentation
Harmony Products, Inc., a Virginia corporation, was organized by a group of
fertilizer executives to develop, manufacture, and market fertilizer and
animal feed products as well as license the patented technology involved. The
Company was incorporated on August 31, 1989, as Natural Sciences/Harmony
Products, Inc., and the name subsequently changed to Harmony Products, Inc.
on October 23, 1989. The Company was inactive until February 9, 1990 (date of
inception), when the Company was capitalized, certain patent rights were
acquired, and the planning for the construction of the manufacturing facility
began. The manufacturing facility was partially complete in December 1990 and
production of product was underway on a test basis. In February 1991, the
manufacturing facility became operational. At this time, the Company ceased
to be a developmental stage enterprise. In June 1995, the Company closed its
primary production line at its manufacturing facility. See note 4.
In December 1991, the Company issued 180,000 shares of common stock in a public
offering with net proceeds of approximately $4,078,000. The proceeds were
used for repayment of bank debt, repayment of notes to shareholders and
working capital.
2. Summary of Significant Accounting Policies
(a) Quarterly Data
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments (consisting of normal recurring accounts)
necessary to present fairly the financial position as of September 30, 1996,
and the results of operations and cash flows for the three and nine months
ended September 30, 1995 and 1996.
(b) Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or
less to be cash equivalents.
(c) Fair Value of Financial Instruments
The Company's financial statements approximate fair value because of the
short maturity of the instruments or because the interest rates associated
with the financial instruments approximate fair value.
(d) Inventories
Inventories are stated at the lower of cost (average cost method) or market
value (replacement cost for raw materials and net realizable value for all
other inventory). Cost includes material, labor and manufacturing costs.
(e) Deferred Turnaround
Included in prepaid assets at December 31, 1995 are approximately $32,000 in
1995 turnaround costs incurred during months of July through September 1995.
The Company's policy is to capitalize these costs after the off-season period
and amortize the costs over the subsequent sales and manufacturing season of
October through June.
(continued)
5
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
2. Summary of Significant Accounting Policies, continued
(f) Property, Plant and Equipment
Property, plant and equipment is carried at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets. The
Company uses the following periods for depreciating and amortizing property,
plant and equipment:
Buildings 10-30 years
Autos 3 years
Furniture, fixtures and equipment 5 years
Manufacturing equipment 10 years
Leasehold improvements 15 years
(g) Patent Rights
Patent rights are amortized using the straight-line method over the lives of
the patents which is seventeen years.
(h) Impairment of Assets
The Company assesses the recoverability of certain assets by determining
whether the balance of the asset can be recovered over its remaining life
through undiscounted futures operating cash flows. The amount of impairment,
if any, is measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability will be impacted if estimated future
operating cash flows are not achieved.
(i) Revenue Recognition
The Company recognizes sales revenue upon transfer of title to the customer,
which generally occurs upon shipment of the product from the Company's
warehouse. Revenue from technology licensing agreements is recognized on the
percentage completion method and is included in other operating income.
(j) Research and Development
Research and development costs are charged to expense in the period incurred.
(k) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(l) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(m) Loss Per Share
Loss per share is based upon the weighted average number of common shares
outstanding.
6
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
3. Inventories
Inventories at December 31, 1995 and September 30, 1996 consist of the
following:
December 31, September 30,
1995 1996
(unaudited)
Finished products $ 77,960 90,117
Raw materials 24,250 1,488
Packaging materials 156,330 142,315
------- -------
$ 258,540 233,920
======= =======
4. Property, Plant and Equipment, net
Property, plant and equipment at December 31, 1995 and September 30, 1996
consists of the following:
December 31, September 30,
1995 1996
(unaudited)
Buildings $ 9,704 9,704
Leasehold improvements 333,892 333,892
Autos 11,711 19,089
Furniture, fixtures and equipment 51,871 55,563
Manufacturing equipment 589,167 589,168
Construction in progress 10,150 11,150
--------- ---------
1,006,495 1,018,566
Less accumulated depreciation
and amortization 404,963 478,990
------- -------
Property, plant and equipment, net $ 601,532 538,635
======= =======
The Company entered into an operating lease for a building in which the
manufacturing equipment is operated with an initial lease term for five years
through July 1995. The Company had two options to extend each lease term an
additional five years. In January 1993, an addendum to the lease was signed
which required base rents of $93,600 for fiscal 1993, increasing to $119,700
for 1995. In January 1995, the first option to extend the lease for an
additional five years was exercised by the Company and accepted by the
lessor. In addition, the lease includes incentives to be paid to the lessor
based on shipping levels. Annual base rents were to increase to $142,200
beginning July 1995 continuing through the year 2000.
In August 1995, the landlord in this facility released the Company from its
lease obligation as to warehouse space primarily used for storage of finished
goods inventory. The Company currently occupies roughly one-half of the space
that was formerly being leased. Annual base rents have decreased to
approximately $58,800.
During the second quarter of 1995, management of the Company closed its primary
production line at its manufacturing facility in Chesapeake Virginia.
Advancements in the Company's technology permit it to utilize other
manufacturers to produce its products at lower manufacturing costs than those
associated with its Chesapeake facility. Accordingly, the Company accrued in
its second quarter of 1995 an estimated loss on the disposal of certain fixed
assets (comprised primarily of production equipment) of approximately
$1,863,000. This estimated loss on disposal represents a write-off of book
value of the equipment expected to be disposed of, net of any estimated
salvage value, as well as an accrual for the costs that will be incurred to
dismantle and sell the equipment.
(continued)
7
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
4. Property, Plant and Equipment, net continued
In June 1995, the Company entered into an agreement with a buyer to sell its
corporate office facility for $375,000. A loss on this sale of approximately
$15,300 was recorded in 1995. The Company currently leases office space that
is more suitable for its needs with annual rents of approximately $25,000.
5. Patent Rights
In February 1990, the Company obtained from another company for $170,000, the
rights, title and interest in a consulting agreement and exclusive
relationship with the inventors of the proprietary fertilizer manufacturing
process, including technical information, know-how, formulation, methods and
inventions. This purchase afforded the Company the right to purchase all of
the technology related to the formulation, processing, manufacturing and
storage of products in the fields of natural-based fertilizers and plant
nutrients from the inventors of the process. Under the terms of this
purchase, the Company has the exclusive right to make, use or sell all
products resulting from this technology and exclusive control of technical
information patent rights and improvements.
For this technology and the related patent rights, the Company paid the
inventors $500,000. In addition, under the agreement, the Company was
committed to pay royalties on sales of patented product in North America to
the inventors as follows: 4-1/2% on the first $2.0 million in sales, 3% on
the next $8.0 million in sales; and 2% on sales in excess of $10.0 million. A
portion of revenues received by the Company in certain licensing arrangements
is paid to the inventors depending upon the identity and place of business of
the licensee.
In June 1995, the Company sublicensed certain of its patent rights with regard
to animal feed supplements back to the inventors. As consideration for the
sublicense, the inventors reduced its current royalty structure with the
Company. A flat royalty of $20,000 is due to the inventors for calendar year
1995 with no royalties due in years thereafter (note 7).
6. Notes Payable
Notes payable to bank
The Company had at December 31, 1995 and September 30, 1996 a $750,000 line of
credit, secured by inventory and receivables and collateralized by certain
members of the Company's Board of Directors. This line expires October 1997
and bears interest at prime plus 1.375%. At December 31, 1995 and at
September 30, 1996, $717,651 and $749,311 was outstanding on the line of
credit, respectively.
Notes payable to shareholders
During 1995, certain Directors advanced the Company approximately $213,000,
payable on demand and at 9% interest. Certain of the Company's Directors
converted $200,350 of this note to 244,329 shares of common stock prior to
year end (note 10). At December 31, 1995 and September 30, 1996, the
remaining $13,000 is included in notes payable to shareholders - short term.
8
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
7. Licensing Contracts
New England Fertilizer
In October 1994, the Company entered into a Master License Agreement and a
Marketing Agreement with New England Fertilizer Company ("NEFCO"). NEFCO
operates a sludge management facility in Quincy, Massachusetts for the
Massachusetts Water Resources Authority. This facility produces a
mechanically dried sewage sludge which it converts to an environmentally safe
product termed "fertilizer-grade biosolids."
Under the Master License Agreement, NEFCO has an exclusive license in all states
east of the Mississippi River for Harmony's patented processes. The resultant
product is an enhancement of the generally low analysis biosolids to produce
virtually any formulation desired. NEFCO intends to utilize Harmony's
technology and know-how to upgrade the biosolids produced at the Quincy plant
and to utilize the combination of the Harmony process and mechanical drying
to offer sludge management programs to other generators in the United States.
NEFCO also expects to utilize the Harmony process to offer product management
services to others who may already mechanically dry sludges.
Under the Marketing Agreement, Harmony will act as NEFCO's sales agent for both
enhanced and unenhanced biosolids. All fertilizer grade biosolid products
marketed under this agreement will be sold under NEFCO-owned or licensed
brand names; Harmony's existing brand names will be applied only to poultry
manure.
Under the Master License Agreement, NEFCO paid Harmony $250,000 upon signing.
Each year, for four years, on the anniversary date of the Master License
Agreement, NEFCO will pay to Harmony $70,000. This receivable has been
discounted: $63,800 is included on the balance sheet as Licensing receivable
- short term and $118,700 is included in Licensing receivable - long term
both at December 31, 1995 and September 30, 1996. NEFCO must meet certain
minimum performance requirements to retain its right to sub-license the
technology over time. Harmony will receive a fee equaling 1/2% of the total
cost to build a facility which employs Harmony technology. Under the
Marketing Agreement, Harmony will receive a marketing fee of 15% of the net
invoiced sales by NEFCO for each location operated by NEFCO. This percentage
will subsequently decrease to 10% after three years. For the three and nine
months ended September 30, 1995 and 1996, the Company recognized other
operating income (expense) for net commissions accrued under the Marketing
Agreement of $(1,039) and $5,846 (three months) and $11,754 and $33,127 (nine
months), respectively.
Animal Feed Sublicense
In June 1995 the Company sublicensed to the inventors of its technology the
Harmony technology expressly related to animal nutrition in North America for
the life of the related patents. In consideration for the sublicense, certain
reductions were made to the existing royalty structure with the inventors
(note 5).
(continued)
9
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
7. Licensing Contracts (continued)
Australia
On December 31, 1995 the Company entered into a Licensing and Consulting
Agreement ("Agreement") with Bio-Recycle (Aust.) Pty. Ltd. ("Bio-Recycle"), an
Australian company that specializes in the recycling of organic waste streams.
Under the provisions of the Agreement, Harmony licenses to Bio-Recycle the
rights to the Company's patents and know how for an exclusive territory that
includes Australia, Malaysia, Indonesia and New Zealand. The Agreement requires
Harmony to provide certain technical, engineering and equipment design
consulting services after a facility fee has been paid. Finally, the Agreement
licenses to Bio-Recycle the right to use certain Harmony trademarks, tradenames
and copyrighted materials.
Bio-Recycle does not plan to begin construction of a facility incorporating
Harmony's patented technology immediately; however, under provisions of the
Agreement, Bio-Recycle must meet certain plant construction thresholds in order
to maintain its rights under the Agreement.
As of December 1995, the Company has no further obligations under the agreement
and recorded other operating income $85,000 (net of royalties due to the
Inventors) and a corresponding short term receivable of $100,000 for the
Australian licensing Agreement. Bio-Recycle has paid $66,000 on its obligation
to Harmony as of September 30, 1996. The Company has a corresponding short term
receivable of $34,000 from Bio-Recycle as of September 30, 1996. For the period
ended September 30, 1995 and 1996 there were no other operating revenues related
to this contract.
8. Long-term Debt
Long-term debt at December 31, 1995 and September 30, 1996 consists of the
following:
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
(unaudited)
<S> <C>
Industrial Development Bonds, due in annual amounts of $350,000
from March 1, 1993 to 1998; final amount of $400,000 due on
March 1, 1999; the interest rate floats with market rates, has
a maximum interest rate of 15% and is due monthly; the average
interest rate during 1994 and 1995 was 3.17% and 4.25%, respectively.
Paid off June 30, 1995.$ - -
7.75% mortgage note payable in monthly installments of
$2,918, including interest, due January 1999; secured by
property. Property sold and debt repaid August 31, 1995. - -
7-1/2% to 12% capitalized leases and 9-1/2% to 13% vehicle loans;
payable in monthly installments, including interest, secured by
equipment and vehicles; final payment due February 1999. 28,169 24,308
------ ------
Total long-term debt 28,169 24,308
Less current installments 13,135 13,144
------ ------
Long-term debt, excluding current
installments $15,034 11,164
====== ======
</TABLE>
(continued)
10
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
8. Long-term Debt (continued)
Industrial Development Bonds
In June 1995, the Company repaid the entire balance due on the Industrial
Development Bonds from the proceeds of a stock sale to certain Directors
(note 10). The Company had entered into a bond issuance agreement in
September 1990 in the amount of $2,500,000 with the Industrial Development
Authority of the City of Chesapeake, Virginia. The bonds were used for the
acquisition and construction of a fertilizer and animal feed manufacturing
facility and for the costs of issuing the bonds.
The bonds were secured by a letter of credit in the amount of approximately
$1,516,000 and the fertilizer and animal feed manufacturing facility.
Mortgage Note Payable
The mortgage on the Company's home office building had a fixed interest of 7.75%
with a 15 year amortization and had a 5 year call option for the bank. As
discussed in note 4, the Company sold its office building during the third
quarter of 1995.
9. Income Taxes
As discussed in Note 1, the Company adopted Financial Accounting Standards No.
109 as of January 1, 1993.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995
and September 30, 1996 are presented below:
December 31, September 30,
1995 1996
(unaudited)
Deferred tax assets and (liabilities):
Net operating loss carryforwards $ 1,959,000 2,100,000
Prepaid expenses, due to differences
in amortization 14,000 14,000
Allowance for doubtful accounts 1,000 1,000
Research and development credits 43,000 43,000
Start-up costs capitalized for tax purposes - -
Intangible assets, due to differences in
basis and amortization (7,000) (7,000)
Property, plant and equipment, due to
differences in basis and depreciation 1,000 1,000
Less: valuation allowance (2,011,000) (2,152,000)
------------- -----------
Net deferred taxes $ - -
============= ===========
The valuation allowance for deferred tax assets as of December 31, 1995 was
$2,011,000. The net change in the total valuation allowance for the nine
months ended September 30, 1996 was an increase of $141,000.
At September 30, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $8.6 million which are available
to offset federal taxable income, if any, through 2009.
11
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
10. Common Stock
The following shares of stock were purchased or exchanged for debt by certain of
the Company's Board of Directors during 1995:
Date Shares Amount Price
June 30 741,982 $ 2,700,812 $ 3.64
December 13 122,058 400,350 3.28
------- ------------
Total 864,040 $ 3,101,162
======= ============
On June 30, 1995, certain of the Company's Board of Directors determined to
recapitalize the Company by purchasing common stock (notes 6 and 8). The
share price of $3.64 for the shares issued in this recapitalization was
determined by averaging the closing bid and closing ask price of the stock
for the thirty days prior to June 30, 1995. The Company and the Board had
agreed to increase the purchase price per share, and accordingly reduce the
number of shares purchased, had the average of the closing bid and closing
ask price of the stock for the 30 days after June 30, 1995 been higher. As
this average was lower, the stock was valued by reference to the higher June
prices.
On December 13, 1995, the Company converted a $200,350 loan to shareholders into
common stock as well as an additional purchase of $200,000 in common stock.
The price paid for the stock represented the prior thirty day average of the
closing bid and closing ask prices for the stock or the average of the
closing bid and closing ask price on the day of the subscription, whichever
was greater.
The following shares of stock were purchased by certain of the Company's Board
of Directors during 1996:
Date Shares Amount Price
---- ------ ------ -----
March 22 22,728 $ 90,000 $ 3.96
April 30 25,254 100,000 3.96
August 1 40,000 100,000 2.50
September 10 40,000 100,000 2.50
------ -------
127,982 $ 390,000
======= =======
The price paid for the stock represented the prior thirty day average of the
closing bid and closing ask prices for the stock or the average of the
closing bid and closing ask price on the day of the subscription, whichever
was greater. Since the Company's stock was no longer traded OTC as of May 9,
1996, the Company used the "stated" value of the stock offered in a now
expired letter of intent to purchase the Company as an indication of stock
value for the August and September 1996 transactions.
At the Company's 1996 Annual Meeting of Shareholders held May 3, 1996 the
Company's shareholders approved an amendment to the Company's Articles of
Incorporation that (i) decreased the aggregate number of authorized shares of
Common Stock from 10,000,000 shares of Common Stock ("Old Shares") to
2,500,000 shares of Common Stock ("New Shares"); (ii) provided that each
outstanding Old Share would be automatically converted into one-fourth of one
New Share; and (iii) provided that after the effective date of the Amendment,
holders of certificates for the Old Shares would not be entitled to receive
dividends, to vote or to exercise any rights as shareholders of the Company
until certificates representing the Old Shares were surrendered for
certificates representing the New Shares. The approval of the Amendment by
the Company's shareholders resulted in a one-for-four reverse stock split of
the Company's Common Stock. All references to shares or share prices in the
financial statements reflect the one-for-four reverse stock split.
12
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
11. Incentive Stock Option Plans
Incentive Stock Option Plan -1991
In September 1991, the Company adopted an Incentive Stock Option Plan (the
Plan). The Plan provides, in the aggregate, for the grant of incentive stock
options to selected employees and officers to purchase up to 25,000 shares.
The Plan has 1,125 stock options outstanding at an exercise price of $6 per
share. Options must be exercised within five years from the date granted.
Generally, unless the compensation committee grants special concessions,
options may be exercised only when the optionee is in the employment of the
Company, except in the case of death of the employee, in which case
unexpired, unexercised options may be exercised within six months of death,
by the optionee's estate.
Long-term Incentive Plan - 1993
In April 1993, the Shareholders approved the 1993 Long-term Incentive Plan (the
1993 Plan). The purpose of the 1993 Plan is to enable the Company to reward
existing directors for guaranteeing certain debts of the Company and lending
money directly to the Company during 1992, to attract and retain qualified
directors and employees, and increase the proprietary interest of such
persons in the Company in order to provide such persons with additional
motivation to continue serving the Company and to further its growth and
achieve profitability. The 1993 Plan is intended to provide the Company with
greater flexibility to address the compensation needs of employees.
Under the 1993 Plan, 25,000 options are available for distribution to employees
and directors at the discretion of the Company's Option Committee. A total of
4,938 options have been granted to employees at exercise prices ranging
between $5 and $10. Options granted must be exercised within ten years from
the date granted. Generally, unless the compensation committee grants special
concessions, options may be exercised only when the optionee is in the
employment of the Company, except in the case of death of the employee, in
which case unexpired, unexercised options may be exercised within six months
of death, by the optionee's estate.
12. Liquidity and Capital Resources
Since inception, the Company has not been profitable and has not generated
sufficient cash flow from operations to fund itself. Additionally, since its
inception, the Directors have, from time to time, provided working capital
and credit enhancement to the Company. During 1994, the Directors purchased
an additional $1.2 million of common stock. During 1995 certain of the
Company's Board of Directors purchased $3.1 million of common stock in an
effort to reduce the Company's debt load and provide working capital. Certain
Directors have purchased $390,000 of common stock thus far in 1996.
Due to the Company's inability to meet certain NASDAQ listing requirements, the
Company's common stock was delisted from the NASDAQ Small Cap Market as of
May 9, 1996. The common stock is now quoted on the NNOTC Bulletin Board, an
NASD sponsored and operated quotation system for equity securities not
included in the NASDAQ stock market. The inability of the Company to list its
common stock on the NASDAQ Small Cap Market has proved to, and the Company
believes will continue to materially adversely affect the liquidity of the
Company's common stock.
(continued)
13
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
12. Liquidity and Capital Resources (continued)
Management believes that the equity infusions already made by certain of the
Company's Directors plus infusions expected of such Directors in the last two
months of 1996, plus cash generated from future operations including any cash
generated from potential licensing arrangements will provide the Company with
sufficient sources of cash flow during 1996. The members of the Company's
Board have informed Management that they will not invest any significant
further cash into the Company. Given this, Management does not believe that
the Company will be able to generate sufficient cash from any sources to
operate the Company beyond the end of 1996. The Company will be unable to
fund its operations beyond 1996, as the Company has been unable to locate any
available alternative methods of financing.
13. Contingencies
As the Company's products are low in analyses (nitrogen, phosphorus and
potassium) and the nitrogen in the products is generally 60% water insoluble,
management believes the products have a minimal effect on the environment.
Accordingly, the Company believes that it does not need, and it does not
maintain, insurance for any environmental claims which might result from the
release of its products into the environment in a manner or in concentrations
not permitted by law.
14
<PAGE>
Part 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In addition to historical information, this report contains forward-looking
statements that are subject to risks and uncertainties that could cause the
Company's actual results to differ materially from those anticipated in these
forward looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect Management's analysis only as of
the date of this report.
Three and Nine months ended September 30, 1996 versus three and nine months
ended September 30, 1995
Net revenues For the three months ended September 30, 1996, net revenues
decreased from the same period last year by $18,571 from $238,202 to $219,631 or
7.8%. For the nine months ended September 30, 1996 net revenues decreased from
the same period last year by $489,743 from $1,506,481 to $1,016,738 or 32.5%.
The Company believes the decrease in net revenues is primarily attributable to
the unseasonably wet and cold weather experienced by the Midwest and
northeastern areas of the United States, which comprise the primary markets for
the Company's products. Though the volume of products sold by the Company, or on
which the Company receives sales commissions, during 1996 closely approximated
the volumes sold during 1995, the late and wet spring caused a change in the
product mix such that a greater portion of the 1996 shipments were lower priced
products. In addition to the difficulties associated with the weather, the
operational problems associated with the contract manufacturers of the Company's
Bridge products also were a cause of the decreased sales of the premium
products. Though the Company was able to effectively manufacture its Bridge
products at several locations during the spring, the drying and screening
operations at these facilities were primarily configured for handling and
screening agricultural grades of fertilizer as opposed to turf grades in which
the Company specializes. This led to some difficulty in scheduling production
runs as well as the double and triple handling of the product, which in addition
to reducing sales volume, had an unfavorable impact on gross margins.
Gross loss Gross loss for the three and nine months ended September 30, 1996 was
$75,207 and $155,096, respectively. This compares to a gross loss of $4,273 and
$412,672 for the same three and nine month periods in 1995. This improvement -
on a lower sales base - is primarily attributable to the June 1995
reorganization associated with the closing of the Company's primary production
line at its Chesapeake facility combined with a cash infusion from certain
members of the Company's Board of Directors. The loss for the nine month period
ending September 30, 1996 was also negatively impacted by certain rework
necessary to correct packaging errors that occurred at the Chesapeake facility.
Additionally, the Company deferred certain costs in the third quarter of 1995 as
turnaround costs to be amortized prospectively. There were no turnaround costs
in the third quarter 1996. Substantial increases in sales volumes are necessary,
however, for the Company to break even on a gross margin basis.
Operating expenses Operating expenses of $189,701 and $530,844 for the three and
nine months ended September 30, 1996, respectively, were significantly lower
than 1995's levels of $197,880 and $2,573,990. The decrease from 1995's levels
is primarily attributable to an accrual for the estimated loss on disposal of
the Company's primary processing equipment of $1,878,602 for the nine months
ended September 30, 1995. Without regard to this charge, operating expenses
decreased by $8,179 or 4.1% for the three months ended September 30, 1996 and by
$164,544 or 23.6% for the nine month period ended September 30, 1996.
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During the second quarter of 1995, management of the Company closed its batch
oriented primary production line at its manufacturing facility in Chesapeake
Virginia. The Company believes that new advancements in the Company's technology
permit it to utilize other manufacturers to produce its products at lower
manufacturing costs than those associated with its Chesapeake facility. Since
completing construction of the primary line in 1991, the Company has developed
the continuous process method of manufacturing its products as well as the
ability to make its organic based Bridge(R) products in conventional fertilizer
granulation facilities. In connection with the shut down and dismantling of its
primary line, the Company accrued an estimated loss on the disposal of certain
fixed assets (comprised primarily of production equipment) of $1,878,602 for the
nine months ended September 30, 1995. This estimated loss on disposal represents
a write-off of the book value of the equipment expected to be disposed of, net
of any estimated salvage value, as well as an accrual for the costs that will be
incurred to dismantle and sell the equipment. No similar charges were incurred
during 1996. Reductions in operating expenses for the three and nine months
ended September 30, 1996 would have been much greater, but for the expenses
related to the proposed purchase of the Company by Cypress Chemical Company
which was announced in August. Though efforts to sell the Company to Cypress
discontinued in October, considerable professional expenses were incurred during
the due diligence and negotiation phases of that proposed transaction which
occurred during the third quarter. Also, during the nine months ended September
30, 1996 substantial expenses were incurred in the Company's unsuccessful
attempt to maintain its listing on the NASDAQ Small Cap Market.
The primary reasons for the decreases in operating expenses are the following
factors:
Marketing and promotion expenses decreased from $87,311 in 1995 to $43,801 for
the three months ended September 30, 1996, a decrease of $43,510 or 49.8% from
1995's level. For the nine months ended September 30, 1995, marketing and
promotion expenses decreased from $306,917 in 1995 to $137,379, a decrease of
$169,538 or 55.2% over the same period in 1995. These decreases are the result
of general cost cutting measures due to the general cash tightness of the
Company as well as timing differences in expenses. The Company does not believe
it will be able to invest any material amounts in the foreseeable future on
marketing and promotion as discussed below in the Plan of Operation. The
Company's sales volumes are unlikely to increase absent such an infusion and
could, in fact, continue to decrease due to the lack of necessary cash for such
items.
General and administrative expenses increased from $99,522 to $138,003, an
increase of $38,481 or 38.7% for the three months ended September 30, 1996. For
the nine month period ended September 30, 1996 general and administrative
expenses increased from $329,902 to $374,455, an increase of $44,553 or 13.5%.
These increases were primarily due to timing of expenditures, management's
efforts to locate third party financing, professional expenses related to the
proposed sale of the Company and expenses incurred with the Company's
unsuccessful attempt to continue listing its common stock on the NASDAQ Small
Cap Market.
Royalties and commissions decreased for the three months ended September 30,
1996, from $5,346 to $20, and for the nine month period, decreased from $39,132
in 1995 to $2,972 in 1996. This decrease occurred due to the change in the
royalty structure negotiated by the Company in 1995, the decline in sales volume
and because many accounts being sold in 1996 have been the result of in house
sales not requiring the payment of a commission.
Interest expense Interest expense decreased from $25,774 for the three months
ended September 30, 1995 to $18,782 for the same period in 1996; and, for the
nine month period decreased from $183,765 in 1995 to $56,956 in 1996. These
decreases are due to Company's reorganization in June 1995 which significantly
reduced the Company's debt load.
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Financial position as of September 30, 1996
Since inception, the Company has not been profitable and has not generated
sufficient cash flow from operations to fund itself. Additionally, since its
inception, the Directors have, from time to time, provided working capital and
credit enhancement to the Company. During 1994, the Directors purchased an
additional $1.2 million of common stock. During 1995 certain of the Company's
Board of Directors purchased $3.1 million of common stock in an effort to reduce
the Company's debt load and provide working capital. Certain Directors have
purchased $390,000 of common stock thus far in 1996.
Due to the Company's inability to meet certain NASDAQ listing requirements, the
Company's common stock was delisted from the NASDAQ Small Cap Market as of May
9, 1996. The common stock is now quoted on the NNOTC Bulletin Board, an NASD
sponsored and operated quotation system for equity securities not included in
the NASDAQ stock market. The inability of the Company to list its common stock
on the NASDAQ Small Cap Market has proved to, and the Company believes will
continue to materially adversely affect the liquidity of the Company's common
stock.
Management believes that the equity infusions already made by certain of the
Company's Directors plus infusions expected of such Directors in the last two
months of 1996, plus cash generated from future operations including any cash
generated from potential licensing arrangements will provide the Company with
sufficient sources of cash flow during 1996. The members of the Company's Board
have informed Management that they will not invest any significant further cash
into the Company. Given this, Management does not believe that the Company will
be able to generate sufficient cash from any sources to operate the Company
beyond the end of 1996. The Company will be unable to fund its operations beyond
1996, as the Company has been unable to locate alternative methods of financing.
Plan of operation
In order to continue operating the Company, a totally unexpected and substantial
increase in sales volume needs to occur. However, this increase will not occur
unless adequate support for the products is available in the form of marketing
and advertising dollars, which the Company has no reason to believe will be
forthcoming. To remain operating, the Company must be able to obtain a
significant cash infusion to, among other things, help support its products with
advertising campaigns that are sponsored by both the retailer and the
manufacturer. Large advertising campaigns, however, require a large financial
commitment. At Harmony's current sales volume, the size campaign needed is not
possible or even conceivable. Management of the Company continues to look for
other means of financing the product support needed, including follow through of
potential technology arrangements and possible third parties, however it is
unlikely that such funds or parties will be found.
The Company believes that consumers and professionals will eventually purchase
more organic and organic base fertilizers over time. Further, the Company
expects that its products and technology might benefit from the continued
attention and adverse publicity received by the mismanagement of waste streams.
As mentioned throughout this report, Management does not believe such a cash
infusion is forthcoming from any source.
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Part II - Other Information
Item 6. Exhibits and reports on Form 8-K
(a). Exhibits
None
(b). Reports on Form 8-K
On August 23, 1996, the Company filed a report on Form 8-K under
Item 1(b) (Changes in Control of Registrant) regarding a
non-binding Letter of Intent the Company entered into with Cypress
Chemical Company ("Cypress") dated August 14, 1996, pursuant to
which Cypress would acquire all of the outstanding shares of
Harmony.
On October 23, 1996, the Company filed a report on Form 8-K under
Item 1(b) (Changes in Control of Registrant) announcing that the
non-binding Letter of Intent between the Company and Cypress
Chemical Company had expired and that all negotiations regarding
any possible sale had been terminated.
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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 Products, Inc.
(Registrant)
By: /s/ Gregory R. Gill
---------------------
Gregory R. Gill
President and Treasurer
November 12, 1996
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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 Products, Inc.
(Registrant)
By:____________________________
Gregory R. Gill
President and Treasurer
November 12, 1996
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