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 June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to __________
Commission file number 0-19979
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)
804-523-2849
(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: 1,436,915 shares of common
stock.
<PAGE>
HARMONY PRODUCTS, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Balance Sheets- December 31, 1995 and
June 30, 1996 (unaudited).................................1
Statements of Operations for the Three and Six Months
ended June 30, 1995 and 1996 (unaudited)..................2
Statement of Shareholders' Equity for the Three and Six
Months ended June 30, 1996 (unaudited)....................3
Statements of Cash Flows for the Three and Six Months
ended June 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 2. CHANGES IN SECURITIES....................................17
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS......................................17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.........................18
SIGNATURE .........................................................19
<PAGE>
HARMONY PRODUCTS, INC.
Balance Sheets
December 31, 1995 and June 30, 1996
<TABLE>
<CAPTION>
Assets December 31, June 30,
1995 1996
(unaudited)
<S> <C>
Current assets:
Cash and cash equivalents $ 101,810 1,708
Trade accounts receivable, net (note 6) 176,727 170,775
Licensing receivable, short term (note 7) 163,800 130,800
Inventories (notes 3 and 6) 258,540 304,724
Prepaid expenses and other assets 108,540 82,775
-------- -------
Total current assets 809,417 690,782
Licensing receivable, long term (note 7) 118,700 118,700
Property, plant and equipment, net (notes 4 and 8) 601,532 565,201
Patent rights, net of accumulated amortization of
$197,877 in 1995 and $219,397 in 1996 (note 5) 536,020 514,500
Other assets, net 40,800 33,846
--------- ---------
$ 2,106,469 1,923,029
========= ==========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt
(note 8) $ 13,135 14,047
Notes payable to shareholders (note 6) 13,000 13,000
Trade accounts payable and accrued expenses 296,063 395,186
--------- ---------
Total current liabilities 322,198 422,233
Notes payable to bank (note 6) 717,651 703,951
Long-term debt, excluding current installments
(note 8) 15,034 14,160
--------- ---------
Total liabilities 1,054,883 1,140,344
--------- ---------
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
1,436,915 in 1996 (notes 10 and 11) - -
Additional paid-in capital 10,987,100 11,177,100
Accumulated deficit (9,935,514) (10,394,415)
--------- ---------
Total shareholders' equity 1,051,586 782,685
Commitments and contingencies
(notes 4, 5, 7, 8, 9, 11, 12 and 13)
--------- ---------
$ 2,106,469 1,923,029
========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE>
HARMONY PRODUCTS, INC.
Statements of Operations
Three Months and Six Months ended June 30, 1995 and 1996
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1995 1996 1995 1996
<S> <C>
Net sales $ 494,077 330,948 1,255,486 769,826
Other operating income 5,624 10,764 12,793 27,281
---------- ------- --------- -------
Total net revenue 499,701 341,712 1,268,279 797,107
Cost of goods sold 692,766 410,000 1,676,678 876,996
---------- ------- --------- -------
Gross loss (193,065) (68,288) (408,399) (79,889)
Operating expenses:
Marketing and promotion 94,114 45,283 219,606 93,578
Research and development 8,454 2,896 13,736 8,161
General and administrative 87,907 136,844 204,466 236,452
Royalties and commissions 13,596 63 33,786 2,952
Loss on disposal of fixed
assets (note 4) 1,878,602 - 1,878,602 -
----------- ------- --------- --------
2,080,673 185,086 2,348,196 341,143
----------- ------- --------- --------
Loss from operations (2,273,738) (253,374) (2,756,595) (421,032)
Other income (expense):
Interest expense (89,905) (19,897) (185,905) (38,174)
Other income (expense) 3,864 186 8,797 305
----------- ------- --------- --------
Net loss $ (2,359,779) (273,085) (2,933,703) (458,901)
=========== ======= ========= ========
Loss per share $ (4.43) (0.19) (5.55) (0.32)
===== ===== ===== =====
Weighted average common shares
outstanding 533,045 1,428,863 528,991 1,423,050
=========== ========= ========= =========
</TABLE>
See accompanying notes to financial statements
<PAGE>
HARMONY PRODUCTS, INC.
Statement of Shareholders' Equity
Six Months ended June 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 1,388,933 $ - 10,987,100 (9,935,514) 1,051,586
Common stock purchased 47,982 - 190,000 - 190,000
Net loss for the six months
ended June 30, 1996 - - - (458,901) (458,901)
--------- ----- ---------- ---------- ---------
Balance at
June 30, 1996 1,436,915 $ - 11,177,100 (10,394,415) 782,685
========= ===== ========== =========== =========
</TABLE>
See accompanying notes to financial statements
<PAGE>
HARMONY PRODUCTS, INC.
Statements of Cash Flows
Three Months and Six Months ended June 30, 1995 and 1996
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30
1995 1996 1995 1996
<S> <C>
Net cash provided by (used in) operating activities:
Net loss $(2,359,779) (273,085) (2,933,703) (458,901)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 110,460 37,690 233,306 69,881
Changes in assets and liabilities providing
(using) cash:
Trade accounts receivable 264,884 141,043 (70,676) 41,101
Licensing receivable - - - 33,000
Inventories 50,008 (58,029) 92,614 (46,184)
Prepaid expenses 69,309 53,599 142,646 (9,384)
Trade accounts payableand accrued expenses (113,819) (39,857) 64,937 100,949
---------- -------- ---------- --------
Net cash used in operating activities (1,978,937) (138,639) (2,470,876) (271,364)
---------- -------- ---------- --------
Cash flows from investing activities:
Plant and equipment disposals 1,878,602 - 1,878,602 -
Purchase and construction of property, plant and
equipment, including interest capitalized 12,153 (3,752) (11,830) (12,030)
Decrease (increase) in restricted bond funds, net 21,233 - 312,900 -
Other 4,039 8,015 6,185 6,954
---------- -------- ---------- --------
Net cash provided by (used in)
investing activities 1,916,027 4,263 2,185,857 (5,076)
---------- -------- ---------- --------
Cash flows from financing activities:
Net repayments on notes payable to shareholders (106,650) - (106,650) -
Net borrowings (repayments) on note payable
to bank (999,793) (45,919) (438,717) (13,700)
Principal payments on long-term debt (1,452,891) - (1,804,936) -
Proceeds from issuance of common stock 2,700,812 100,000 2,700,812 190,000
Other (14,071) (3,979) (29,763) 38
---------- -------- ---------- -------
Net cash provided by financing
activities 127,407 50,102 320,746 176,338
---------- -------- ---------- -------
Net increase (decrease) in cash 64,497 (84,274) 35,727 (100,102)
Cash and cash equivalents at beginning of period 30,118 85,982 58,888 101,810
---------- -------- ---------- -------
Cash and cash equivalents at end of period $ 94,615 1,708 94,615 1,708
========== ======== ========== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 89,451 18,613 144,544 39,258
========== ======== ========== =======
</TABLE>
See accompanying notes to financial statements
<PAGE>
HARMONY PRODUCTS, INC.
Notes to Financial Statements
June 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 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) 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 June 30, 1996, and
the results of operations and cash flows for the three and six months ended
June 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)
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.
HARMONY PRODUCTS, INC.
Notes to Financial Statements
3. Inventories
Inventories at December 31, 1995 and June 30, 1996 consist of the following:
December 31, June 30,
1995 1996
(unaudited)
Finished products $ 77,960 153,448
Raw materials 24,250 2,510
Packaging materials 156,330 148,766
------- -------
$ 258,540 304,724
======= =======
4. Property, Plant and Equipment, net
Property, plant and equipment at December 31, 1995 and June 30, 1996 consists of
the following:
December 31, June 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 54,622
Manufacturing equipment 589,167 589,168
Construction in progress 10,150 12,050
---------- ---------
1,006,495 1,018,525
Less accumulated depreciation
and amortization 404,963 453,324
---------- ---------
Property, plant and equipment, net $ 601,532 565,201
========== =========
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.
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.
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
The Company had at December 31, 1995 and March 31, 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 1996
and bears interest at prime plus 1.375%. At December 31, 1995 and at June 30,
1996, $717,651 and $703,951 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 June 30, 1996, the remaining
$13,000 is included in notes payable to shareholders - short term.
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 June 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 six months ended June 30,
1995 and 1996, the Company recognized other operating income for net
commissions accrued under the Marketing Agreement of $5,624 and $10,964 (three
months) and $12,793 and $27,281 (six 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).
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 $33,000 on its obligation
to Harmony as of June 30, 1996. The Company has a corresponding short term
receivable of $67,000 from Bio-Recycle as of June 30, 1996. For the period ended
June 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 June 30, 1996 consists of the following:
December 31, June 30,
1995 1996
(unaudited)
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 28,207
------ ------
Total long-term debt 28,169 28,207
Less current installments 13,135 14,047
------ ------
Long-term debt, excluding current
installments $ 15,034 14,160
====== ======
HARMONY PRODUCTS, INC.
Notes to Financial Statements
7. 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 June 30, 1996 are presented below:
December 31, June 30,
1995 1996
(unaudited)
Deferred tax assets and (liabilities):
Net operating loss carryforwards $ 1,959,000 2,043,000
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) (2,095,000)
----------- ----------
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 six months
ended June 30, 1996 was an increase of $84,000.
At June 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.
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
------ -------
47,982 $ 190,000
====== =======
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.
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.
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 19,000 stock options outstanding at exercise prices ranging from
$6 to $16 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, 25,000 options are available for distribution to employees
and directors at the discretion of the Company's Option Committee. A total of
5,376 options have been granted to employees at exercise prices ranging
between $5-1/2 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
purchased $90,000 of common stock in the first quarter 1996 as well as an
additional $100,000 of common stock in the second quarter of 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 stock market has, and will continue to materially adversely
affect the liquidity of the Company's common stock.
HARMONY PRODUCTS, INC.
Notes to Financial Statements
12. Liquidity and Capital Resources (continued)
Management believes that the 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 during 1996. Management cannot offer any
assurance that the Company will be able to generate sufficient cash from any
sources, including the Company's Board of Directors, to operate the Company
beyond the end of 1996. If future operations, including licensing
arrangements, do not materialize the Company will be unable to fund its
operations and will be forced to look to 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.
<PAGE>
Part 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This section contains forward looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward looking statements as a result of certain factors.
Three and Six months ended June 30, 1996 versus three and six months ended June
30, 1995
Net revenues For the three months ended June 30, 1996, net revenues decreased
from the same period last year by $157,989 from $499,701 to $341,712 or 31.6%.
For the six months ended June 30, 1996 net revenues decreased from the same
period last year by $471,172 from $1,268,279 to $797,107 or 37.2%. 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 during 1996 closely
approximated the volumes moved 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, difficulties with the contract manufacturers
of the Company's Bridge products were a cause of the decreased sales of the
premium products.
Gross loss Gross loss for the three and six months ended June 30, 1996 was
$68,288 and $79,889 respectively. This compares to a gross loss of $193,065 and
$408,399 for the same three and six 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 second quarter of 1996 was also
negatively impacted by certain rework necessary to correct packaging errors that
occurred at the Chesapeake facility. Further increases in sales volumes are
necessary, however, for the Company to break even on a gross margin basis.
Operating expenses Operating expenses of $185,086 and $341,143 for the three and
six months ended June 30, 1996, respectively, were significantly lower than
1995's levels of $2,080,673 and $2,348,196. 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 both the three and six
months ended June 30, 1995. Without regard to this charge, operating expenses
decreased by $16,985 or 8.4% for the three months ended June 30, 1996 and by
$128,451 or 27.4% for the six month period ended June 30, 1996.
During the second quarter of 1995, management of the Company closed its batch
oriented primary production line at its manufacturing facility in Chesapeake
Virginia. 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 three and six months
ended June 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.
The primary reasons for the decreases in operating expenses are the following
factors:
Marketing and promotion expenses decreased from $94,114 to $45,283 for the three
months ended June 30, 1996, a decrease of $48,831 or 51.9% from 1995's level.
For the six months ended June 30, 1995, marketing and promotion expenses
decreased from $219,606 to $93,578, a decrease of $126,028 or 57.4% over the
same period in 1995. These decreases are the result of timing differences in
expenses as well as general cost cutting measures due to the general cash
tightness of the Company. 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.
General and administrative expenses increased from $87,907 to $136,844, an
increase of $48,937 or 55.7% for the three months ended June 30, 1996. For the
six month period ended June 30, 1996 general and administrative expenses
increased from $204,466 to $236,452, an increase of $31,986 or 15.6%. These
increases were primarily due to timing of expenditures, management's efforts to
locate third party financing 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 June 30, 1996,
from $13,956 to $63, and for the six month period, decreased from $33,786 in
1995 to $2,952 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 $89,905 for the three months
ended June 30, 1995 to $19,897 for the same period in 1996; and, for the six
month period decreased from $185,905 in 1995 to $38,174 in 1996. These decreases
are due to Company's reorganization in June 1995 which significantly reduced the
Company's debt load.
Financial position as of June 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 purchased
$90,000 of common stock in the first quarter 1996 as well as an additional
$100,000 of common stock in the second quarter of 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 stock market has, and will continue to materially adversely affect
the liquidity of the Company's common stock.
Management believes that the 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 during 1996. Management cannot offer any
assurance that the Company will be able to generate sufficient cash from any
sources, including the Company's Board of Directors, to operate the Company
beyond the end of 1996. If future operations, including licensing arrangements,
do not materialize the Company will be unable to fund its operations and will be
forced to look to any available alternative methods of financing.
Plan of operation
In order to bring gross margins to a positive level sufficient to support the
Company on an ongoing basis, a 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
management has no reason to believe are forthcoming. The Company must be able to
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 unable to offer any assurance 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 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 experience difficulty
in selling its products in significant volumes.
Part II - Other Information
Item 2. Changes in Securities
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.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1996 Annual Meeting of Shareholders was held on May 3, 1996. At
the Annual Meeting the following matters were acted upon:
1. Election of directors: W. Reginald Powell, James A. Shirley,
Gregory R. Gill, Raymond E. Grover, J. Mark Nuzum, J. Samuel Roady and
John W. Dibble were all elected as directors to serve a one year term.
Each director received 1,347,793 votes; 825 votes were withheld.
2. Approval of amendment to Articles of Incorporation, as described in
Part II - Item 2 above: 1,347,830 votes for; 463 votes against; 325
votes abstain.
3. Ratification of appointment of KPMG Peat Marwick as independent
auditors: 1,348,568 votes for; 25 votes against; 25 votes abstain.
In all matters, there were 40,313 shares not voted.
<PAGE>
Item 6. Exhibits and reports on Form 8-K
(a). Exhibits
None.
(b). Reports on Form 8-K
On April 26, 1996, the Company filed a report on Form 8-K under Item 5 (Other
Information) regarding the infusion of cash into the company by certain
directors in return for the issuance of Common Stock.
<PAGE>
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
August 7, 1996
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