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.
15
<PAGE>
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.
16
<PAGE>
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.
17
<PAGE>
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.
18
<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
November 12, 1996
19
<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:____________________________
Gregory R. Gill
President and Treasurer
November 12, 1996
19
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