PROSPECTUS
THE HARMAT ORGANIZATION, INC.
750,000 Shares
The Harmat Organization, Inc., a Delaware corporation (the "Company"),
is offering for sale 750,000 shares of Common Stock, par value $.001 per share
(the "Common Stock"). The offering price of the Common Stock was determined
arbitrarily by the Company and Biltmore Securities, Inc. ("Biltmore"), the
underwriter of this offering (the "Underwriter"), and are not necessarily
related to the Company's assets, book value, net worth or any other established
criteria of value. See "Risk Factors", "Underwriting", and see "Use of
Proceeds." Upon completion of the Company's public offering, management will own
an aggregate of 50%, (47.8% if the Over-Allotment Option, as hereinafter
defined, is exercised in full) of the then outstanding Common Stock of the
Company.
The Registration Statement of which this Prospectus forms a part also
relates to the offer and sale of an option to purchase up to 75,000 shares of
Common Stock covered by the options and the underlying securities to be issued
to the Underwriter. The Underwriter`s Purchase Option is not redeemable by the
Company.
The Registration Statement of which this Prospectus forms a part also relates to
the offer and sale of 1,250,000 shares of Common Stock; and 2,000,000 shares
issuable upon exercise of outstanding Series A and Series B Warrants which were
previously issued by the Company to the holders thereof and are to be offered
and sold by such stockholders (the "Selling Stockholders"). The Series A
Warrants are exercisable at $6.00 per share and the Series B Warrants are
exercisable at $9.00 per share. Such securities are subject to an 18 month
lock-up by the Underwriter. The shares are being offered by the Selling
Stockholders are being registered for resale purposes only pursuant to an
Alternate Prospectus. Sales of the securities to be offered by Selling
Stockholders (or even the potential of such sales) would likely have an adverse
effect on the market prices of the securities being offered by the Company. The
Company will not receive the proceeds of any sale of such securities by the
Selling Stockholders. The Selling Stockholders will receive the proceeds from
the sale, if any, of the securities to be offered by Selling Stockholders.
Except as otherwise set forth herein, the costs incurred in connection with the
registration of such securities are to be borne by the Company. See "Selling
Stockholders."
AN INVESTMENT IN THE SECURITIES DESCRIBED HEREIN INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION."
SUCH SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
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Price to Public Underwriting Discounts Proceeds to Company(2)
and Commissions (1)
Common Stock
offered $ 5.75 $ .575 $ 5.175
by Company.....
Total(3)..... $4,312,500 $431,250 $3,881,250
BILTMORE SECURITIES, INC
The Date of this Prospectus is September 9, 1996
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(1) Does not include additional underwriting compensation to be
paid by the Company to the Underwriter in the form of: (a)
an option to purchase up to 75,000 shares of Common Stock
(the "Underwriter's Purchase Option") at an exercise price
equal to 120% of the public offering price ($6.90 per
share); and (b) a non-accountable expense allowance of
$129,375 Non-Accountable Expense Allowance" equal to 3% of
the aggregate initial public offering price of the Common
Stock (or $148,781.25 assuming exercise in full of the Over-
Allotment Option, as defined below), $25,000 of which has
been advanced to the Underwriter.
(2) Exclusive of exercise of the Over-Allotment Option (as
defined below) and before deducting expenses payable by the
Company estimated at $429,375 (including the Underwriter's
Non-Accountable Expense Allowance of $129,375 payable by the
Company). After deducting such expenses and applicable
underwriting discounts, the net proceeds to the Company,
exclusive of the exercise of the Over-Allotment Option (as
defined below), will be approximately $3,451,875.
(3) The Company has granted an option to the Underwriter to
purchase up to an aggregate of 112,500 additional shares of
Common Stock exercisable for a period of 30 days following
the Effective Date to cover over-allotments, if any, at the
initial public offering price ($5.75 per share) less an
underwriting discount equal to 10% of the public offering
price (the "Over-Allotment Option"). If the Over-Allotment
Option is exercised in full, the total of each of the Price
to Public, Underwriting Discounts and Commissions, and
Proceeds to the Company of each of the Price to Public,
Underwriting Discounts and Commissions, and Proceeds to the
Company will be $4,959,375, $495,938 and $4,463,437,
respectively (exclusive of other expenses payable by the
Company and the Non-Accountable Expense Allowance). Assuming
exercise of the Over-Allotment Option and after deducting
expenses and applicable underwriting discounts, the net
proceeds to the Company will be approximately $4,014,656,
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See "Underwriting."
Prior to the Company's public offering as described herein, there has
been no public market for the Common Stock and no assurance may be given that a
public market will develop following the completion of the offering or that, if
any such market does develop, it will be sustained. The Company's Common Stock
will be quoted on the NASDAQ Electronic Bulletin Board under the symbol: "HMAT".
See "Risk Factors - No Assurances of Public Market" and "Market for the
Company's Securities and Other Related Stockholder Matters."
The securities being offered for sale by the Company are being offered
on a "firm commitment" basis, subject to prior sale, when, as and if delivered
to and accepted by the Underwriter pursuant to the terms of the underwriting
agreement relating to the offering. See "Underwriting." It is expected that
delivery of certificates representing the securities being offered by the
Company will be made against payment therefor at the offices of the Underwriter
on or about September 13, 1996. The Company does not currently file reports and
other information with the Commission. However, following completion of its
offering, the Company intends to issue annual reports containing audited
financial statements and such interim reports to its Securityholders as the
Company may determine to furnish or as the same may be required by law. See
"Available Information."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMPANY'S SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
ALTHOUGH IT HAS NO LEGAL OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM
TIME TO TIME ACT AS A MARKETMAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE
COMPANY'S SECURITIES. THE UNDERWRITER WILL NOT ACT AS A MARKETMAKER UNTIL SUCH
TIME AS ITS PARTICIPATION IN THIS OFFERING IS COMPLETE. THE UNDERWRITER, IF IT
PARTICIPATES IN THE MARKET, MAY BE A DOMINATING INFLUENCE IN ANY MARKET THAT
MIGHT DEVELOP FOR ANY OF THE COMPANY'S SECURITIES. SUCH ACTIVITIES, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME OR FROM TIME TO TIME. THEREFORE,
THERE IS NO ASSURANCE THAT THE UNDERWRITER WILL OR WILL NOT BE A DOMINATING
INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED HEREUNDER MAY BE
AFFECTED BY THE DEGREE, IF ANY, OF THE UNDERWRITER'S PARTICIPATION IN THE
MARKET. SEE "RISK FACTORS" AND "UNDERWRITING."
AVAILABLE INFORMATION
Upon completion of its offering, the Company will be subject
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to the informational requirements of the Securities Exchange Act of 1934, a
amended (the "Exchange Act") and in accordance therewith will file reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information may be inspected and copies at the Commission's
public reference room located in Room 1024 at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's Regional Offices located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such materials may also be obtained at prescribed rates from
the Public Reference Section of the Commission located in Room 1024 at 450 Fifth
Street, N.W., Washington, D.C. 20549.
The Company has filed a Registration Statement relating to the
securities offered hereby with the Commission pursuant to the provision s of the
Securities Act of 1933, as amended (the "Securities Act"). Although this
Prospectus forms a part of the Registration Statement, it does not contain all
of the information set forth in the Registration Statement, the exhibits or the
schedules thereto. For further information with respect to the Company and the
securities offered hereby, reference is made to the registration Statement, the
exhibits and the schedules thereto. Summaries of and references to various
documents in this Prospectus do not purport to be complete and in each case
reference is made to the copy of such document which has been filed as an
exhibit to the Registration Statement.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to and
should be read in conjunction with the more detailed information and financial
data (including any financial statements and the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, all share and per
share amounts set forth hereinafter have been adjusted to reflect the issuance
to Matthew Schilowitz, the Company's President, CEO and Chairman of the Board of
Directors, in March 1, 1996 of 1,750,000 shares of Common Stock of the Company
in exchange for shares of common stock of Harmat Homes, Inc., Harmat Capital
Corp., Northside Woods, Inc., Harmat Holding Corp., Harmat Organization, Inc.
and Quick Storage of Quogue, Inc. (collectively the "Subsidiaries"). The
consideration for such exchange was arbitrarily determined and was not an
arms-length transaction. Pursuant to an agreement with the Underwriter, Mr.
Schilowitz made a capital contribution of 500,000 shares to the Company in lieu
of an escrow of 750,000 shares so that Mr. Schilowitz owns 1,250,000 shares of
Common Stock. The Company has outstanding prior to the Offering contemplated
hereby 1,750,000 shares of Common Stock. See "The Company;" and "Certain
Transactions."
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Each prospective investor is urged to read this Prospectus in its entirety.
The Company
The Harmat Organization, Inc. (hereinafter with its Subsidiaries
collectively "Harmat" or the "Company"), incorporated on December 14, 1995, a
Delaware corporation, is a construction, architectural and landscape design and
real estate development firm based in Long Island, New York. Harmat builds
custom homes on either the client's land or on properties owned or controlled by
entities affiliated with Harmat. The Company also builds commercial and
residential rental properties. The Company also offers interior design,
renovation and restoration services to its clients. In addition, Harmat owns
undeveloped land, storage facilities containing 115 units, rental properties and
is involved in real estate development projects. Over the past ten years, the
Company has focused its efforts in the Suffolk County area of eastern Long
Island, New York, where it has built approximately 150 single-family homes as
well as such commercial/public projects as the 6,000 square feet center of
Jewish Life in Westhampton Beach, the Hamptons Synagogue. The Company is
currently constructing a 14 unit luxury condominium in Westhampton Beach on a 10
acre bayfront property on Dune Road consisting of club house, 6 tennis courts,
pool, patio, beach access and 30 boat slips. The Company maintains its principal
office at 2 Old Country Road, Quogue, NY 11959; its phone number is (516)
653-3303.
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The Offering
Securities Offered by the Company... 750,000 shares of Common
Stock
Securities Outstanding Prior to the
Company's Offering
Common Stock................... 1,750,000 Shares
Series A Warrants.............. 1,500,000
Series B Warrants............... 500,000
Securities Outstanding After the
Company's Offering:
Common Stock (1).................2,500,000 Shares
Series A Warrant................ 1,500,000 Warrants
Series B Warrants................ 500,000 Warrants
Proposed Symbol:
Common Stock..................... HMAT
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(1) Does not include: (a) 2,000,000 shares of Common Stock
issuable upon exercise of the Series A and Series B Warrants
issued in a private placement; (b) 112,500 shares of Common
Stock issuable upon exercise of the Over-Allotment Option;
(c) 75,000 shares of Common Stock issuable upon exercise of
the Underwriter's Purchase Option; (d) 400,000 shares of
Common Stock reserved for issuance pursuant to the Company's
Stock Option Plan (as hereinafter defined); and (e) 500,000
shares of Common Stock reserved for issuance pursuant to an
option issued to an officer of the Company. In the event all
outstanding options (excluding 112,500 options covering the
over-allotment option and 400,000 shares covered by the
Company's qualified option plan but including 75,000 shares
covered by the Underwriters Purchase Option and 500,000
shares covered by the Employment Option granted to Mr.
Schilowitz, the President of the Company) were exercised
there would be 3,075,000 shares of Common Stock outstanding.
See "Description of Securities," "Certain Transactions,"
"Management-Other Options or Plans" and "Underwriting."
Risk Factors
An investment in any of the securities being offered hereby
is highly speculative and involves substantial risks including,
but not limited to, the Company`s working capital and
shareholder`s deficits, economic dependency, inherent risks of
the real estate business, the risks of the construction industry,
potential conflicts of interest, the Company's ongoing capital
requirements, dependence upon and application of the proceeds of
the Company's public offering, the potential need for additional
financing, the Company's reliance on senior management, the
Underwriter's influence on the market, industry competition, lack
of cash dividends and dilution. See "Risk Factors," "Business,"
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"Dilution," "Market for the Company's Securities and Other
Related Stockholder Matters" and "Underwriting."
Use of Proceeds
The Company will receive the net proceeds of its offer and sale of the
Units and will receive the proceeds from the exercise, if any, of the Series A
Warrants included in the Units. The Company intends to use the net proceeds from
its offering of the Units for the following: (i) approximately $600,000 for the
acquisition and development of property; (ii) repayment of approximately
$1,068,048 in outstanding indebtedness; and (iii) the remainder of approximately
$1,783,827, for general working capital purposes. See "Risk Factors-Use of
Proceeds Subject to Management Discretion," and "Use of Proceeds."
Summary Financial Information
The following summary of selected financial information concerning the
Company, other the "As Adjusted" information reflecting the Company's receipt
and use of the net proceeds of its public offering (see "Use of Proceeds"), has
been derived from the financial statements (including the related notes thereto)
of the Company included elsewhere in this Prospectus (the "Financial
Statements"). This information should be read in conjunction with the Financial
Statements and the section hereof entitled "Management's Discussion and Analysis
of Financial condition and Results of Operations." The financial information
presented below for each of the fiscal years ended December 31, 1995 and
December 31, 1994 has been
derived from audited financial statements.
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December 31,
1995
Balance Sheet Data
Working Capital (Deficit).............. (1,206,453)
Total Assets........................... 2,694,555
Total Liabilities...................... 2,876,485
Total Long-Term Obligations............ 1,156,273
Stockholders' Equity (Deficit)......... (181,930)
June 30, 1996
Actual As Adjusted(1)
(Unaudited)
Balance Sheet Data
Working Capital (Deficit).............. (1,466,859) 1,837,368
Total Assets........................... 3,534,875 5,918,702
Total Liabilities...................... 3,640,266 2,572,218
Total Long-Term Obligations............ 922,378 774,730
Stockholders' Equity................... (105,391) 3,346,484
Six Months Ended June 30,
1996 1995
(Unaudited) (Unaudited)
Income Statement Data
Revenues................................ 688,919 2,058,642
Income (Loss) from Operations........... (156,779) 257,732
Net Income (Loss)....................... (186,392) 238,672
Pro Forma Net Earnings (Loss)........... (186,392)
Pro Forma Net (Loss) per Share of
Common Stock........................... (.11)
Weighted Average Number of Common Shares
Outstanding Used in Computation.........1,750,000
December 31, December 31,
1995 1994
Income Statement Data
Revenues (2)............................ 2,323,524 4,518,872
Income from Operations.................. 131,710 1,260
Net Income (Loss)....................... 235,903 258,171
Pro Forma Net Earnings.................. 141,000
Pro Forma Net Earnings per Share of
Common Stock........................... .08
Weighted Average Number of Common Shares
Outstanding Used in Computation......... 1,750,000
(1) Includes the effect of the proposed public offering with anticipated
net proceeds of $3,451,875.
(2) The decrease of sales revenues from 1994 to 1995 reflects the
Company's decision to expand into the construction management phase
of the commercial real estate market. In 1995, the Company entered
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into a construction management contract to supervise
the construction of a 14 unit condominium project in
Westhampton, N.Y. As a result, all sales revenue
generated by the sale of these condominium units were
not reflected on the books of the Company, only the
construction management fee for the construction
period was reflected as revenue.
In addition, the Company has moved towards constructing
homes for the upscale market which has resulted in fewer homes
delivered last year. Although, fewer homes were delivered in
1995 than in 1994, the gross profit margin increased in 1995.
This increase in gross profit indicates the Company's
direction in producing an upscale product at that same time
monitoring costs.
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RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE IN NATURE AND INVOLVE A
HIGH DEGREE OF RISK. SUCH SECURITIES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN
AFFORD TO LOSE THEIR ENTIRE INVESTMENT. THEREFORE, EACH PROSPECTIVE INVESTOR
SHOULD, PRIOR TO PURCHASE, CONSIDER VERY CAREFULLY THE FOLLOWING RISK FACTORS,
AS WELL AS ALL OF THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS
AND THE INFORMATION CONTAINED IN THE FINANCIAL STATEMENTS, THE NOTES THERETO AND
THE DOCUMENTS REFERENCED HEREIN.
Modified Independent Auditor`s Report - Financial Losses
The financial statements have been prepared assuming that the Company
will continue as a going concern and the accountant's report contains a going
concern modification. There can be no assurance that the Company's business
strategy will prove successful, or that the Company will operate profitably.
Since the Company has incurred operating losses from inception and has capital
and working capital deficiencies, there is doubt as to the Company's ability to
continue as a going concern. See "Business", "Financial Statements" and
"Management's Discussion and Analysis".
Economic Dependency
Most of the Company`s business is of a non-recurring nature. The
Company must continually market its homes in order to attract new purchasers.
Unless the Company is successful in attracting new purchasers for its houses,
such lack of new purchasers will have a negative impact to the Company in the
near term.
Inherent Risks of the Real Estate Business
The real estate business is highly speculative. Land values and/or home prices
may fluctuate significantly, and the rate of home sales can be slow.
Furthermore, the Company's building has been centered in the Hamptons resort
area in eastern Long Island, New York, where the bulk of the market consists of
vacation homes. This market is highly dependant upon the disposable income of
potential buyers as well as the interest rate climate and the availability of
suitable financing for both the Company and its clients. No assurances can be
given that the housing or commercial real estate market will expand such that
the Company will be profitable or that the Company's inventory of homes and lots
will sell at such a rate that the Company will be able to carry such inventory.
See "Business."
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Inherent Risks of the Construction Industry
The construction industry poses certain inherent risks to the Company,
such as a shortage of skilled labor or labor problems such as strikes, walkouts,
etc. In addition, certain other problems may arise resulting in construction
delays such as weather delays, cost of supplies and late deliveries and/or cost
overruns that the Company may have to absorb. Furthermore, the Company may incur
unexpected costs with respect to warranty service on completed projects even
though it carries warranty insurance to cover such contingencies. Such
construction risks can affect the Company`s cash flow and profits. To date the
Company has not been materially affected by such construction risks. See
"Business."
Expansion of Business - Unspecified Acquisitions
The Company proposes to seek opportunities to expand its business in
commercial real estate and to acquire income producing properties such as mini
storage facilities, apartments and commercial strip retail centers. The Company
has not entered into any negotiations in respect thereto. Such opportunities
management believes are attractive since they require low maintenance, limited
supervision and a preferred return. No assurance can be given that the Company
will be able to expand its business or realize profitable operations. See
"Business Strategy".
Dependence Upon Key Individual
The Company's success is dependent upon the activities of Matthew C.
Schilowitz, its principal shareholder and officer. The loss of Mr. Schilowitz'
services through death, disability or resignation will have a material and
adverse effect on the business of the Company. The Company has a five year
employment agreement with Mr. Schilowitz. The Company intends to obtain keyman
insurance on the life of Mr. Schilowitz in the amount of $1,000,000. See
"Management".
Seasonality
The Company generally experiences an increase in revenues in the fall when it
commences the majority of its construction projects, and a decrease in revenues
during the summer, when it does most of its marketing and in the winter, when
adverse weather may make construction difficult. The Company sometimes obtains
bridge loans to cover construction costs and utilizes its rental income from
apartments and the storage facility to cover its overhead during slow periods.
The Company`s construction projects usually
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begin in the fall with most sales completed in the spring and
early summer. See "Business - Seasonality".
Broad Discretion in Application of Proceeds
The management of the Company has broad discretion to adjust the
application and allocation of the net proceeds of this offering of approximately
$2,383,827 or 69% of the net proceeds, including up to $10,500,000 may be
received upon exercise of the outstanding Class A and Class B Warrants, in order
to address changed circumstances and opportunities. As a result of the
foregoing, the success of the Company will be substantially dependent upon the
discretion and judgment of the management of the Company with respect to the
application and allocation of the net proceeds hereof. Pending use of such
proceeds, the net proceeds of this offering will be invested by the Company in
temporary, short-term interest-bearing obligations. See "Use of Proceeds,"
"Business" and "Management."
Possible Need for Additional Financing
The Company intends to fund its operations and other capital needs for
the next twelve (12) months substantially form operations and the proceeds of
this offering, but there can be no assurance that such funds will be sufficient
for these purposes. The Company may require substantial amounts of the proceeds
of this offering for its future expansion, operating and capital needs, there
can be no assurance that such financing will be available, or that it will be
available on acceptable terms. See "Use of Proceeds."
Conflicts of Interest
Mr. Schilowitz currently has interests in several real estate
development projects either individually or through entities either owned
outright or controlled by him. To the extent feasible, Mr. Schilowitz will seek
to have the Company retained as a construction and/or development firm for such
projects, and to have the Company receive a management fee for services provided
to such entities. All such arrangements will be reviewed solely by the Company's
outside directors, who will determine the value of any services provided by the
Company and attempt to ensure that all terms received by the Company will be
equivalent to those granted by unrelated third parties. Additional conflicts
could occur by reason of the fact that a director of the Company is a member of
the law firm representing the Company. See "Certain Transactions" and "Legal
Matters".
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Working Capital - Use of Proceeds - Management's Discretion
A portion (approximately $1,783,827 or 51.7%) of the net proceeds
derived from the sale of the Common Stock offered hereby will be added to the
Company's general working capital. Management will have complete discretion as
to the application of such funds. No assurance can be given as to the amounts
that will be raised under this offering and if such amounts will be sufficient
to meet the Company's needs. See "Use of Proceeds."
Competition
The Company faces competition from a number of local builders, many of
which can offer either the same or lower building costs than the Company. The
Company seeks to compete not solely on the basis of price, however, but also on
the basis of quality, reliability, selection of quality building sites, customer
service and its ability to offer a "turn key" operation. No assurances can be
given that this strategy will enable the Company to compete successfully. See
"Business - Competition."
Government Regulation - Cost of Compliance
The Company is subject to federal and state regulations regarding
environmental, and the construction industry generally and is therefore subject
to expenditures to maintain its compliance with these regulations. To date, the
Company has had no problems in complying with such laws nor experienced any
unusual cost with respect to compliance therewith. The Company is also subject
to changes in these regulations that may have a materially adverse effect on its
business. See "Business Government Regulation".
Limitation on Directors' Liabilities Under Delaware Law
The Company's Certificate of Incorporation limits the liability of the
Company's directors for breach of their fiduciary duty of care to the Company.
The effect is to eliminate liability of directors for monetary damages arising
out of negligent or grossly negligent conduct. Stockholder actions against a
director of the Company for monetary damages can only be maintained upon a
showing of a breach of the individual director's duty of loyalty to the Company,
a failure to act in good faith, intentional misconduct, a knowing violation of
the law, an improper personal benefit, or an illegal dividend or stock purchase,
and not for such director's negligence or gross negligence in satisfying his
duty of care. See "Description of Securities".
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Limitation on Future Issuance of Securities
The Underwriting Agreement prohibits the Company from issuing any
capital stock or other securities for a period of 18 months following the
Effective Date without the Underwriter's prior consent. This provision may limit
the Company's ability to raise additional equity capital. The purpose of such
provision is to protect against unnecessary dilution to the public shareholders.
Arbitrary Determination of Offering Price of Securities
The public offering price of the Common Stock was determined by
negotiation between the Company and the Underwriter and does not necessarily
bear any relationship to the Company's assets, book value, net worth or any
other established criteria of value. Among the factors considered in determining
such prices were the Company's historical performance and growth, management's
assessment of the Company's business potential and earning prospects, the
prospects for growth in the industry in which the Company operates, market
prices and prevailing market conditions generally. Neither the offering price of
the Common Stock should be regarded as indicative of the actual value of any of
the securities being offered by the Company. See "Underwriting".
Immediate and Substantial Dilution
Purchasers of the securities being offered by the Company will suffer
immediate substantial dilution in the net tangible book value of shares of
Common Stock purchased in the amount of $4.54 per share, or approximately
79%, assuming that with the
anticipated $5.75 price per share. Additional dilution may result
in the event of the exercise of options granted pursuant to the
Company's Stock Option Plan (as hereinafter defined). See
"Dilution," "Stock Option Plan," and "Other Options and Plans,"
"Description of Securities" and "Certain Transactions."
Absence of Dividends on Common Stock
The Company has not paid any dividends on its Common Stock since its
incorporation and anticipates that, for the foreseeable future, working capital
and earnings, if any, will be retained for use in the Company's business
operations and in the expansion of its business. The Company has no present
intention to pay cash dividends on its Common Stock. See "Dividend Policy" and
"Description of Securities".
Future Issuances of Stock by the Company; Potential Anti-Takeover
Effect
The Company has authorized capital stock of 25,000,000 shares of Common
Stock, $.001 par value per share, and 5,000,000
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shares of preferred stock, $.001 par value per share (the "Preferred Stock"). As
of the date hereof, there are 1,750,000 shares of Common Stock issued and
outstanding. Although there are no present plans, agreement or undertakings with
respect to the Company's issuance of any shares of stock or related convertible
securities, other than as disclosed herein, the issuance of any of such
securities by the Company could have anti-takeover effects insofar as such
securities could be used as a method of discouraging, delaying or preventing a
change in control of the Company. Such issuance could also dilute the public
ownership of the Company. Inasmuch as the Company may, in the future, issue
authorized shares of Common Stock or Preferred Stock without prior stockholder
approval, there may be substantial dilution to the interests of the Company's
stockholders. In addition, a stockholder's pro rata ownership interest in the
Company may be reduced to the extent of the issuance and/or exercise of any
options or warrants relating to the Common Stock or Preferred Stock (including
exercise of the Over-Allotment Option). See "Use of Proceeds," "Capitalization,"
"Description of Securities" and "Underwriting".
Future Sales of Stock by Stockholders
All of the Company's 1,750,000 outstanding shares of Common Stock are
"restricted securities" as that term is defined under the Securities Act and in
the future may only be sold in compliance with Rule 144 promulgated under the
Securities Act or pursuant to an effective registration statement. Rule 144
provides, in essence, that a person (including a group of persons whose shares
are aggregated) who has satisfied a two-year holding period for such restricted
securities may sell within any three-month period, under certain circumstances,
an amount of restricted securities which does not exceed the greater of 1% of
that class of the Company's outstanding securities or the average weekly trading
volume of that class of securities during the four calendar weeks prior to such
sale. In addition, pursuant to Rule 144, persons who are not affiliated with the
Company and who have held their restricted securities for at least three years
are not subject to the quantity limitations or the manner of sale restriction of
the rules. As of the date hereof, no shares of Common Stock are available for
resale pursuant to Rule 144. However, 1,250,000 shares of the 1,750,000 shares
of the Company issued and outstanding Common Stock have been included in the
Registration Statement of which this Prospectus forms a part. Pursuant to an
agreement with the Underwriter, the officers, directors and holders of 5% or
more of the Company's equity securities are restricted from selling their
respective securities for a period of 18 months from the Effective Date, absent
waiver of such restriction by the Underwriter. The Underwriter required that all
shareholders of the Company lock-up their securities in order for the
Underwriter to engage in the
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<PAGE>
Offering. In previous offerings the Underwriter has released the lock-up prior
to the end of the lock-up period. In making its decision to release the lock-up
, the Underwriter evaluates the totality of the facts and circumstances that
exist at the time the decision is made, including, without limitation market
demand for the securities and trading volume. See "Certain Transactions" and
"Underwriting."
In the event that shares of Common Stock which are not currently
salable become salable by means of registration, eligibility for sale under Rule
144 or otherwise and the holders of such shares of Common Stock elect to sell
such shares of Common Stock in the public market, there is likely to be negative
effect on the market price of the Company's securities and on the ability of the
Company to obtain additional equity financing. In addition, to the extent that
such shares of Common Stock enter the market, the value of the Common Stock in
the over-the-counter market may be reduced. No predictions can be made as to the
effect, if any, that sales of the Common Stock will have on the market price of
such securities which may prevail from time to time. Nevertheless, the foregoing
could adversely affect such prevailing market prices. See "Shares Eligible For
Future Sale," "Principal Stockholders," "Certain Transactions" and "Description
of Securities."
Authorization of Preferred Stock
The Company's Articles of Incorporation authorize the issuance of up to
5,000,000 shares of Preferred Stock with such rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors may, without shareholder approval, issue shares of Preferred Stock
with dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of Common
Stock. In addition, the issuance of such Preferred Stock may have the effect of
rendering more difficult, or discouraging, an acquisition of the Company or
changes in control of the Company. Although the Company does not currently
intend to issue any shares of Preferred Stock, there can be no assurance that
the Company will not do so in the future. See "Risk Factors - Future Issuances
of Stock by the Company; Potential Anti-Takeover Effect", and "Description of
Securities".
Financial Risk to Investors in Public Offering
Upon completion of the Company's public offering, the Company's current
stockholders will have paid $525,500 for 1,750,000 shares of Common Stock, or
70% of the Company's then outstanding shares of Common Stock, and purchasers of
the Common Stock in the Company's public offering will have paid $4,312,500
16
<PAGE>
for 750,000 shares of Common Stock, or 30% of the Company's then
outstanding shares of Common Stock, assuming no exercise of the
Over-Allotment Option or the Underwriter's Purchase Option.
Therefore, investors purchasing the Common Stock in the Company's
public offering will bear a substantially greater financial risk
than the Company's current stockholders. See "Dilution."
No Assurance of Public Market
Prior to the Company's public offering, there has been no public market
for any of the Company's securities, and there can be no assurance given that a
regular trading market for the Common Stock will develop after the completion of
the Company's public offering. If a trading market does in fact develop, there
can be no assurance given that it will be sustained. In connection with the
Company's public offering, the Company's Common Stock will be quoted on the
NASDAQ Electronic Bulletin Board under the symbol: HMAT. If, for any reason, a
public trading market does not develop, purchasers of such securities may have
difficulty selling their securities should they desire to do so. The Company's
listing application for listing its securities with NASDAQ was rejected by
NASDAQ and no assurance can be given that a listing can be attained in the
future. See "Underwriting".
Underwriter's Influence on the Market
Although it has no legal obligation to do so, the Underwriter may from
time to time act as a marketmaker and otherwise effect transactions in the
Company's securities. To the extent the Underwriter acts as a marketmaker in the
Common Stock it may be a dominating influence in that market. The price and
liquidity of such securities may be affected by the degree, if any, of the
Underwriter's participation in the market inasmuch as a significant amount of
such securities may be sold to customers of the Underwriter. Such customers
subsequently may engage in transactions for the sale or purchase of such
securities through or with the Underwriter. In the event that marketmaking
activities are commenced, the Underwriter may discontinue such activities at any
time or from time to time. See "Underwriting."
Litigation Involving the Underwriter - SEC Judgement
The Company has been advised by the Underwriter that on or about May
22, 1995, the Underwriter and Elliot Lowenstern and Richard Bronson, principals
of the Underwriter, and the Securities and Exchange Commission (the
"Commission") agreed to an offer of settlement (the "Offer of Settlement") in
connection
17
<PAGE>
with a complaint filed by the Commission in the United States District Court for
the Southern District of Florida alleging violations of the federal securities
laws, Section 17(a) of the Securities Act of 1933, Section 10(b) and 15(c) of
the Securities Exchange Act of 1934, and Rules 10b-5, 10b-6 and 15c1-2
promulgated thereunder. The complaint also alleged that in connection with the
sale of securities in three (3) IPOs in 1992 and 1993, the Underwriter engaged
in fraudulent sales practices. The proposed Offer of Settlement was consented to
by the Underwriter and Messrs. Loewenstern and Bronson without admitting or
denying the allegations of the complaint. The Offer of Settlement was approved
by Judge Gonzales on June 6, 1995. Pursuant to the final judgment (the "Final
Judgment"), the Underwriter:
* was required to disgorge $1,000,000 to the Commission,
which amount was paid in four (4) equal installments on
or before June 22, 1995; and
* agreed to the appointment of an independent consultant
("Consultant").
Such Consultant is obligated, on or before September 15, 1996:
* to review the Underwriter's policies, practices and
procedures in six (6) areas relating to compliance and
sales practices;
* to formulate policies, practices and procedures for the
Underwriter that the Consultant deems necessary with
respect to the Underwriter`s compliance and sales
practices;
* to prepare a report devoted to and which details the
aforementioned policies, practices and procedures (the
"Report");
* to deliver the Report to the President of the
Underwriter and to the staff of the Southeast Regional
office of the Commission;
* to prepare, if necessary, a supervisory procedures and
compliance manual for the Underwriter, or to amend the
Underwriter's existing manual; and
* to formulate policies, practices and procedures designed to
provide mandatory on-going training to all existing and newly
hired employees of the Underwriter. The Final Judgment further
provides that, within thirty (30) days of the Underwriter's
receipt of the Report, unless such time is extended, the
Underwriter shall
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<PAGE>
adopt, implement and maintain any and all policies,
practices and procedures set forth in the Report.
The Final Judgment also provides that an independent auditor
("Auditor") shall conduct four (4) special reviews of the Underwriter's
policies, practices and procedures, the first such review to take place six (6)
months after the Report has been delivered to the Underwriter and thereafter at
six-month intervals. The Auditor is also authorized to conduct a review, on a
random basis and without notice to the Underwriter, to certify that any persons
associated with the Underwriter, who have been suspended or barred by any
Commission order are complying with the terms of such orders.
On July 10, 1995, the action as against Messrs. Loewenstern and
Bronston was dismissed with prejudice. Mr. Bronson has agreed to a suspension
from associating in any supervisory capacity with any broker, dealer, municipal
securities dealer, investment advisor or investment company for a period of
twelve (12) months, dating from the beginning of such suspension. Mr.
Loewenstern has agreed to a suspension from associating in any supervisory
capacity with any broker, dealer, municipal securities dealer, investment
advisor or investment company for a period of twelve (12) months commencing upon
the expiration of Mr. Bronson's suspension.
In the event that the requirements of the foregoing judgment adversely
affect the Underwriter's ability to act as a market maker for the Company`s
stock, and additional brokers do not make a market in the Company`s securities,
the market for and liquidity of the Company`s securities may be adversely
affected. In the event that other broker dealers fail to make a market in the
Company`s securities, the possibility exists that the market for and the
liquidity of the Company`s securities may be adversely affected to such an
extent that public security holders may not have anyone to purchase their
securities when offered for sale at any price. In such event, the market for,
liquidity and prices of the Company`s securities may not exist. For additional
information regarding the Underwriter, investors may call the National
Association of Securities Dealers, Inc. at (800) 289- 9999. See "Underwriting".
Recent State Action Involving the Underwriter - Possible Loss of
Liquidity
The State of Indiana has commenced an action seeking among other things
to revoke the Underwriter`s license to do business in such state. A hearing in
this matter has been scheduled for October 7, 1996. Such proceeding if
ultimately successful may adversely affect the market for and liquidity of the
Company`s securities if additional broker dealers do not make a market in the
Company`s securities. Moreover, should Indiana investors
19
<PAGE>
purchase any of the securities sold in this Offering from the Underwriter prior
to the possible revocation of the Underwriter`s license in Indiana, such
investors will not be able to resell such securities in such state through the
Underwriter but will be required to retain a new broker dealer firm for such
purpose. The Company cannot ensure that other broker dealers will make a market
in the Company`s securities. In the event that other broker dealers fail to make
a market in the Company`s securities, the possibility exists that the market for
and the liquidity of the Company`s securities may be adversely affected to an
extent that public security holders may not have anyone to purchase their
securities when offered for a sale at any price. In such event, the market for,
liquidity and prices of the Company`s securities may not exist. It should be
noted that although the Underwriter may not be the sole market maker in the
Company`s securities, it will most likely be the dominant market maker in the
Company`s securities. See "Underwriting".
Underwriter's Unit Purchase Option
In connection with the Company's offering of the 750,000 shares of
Common Stock, the Company will sell to the Underwriter, for nominal
consideration, an option to purchase up to an aggregate of 75,000 shares of
Common Stock. The Underwriter's Purchase Option (as previously defined) will be
exercisable commencing 12 months after the Effective Date of the Registration
Statement of which this Prospectus forms a part and ending four years from such
date at an exercise price of $6.90 per share of Common Stock, subject to certain
adjustments. The holder of the Underwriter's Purchase Option will have the
opportunity to profit from a rise in the market price of the Common Stock, if
any, without assuming the risk of ownership, with a resulting dilution in the
interest of other stockholders. The Company may find it more difficult to raise
additional equity capital if it should be needed for the business of the Company
while the Underwriter's Purchase Option is outstanding. At any time at which the
holder thereof might be expected to exercise such option, the Company would
probably be able to obtain additional capital on terms more favorable than those
provided by the Underwriter's Purchase Option. The holder of the Underwriter's
Purchase Option will have the right to require registration under the Securities
Act of the securities issuable upon exercise of the Underwriter's Purchase
Option and will have certain "piggy-back" registration rights. The cost to the
Company of effecting any such registration may be substantial. See
"Underwriting" and "Dilution."
Certain Provisions of Certificate of Incorporation and Bylaws
As previously noted, pursuant to the Company's Certificate of
Incorporation, the Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock without further
20
<PAGE>
action by the stockholders in one or more series having such preferences, rights
and other provisions as the Board of Directors may designate in providing for
the issuance of such series. The Certificate of Incorporation and Bylaws contain
provisions which may discourage certain transactions which involve an actual or
threatened change in control of the Company. These provisions provide for a
classified Board of directors. See "Description of Securities" and "Management."
As permitted by the Delaware General Corporation Law, the Certificate of
Incorporation provides that a director of the Company will not be personally
liable to the Company or its stockholders for monetary damages for breach of the
fiduciary duty of care as a director, except under certain circumstances
including breach of the director's duty of loyalty to the Company or its
stockholders or any transaction from which the director derived an improper
personal benefit. See "Description of Securities".
Voting Control by Current Officers and Directors
As of the date hereof, Matthew Schilowitz, a director and officer of
the Company owns 1,250,000 shares of Common Stock. See "Certain Transactions".
Consequently, immediately upon completion of the Company's public offering of
the 750,000 shares of Common Stock, the officers and directors of the Company
will own or control the voting of 50% of the Company's issued and outstanding
Common Stock, assuming no exercise of the Over-Allotment Option, no exercise of
the Underwriter's Purchase Option, and no exercise of the outstanding Series A
Warrants nor the exercise of the outstanding Series B Warrants. There are no
cumulative voting rights and directors must be elected by a plurality of the
outstanding voting securities entitled to vote. Although Mr. Schilowitz does not
own a majority of the Company`s issued and outstanding Common Stock, Mr.
Schilowitz will be in a position to exert substantial influence over the actions
of the Company. Mr. Schilowitz is also a Selling Stockholder under the alternate
prospectus selling 750,000 shares. After such sale, Mr. Schilowitz will own
500,000 shares of the Company`s Common Stock. See "Principal Stockholders" and
"Certain Transactions."
Current Prospectus Requirement
During the 18 month lock-up period applicable to the Selling
Stockholders, the Company must maintain and make available a current prospectus.
This Prospectus will no longer be current after October, 1997 (or earlier upon
the occurrence of a material event or change which would render the information
herein inaccurate or otherwise misleading). There can be no assurance give that
the Company will not be prevented by financial or other considerations from
maintaining a current prospectus. See "Underwriting".
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock being
offered by the Company, after deducting expenses and other costs of the
offering, are estimated to be approximately $3,451,875 (or $4,004,655 if the
Over-Allotment Option is exercised in full). The Company intends to use the net
proceeds of its offering substantially as follows:
Approximate
Proposed Use of Proceeds Amount
Percentage
Acquisition and Development of Property (1).. $ 600,000 17.4%
Repayment of Debt(2)......................... 1,068,048 30.9%
General Working Capital (3).................. 1,783,827 51.7%
---------- -----
Total.............................. $3,451,875 100%
- -------------
(1) To be utilized for a) the Jaegger Woods project in
Westhampton, New York ($500,000) with the balance of the
funds needed for this project to be obtained from
conventional mortgage financing of approximately $3,425,000,
a commitment from Key Bank of New York having been obtained;
and (b) expansion of the mini storage facility in Quogue,
New York ($100,000).
(2) Of the total debt of $1,068,048 being repaid (a) $125,000
bears interest at 8% and matures on March 26, 1997 and is
payable to a related party; (b) $20,000 bears interest at 6%
and matures December 31, 1996 and is payable to Sidney
Prizer, the grandfather of Matthew Schilowitz, the President
of the Company; (c) $70,000 bears interest at 8% and matures
on December 31, 1996 and is payable to the mother of Matthew
Schilowitz, the President of the Company; (d) $240,000 bears
interest of prime plus 1 1/2% and matures September 30, 1996
and is payable to a bank; (e) $150,000 bears interest at 4%
and matures December 31, 1996 or earlier upon completion of
the offering contemplated hereby and is payable to the
unaffiliated prior owners of Quick Storage of Quogue, Inc.;
(f) $100,000, bears interest at 12% and matures August 31,
1996 and is payable to an unaffiliated party; (g) $215,400
bears interest at prime plus 3%, is due October 11, 1996 and
is payable to a bank; and (h) $147,648 bears interest at
10.625% and matures February 1, 2006 and is payable to a
bank.
(3) General working capital contemplates, among other things,
the use for general corporate purposes, including funding
22
<PAGE>
the day-to-day operations of the Company and the Company's
future development.
The amounts set forth above are estimates developed by management of
the Company based upon the Company's current plans and prevailing economic and
industry conditions. Although the Company does not currently contemplate
material changes in the proposed use of proceeds set forth above, to the extent
that management of the Company finds that adjustment thereto is required, the
amounts shown may be adjusted among the uses indicated above. The Company's
proposed use of proceeds is subject to changes in general, economic and
competitive conditions, timing and management discretion, each of which may
change the amount of proceeds expended for the purposes intended. The proposed
application of proceeds is also subject to changes in market conditions and the
Company's financial condition in general. Changes in general, economic,
competitive and market conditions and the Company's financial condition would
include, without limitation, the occurrence of an economic slowdown or
recession, changes in the competitive environment in which the Company operates.
While management of the Company is not currently aware of the existence or
pending threat of any of the foregoing events, there can be no assurance given
that one or more of such events will not occur. See "Risk Factors" generally,
including specifically, "Risk Factors-Working Capital-Use of Proceeds" and "Risk
Factors-Competition." Any additional proceeds received upon exercise of the
Over-Allotment Option, the Underwriter's Purchase Option or the Series A
Warrants or the Series B Warrants will be added to working capital and used as
management, in its sole discretion, deems appropriate.
While there can be no assurance given, the Company believes that the
net proceeds from its public offering and internally generated funds will be
adequate to satisfy the Company's working capital needs for the next 12 months.
The Company does not currently anticipate that it will need the proceeds from
the potential exercise of outstanding Series A and Series B Warrants to fund its
working capital needs or to maintain its operations over the next 12 months.
However, the Company may require additional financing in the future in order to
expand its business. The Company is not able at this time to predict the amount
or potential source of such additional funds and has no current commitments to
obtain such funds, other than as set forth herein. There can be no assurance
that additional financing on acceptable terms will be available to the Company
when needed, if at all. See "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Pending use of the net
proceeds from the Company's public offering, the Company may make temporary
investments in short-term, high grade, interest-bearing instruments.
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<PAGE>
- ----------------------------------------------------------------
CAPITALIZATION
- -----------------------------------------------------------------
The following table sets forth the Company's capitalization on an actual basis
and as adjusted as if all of the Common Stock offered herein were sold.
June 30, 1996
Actual As Adjusted(1)(2)
Short-Term Debt $2,717,888 $1,797,488
Long-Term Debt $ 922,378 $ 774,730
Common Stock,
$0.001 par value
shares authorized;
outstanding(2) $ 1,750 $ 2,500
Additional Paid-In
Capital $ 301,063 $3,752,188
Retained Earnings
(Deficit) $ (408,204) $ (408,204)
----------- -----------
Total
Capitalization $3,534,875 $5,918,702
========== ==========
(1) Gives effect to the anticipated net proceeds of $3,451,875 public
offering and the repayment of debt of $1,068,048 with the proceeds.
(2) Does not include: (a) 2,000,000 shares of Common Stock
issuable upon exercise of the Series A and Series B Warrants
issued in a private placement; (b) 112,500 shares of Common
Stock issuable upon exercise of the Over-Allotment Option;
(c) 75,000 shares of Common Stock issuable upon exercise of
the Underwriter's Purchase Option; (d) 400,000 shares of
Common Stock reserved for issuance pursuant to the Company's
Stock Option Plan (as hereinafter defined); or (e) 500,000
shares of Common Stock reserved for issuance pursuant to an
option issued to an officer of the Company. In the event all
outstanding options (excluding 112,500 options covering the
over-allotment option and 400,000 shares covered by the
Company's qualified option plan but including 75,000 shares
covered by the Underwriters Unit Purchase Option and 500,000
shares covered by the Employment Option granted to Mr.
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<PAGE>
Schilowitz, the President of the Company) were exercised
there would be 3,075,000 shares of Common Stock outstanding.
See "Description of Securities," "Certain Transactions,"
"Management-Other Options or Plans" and "Underwriting."
Private Placement
In March 1996, the Company completed a private placement of $500,000 by
the sale of 500,000 Units, each Unit consisting of one share of the Company's
Common Stock; three Series A Warrants and one Series B Warrant. The Series A
Warrants are exercisable at $6.00 per share and are callable at a redemption
price of $.05 per Warrant in the event that the price of the Company's Common
Stock equals or exceeds $8.00 per share for 20 consecutive trading days ending
within five days prior to notice of redemption. The Series B Warrants are
exercisable at $9.00 per share over a four year period commencing on the date of
this Prospectus. The Series B Warrants are callable at a redemption price of
$.05 per Warrant in the event that the price of the Company`s Common Stock
equals or exceeds $10.00 per share for 20 consecutive trading days ending within
five days prior to the Company`s notice of redemption. Of the $500,000 raised,
$177,000 were utilized towards expenses of the offering contemplated hereby,
including blue sky filing and legal fees, deposit towards Underwriter`s
non-accountable expense allowance, NASD and NASDAQ filing fees, SEC filing fees
and legal and accounting expenses and the balance of $323,000 was used for
working capital purposes.
DILUTION
As of June 30, 1996, the Company had an aggregate of 1,750,000 shares
of Common Stock outstanding and a net tangible book value deficit of $(426,973)
or $(.24) per share of Common Stock. "Net Tangible Book Value Per Share"
represents the total amount of the Company's tangible assets, less the total
amount of its liabilities, divided by the total number of shares of Common Stock
outstanding.
After giving effect to the sale of 750,000 shares of Common Stock by
the Company at the offering price of $5.75 per Share, the issuance of 750,000
shares of Common Stock, and the deduction of offering expenses in the amount of
$300,000 and underwriting discounts and commissions estimated at $560,625 (which
amounts include payment of the Underwriter's Non-Accountable Expense Allowance
but without taking into account exercise of the Over-Allotment Option or the
Series A and Series B Warrants issued in a private placement) the pro forma note
tangible book value of the Company would be $1.21 per share of Common Stock.
This amount represents an immediate dilution (the difference between the
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<PAGE>
attributed price per share of Common Stock to purchasers in the Company's
offering and the pro forma net tangible book value per share of Common Stock as
of June 30, 1996, after giving effect to the issuance of 750,000 shares of
Common Stock included in the Units) of approximately $4.54 per share of Common
Stock to new investors and an immediate increase (the difference between the pro
forma net tangible book value per share of Common Stock as of June 30, 1996 and
the pro forma net tangible book value per share of Common Stock as of June 30,
1996, after giving effect to the issuance of 750,000 shares of Common Stock) of
$1.45 per share of Common Stock to the Company's stockholders. Such increase to
the Company's current stockholders is solely attributable to the cash price paid
by purchasers of the shares of Common Stock offered for sale by the Company.
The following table illustrates the per share dilution as of June 30, 1996:
Public offering price per share(1)............. $5.75
Net tangible book value per share before giving
effect to the Company's offering ............ (.24)
Increase per share attributable to the sale of
750,000 shares of Common Stock
offered by the Company ........................ 1.45
Pro forma net tangible book value per share as of
June 30, 1996 reflecting the Company's
Offering(2).................................... 1.21
Dilution per share to purchasers in the Company's
offering................................. ....... $4.54
- ------------------------
(1) Attributes $5.75 of the public offering price per share to
the Common Stock. Represents the public offering price
before deduction of estimated expenses of the Company's
offering, underwriting discounts and commissions. If the
Underwriter's option is exercised in full, the pro forma as
adjusted net tangible book value per share of common stock
after this Offering would be approximately $1.37,
representing an immediate increase of $1.61 per share to
current stockholders and an immediate dilution of $4.14 per
share to new investors.
(2) Assumes no exercise of: (a) the Underwriter's Purchase
Option; (b) the Over-Allotment Option; or (c) the Series A
and the Series B Warrants issued in a private placement. In
the event all outstanding options (excluding 112,500 options
covering the over-allotment option and 400,000 shares
covered by the Company's qualified option plan but including
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<PAGE>
75,000 shares covered by the Underwriters Purchase Option
and 500,000 shares covered by the Employment Option granted
to Mr. Schilowitz, the President of the Company) were
exercised there would be 3,075,000 shares of Common Stock
outstanding. See "Capitalization," "Underwriting," "Certain
Transactions" and "Description of Securities."
The following table sets forth, as of June 30, 1996, a
comparison of the number of shares of Common Stock acquired by current
stockholders from the Company, the total consideration paid for such shares of
Common Stock and the average price per share paid by current stockholders of
Common Stock and to be paid by the prospective purchasers of Units offered for
sale by the Company (based upon the anticipated public offering price of $5.75
per share of Common Stock, before deducting underwriting discounts and
commissions and estimated offering expenses):
Common Stock Acquired Total Consideration Average Price
Number Percent Amount Percent Per Share
Current
Stockholders... 1,750,000 70% $ 525,500 10.8% .30
New Investors(1) 750,000 30% $4,312,500 89.2% $5.75(3)
--------- ------ ---------- ---------
Total(2).... 2,500,000 100% $4,838,000 100%
(1) Does not include 112,500 Units which may be issued on
exercise of a 30-day option granted to the Underwriters to
cover over-allotments. See "Underwriting".
(2) Assumes no exercise of: (a) the Underwriter's Purchase
Option; (b) the Over-Allotment Option; or (c) the Series A
and Series B Warrants issued in a private placement. See
"Capitalization," "Underwriting," "Certain Transactions" and
"Description of Securities."
(3) Aggregate offering price for common stock only before deduction of
offering expenses, underwriting discounts and commissions.
DIVIDEND POLICY
The Company has not, to date, paid and does not anticipate
paying any dividends on its Common Stock in the foreseeable
future. The Company currently intends to retain all working
capital and earnings, if any, for use in the Company's business
operations and in the expansion of its business. See "Description
of Securities-Common Stock."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the six months ended June 30, 1996 and 1995
Introduction
The Company has, since its inception in 1985, built in excess of 150
single-family homes in the Hamptons resorts area of Long Island. New York. It
has also been able to acquire residential and commercial rental properties which
generated additional cash flow for the Company. In addition, the Company has
acquired a 12 lot subdivision, Polo grounds, which is currently in development.
The Company is marketing Polo Grounds and currently has three contracts. The
Company is also in contract with a 57 unit subdivision in Westhampton Beach
[Jaegger] which it intents to close on during the summer of 1996, market
immediately thereafter and deliver homes from such development by year end 1996.
The Company provides construction management services to other developers and
charges a fee for providing construction supervision on a project.
Currently, the luxury housing market, which has been the Company's primary
target niche, has thousands of acres in and around the Hampton area that are
available for development. Based upon prior experience, the Company expects that
its entry into the market for this usable acreage which is spread in various
size pockets throughout the Hampton area, will not be a problematic. The Company
will not only continue to invest in properties that are scattered throughout the
Hampton area but in markets that are more concentrated and are experiencing
residential, industrial and/or commercial growth i.e. Western Suffolk County and
Nassau County, New York. The Company feels that it has limited competition from
a few large and small real estate developers.
Since there is significant customer concentration to high net worth individuals
who are for the most part impervious to economic conditions, the Company does
not expect to experience any significant sales volatility. The Company is also
focusing on delivering more moderately-priced homes with similar gross profit
margins as its higher-priced homes. The Company expects to purchase larger
tracts of land at substantially lower costs per acre than it has historically
paid so that it can deliver more homes to at least have a similar impact on its
operating results than the Company's higher-end products. At the same time, the
Company will be expanding its appeal to customers seeking not only second
vacation homes, but affordable primary homes as well.
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The Company expects to expand into commercial and residential management,
construction supervision and consulting services all of which it will access
primarily through reputation and referrals. Management feels that special
projects requiring such services are readily available. In addition, the Company
intends to purchase additional rental units to add to its portfolio in order to
maintain cash flow during slow periods.
The Company prices its products on a cost plus basis.
For the six months ended June 30, 1996 and 1995
Results of Operations
Revenues for the six months ended June 30,1996 were $688,919 compared to
revenues of $2,058,642 for the six months ended June 30, 1995, a decrease of
approximately $1,370,000 or 67%.
Revenues
The Company delivered one home, which generated approximately $485,000 of
revenue, during the six months ended June 30, 1996. The balance of homes were in
inventory and under construction. For the six months ended June 30, 1995, the
Company delivered six homes which generated $1,972,196 of revenue. For the six
months ended June 30, 1996, the Company received proceeds of $52,000 from the
sale of land previously held for development. The Company generated no such
sales in the six months ended June 30, 1995. The Company received revenues of
$6,473 and $6,550 for construction extras for the six months ended June 30, 1996
and 1995, respectively. The Company has moved into the commercial construction
market and is concentrating its residential inventory toward the upscale market.
In addition, the Company has grown into a construction management firm, and
accordingly it has received a management fee to supervise the construction of a
project. The Company's first commercial construction venture included the
completion of the Hamptons Synagogue in Westhampton Beach. This initial
commercial construction venture has given the Company publicity towards
successfully entering this market with plans to secure future commercial
ventures. In addition, the Company has grown into a construction management firm
where the Company receives a management fee to supervise the construction of a
project. The construction management fee of $50,000 was the only source of
revenue generated from the project [See "Construction Management"].
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Construction Management Revenue
Construction management services for the six months ended June 30, 1996
generated $50,000 compared to $-0- generated for the six months ended June 30,
1995. This increase reflects a contract secured by the Company to perform
construction management supervision for a 14 unit condominium development in
Westhampton. Construction management supervision is consistent with the
Company's plans to emerge as a full service real estate development company. The
Company is currently pursuing additional construction management projects for
future development.
Gross Profit Margin
The Company's overall gross profit margin was 25% for the six months ended June
30, 1996 as compared to 20% for the six months ended June 30, 1995. The
Company's gross margin on homes delivered decreased from 17% to 11% due to an
increase in the cost of completing the one home delivered in the six months
ended June 30, 1996. The cost of land held for development exceeded the sales
proceeds which caused a decrease in the gross profit. However, an increase in
rental income of approximately 19%, due primarily to an increase in the rental
income of Quick Storage, Inc. in the six months ended June 30, 196 as compared
to the six months ended June 30, 1995, and increase in management fee income
[see "Construction Management Revenues"] from $-0- in the six months ended June
30, 1995 to $50,000 in the six months ended June 30, 1995 caused the Company's
overall gross profit margin to increase. Gross profit decreased to $172,652 rom
$418,611 primarily due to the decrease in the number of homes delivered in the
six months ended June 30, 1996 as compared to the six months ended June 30,
1995.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses increased to $314,681
for the six months ended June 30, 1996, compared to $160,879 for the six months
ended June 30, 1995. The increase of approximately $154,000 is principally due
to the addition of key employees to the Company and increased salaries for
certain other employees.
Charge for Executive Compensation Capitalized
The fair value of services provided by an executive was $26,250. Of such amount
$11,500 was paid and included as an expense for the period. The difference of
$14,750 was capitalized.
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Income from Operations
The Company's (loss)gain from operations for the six months ended June 30, 1996
and 1995 was $(156,759) and $257,732, respectively. The decrease in results from
operations of approximately $414,000 is primarily due to an increase in Selling,
General and Adminstrative Expense of approximately $154,000 and a decrease in
the gross profit of approximately $246,000 [see "Gross Profit and Selling,
General and Administrative Expense'].
Other Income Expense
Included in other income [expense] during the six months ended June 30, 1996 is
$41,364 which represents gains on sale of marketable securities. Also included
in other income [expense] during the first six months of 1996 is $13,036
representing unrealized gains on marketable securities, compared to gains on the
sale of marketable securities of $103,658 of unrealized losses on marketable
securities $(51,359)during the six months ended June 30, 1995. The Company
realizes the real estate industry is highly speculative. Land values and/or home
prices may fluctuate significantly, and the rate of home sales can be slow. The
Company's building activities have centered in the Hamptons resort area in
Eastern Long Island, New York, where the bulk of the market consists of vacation
homes. The Company has already begun to expand into other areas of the real
estate industry [rental properties, primary residences, construction management
and commercial construction projects]. The Company has acquired key personnel
with the requisite skills, contacts and experience to successfully expand into
these areas within the real estate field. The Company will seek out additional
opportunities to construct, manage and/or invest in family communities, shopping
centers, industrial parks, congregate care facilities and other income producing
properties. The Company's belief that investing in income producing properties
will ensure a stable growth for the future should adverse market conditions
arise.
Pro Forma Net [Loss]
Pro forma net [loss] gives effect to income tax considerations assuming that
each of the subsidiary entities had been a "C" Corp. for the period January 1,
1996 to February 29, 1996. Since each of the subsidiary entities was an "S"
Corp. and that period no provision for income taxes was necessary. Although,
each of the subsidiary entities became "C" Corps on March 1, 1996 no charge in
lieu of income taxes was deemed necessary for the period January 1, 1996 to
February 29,1996 as the amount was deemed immaterial.
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Liquidity and Capital Resources
At June 30, 1996 and 1995, the Company had cash of $1,747 and $40,944,
respectively.
The Company generated $659,156 from operating activities for the six months
ended June 30, 1996 as compared to $169,671 generated from operating activities
for the six months ended June 30, 1995. The overall net increase of
approximately $490,000 is substantially attributable to an increase of $452,349
of customer deposits, and increase in the change of $426,214 in accounts payable
and accrued expense balances, $376,026 generated by the sale of marketable
securities offset by a $425,064 reduction of net income, an increase in the
purchase of marketable securities of $222,548 and a decrease in collections of
contract receivables of $138,782 and costs and profits in excess of billings on
uncompleted contracts of $359,778 due to less homes delivered.
The Company intends to improve its profitability and, therefore, increase the
cash generated from operations, by continuing its strategy from 1995 to
emphasize the construction of higher priced quality homes. Management assesses
on a continuing basis the current lending real estate market and investigates
additional lending opportunities which will improve cash flow or decrease the
cost of existing borrowings. If such available borrowings are deemed to be
advantageous to the Company, management will assemble all necessary information
and provide such data to prospective lenders and begin the process of
negotiating such refinancing.
For the six months ended June 30, 1996 and 1995, $1,093,512 and $151,454,
respectively, were utilized for investing activities. The overall net increase
in the utilization of cash of $942,058 is substantially attributable to a
$787,361 increase in the utilization of cash for land and construction costs, a
$204,727 increase in payments offset by no acquisition for $150,000 of Quick
Storage in 1995.
For the six months ended June 30, 1996, the Company generated $420,664 from
financing activities as compared to $20,811 used for financing activities for
the six months ended June 30, 1995. The overall net increase in the cash
generated by financing activities of $441,475 was substantially attributable to
$500,000 generated by a private placement offset by $65,419 of distributions to
a shareholder.
At June 30, 1996, the Company had notes and loans payable of $864,800, mortgages
payable of $1,253,493, accounts payable and accrued expenses of $972,124 and
customer deposit of $549,849. The Company intends to repay notes payable and
mortgages payable totaling $1,068,048 out of the proceeds of the proposed public
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offering. This amount includes $928,180 which is included in current liabilities
at June 30, 1996. Although the proposed offering is on a firm commitment basis,
the Company believes that through alternatives such as cash generated from
operations, the refinancing of short-term debt by extending the due dates, or
loans from the Company's principal stockholder, the Company will be able to meet
its short-term liquidity needs. Although, the Company intends to utilize one or
more of these alternatives if the proposed public offering is not timely
completed, there is no assurance that the Company will be successful in
utilizing any or all of these alternatives.
The Company believes that its long-term liquidity needs will be satisfied
through cash generated from operations, the refinancing of long-term debt and
through equity financing resulting from the proposed public offering.
Going Concern
The Company's accountants issued a modified going concern opinion to the
December 31, 1995 financial statements based upon a working capital deficit at
December 31, 1995 of approximately $1,200,000.
The Company's financial statements for the year ended December 31, 1995, have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. The continuation of the Company as a going concern is dependent upon
its ability to generate sufficient cash from operations and financing
activities. The Company's working capital deficit raises substantial doubt about
the entity's ability to continue as a going concern. Management's viable plans
include the following:
1. To generate additional equity financing through a private placement
with proceeds of approximately $500,000 [See Note 10 to the Financial
Statements].
2. To close a proposed public offering for common stock with anticipated
net proceeds of approximately $3,451,875 and satisfy certain
outstanding obligations with the net proceeds of this offering [See
Note 11A to the Financial Statements].
3. To continue to investigate additional lending opportunities with more
favorable terms and more specifically to take advantage of lower
interest rates and refinance properties that currently having floating
rate mortgages.
4. To expand into other areas of the real estate market such as
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the commercial market. The Company has acquired key personnel with the
requisite skills, contracts and experience to successfully expand into
commercial and residential management, construction supervision and
consulting services. The Company intends to access these markets by
advertisements, reputation and referrals. The Company's first
commercial construction venture included the completion of the Hampton
Synagogue of Westhampton Beach.
5. To seek opportunities to acquire income producing properties
which would include apartment buildings, shopping centers,
industrial parks, office buildings and other income
producing properties. Management believes that investing in
income producing properties will enable the Company to
generate sufficient residual income in the future to fund
the Company's operating expenses should adverse market
conditions arise.
Management believes that these plans can be effectively implemented in the next
twelve months. There can be no assurances that management will be successful in
these endeavors. The Company's ability to continue as a going concern is
dependent on the implementation and success of these plans. The financial
statements do not include any adjustments in the event the Company is unable to
continue as a going concern.
The years ended December 31, 1995 and 1994
Total revenues for the year ended December 31, 1995 were $2,323,524 compared to
revenues of $4,518,872 for the year ended December 31, 1994, a decrease of
approximately $2,200,000 or 50%.
Construction Sales. Deliveries of 6 homes resulted in housing revenues of
$2,065,126 for the year ended December 31, 1995. For the year ended December 31,
1994, the Company delivered 14 homes which generated $4,449,827 of housing
revenues. Housing revenues in 1995 decreased $2,384,701. The Company's plan is
to move into the commercial construction market and concentrate its residential
inventory toward the upscale market. Although, fewer homes were delivered in
1995 than in 1994 the gross profit margin increased [see gross profit margin].
The Company's first commercial construction venture includes the completion of
The Hamptons Synagogue in Westhampton Beach in 1994 which generated $650,000 in
additional revenues for the year ended December 31, 1994. This initial
commercial construction venture has given the Company publicity towards
successfully entering this market with plans to secure future commercial
ventures. In addition, the Company has grown into a construction management
firm, where the Company receives a management fee to supervise the construction
of a project. The decrease in the home delivered for 1995 (6),
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compared to 1994 (14) reflects the Company's construction management contract to
complete a 14 unit condominium project in Westhampton, whereby the sales
revenues have been deferred. The construction management fee of $75,000 was the
only source of revenue generated from the project [see "Construction Management
Revenues"].
Rental Income. Acquisition of additional rental based properties resulted in
rental income of $183,398 for the year ended December 31, 1995. For the year
ended December 31, 1994, the Company generated rental income of $69,045. Rental
income in 1995 increased by $114,353 which reflects the acquisition of Quick
Storage At Quogue, a self storage facility with 111 units. This facility
generated rental income for $113,905 for the year ended December 31, 1995. The
Company plans to expand the existing facility by purchasing and constructing on
the acquisition of rental based properties.
Construction Management Revenue. Construction Management Services for the year
ended December 31, 1995 generated $75,000 compared to $-0- generated for the
year ended December 31, 1994. This increase reflects a contract secured by the
Company to perform construction management supervision for a 14 unit condominium
development in Westhampton. Construction management supervision is consistent
with the Company's plans to emerge as a full service real estate development
company. The Company is currently pursuing additional construction management
projects for future development.
Gross Profit Margin. The Company's gross profit margin on homes delivered was
approximately seventeen percent [17%] during the year ended December 31, 1995,
compared to four percent [4%] in the year ended December 31, 1994. The gross
profit margin on homes increased due to the quality and pricing of the homes
built in 1995. In 1995, the Company positioned itself in the upscale market
segment. As a result, the number of homes decreased in 1995 from 1994 but the
gross profit margin increased substantially.
Selling, General and Administrative Expenses. The Company's selling, general and
administrative expenses increased to $367,498 [16% of Revenues] for the year
ended December 31, 1995, compared to $239,791 [5% of revenues] for the year
ended December 31, 1994. The increase percentage is principally due to the
reduction of revenue for the year ended 1995, the addition of Key Employees an
the acquisition of Quick Storage at Quogue [a self storage facility] which
produced $54,770 of selling, general and administrative expenses for the year
ended December 31, 1995.
Charge for Executive Compensation Capitalized. The $105,000
represents the fair value of services provided for executive
compensation that would have been paid had the Company chose to
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do so.
Income from Operations. The Company's income from operations for the years ended
December 31, 1995 and 1994 was $131,710 and $1,260, respectively. This increase
of $130,450 is primarily attributable to the improved gross profit in 1995 of
approximately $363,000.
Gross Interest Costs. Gross interest costs were $157,678 for the year ended
December 31, 1995 compared to $51,470 for the year ended December 31, 994. The
increase in gross interest cost for the year ended 1995 resulted from the
acquisition of Quick Storage at Quogue [a self storage facility], Polo Grounds
[12 units subdivision] and other real estate ventures whereby additional debt
was incurred upon acquisition.
Other [Income] Expense. Included in other [income] expense in 1995 is $(245,022)
which represents gain on sale of marketable securities, compared to $(281,767)
for the year ended December 31, 1994. the Company realizes that the real estate
industry is highly speculative. Land values and/or home prices may fluctuate
significantly, and the rate of home sales can be slow. The Company's building
has centered in the Hamptons resort area in Easter Long Island, New York, where
the bulk of the market consists of vacation homes. The Company has already begun
to expand into other areas of the real estate industry [rental properties,
primary residences, construction management and commercial construction
projects]. The Company has acquired key personnel with the requisite skills,
contracts and experience to successfully expand into these areas within the real
estate field. The Company will seek out additional opportunities to construct,
manage and/or invest in family communities, shopping centers, industrial parks,
congregate care facilities and other income producing properties. The Company's
belief that investing in income producing properties will insure a stable growth
for the future should adverse market conditions arise.
Pro Forma Net Income. Pro forma net income gives to income tax consideration
assuming that each of the subsidiary entities had been a "C" Corp. For the year
ended December 31, 1995. Since each of the subsidiary entities was an "S" Corp.
No provision for income taxes was necessary. In accordance therewith, an
estimated pro forma income charge of $94,903 gave effect to an income tax
provision had each of the subsidiaries been a "C" Corp rather than an "S" Corp.
Upon the conversion of each of these subsidiaries to a "C" Corp., a provision
for income taxes will be reflected in net income.
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BUSINESS
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The Harmat Organization, Inc. ("Harmat" or "Company"), a Delaware corporation,
has, through its wholly owned subsidiary Harmat Homes, Incorporated ("Harmat
Homes"), been engaged in real estate development and construction in the
Hamptons resort area of Long Island, New York ("Hamptons") for the past eleven
years. The Company develops large multi-parcel projects, builds custom
single-family homes and rental properties as well as commercial/public
structures such as the Hamptons Synagogue in Westhampton Beach. Harmat also
provides remodeling, design and landscape architectural services. The Company
will build on either land owned or provided by the client or on land owned or
controlled by entities affiliated with the Company. To date, the Company has
built approximately 150 single-family homes as well as rental properties, a
short-term storage facility and commercial properties.
To date, the Company's strategy for growth has been to integrate the foregoing
services into a "turn key" business which can offer its customers the
convenience of obtaining all of the necessary elements and services regarding
the purchase and maintenance of a home, including the land, architectural,
interior and landscape design services, construction of a home, swimming pool or
tennis court, and maintenance of the property. The Company believes that it has
carved a niche for itself as one of the premier full-service builder/developers
in the western portion of the Hamptons.
Since Harmat Homes' inception in 1985, the Company's founder and principal
shareholder, Matthew C. Schilowitz, has sought to not only provide construction
services through the Company but also to invest in real estate development
ventures by purchasing large parcels of real property for development. To date,
the majority of such investments have been made by Mr. Schilowitz individually,
as a general partner, joint venturer or principal stockholder of a corporation.
Mr. Schilowitz has been able to invest in the majority of such properties using
private non-recourse financing with only a modest down payment on the purchase
price. This type of financing is attractive because the investor is often able
to recoup its cash investment after selling only a small number of lots while
being able to market the balance with minimal exposure. The Company believes
that such sources and terms of financing will be available for future projects,
although no assurances can be given that this will be the case.
These projects have involved the construction of single-family
homes as well as the development and construction of luxury
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properties where each home has its own swimming pool and tennis court. Such
developments have included "Hidden Cove" in Southampton (12 lots, all of which
have been sold); "Woodridge" in Bridgehampton (52 lots, 32 of which have been
sold); "The Woodlands" (52 lots, 37 of which have been sold) and "The
Crossings," (14 lots, 12 of which have been sold) each in East Quogue; "Emerald
Woods" in East Quogue (14 lots, 12 of which have been sold) and "The Fairways"
in Westhampton Beach (6 lots, 4 of which have been sold). All of these projects
are located in prime areas where the bulk of the lots abut either a nature
preserve, golf course or farm land. The Company also anticipates performing
construction services for the "Bridal Path" development in Westhampton. The real
property for all of the foregoing projects is owned by entities affiliated with
the Company.
The Company has built homes ranging in price from $200,000 to $2,000,000. While
the bulk of the homes built in the Hamptons are vacation homes, the Company
believes that approximately 25% of its clients live in their homes on a
year-round basis.
Strategy
Harmat is now seeking to expand, by providing first class construction, design
and homeowner and management services to not only residential buyers but to a
broad array of commercial clients as well.
For example, the Company is considering developing or investing in luxury
single-family developments, senior citizen condominium units and undeveloped
real property (including oceanfront acreage) in such areas as western Suffolk
County, the Hamptons, Florida and the Washington, D.C./Maryland area that
management believes provide attractive opportunities. The Company further
believes that it could obtain financing similar to that used in its previous
projects, (i.e. a modest down payment and no recourse against the Company) and
that such projects would enhance its growth. Furthermore, Management of Harmat
is of the opinion that all of such potential projects involve lots in prime
locations where homes (or commercial buildings) could be sold or leased
profitably within a reasonable amount of time, although no assurances can be
given that such transactions will be consummated or that any sales or leases
thereunder will occur within any particular time frame. Depending on the
project, the Company may either simply build model homes or may be required to
put in the required infrastructure such as roads, etc. It is presently
contemplated that the Company would receive a management fee and construction
fees for services provided for such projects, although no assurances can be
given that such fees will be paid or that such ventures will be profitable. The
Company may also make construction loans to either its affiliates or to third
parties during the course of such projects.
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The Company also intends to expand into the commercial real estate field
including income producing properties and will therefore aggressively seek out
opportunities to construct, manage and/or invest in shopping malls, motels, golf
courses, industrial parks and other income-producing properties. The Company
believes that its officers and directors have the requisite skills, contacts and
experience to successfully enter this field, but no assurances can be given that
such goals will be achieved or that any of Harmat's future real estate
investments will be profitable.
Competition
The Company believes that it is one of the larger, more sophisticated builders
in the western Suffolk County area. Unlike smaller local builders, the Company
maintains a permanent sales office and has a registered architect on staff to
supervise construction and work with clients who request such services. The
construction business is highly competitive, however, and the Company is aware
of many builders who are able to meet or improve upon a price the Company can
offer its clients for a given construction project. The Company seeks to compete
not solely on the basis of price, but on the ability to provide integrated
quality real estate, design and construction services under one roof. No
assurances can be given that this strategy will enable the Company to compete
successfully.
Employees
The Company has five full-time employees, 3 in management and 2 in clerical.
Since 1990, Harmat has not employed a full-time construction staff but has hired
skilled non-union local labor on a per-project basis. The Company believes that
its relationships with its employees and its sub-contractors are good, and that
the supply of skilled labor in the area is adequate for its needs.
Properties
The Company's wholly-owned subsidiaries hold title to certain real property.
Such properties include (i) The Polo Grounds, a development with 12 one acre
lots in Southampton, New York, each building lot contains room for house with
all amenities, pool and tennis court; three of the lots have been built upon and
sold; (ii) 2 single-family residential rental properties in the Hamptons; one
six bedroom home in Westhampton Beach, New York with eight horse stalls and the
other an 8 bedroom house in Southampton, New York both rented on an annual
basis; (iii) three acres of unimproved real property in Westhampton, NY; (iv)
the 4,000 square foot premises in Quogue, NY housing the Company's
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executive offices and corporate sales office, which the Company believes is
adequate for its foreseeable needs; and (v) a 115,000 square foot mini-storage
facility in Quogue, NY., which the Company expects to expand on adjacent
property.
The Company issued 1,750,000 shares of its common stock to Mr.
Schilowitz upon transfer of the stock of the corporations holding
title to the foregoing properties. See "Certain Transactions."
The Company currently has the following projects under contract:
(A) Jagger Woods at Westhampton Beach, N.Y. - A 41 acre parcel
with approvals to construct 57 single family residences on 1/2
to 3/4 acre parcels complete with the following amenities:
(community pool, tennis court and clubhouse). Homes will range
between 1,271 and 2,160 square feet.
(B) Two 1 1/2 acre building lots with all road improvements
completed located in East Quogue, N.Y., - The lots will be
marketed whereby the Company shall construct a single family
house complete with pool and tennis court.
(C) Vacant parcel located adjacent to the Company's mini storage
facility in Quogue, N.Y. The Company intends to develop this
property to expand its current facility by constructing 5,000
additional square feet of specialized storage.
Seasonality
The Company generally experiences an increase in revenues in the fall when it
commences the majority of its construction projects, and a decrease in revenues
during the summer, when it does most of its marketing and in the winter, when
adverse weather may make construction difficult. The Company`s projects usually
begin in the fall with most sales completed in the spring and early summer. The
Company sometimes obtains bridge loans to cover construction costs and utilizes
its rental income from apartments and the storage facility to cover its overhead
during slow periods.
Licensing
The Company does not require any State or County license or permits to perform
services as a general contractor, but does require (and possess) a home
improvement license from the Town of Southampton.
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Government Regulation
In the construction business, the Company is required to meet and satisfy both
State and local building and zoning regulations as well as State and local
environmental regulations. Prior to the commencement of construction building
plans must be approved which show full compliance with all applicable rules and
regulations. In addition, building permits are needed. To date, the Company has
had no problems in meeting and satisfying such requirements and in obtaining all
permits that it needs for its projects.
Litigation
In January, 1994, Harmat commenced an action in the Supreme Court of the State
of New York, County of Suffolk, against a former client seeking lost profits in
an undetermined amount for wrongful termination of a construction contract.
Harmat also filed a mechanic's lien on the property. The defendant
counterclaimed and is seeking rescission of the construction contract, a refund
of their $28,500 contract deposit, and $100,000 in damages for the wrongful
filing of a mechanic's lien. Defendants are also seeking to recover $150,000
against Mr. Schilowitz personally on an alleged personal guaranty of Harmat's
performance. Harmat's motion for summary judgment is pending. In a related
litigation, the subcontractor on this project brought an action against Harmat
and its former client seeking damages of $30,000 for monies owed regarding this
project. The Company does not believe this litigation will have a material
adverse effect on its business. The litigation was settled on June 20, 1996
without cost or liability to the Company.
In May 1996, the Company commenced an action in the Supreme Court,
State of New York, County of Suffolk, against Carl Gasparik seeking specific
performance to close on a purchase of two parcels of land in East Quogue, New
York. The Company believes that it has met all conditions of the contract to
close and the Seller has refused to close and the Seller is seeking additional
consideration beyond that which is set forth in the contract. The defendant has
filed an answer denying the allegations of the Complaint.
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MANAGEMENT
- -----------------------------------------------------------------
Directors and Officers
The Executive Officers and Directors of the Company and a brief summary of their
business experience and certain other information with respect to them are set
forth below:
Name Age Title
Matthew C. Schilowitz 32 President, CEO & Chairman
Scott Prizer 33 Secretary & Director
Michael C. Gentile 32 Vice-
President/Construction
Seymour G. Siegel 53 Treasurer & Director
David W. Sass 60 Director
David S. Eiten 36 Director
Matthew C. Schilowitz Mr. Schilowitz founded Harmat in 1985, and
has been its president and chairman since inception. Mr.
Schilowitz has a B.A. in Business Administration from Tulane
University.
Scott Prizer Mr. Prizer became an officer and director of the
Company in July 1995. From 1990 to 1992, he worked as an
investment banker specializing in mergers and acquisitions at
European Investors, Inc. ("EII"). Since 1992, he has worked as a
investment advisor/asset manager in the real estate group of EII.
He is a Vice President of EII an investment advisor with real
estate and securities portfolios, in excess of $800,000,000. Mr.
Prizer has a B.A. from George Washington University and an M.B.A.
from New York University. Mr. Prizer is Mr. Schilowitz' first
cousin.
Michael C. Gentile Mr. Gentile joined the Company in February
1995 and serves as vice-president/staff architect and
construction site manager for all of the Company's projects. Mr.
Gentile has eight years of architectural and design experience in
commercial and high-end residential construction. From July 1990
to June 1991, he worked as a designer for James Gaddis, R.A.
From June 1991 to September 1993 he was project manager for
Fanning Phillips and Molnar, Engineers, and from September 1993
to January 1995, served as project manager for Brockwood
Communities, Inc. Mr. Gentile earned a B.A. in architecture from
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New York Institute of Technology.
Seymour G. Siegel Mr. Siegel became a director of the Company in
July 1995. Mr. Siegel is a CPA and from 1969-1990 was senior
partner and founder of Siegel Rich & Co. P.C. ("Siegel Rich"), an
accounting firm specializing in privately owned businesses and
high net worth individuals. In 1990, Siegel Rich merged with
M.R. Weiser & Co. Mr. Siegel stayed on as a senior partner until
1994, when he co-founded Siegel Rich Incorporated, a firm
providing advisory services to businesses regarding mergers and
acquisitions, long-range planning and problem resolution. Mr.
Siegel is a director of the Oak Hall Capital Fund and Prime Motor
Inns, L.P.
David W. Sass Mr. Sass has been a director of the Company since July 1995. For
the past 35 years, Mr. Sass has been a practicing attorney in New York City and
is currently a senior partner in the law firm of McLaughlin & Stern, LLP,
counsel to the Company. Mr. Sass is a director and officer of J.E.C. Lasers,
Inc., a public company engaged in various aspects of the laser business; a
director and officer of Carter, Milchman & Frank, Inc., a company in the
wholesale distribution of tools and related building equipment; an officer of
Ionic Fuel Technology, Inc., a company engaged in the sale and distribution of
emission control systems, and a member and Vice Chairman of the Board of
Trustees of Ithaca College.
David S. Eiten Mr. Eiten became a director of the Company in
January 1996. From 1990 to the present he is the owner and
operator of a residential and commercial construction company.
From 1986 to 1990 he was Vice President of Field Operations for
the Company.
Executive Compensation
Summary Compensation Table. The following table sets forth the aggregate cash
compensation paid for services rendered to the Company during each of the
Company's last three fiscal years by all individuals who served as the Company's
Chief Executive Officer during the last fiscal year and the Company's most
highly compensated executive officers who served as such during the last fiscal
year.
Long-Term Compensation
Annual Compensation Awards
Other Annual Restricted
Name and Compensation Stock
Principal Position Year Salary($) Bonus ($) Awards($)
---- --------- ----- ------------ ----------
Matthew Schilowitz(1)(2) 1995 197,000
Chief Executive Officer, 1994 217,000
Chief Financial Officer 1993 154,000
Payouts
All
Other
Name and Options LTIP Compen-
Principal Position Year SARs Payouts(#) sation($)
---- --------- ----- ------------ ----------
Matthew Schilowitz(1)(2) 1995
Chief Executive Officer, 1994
Chief Financial Officer 1993
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- -------
(1) See "Employment Agreement" below for a description of the Company's
employment agreement with Mr. Schilowitz.
(2) During the three years ended December 31, 1995, Mr. Schilowitz received
distributions as the Companies were Sub Chapter S corporations and/or
partnerships and no salary was paid.
(3) For the six months ended June 30, 1996, the Company distributed to
Matthew Schilowitz marketable securities with a fair market value of
$186,400 as additional compensation.
Employment Agreement. On April 1, 1996 the Company entered into a five
year employment agreement which was amended August 3, 1996 with Matthew
Schilowitz, a stockholder, director and officer of the Company (the "Schilowitz
Agreement"). Under the Agreement, Mr. Schilowitz's compensation is $105,000 for
the first year, $155,000 for the second year, $205,000 for the third year,
$255,000 for the fourth year and $305,000 for the fifth year. In addition, Mr.
Schilowitz will receive a bonus of 5% of the pre-tax earnings of the Company in
each fiscal year. See "Other Options or Plans."
The foregoing employment agreement terminates upon death or disability
of the employee and permits the Company to terminate the Schilowitz Agreement
upon the occurrence of certain events or the commission of certain acts or for
any other reason provided that the Company pays to such employee a severance
payment equal to the aggregate base salary otherwise owed to such employee over
the remaining term of the employment agreement (other than for instances in
which such employee is terminated for "cause" as defined in such agreement).
Pursuant to the provisions of his employment agreement in the event that Mr.
Schilowitz is not nominated or re-elected to serve as member of the Board of
Directors, either may terminate his employment with the Company and will, in
such event, be entitled to continue to receive his base salary as set forth in
such employment with the Company for the remainder of the term thereof. The
employment agreement also contains certain confidentiality and non-competition
provisions which are operative during the term of the agreement and for given
periods of time after termination thereof.
Stock Option Plan
In February 1996, the Board of Directors adopted and the Company's
stockholders approved The Harmat Organization, Inc. 1996 Stock Option Plan (the
"Stock Option Plan"), which provides for the grant of options which qualify as
incentive stock options ("Incentive Options") under the Internal Revenue Code of
1986, as amended, to be issued to officers and employees, as well as options
which do not so qualify ("Non-Qualified Options") to be
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issued to the Company's officers, directors, employees and consultants. The
Stock Option Plan provides for the grant of options with respect to, in the
aggregate, up to 400,000 shares of Common Stock (which number is subject to
adjustment in the event of the Company's declaration of stock dividends, stock
splits, reclassification and the occurrence of other similar events). The
Company has reserved 400,000 shares of Common Stock for issuance under the Stock
Option Plan.
Pursuant to its terms, the Stock Option Plan is to be administered by
the Board of Directors or a committee established by the Board of Directors (the
"Stock Option Committee"). The Board of Directors or such committee determines
the persons to whom options are granted, the number of shares of stock subject
to an option, the period during which options may be exercised and the exercise
price thereof. The Stock Option Plan places restrictions on the grant of options
to persons who are, at the time of the grant, members of the Stock Option
Committee and, if no such committee is established, on the grant of options to
directors.
Non-employee directors of the Company may participate in the Stock
Option Plan but may only be granted Non-Qualified Options on a non-discretionary
basis. To date, no options have been granted under the Stock Option Plan.
Other Options or Plans
The Plan for Incentive Compensation of Matthew Schilowitz (the
"Schilowitz Incentive Plan") was adopted by the Board of Directors and approved
by the Company's stockholders on March 1, 1996 and amended August 3, 1996.
Pursuant to such plan, Mr. Schilowitz has been granted an option (the "Option")
to purchase up to an aggregate of 500,000 shares of Common Stock at an exercise
price of $5.75 per share. The Option has a duration of ten years. The Option
provides for the grant of: (i) the right to purchase 250,000 shares of Common
Stock such right to vest and become exercisable upon the Company realizing
annual earnings before taxes equaling or exceeding $750,000; and (ii) the right
to purchase 250,000 shares of Common Stock such right to vest and become
exercisable upon the Company realizing annual earnings before taxes equaling or
exceeding $1,500,000. Shares subject to options granted under the Schilowitz
Incentive Plan are subject to adjustment in the event of the Company's
declaration of stock dividends, stock splits, reclassification and the
occurrence of other similar events. The Company has reserved 500,000 shares of
Common Stock for issuance under the Schilowitz Incentive Plan. Pursuant to the
terms of the Schilowitz Incentive Plan, the Board of Directors or a committee
established by the Board of Directors administers such plan.
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<PAGE>
CERTAIN TRANSACTIONS
Mr. Schilowitz has interests, either as a general partner, joint venturer or
shareholder, in a number of entities which either have entered, or may in the
future enter, into a variety of transactions with the Company. In addition,
entities owned or controlled by Mr. Schilowitz own interests in various real
estate ventures which may retain the Company as a builder for such developments.
The following table sets forth the name of each of the Company's
affiliates, Mr. Schilowitz' interest therein, and its
transactions (either current or contemplated), if any, with the
Company:
Company Name Mr. Schilowitz' Interest Transactions
Woodlands Construction
Corp. LLP 50% shareholder Woodlands provides
contracting services on
small jobs - Woodlands
owns no property. It is
possible that the Company
may provide services to
Woodlands in the future.
Crossings Associates, L.P. 1/9th interest
Services The Crossings had a 14
lot subdivision. There
are only 2 available
lots. The Company may
provide construction
services to the crossings
in the future.
Emerald Woods Dev. Corp. 50% shareholder
Services
Emerald had a 14 lot
subdivision. There are only 3
available lots. The Company
may provide construction
services to Emerald in the
future.
Fairways at Westhampton, Inc. 50% shareholder
Services Fairways had 6 building
lots. All Lots have been
sold. Fairways owns no
other property.
Bridal Path Development Corp. 50% shareholder
Services Bridle Path had a 14 lot
subdivision. There are 13
available lots. The
company may provide
construction services to
Bridle Path in the
future.
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<PAGE>
Company Name Mr. Schilowitz' Interest Transactions
Woodland Development
Association, a partnership 1/9th interest Woodland owns 3
building lots
located in East
Quogue, N.Y. The
Company may
provide
construction to
Woodland in the
future.
Woodland Pines Associates,
a partnership Joint Venture Woodland Pines owns 10
building lots located in
East Quogue, N.Y. The
Company may provide
construction to Woodland
Pines in the future.
The Company issued 1,750,000 shares of its Common Stock to Mr. Schilowitz in
connection with the transfer to the Company of all of the issued and outstanding
stock of Harmat Homes, Inc. a construction and sales company; Harmat Capital
Corp. which owns the corporate headquarters, and vacant l and in Southampton,
New York and Southold, New York; Northside Woods, Inc., which owns rental
property in Westhampton, New York; Harmat Holding Corp., which owns the
subdivision known as the Polo Grounds; Harmat Organization Inc., which owns an
interest in Woodland Development Associates, a partnership; and a fifty percent
interest in Quick Storage of Quogue, Inc. which owns the storage facility in
Quogue, New York. The Company has a contract to purchase the remaining 50%
interest from unrelated parties for a purchase price of $150,000.
At the request of the Underwriter, Mr. Schilowitz has made a capital
contribution to the Company of 500,000 shares reducing his holding to 1,250,000
in lieu of an earnout escrow of 750,000 shares.
All transactions between the Company and its affiliates will be reviewed solely
by the Company's outside directors, who will determine the value of any services
provided by the Company for any affiliated entity. All sums received by the
Company will be equivalent to those granted by unrelated third parties.
The Company is indebted to Mr. Schilowitz in the amount of $127,000 bearing
interest at 7% due December 31, 1996 representing advances made by Mr.
Schilowitz on behalf of the Company, which will not be repaid by the Company
from the proceeds of the Offering.
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The Company borrowed from affiliated persons an aggregate of $240,000 as
follows: $20,000 from Sidney Prizer, the grandfather of Matthew Schilowitz, the
President of the Company, which loan bears interest at 6% per annum, matures on
December 31, 1996 and will be repaid from the proceeds of this offering; $70,000
from the mother of Matthew Schilowitz, which loan bears interest at 8% per annum
and matures on December 31, 1996 and will be repaid from the proceeds of this
offering; $150,000 payable to three former owners of Quick Storage of Quogue,
Inc. in connection with the purchase by the Company of such persons 50% interest
in such company.
All of the Company's mortgages on the properties that it owns are personally
guaranteed by Matthew Schilowitz, the President of the Company. The Company has
agreed to indemnify Mr. Schilowitz against any liability with respect to such
guarantees.
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<PAGE>
- -----------------------------------------------------------------
PRINCIPAL STOCKHOLDERS
- -----------------------------------------------------------------
The following table provides, on a pro forma basis, information as of August 15,
1996 concerning officers and directors as a group as well as each person who
beneficially owned more than five (5%) percent of the Company's outstanding
common shares.
Name and Address of Common Shares Percentage Percentage
- ------------------- -------------
Beneficial Owner Beneficially Owned Before Offering After Offering
Matthew C. Schilowitz 1,250,000(1) 71.4% 50%(2)
c/o Harmat Homes Inc.
P.O. Box 539
Quogue, NY 11959
Scott Prizer -0- * *
145 W.67th St.
New York, NY 10023
Seymour G. Siegel -0- * *
c/o Siegel Rich Resources, Inc.
1180 Avenue of the Americas
New York, NY 10036
David W. Sass -0- * *
c/o McLaughlin & Stern, LLP
260 Madison Ave.
New York, NY 10016
David S. Eiten -0- * *
7 Thorngrove Lane
Dix Hills, New York 11746
Dr. Irving Kraut (3) 250,000 14.3% 10%
740 River Road
Trenton, New Jersey 08628
Martin Rothstein (3) 200,000 11.4% 8%
c/o Model Marketing
39 West 19th Street
New York, New York 10011
All officers and directors 1,250,000 71.4% 50%
as a group (5 persons)
- ------------------
* No shares owned.
(1) Includes 750,000 shares of Common Stock which are included
in the Registration Statement, of which this Prospectus is a
part to be sold by Mr. Schilowitz as part of the alternate
prospectus. See "Certain Transactions" and "Selling
Stockholders".
(2) Does not give effect to the sale of 750,000 which Mr.
49
<PAGE>
Schilowitz proposes to sell through the alternate prospectus after the
18 month lock-up to which such shares are subject.
(3) Assumes all shares are sold after the public offering. Does not
included 1,000,000 shares issuable upon exercise of the Series A
Warrants and Series B Warrants owned by Dr. Kraut nor 800,000 shares
issuable upon exercise of the Series A Warrants and Series B Warrants
owned by Mr. Rothstein.
SELLING STOCKHOLDERS
In addition to the Common Stock, the Registration Statement, of which
this Prospectus forms a part, also covers the registration of an aggregate of
(i) 1,250,000 shares of Common Stock and (ii) 2,000,000 shares of Common Stock
issuable upon the exercise of 1,500,000 Series A Warrants and 500,000 Series B
Warrants. The Company will not receive any proceeds from the sale of these
shares. The costs of qualifying these 1,250,000 shares of Common Stock under
federal and state securities laws, together with legal and accounting fees,
printing and other costs in connection with this offering, will be paid by the
Company.
The 1,250,000 shares of Common Stock registered in the Registration
Statement, of which this Prospectus forms a part, pursuant to an agreement with
the Underwriter, may not be sold for eighteen months from the date of this
Prospectus, subject, however, to earlier release at the sole discretion of the
Underwriter. Such shares are being registered for resale purposes only and will
be offered pursuant to an alternate prospectus. See "Underwriting."
In addition to the 1,250,000 shares of Common Stock, the Registration
Statement, of which this Prospectus forms a part, also covers the registration
of 2,000,000 shares issuable upon exercise of the Series A Warrants and Series B
Warrants issued in a private placement. Such warrants and the underlying shares
are registered for resale purposes only and will be offered pursuant to an
alternate prospectus. See "Description of Securities" for the terms and
conditions of the Common Stock, the Series A and the Series B Warrants. All of
the securities issued in the private placement are being registered in the
Registration Statement, of which this Prospectus forms a part. Accordingly, that
part of the securities issued in the private placement being registered for
resale by such persons are the shares of Common Stock and the Series A Warrants
as well as the Common Stock issuable upon exercise of the Series A and Series B
Warrants. Pursuant to an agreement with the Underwriter, 1,250,000 shares of
Common Stock held by the Selling Stockholders and the shares of Common Stock
issuable on exercise of the Series A and Series B Warrants may not be sold until
eighteen months from the date of this Prospectus, subject, however, to earlier
release at the sole discretion of the Underwriter. The certificates representing
the
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<PAGE>
1,250,000 shares of Common Stock of the Selling Stockholders, as well as the
shares of Common Stock issuable on exercise of the Series A and Series B
Warrants will have legends affixed setting forth such restrictions. The
Underwriter may release these securities from this eighteen month restriction at
any time after all securities subject to this offering have been sold. See
"Underwriting." The resale of securities by the Selling Stockholders are subject
to prospectus delivery and other requirements of the Securities Act. Sales of
these securities, or even the potential for such sales at any time, would likely
have an adverse effect on the market prices of the Common Stock. The Company
will not receive any proceeds from the sale of the securities of the Selling
Stockholders. See "Description of Securities ." If all of the Series A Warrants
and Series B Warrants issued in the private placement are exercised, of which
there is no assurance, the Company will receive the gross proceeds therefrom
aggregating up to an addition $10,500,000.
Set forth below is a list of the Selling Stockholders and the number of
shares of Common Stock owned which are being registered pursuant to the
Registration Statement, of which this Prospectus
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<PAGE>
forms a part:
Number of Number of Shares
Shares Owned Registered but
Before Subject to 18 Number of Shares Percentage
Offering Month Owned After Owned After
Restriction Offering Offering (3)(7)
Name (1)
Matthew
Schilowitz(2)) 1,250,000 750,000 500,000 20%
Dr. Irving
Kraut (4) 250,000 250,000 -0- -
Martin
Rothstein (5) 200,000 200,000 -0- -
Alan & Rita
Robinson (6) 50,000 50,000 -0- -
TOTAL
- -------------------------
(1) The persons named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned
by them, except as otherwise indicated.
(2) The Company's President and Chief Executive Officer.
(3) Does not give effect to: (a) 2,000,000 shares issuable upon exercise of
the Series A and Series B Warrants issued in the private placement; (b)
75,000 shares of Common Stock issuable upon exercise of the
Underwriter's Purchase Option; (c) the Over-Allotment Options; and (d)
any Employment Options. See "Description of Securities", "Certain
Transactions", "Underwriting" and "Management - Employment Agreement".
(4) Does not include 1,000,000 shares issuable upon exercise of the Series
A and Series B Warrants.
(5) Does not include 800,000 shares issuable upon exercise of the Series A
and Series B Warrants.
(6) Does not include 200,000 shares issuable upon exercise of the Series A
and Series B Warrants.
(7) Assumes (i) each investor sells all shares of Common Stock acquired
upon exercise of the Series A and Series B Warrants and (ii) no
additional securities of the Company are acquired.
After making the investment in the private placement, the investors did
not own, nor did any of them have any right to acquire, any other securities of
the Company. None of the investors were affiliated with the Company at the time
of making their investment, at the time of this offering, or at any other time.
Plan of Distribution
Subject to the eighteen month restriction on the offer and sale for
1,250,000 shares, the Common Stock issuable on the exercise of the Series A and
Series B Warrants, the securities
52
<PAGE>
offered hereby may be sold from time to time directly by the Selling
Stockholders. Alternatively, the Selling Stockholders may, from time to time,
offer such securities through underwriters, dealers and/or agents. The
distribution of securities by the Selling Stockholders may be effected in one or
more transactions, privately-negotiated transactions or through sales to one or
more broker-dealers for resale of such securities as principals, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Stockholders
in connection with such sales. The Selling Stockholders, and intermediaries
through whom such securities are sold, may be deemed "underwriters" within the
meaning of the Securities Act with respect to the securities offered, and any
profits realized or commissions received may be deemed underwriting
compensation.
At the time a particular offer of securities is made by or on behalf of
the Selling Stockholders to the extent required, a prospectus will be
distributed which will set forth the number of securities being offered and the
terms of the offering, including the name or names of any underwriter, dealer or
agent, the purchase price paid by the underwriter for securities purchased from
the Selling Stockholders and any discounts, commissions or concessions allowed
or reallowed or paid to dealers and the proposed selling price to the public.
Under the Securities Exchange Act of 1934, as amended ("Exchange Act")
and the regulations promulgated thereunder, any person engaged in the
distribution of the securities of the Company offered by this Prospectus may not
simultaneously engage in market-making activities with respect to such
securities of the Company during the applicable "cooling off" period (which is
nine days) prior to the commencement of such distribution. In addition, and
without limiting the foregoing, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act, and the rules and regulations
promulgated thereunder, including without limitation, Rules 10b-6 and 10b-7 in
connection with transactions in such securities, which provisions may limit the
timing of purchases and sales of such securities by the Selling Stockholders.
Sales of securities by the Selling Stockholders or even the potential
of such sales, would likely have an adverse effect on the market prices of the
securities offered hereby . Following the closing of this offering, the freely
tradeable securities of the Company ("public float"), including this offering,
will be 750,000 shares of Common Stock not including 1,250,000 shares of Common
Stock owned by the Selling Stockholders and an aggregate of 2,000,000 shares of
Common Stock issuable upon exercise of the Series A and Series B Warrants owned
by the private placement
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<PAGE>
investors, which such securities are not transferable for eighteen months
commencing on the date of this Prospectus or at such earlier date as may be
permitted by the Underwriter, which may release such securities at any time
after all securities subject to this offering have been sold and assuming no
exercise of the Underwriter's Purchase Option or any Employment Options. See
"Descriptions of Securities" and "Underwriting".
DESCRIPTION OF SECURITIES
Common Stock
The Company is currently authorized to issue 25,000,000 shares of
Common Stock, having a par value of $.001 per share of which 1,750,000 are
outstanding prior to the offering contemplated hereby. Each share of Common
Stock entitles the holder thereof to one vote on each matter submitted to the
stockholders of the Company for a vote thereon. The holders of Common Stock: (i)
have equal ratable rights to dividends from funds legally available therefor
when, as and if declared by the Board of Directors; (ii) are entitled to share
ratably in all of the assets of the Company available for distribution to
holders of Common Stock upon liquidation, dissolution or winding up of the
affairs of the Company; (iii) do not have preemptive, subscription or conversion
rights, or redemption or sinking fund provisions applicable thereto; and (iv) as
noted above, are entitled to one non-cumulative vote per share on all matters
submitted to stockholders for a vote at any meeting of stockholders. The Company
has not paid any dividends on its Common Stock to date. The Company anticipates
that, for the foreseeable future, it will retain earnings, if any, to finance
the continuing operations of its business. The payment of dividends will depend
upon, among other things, capital requirements and operating and financial
conditions of the Company.
Preferred Stock
The Certificate of Incorporation of the Company authorizes the issuance
of up to 5,000,000 shares of Preferred Stock, $.001 par value per share. None of
such Preferred Stock has been designated or issued. The Board of Directors is
authorized to issue shares of Preferred stock from time to time in one or more
series and, subject to the limitations contained in the Certificate of
Incorporation and any limitations prescribed by law, to establish and designate
any such series and to fix the number of shares and the relative conversion
rights, voting rights and terms of redemption (including sinking fund
provisions) and liquidation preferences. If shares of Preferred Stock with
voting rights are issued, such issuance could affect
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<PAGE>
the voting rights of the holders of the Common Stock by increasing the number of
outstanding shares having voting rights, and by the creation of class or series
voting rights. If the Board of Directors authorizes the issuance of shares of
Preferred Stock with conversion rights, the number of shares of Common Stock
outstanding could potentially be increased by up to the authorized amount.
Issuance of shares of Preferred Stock could, under certain circumstances, have
the effect of delaying or preventing a change in control of the Company and may
adversely affect the rights of holders of Common Stock. Also, the Preferred
Stock could have preferences over the Common Stock (and other series of
preferred stock) with respect to dividends and liquidation rights.
Series A Redeemable Common Stock Purchase Warrants
Each Series A Common Stock Purchase Warrant entitles the holder thereof
to purchase one share of Common Stock at an exercise price of $6.00 per share
for a period of four years commencing one year after the Effective Date of the
Registration Statement of which this Prospectus forms a part. The exercise price
and/or the exercise date of each Series A Warrant is subject to adjustment under
certain circumstances including, without limitation, the following: (i) the
Company's issuance of Common Stock for less than its fair market value; (ii) the
Company's issuance of a dividend in Common Stock; (iii) the subdivision of
outstanding shares of Common Stock; (iv) the recapitalization or reorganization
of the Company; (v) the merger or consolidation of the Company with or into
another company; and (vi) the sale of all or substantially all of the assets of
the Company. Each Series A Warrant is redeemable upon 30 days prior written
notice by the Company at a redemption price of $.05 per Series A Warrant at any
time after September 8, 1997, provided that the closing bid price of the Common
Stock, as reported by NASDAQ (or such other principal exchange on which the
Common Stock is then quoted), the NASD OTC Electronic Bulletin Board or the
National Quotation Bureau, Inc., as the case may be, equals or exceeds $8.00 per
share for 20 consecutive trading days ending within five days prior to the date
of the Company's notice of redemption. Pursuant to the terms of the Series A
Warrants, the Company has the right, upon 30 days written notice to all holders
of the Series A Warrants and subject to compliance with Rule 13e- 4 under the
Exchange Act (including the filing of Schedule 13E- 4), to reduce the exercise
price and/or extend the term of the Series A Warrants.
Series B Warrants
Each Series B Warrant entitles the holder thereof to purchase one share
of Common Stock at an exercise price of $9.00 per share with respect for a
period of four years commencing 90
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<PAGE>
days after issuance (February, 1996) after the Effective Date of the
Registration Statement of which this Prospectus forms a part. The exercise price
and/or the exercise date of each Series B Warrant is subject to adjustment under
certain circumstances including, without limitation, the following: (i) the
Company's issuance of Common Stock for less than its fair market value; (ii) the
Company's issuance of a dividend in Common Stock; (iii) the subdivision of
outstanding shares of Common Stock; (iv) the recapitalization or reorganization
of the Company; (v) the merger or consolidation of the Company with or into
another company; and (vi) the sale of all or substantially all of the assets of
the Company. Each Series B Warrant is redeemable upon 30 days prior written
notice by the Company at a redemption price of $.05 per Series B Warrant at any
time after September, 1996, provided that the closing bid price of the Common
Stock, as reported by NASDAQ (or such other principal exchange on which the
Common Stock is then quoted), the NASD OTC Electronic Bulletin Board or the
National Quotation Bureau, Inc., as the case may be, equals or exceeds $10.00
per share for 20 consecutive trading days ending within five days prior to the
date of the Company's notice of redemption. Pursuant to the terms of the Series
B Warrants, the Company has the right, upon 30 days written notice to all
holders of the Series B Warrants and subject to compliance with Rule 13e- 4
under the Exchange Act (including the filing of Schedule 13E- 4), to reduce the
exercise price and/or extend the term of the Series B Warrants.
Transfer and Warrant Agent
American Stock Transfer & Trust Company, New York, New York is the
Registrar and Transfer Agent for the Units and the Common Stock and the
Registrar and Warrant Agent for the Series A Warrants.
Limitation on Directors Liabilities
The Company's Certificate of Incorporation limits the liability of the Company's
directors for breach of their fiduciary duty of care to the Company. The effect
is to eliminate liability of directors for monetary damages arising out of
negligent or grossly negligent conduct. Stockholder actions against a director
of the Company for monetary damages can only be maintained upon a showing of a
breach of the individual director's duty of loyalty to the Company, a failure to
act in good faith, intentional misconduct, a knowing violation of the law, an
improper personal benefit, or an illegal dividend or stock purchase, and not for
such director's negligence or gross negligence in satisfying his duty of care.
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<PAGE>
UNDERWRITING
General
Subject to the terms and conditions set forth in the Underwriting
Agreement by and between the Company and the Underwriter (the "Underwriting
Agreement"), the Underwriter has agreed to purchase on a "firm commitment"
basis, an aggregate of 750,000 shares of Common Stock from the Company
(exclusive of the 112,500 shares of Common Stock subject to the Over-Allotment
Option).
The shares of Common Stock being offered to the public by the Company
are being offered at a price of $5.75 per share as set forth on the cover page
of this Prospectus. The shares of Common Stock are offered by the Underwriter
subject to: (i) the Underwriter's receipt and acceptance; (ii) the Underwriter's
right to reject any order in whole or in part; (iii) approval of certain legal
matters by counsel to the Underwriter; and (iv) certain other conditions
specified in the Underwriting Agreement.
The Company has agreed to sell the shares of Common Stock to the
Underwriter at a discount of 10% of the public offering price thereof. The
Company has also agreed to pay the Underwriter the Non-Accountable Expense
Allowance (as previously defined) equal to 3% of the aggregate offering price of
the Units and Shares ($25,000 of which was advanced to the Underwriter).
Pursuant to the provisions of the Underwriting Agreement, in the event that the
Company's public offering is terminated for any reason, the Underwriter shall be
reimbursed for all accountable expense incurred by it. Any amounts previously
paid shall be credited against any amounts due.
The Underwriter has advised the Company that sales to certain dealers
may be made at the public offering price less a concession not in excess of $.20
per share. Upon completion of the Company's public offering, the public offering
price and other selling terms may be changed by the Underwriter. The Underwriter
does not intend to confirm sales of more than 1% of the shares of Common Stock
offered hereby to any accounts over which it exercises discretionary authority.
Prior to the Company's public offering, there has been no public
trading market for the Common Stock. The offering price of the shares of Common
Stock was determined by negotiation between the Company and the Underwriter. The
major factors considered by the Company and the Underwriter in determining the
public offering price of the shares of Common Stock, in addition to prevailing
market conditions, were the Company's historical performance and growth,
management's assessment of the Company's business potential and earning
prospects, the prospects for growth in the industry in which the Company
operates, and the
57
<PAGE>
foregoing factors in relation to market valuations of other similar companies.
The public offering price may not bear any relationship to the Company's assets,
book value, net worth or other criteria of value applicable to the Company.
The Underwriter has required that all shareholders of the Company lock-up their
securities in order for the Underwriter to engage in the Offering as well as in
order to maintain a more orderly trading market. Such shares will have a legend
placed on the certificates to express the lock-up.
The Underwriting Agreement prohibits the Company from issuing any
capital stock or other securities for a period of 18 months following the
Effective Date without the Underwriter`s prior consent. This provision may limit
the Company`s ability to raise additional equity capital. The purpose of such
provision is to protect against unnecessary dilution to the public shareholders.
The Over-Allotment Option
The Company has granted to the Underwriter the Over-Allotment Option
which is exercisable for a period of 30 days following the Effective Date of the
Registration Statement of which this Prospectus forms a part to purchase up to
112,500 shares of Common Stock (equal to an aggregate of up to 15% of the number
of shares of Common Stock being offered by the Company to the public) for the
purpose of covering over-allotments. The Over-Allotment Option is exercisable
upon the same terms and conditions as are applicable to the sale of the shares
of Common Stock.
The Underwriter's Purchase Option
As part of the consideration to the Underwriter for its services in
connection with the public offering described herein, the Company has agreed to
issue to the Underwriter, for nominal consideration, the Underwriter's Purchase
Option to purchase up to 75,000 shares of Common Stock (an aggregate of up to
10% of the number of shares of Common Stock being offered by the Company to the
public). The Underwriter's Purchase Option will be exercisable commencing 1 year
after the effective Date and ending four years thereafter at an exercise price
of $6.90 per share (120% of the public offering price of the Common Stock). The
Underwriter's Purchase Option will be restricted from exercise, sale, transfer,
assignment or hypothecation, except to officers of the Underwriter and members
of the selling group and/or their officers or partners, for a period of one year
from the Effective Date and will, thereafter, be exercisable for a period of
four years. The exercise price of the Underwriter's Purchase Option was
arbitrarily determined by the Company and the Underwriter and should not be
deemed to reflect any estimate of the intrinsic
58
<PAGE>
value of either the Underwriter's Purchase Option, or the Common Stock. The
Underwriter's Purchase Option will also contain certain anti-dilution and
adjustment provisions.
During the period in which the Underwriter's Purchase Option is
exercisable, the holders thereof are given the opportunity to profit from a rise
in the market price of the Common Stock which may result in a dilution of the
interest of the stockholders. The Company may find it more difficult to raise
additional equity capital if it should be needed for the business of the Company
while the Underwriter's Purchase Option is outstanding. At any time when the
holders thereof might be expected to exercise such Options and the underlying
securities, the Company would probably be able to obtain additional equity
capital on terms more favorable than those provided by the Underwriter's
Purchase Option. Any profit realized on the sale of securities issuable upon the
exercise of the Underwriter's Purchase Option may be deemed additional
underwriter compensation.
Registration Rights
In connection with the underwriting of the Company's public offering,
the Company has granted to the Underwriter certain "piggy back" and "demand"
registration rights. Pursuant to the terms of the Underwriting Agreement, the
Company has granted to the Underwriter, for a period of seven years commencing
one year from the Effective Date, the right to include for registration, the
Underwriter's Purchase Option (including the underlying securities) in the event
that the Company files a registration statement under the securities act
relating to the Public sale of any of its securities. Consequently, the "piggy
back" registration rights are only operative if the Company otherwise files a
registration statement. In addition, the Company has agreed, for a period of
five years from the Effective Date, to register under the Securities Act: (i) on
one occasion and at its expense, the Underwriter's Purchase Option (including
the underlying securities) upon the request of the holders of 50% or more of the
Underwriter's Purchase Option (including the underlying securities); and (ii) on
one occasion and at the holder's expense, the Underwriter's Unit Purchase Option
(including the underlying securities) upon the request of any holder thereof.
Finder's Fees
The Company has also agreed, pursuant to the provisions of the
Underwriting Agreement, to pay the Underwriter a finder's fee (the "Finder's
Fee") in the event that the Company consummates a transaction with a party
introduced to the Company by the Underwriter during the five-year period
following completion of the public offering described herein. The Finder's Fee
is based
59
<PAGE>
upon the consideration received by the Company in connection with such a
transaction and may range from between 1% to 5% of such transaction price. No
finder has been associated with the Company's public offering as described
herein; nor does the Company have any obligation to pay a finder's fee to anyone
in connection with any pending transaction involving the Company.
Other Terms of the Underwriting
The Company has agreed not to issue, sell, offer to sell, grant any
option relating to the sale of or otherwise dispose of (directly or indirectly)
any of the Company's equity securities (including securities convertible into,
exercisable for or exchangeable into equity securities) without the
Underwriter's prior written consent, except for issuances pursuant to: (i) the
exercise of the Underwriter's Purchase Option; (ii) the Company's public
offering of securities as described herein; (iii) a declaration of dividends,
recapitalization, reorganization or similar transaction; or (iv) a currently
existing stock incentive or option plan, for 18 months from the Effective Date.
In addition, each officer, director and stockholder who owns 5% or more of the
Company's equity securities has agreed not to sell, transfer, convey, pledge,
hypothecate or otherwise dispose of any of the respective securities of the
Company owned by them for a period of 18 months from the Effective Date without
the Underwriter's prior approval.
Indemnification
The Company has agreed to indemnify the Underwriter and others against
certain liabilities, including liabilities under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act may be provided
to officers, directors or persons controlling the Company, the Company has been
informed that, in the opinion of the Commission, such indemnification is against
public policy and is therefore unenforceable. The Underwriter has agreed to
indemnify the Company, its directors, and each person who controls it within the
meaning of Section 15 of the Securities Act with respect to any statement in or
omission from the Registration Statement, the Prospectus or any amendment or
supplement thereto if such statement or omission was made in reliance upon
information furnished in writing to the Company by the Underwriter specifically
for or in connection with the preparation of the Registration Statement, the
Prospectus, or any such amendment or supplement thereto.
The foregoing summaries of certain terms and conditions of the
Underwriting Agreement and the Underwriter's Purchase Option do not purport to
be complete statements of the terms and/or
60
<PAGE>
contents of such agreements. Copies of the foregoing documents
have been filed with the Commission as exhibits to the
Registration Statement of which this Prospectus forms a part and
are also on file at the offices of the Underwriter and the
Company. Reference is hereby made to each such exhibit for a
detailed description of the provisions thereof which have been
summarized above. See "Available Information."
Action Involving the Underwriter
The Company has been advised by the Underwriter that on or about May
22, 1995, the Underwriter and Elliot Lowenstern and Richard Bronson, principals
of the Underwriter, and the Securities and Exchange Commission (the
"Commission") agreed to an offer of settlement (the "Offer of Settlement") in
connection with a complaint filed by the Commission in the United States
District Court for the Southern District of Florida alleging violations of the
federal securities laws, Section 17(a) of the Securities Act of 1933, Section
10(b) and 15(C) of the Securities Exchange Act of 1934, and Rules 10b-5, 10b-6
and 15c1-2 promulgated thereunder. The complaint also alleged that in connection
with the sale of securities in three (3) IPOs in 1992 and 1993, the Underwriter
engaged in fraudulent sales practices. The proposed Offer of Settlement was
consented to by the Underwriter and Messrs. Loewenstern and Bronson without
admitting or denying the allegations of the complaint. The Offer of Settlement
was approved by Judge Gonzales on June 6, 1995. Pursuant to the final judgment
(the "Final Judgment"), the Underwriter:
* was required to disgorge $1,000,000 to the Commission,
which amount was paid in four (4) equal installments on
or before June 22, 1995; and
* agreed to the appointment of an independent consultant
("Consultant").
Such Consultant is obligated, on or before September 15, 1996:
* to review the Underwriter's policies, practices and
procedures in six (6) areas relating to compliance and
sales practices;
* to formulate policies, practices and procedures for the
Underwriter that the Consultant deems necessary with
respect to the Underwriter`s compliance and sales
practices;
* to prepare a report devoted to and which details the
aforementioned policies, practices and procedures (the
"Report");
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<PAGE>
* to deliver the Report to the President of the
Underwriter and to the staff of the Southeast Regional
office of the Commission;
* to prepare, if necessary, a supervisory procedures and
compliance manual for the Underwriter, or to amend the
Underwriter's existing manual; and
* to formulate policies, practices and procedures
designed to provide mandatory on-going training to all
existing and newly hired employees of the Underwriter.
The Final Judgment further provides that, within thirty
(30) days of the Underwriter's receipt of the Report,
unless such time is extended, the Underwriter shall
adopt, implement and maintain any and all policies,
practices and procedures set forth in the Report.
The Final Judgment also provides that an independent auditor
("Auditor") shall conduct four (4) special reviews of the Underwriter's
policies, practices and procedures, the first such review to take place six (6)
months after the Report has been delivered to the Underwriter and thereafter at
six-month intervals. The Auditor is also authorized to conduct a review, on a
random basis and without notice to the Underwriter, to certify that any persons
associated with the Underwriter, who have been suspended or barred by any
Commission order are complying with the terms of such orders.
On July 10, 1995, the action as against Messrs. Loewenstern and
Bronston was dismissed with prejudice. Mr. Bronson has agreed to a suspension
from associating in any supervisory capacity with any broker, dealer, municipal
securities dealer, investment advisor or investment company for a period of
twelve (12) months, dating from the beginning of such suspension. Mr.
Loewenstern has agreed to a suspension from associating in any supervisory
capacity with any broker, dealer, municipal securities dealer, investment
advisor or investment company for a period of twelve (12) months commencing upon
the expiration of Mr. Bronson's suspension.
In the event that the requirements of the foregoing judgment adversely
affect the Underwriter's ability to act as a market maker for the Company`s
stock, and additional brokers do not make a market in the Company`s securities,
the market for and liquidity of the Company`s securities may be adversely
affected. In the event that other broker dealers fail to make a market in the
Company`s securities, the possibility exists that the market for and the
liquidity of the Company`s securities may be adversely affected to such an
extent that public security holders may not have anyone to purchase their
securities when offered for sale at any price. In such event, the market for,
liquidity and prices of the Company`s securities may not exist. For additional
62
<PAGE>
information regarding the Underwriter, investors may call the
National Association of Securities Dealers, Inc. at (800) 289-
9999.
The State of Indiana has commenced an action seeking among other things
to revoke the Underwriter`s license to do business in such state. A hearing in
this matter has been scheduled for October 7, 1996. Such proceeding if
ultimately successful may adversely affect the market for and liquidity of the
Company`s securities if additional broker dealers do not make a market in the
Company`s securities. Moreover, should Indiana investors purchase any of the
securities sold in this Offering from the Underwriter prior to the possible
revocation of the Underwriter`s license in Indiana, such investors will not be
able to resell such securities in such state through the Underwriter but will be
required to retain a new broker dealer firm for such purpose. The Company cannot
ensure that other broker dealers will make a market in the Company`s securities.
In the event that other broker dealers fail to make a market in the Company`s
securities, the possibility exists that the market for and the liquidity of the
Company`s securities may be adversely affected to an extent that public security
holders may not have anyone to purchase their securities when offered for a sale
at any price. In such event, the market for, liquidity and prices of the
Company`s securities may not exist. It should be noted that although the
Underwriter may not be the sole market maker in the Company`s securities, it
will most likely be the dominant market maker in the Company`s securities.
CONCURRENT SALES BY SELLING STOCKHOLDERS
The Registration Statement of which this Prospectus forms a part also
relates to the offer and sale of up to 1,250,000 shares of Common Stock, and
2,000,000 shares of Common Stock issuable upon exercise of outstanding Class A
and Class B Warrants previously issued to the Selling Stockholders. Such
securities are to be offered and sold by the Selling Stockholders and are
subject to an 18 month lock-up. Such securities are expected to become tradeable
on or about the date of this Prospectus. Sales of the shares of Common Stock to
be offered by Selling Stockholders, or even the potential of such sales, would
likely have an adverse effect on the market prices of the securities being
offered for sale by the Company. The freely tradeable shares of the Common Stock
(the public float), upon the Effective Date of the Registration Statement of
which this Prospectus forms a part and upon consummation of the transactions
contemplated herein, will be 1,300,000 shares of Common Stock, of which 200,000
shares are to be sold by a Selling Stockholder.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the securities
being offered by the Company will be passed upon for the Company by McLaughlin &
Stern, LLP, New York, New York, David W. Sass, a member of such firm is a
Director of the Company. Legal matters for the Underwriter will be passed upon
by
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<PAGE>
Bernstein and Wasserman, LLP, New York, New York.
EXPERTS
The Financial Statements of the Company included in this Prospectus to
the extent and for the periods indicated in their report have been reported on
by Moore Stephens, P.C., independent certified public accountants, as stated in
their report appearing herein in reliance upon such report given on the
authority of that firm as experts and auditing.
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<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholder of
The Harmat Organization, Inc. and Subsidiaries
Quogue, New York
We have audited the accompanying consolidated balance sheet of The Harmat
Organization, Inc. and Subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholder's equity [deficit], and cash
flows for each of the two years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Harmat Organization, Inc. and Subsidiaries as of December 31, 1995, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that The Harmat Organization, Inc. and Subsidiaries will continue as a
going concern. As discussed in Note 7 to the consolidated financial statements,
the Company has insufficient cash resources and negative working capital that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 7. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
MOORE STEPHENS, P.C.
Certified Public
Accountants.
Cranford, New Jersey
March 27, 1996
F-1
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<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------
- -------------
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------
- -------------
June 30, December 31,
1996 1995
------- ----------
[Unaudited]
Assets:
Current Assets:
Cash $ 1,747 $ 15,439
Marketable Securities 101,615 367,492
Accounts Receivable 107,331 14,764
Land and Construction Costs 1,016,236 114,889
Prepaid Expenses 24,100 1,175
---------- ----------
Total Current Assets 1,251,029 513,759
---------- ----------
Property and Equipment - Net 1,148,218 1,125,067
---------- ----------
Other Assets:
Land and Construction Costs 709,319 776,327
Goodwill - Net 68,355 72,377
Land Held for Development -- 72,298
Investment in Partnership 29,727 29,727
Land Deposits 75,000 75,000
Deferred Offering Costs 253,227 30,000
---------- ----------
Total Other Assets 1,135,628 1,055,729
---------- ----------
Total Assets $3,534,875 $2,694,555
========== ==========
Substantially all of the assets are pledged.
The Accompanying Notes are an Integral Part of these Consolidated
Financial Statements.
F-2
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<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------
June 30, December 31,
1996 1995
----------- -----------
[Unaudited]
Liabilities and Stockholder's Equity [Deficit]:
Current Liabilities:
Current Portion of
Mortgage Payable $ 331,115 $ 229,577
Notes Payable -
Shareholders 277,000 277,000
Notes Payable -
Related Parties 215,000 90,000
Loans Payable -
Bank 240,000 240,000
Other Loan Payable 132,800 139,360
Accounts Payable and
Accrued Expenses 972,124 646,775
Customer Deposits 549,849 97,500
----------- -----------
Total Current Liabilities 2,717,888 1,720,212
----------- -----------
Commitment and
Contingencies [8] -- --
----------- -----------
Other Liabilities:
Mortgages Payable -
Net of Current Maturities 922,378 1,031,273
Notes Payable -
Related Party -- 125,000
----------- -----------
Total Other Liabilities 922,378 1,156,273
----------- -----------
Stockholder's Equity [Deficit]:
Preferred Stock - $.001
Par Value, 5,000,000
Shares Authorized
No Shares Issued and Outstanding --- --
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<PAGE>
Common Stock - $.001 Par Value, 25,000,000 Shares Authorized, 1,750,000 and
1,250,000 Shares Issued and Outstanding at June 30, 1996 and
December 31, 1995, Respectively 1,750 1,250
Additional Paid-in Capital -
Common Stock 301,063 129,250
Retained Earnings [Deficit] (408,204) (312,430)
----------- -----------
Total Stockholder's Equity [Deficit] (105,391) (181,930)
----------- -----------
Total Liabilities and Stockholder's
Equity [Deficit]
$ 3,534,875 $ 2,694,555
=========== ===========
The Accompanying Notes are an Integral Part of these Consolidated
Financial Statements.
F-3
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<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------
Six months ended Years ended
June 30, December 31,
1996 1995 1995 1994
[Unaudited] [Unaudited]
Revenues:
Construction
Sales $ 491,573 $ 1,978,746 $ 2,065,126 $4,449,827
Sale of Land Held for
Development 52,000 -- -- --
Rental Income 95,346 79,896 183,398 69,045
Management Fee
Income 50,000 -- 75,000 --
----------- ----------- ----------- -----------
Total
Revenues 688,919 2,058,642 2,323,524 4,518,872
Cost of Sales
and Direct
Operating
Expenses 516,267 1,640,031 1,719,316 4,277,821
Gross Profit 172,652 418,611 604,208 241,051
Selling, General and
Administrative
Expenses 314,681 160,879 367,498 239,791
Charge for Executive
Compensation
Capitalized 14,750 -- 105,000 --
[Loss] Income from
Operations (156,779) 257,732 131,710 1,260
Other Income [Expense]:
Gain on Sale of Marketable
Securities 41,364 103,658 245,022 281,767
Unrealized Gain on Marketable
Securities 13,036 (51,359) 5,575 13,803
Interest and
Dividend Income 566 1,506 11,274 12,811
Interest Expense (84,579) (72,865) (157,678) (51,470)
Total Other [Expense]
Income (29,613) (19,060) 104,193 256,911
Net [Loss] Income:
Historical (186,392) $ 238,672 235,903 $ 258,171
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<PAGE>
Charge in Lieu of
Income Taxes [1] -- (94,903)
Pro Forma Net [Loss]
Income [2] $ (186,392) $ 141,000
Pro Forma [Loss] Earnings Per Share:
Net [Loss]
Income $ (.11) $ .08
=========== ===========
Number
of Shares 1,750,000 1,750,000
=========== ===========
The Accompanying Notes are an Integral Part of these Consolidated
Financial Statements.
F-4
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<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY [DEFICIT]
- -----------------------------------------------------------------
Common Stock Total
Additional Retained Stockholder's
Number of Amount Paid-in Earnings Equity
Shares [At Par] Capital [Deficit] [Deficit]
------ -------- ------- --------- ---------
Balance -
December 31, 1993
1,750,000 $ 1,750 $ 23,750 $ (123,630) $ (98,130)
Contribution of
Common Stock
by Stockholder
[11E] (500,000) (500) 500 -- --
Net Income -- -- -- 258,171 258,171
Stockholder
Distributions -- -- -- (78,887) (78,887)
---------- ---------- ---------- ---------- ----------
Balance -
December 31,
1994 1,250,000 1,250 24,250 55,654 81,154
Net Income -- -- -- 235,903 235,903
Executive
Compensation
Capitalized -- -- 105,000 -- 105,000
Stockholder
Distributions -- -- -- (603,987) (603,987)
---------- ---------- ---------- ---------- ----------
Balance -
December
31, 1995 1,250,000 1,250 129,250 (312,430) (181,930)
March 1,
1996 - Transfer
of S Corporation
Deficit to
Additional
Paid-in
Capital -- -- (342,437) 342,437 --
Proceeds from Private
Placement 500,000 500 499,500 -- 500,000
Executive Compensation
Capitalized -- -- 14,750 -- 14,750
Net [Loss] -- -- -- (186,392) (186,392)
Stockholder
Distributions -- -- -- (251,819) (251,819)
---------- ---------- ---------- ---------- ----------
Balance - June 30, 1996
[Unaudited] 1,750,000 $ 1,750 $ 301,063 $ (408,204) $ (105,391)
========== ========== ========== ========== ==========
The Accompanying Notes are an Integral Part of these Consolidated
Financial
Statements.
F-5
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<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------
Six months ended Years ended
June 30, December 31,
1996 1995 1995 1994
[Unaudited] [Unaudited]
Operating Activities:
Net [Loss]
Income $(186,392) $ 238,672 $235,903 $258,171
Adjustments to
Reconcile Net [Loss]
Income to Net Cash
Provided by Operating
Activities:
Depreciation and
Amortization 16,816 14,938 29,414 17,091
Gain on Sale of
Marketable
Securities (41,364) (103,658) (245,022) (281,767)
Change in Unrealized
[Gain] Loss on
Investments (13,036) 51,359 8,228 (13,803)
Allowance for
Uncollectible
Mortgage
Receivable -- -- -- 35,325
Loss on
Partnership
Investment -- 500 1,000 416
Executive
Compensation
Capitalized 14,750 -- 105,000 --
Changes in
Assets and
Liabilities:
Contract
Receivables (92,567) (231,349) 153,706 (153,706)
Accrued
Interest
Receivable -- -- (16,665) --
Purchase of Marketable
Securities (242,148) (19,600) (2,905,276) (2,461,439)
Sales of Marketable
Securities 376,026 -- 3,402,329 2,618,317
Costs and
Profits in
Excess of
Billings
on Uncompleted
Contacts -- 359,887 345,123 (154,614)
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<PAGE>
Billing in Excess
of Costs and Profits
on Uncompleted
Contracts -- (32,478) (32,478) 7,466
Prepaid Expenses (22,925) (7,735) 1,080 7,322
Land Held for
Development 72,298 -- -- --
Accounts Payable
and Accrued
Expenses 325,349 (100,865) 135,234 202,370
Customer Deposits 452,349 -- 97,500 --
-------- -------- ------- ------
Total
Adjustments 845,548 (69,001) 1,079,173 (177,022)
----------- ----------- ------- --------
Net Cash - Operating Activities -
Forward 659,156 169,671 1,315,076 81,149
----------- ----------- --------- --------
Investing Activities:
Acquisition of
Quick Storage -- (150,000) (150,000) --
Less: Cash of Quick Storage at
Acquisition -- 4,737 4,737 --
Acquisition of Property and
Equipment (35,946) (13,762) (19,825) (774)
Deposit on Land -- -- (75,000) --
Land and Construction
Costs (834,339) (46,978) (406,070) (21,416)
Payment of Deferred Offering
Costs (223,227) (18,500) (30,000) --
Advances from/to Affiliates and
Related Parties -- 73,049 92,152 71,761
----------- ----------- ------ ------
Net Cash - Investing Activities -
Forward $(1,093,512) $(151,454) $(584,006) $ 49,571
The Accompanying Notes are an Integral Part of these Consolidated
Financial Statements.
F-6
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<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended Years ended
June 30, December 31,
1996 1995 1995 1994
[Unaudited] [Unaudited]
Net Cash - Operating
Activities -
Forwarded $ 659,156 $ 169,671 $1,315,076 $81,149
------- ------- ------- --------
Net Cash -
Investing Activities -
Forwarded (1,093,512) (151,454) (584,006) 49,571
----------- ----------- ----------- --------
Financing Activities:
[Repayments]
Proceeds from New
Loans -- -- 309,500 100,000
Proceeds of
Mortgage Payable (7,357) (6,152) -- --
Repayments of Mortgages
Payable -- -- (14,764) (9,352)
[Repayments] Proceeds of Notes
Payable -
Stockholder (6,560) -- 150,000 (205,034)
[Repayments] Proceeds of Notes
Payable -
Other -- (14,659) (8,120) (28,120)
Proceeds [Repayment] of
Due to Stockholder -- -- (608,463) --
Distribution to
Stockholders (65,419) -- (587,322) (78,889)
Proceeds of Private
Placement 500,000 -- -- --
----------- ----------- ------ --------
Net Cash - Financing
Activities 420,664 (20,811) (759,169) (221,395)
----------- ----------- ------ -----------
Net [Decrease]
in Cash (13,692) (2,594) (28,099) (90,675)
Cash - Beginning
of Periods 15,439 43,538 43,538 134,213
----------- ----------- ---------- ---------
Cash -
End of
Periods $ 1,747 $40,944 $15,439 $43,538
=========== ========= =========== ===========
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Supplemental Disclosures of Cash Flow Information:
Cash paid during
the periods for:
Interest $ 73,353 $ 57,665 $ 50,066 $ 38,585
Income Taxes $-- $ -- $ -- $ --
Supplemental Disclosures on Non-Cash Investing and Financing
Activities:
For the quarter ended March 31, 1996, the Company distributed marketable
securities with a fair value of $186,400 to its controlling stockholder.
On August 3, 1996, the major stockholder of the Company contributed 500,000
shares of the Company's common stock to the Company.
The Accompanying Notes are an Integral Part of these Consolidated
Financial Statements.
F-7
76
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
[1] Principles of Consolidation and Business
The Harmat Companies are owned by an individual stockholder.
In November 1995, the Harmat Organization, Inc. [Delaware] [the "Company"] was
formed for the purpose of offering securities to the general public and
1,750,000 shares of common stock were issued to the individual stockholder of
the Harmat Companies. On March 1, 1996, the individual stockholder of the Harmat
Companies transferred his stock in the Harmat Companies to the Harmat
Organization [Delaware] for a 100% ownership interest in the Harmat
Organization, Inc. [Delaware].
These December 31, 1995 and 1994 financial statements reflect the financial
position and results of operations of the Parent Company and its subsidiaries on
a consolidated basis, which reflects the Company's current organizational
structure. The Company's policy is to consolidate all majority-owned
subsidiaries. All intercompany amounts have been eliminated in consolidation.
Entity Nature of Business
------ ------------------
Parent Company:
The Harmat Organization, Inc. - Delaware
Harmat Companies: [Subsidiaries]
Harmat Homes, Inc. ["Harmat"] Construction of custom
homes and
residential and commercial
rental properties.
Harmat Holding Corp. ["Harmat Holding"] Subdivision and
development of
undeveloped land.
Northside Woods, Inc. ["Northside"] Rental of residential
property.
Harmat Capital Corp. ["Harmat Capital"] Rental of residential
property.
Harmat Organization - New York Limited Partner in real
estate partnership.
Quick Storage, Inc. Short-term rental of
storage facilities.
The sole stockholder who owns all of the above entities is a general partner in
the partnership in which the Harmat Organization - New York has a limited
partnership interest.
77
<PAGE>
The Plan for Incentive Compensation of Matthew Schilowitz [the "Schilowitz
Incentive Plan"] was adopted by the Board of Directors and approved by the
Company's stockholder on March 1, 1996 and amended August 3, 1996. Pursuant to
such plan, Mr. Schilowitz has been granted an option to purchase up to an
aggregate of 500,000 shares of common stock at an exercise price of $5.75 per
share. In the event the Company's earnings before taxes first equals or exceeds
an amount listed below for any fiscal year ending after the date the Company's
initial public offering, the shares shall be released to such stockholder as
follows:
Earnings Before Shares to be
Taxes Issued
--------------- ------------
$ 750,000 250,000
$ 1,500,000 250,000
If the above earnings levels are achieved, the Company will recognize
compensation expense equal to the difference between the fair market value and
the exercise price at the time the performance conditions are achieved. Issuance
of the shares would result in substantial compensation expense to the Company in
future years.
F-8
78
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[2] Summary of Significant Accounting Policies
Concentration of Credit Risk - Accounts receivable arise principally from the
construction and sale of custom homes and residential and commercial properties
in Eastern Suffolk County, New York. The management of the Subsidiaries
continually reviews and evaluates such accounts receivable and provides an
allowance for doubtful accounts for accounts it deems uncollectible and as a
consequence, believes its accounts receivable credit risk exposure beyond such
allowance is limited. Such estimates of the financial strength of such customers
may be subject to change in the near term.
Deferred Offering Costs - As of December 31, 1995, the Company incurred $30,000
of legal and accounting fees in connection with the proposed public offering of
the Company's common stock. These costs will be charged to additional paid-in
capital upon completion of the proposed public offering.
Economic Dependency - There were six construction contracts which were deemed
major customers and accounted for approximately 99% of total construction sales
for the year ended December 31, 1995. Five contracts represented 16% each of
total sales and one contract represented 19% of total sales. There were no
amounts due under such contracts at December 31, 1995. In 1994, no individual
customer exceeded 10% of total sales. Most of the Company's business is of a
nonrecurring nature. The Company must continually market its homes in order to
attract new purchasers. Unless the Company is successful in attracting new
purchasers for its homes, a lack of new purchasers will have a severe negative
impact to the Company in the near term.
Marketable Securities - The Company adopted Statement of Financial Accounting
Standards ["SFAS"] No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," at January 1, 1994. SFAS No. 115 addresses the accounting
and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Those
investments are to be classified into the following three categories:
held-to-maturity debt securities; trading securities; and available-for- sale
securities. In accordance with SFAS No. 115, prior years' financial statements
are not to be restated to reflect the change in adopting the new accounting
method. There was no cumulative effect as a result of adopting SFAS No. 115 at
January 1, 1994.
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date. At December 31, 1995, all of the Company investments
were classified as trading securities. Trading securities are securities bought
and held principally for the purpose of selling them in the near term and are
reported at fair value, with unrealized gains and losses included in operations
for the current year. The Company primarily uses the specific
79
<PAGE>
identification method for gains and losses on the sales of marketable securities
[See Note 3].
Property and Equipment and Depreciation - Property and equipment are stated at
cost. Depreciation is computed over the estimated useful lives of the assets,
using the straight-line method and for building and building improvements and
accelerated methods for furniture and equipment, as follows:
Building and Building Improvements 40 Years
Furniture and Equipment 5 to 7 Years
Pro Forma Earnings Per Share - Pro forma earnings per share are based on the
1,250,000 shares issued [See Notes 1 and 11E] and the 500,000 shares issued in
the private placement [See Note 10] for all periods presented. Shares or
equivalents issued within a one year period prior to the initial filing of the
initial public offering of the registration statement are treated as outstanding
for all reported periods.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
80
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[2] Summary of Significant Accounting Policies [Continued]
Land Development Costs - Costs that clearly relate to land development projects
are capitalized. Costs are allocated to project components by the specific
identification method whenever possible. Otherwise, acquisition costs are
allocated based on their relative fair value before development, and development
costs are allocated based on their relative sales value. Interest costs are
capitalized while development is in progress.
Revenue Recognition - Harmat recognizes revenues from fixed-price and modified
fixed-price construction contracts on the percentage-of-completion method,
measured by the percentage of cost incurred to date to estimated total cost for
each contract. That method is used because management considers total cost to be
the best available measure of progress on the contracts. Because of inherent
uncertainties in estimating costs, it is at least reasonably possible that the
estimates used will change within the near term.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, and estimated profitability may result in
revisions to costs and income, which are recognized in the period in which the
revisions are determined. Changes in estimated job profitability resulting from
job performance, job conditions, contract penalty provisions, claims, change
orders, and settlements, are accounted for as changes in estimates in the
current period.
At December 31, 1995, all construction contracts were complete.
o Harmat Holding - Harmat Holding recognizes revenue from the acquisition,
development and sale of land and construction and sale of houses on such land.
Pursuant to the terms of such contracts and Statement of Financial Accounting
Standards ["SFAS"] No. 66, "Accounting for Sales of Real Estate," the Company
uses the deposit method of accounting. The method provides that all construction
costs be recorded as incurred and monies received from the purchases recorded as
deposits until the purchase contracts close when all revenue costs and profits
are recognized.
Harmat Holding classifies all land and construction costs
that are expected
to be completed within one year as a current asset. At
December 31, 1995,
such land and construction costs totaled $114,889. Customer
deposits
received on such contracts totaled $97,500 at December 31,
81
<PAGE>
1995.
o Northside Woods and Harmat Capital - Rental income is
recognized as it is
earned pursuant to the terms of each lease on a straight
line basis. All
leases have an initial or remaining term of one year or
less.
Income Taxes - Each of the Subsidiaries has elected S corporation status under
the Internal Revenue Code and similar statutes, and, therefore, does not incur
federal or state income taxes except for a New York State equalization tax on S
corporation earnings which is based on the differential between corporate and
personal income tax rates. The amount of this tax has been deemed to be
immaterial and is not included in the financial statements. Taxes are passed
through to the individual shareholder. Pro forma net income and earnings per
share are presented as if the companies were C corporations.
On March 1, 1996, each of the S corporations terminated their S corporation
status and became C corporations. The undistribution S corporation deficit of
each entity at March 1, 1996 was transferred to additional
paid-in capital.
F-10
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- -----------------------------------------------------------------
- -------------
[2] Summary of Significant Accounting Policies [Continued]
Goodwill - Amortization for securities of the newly acquired subsidiary, Quick
Storage, in excess of the fair value of the net assets of such subsidiary has
been charged to goodwill. Goodwill is related to revenues the Company
anticipates realized in future years. The Company has decided to amortize its
goodwill over a period of up to ten years under the straight-line method.
Accumulated amortization at December 31, 1995 was $8,042. The Company's policy
is to evaluate the periods of goodwill amortization to determine whether later
events and circumstances warrant revised estimates of useful lives. The Company
also evaluates whether the carrying value of goodwill has become impaired by
comparing the carrying value of goodwill to the value of projected undiscounted
cash flows from the acquired assets of Quick Storage, Inc. Impairment is
recognized if the Company value of goodwill is less than the projected
undiscounted cash flow from acquired assets or business.
Stock Options and Similar Equity Instruments Issued to Employees - The Company
uses the intrinsic value method to recognize cost in accordance with APB 25
[Accounting for Stock Issued to Employees].
[3] Marketable Securities
Marketable securities consist of investments in equity and debt securities at
fair value. The cost of such securities is $361,710. The change in the
unrealized gain account for 1995 is $5,575.
[4] Property and Equipment
Property and equipment consist of the following at December 31, 1995:
Land $ 450,495
Building and Building Improvements 795,950
Furniture and Office Equipment 33,324
----------
Total 1,279,769
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<PAGE>
Less: Accumulated Depreciation 154,702
----------
Property and Equipment - Net $1,125,067
==========
Depreciation expense for the years ended December 31, 1995 and
1994 totaled
$21,380 and $17,091, respectively.
F-11
85
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- -----------------------------------------------------------------
- -------------
[5] Notes and Mortgages Payable
[A] Mortgages - At December 31, 1995, the mortgages payable consist of the
following:
Mortgage payable, dated November 30, 1992, in the amount of $400,000, bearing
interest at 4% plus contingent interest participation payments upon the sale
of subdivided lots. This mortgage is secured by property with a cost of
approximately $450,000 and the personal guaranty of the stockholder of the
Companies. This mortgage requires semi-annual payments of interest only
commencing June 30, 1993 through October 30, 1997 when the mortgage matures
and contingent interest participation payments upon the sale of subdivided
lots.
$ 400,000
Mortgage payable, dated November 14, 1985, in the original amount of $270,000,
payable in monthly installments of $2,379 including interest through December
1, 2015. Interest is payable at adjustable interest rate [10% at December 31,
1995] which is determined every three years. The mortgage is secured by rental
property consisting of land and building having a cost of approximately
$330,000.
246,817
Mortgage payable, dated January 30, 1992, in the original amount of $264,000,
payable in monthly installments of $1,979 including interest through February
1, 2022. Interest is payable at an adjustable interest rate [8.375% at
December 31, 1995] which is determined annually. The mortgage is secured by
rental property consisting of land and building having a cost of approximately
$270,000.
251,653
Mortgage payable, dated March 11, 1994, in the original amount of $215,400, with
monthly interest at prime plus 3% until December 15, 1994 when all unpaid
principal and interest is due. This loan was extended until October 11, 1996.
The mortgage is secured by land and building have a cost of approximately
$415,000.
215,400
Mortgage payable dated January 17, 1991, and amended June 14, 1994 in the
original amount of $180,000 payable in monthly installments of $1,975
including interest through February 1, 2006. Interest is payable at an
adjustable interest rate [10.625% at December 31, 1995] which is determined
annually. The mortgage is secured by land and building having a cost of
approximately $200,000.
146,980
----------
86
<PAGE>
Total Mortgages Payable
$1,260,850
==========
F-12
87
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- -----------------------------------------------------------------
- -------------
[5] Notes and Mortgages Payable [Continued]
[B] Related Party Notes Payable
A loan payable to a related party which was originally due on June 25, 1994 and
was extended to March 26, 1997 and bears interest at 8% per annum. Repayment
of this loan has been guaranteed by the sole stockholder of the Companies.
$ 125,000
Notes payable to two related parties due on demand for $70,000 and $20,000,
bearing interest at 10% and 6% per annum, respectively.
90,000
[C] Note Payable - Bank
A one year bank loan dated September 21, 1995, with interest of prime plus 1.5%
is guaranteed by the sole stockholder of the Company. The loan is
collateralized by marketable securities of Harmat Capital having a fair market
value at December 31, 1995 of approximately $360,000
240,000
[D] Notes Payable - Shareholders
Promissory notes resulting from the buyout of an interest in Quick Storage with
annual interest of 4% due at the earlier of December 31, 1996 or thirty days
after the completion on the initial public offering by the Company [See Note
12]. Interest [totaling approximately $2,000 ] represents the difference
between the stated rate of interest in the promissory notes and the market
rate of interest and is deemed immaterial and, therefore, not imputed.
150,000
Promissory note to a shareholder dated January 1, 1995 with interest of 7% per
annum due December 31, 1996.
127,000
[E] Other Loans Payable
In1994 and 1995, there was a loan to an individual with interest at 12% per
annum. This loan was due February 1, 1996 and has been extended to August 31,
1996. Repayment of this loan is guaranteed by the sole stockholder of the
Companies.
100,000
Legal settlement obligation from 1991 to a contractor is payable in equal
semi-annual installments on June 1 and December 1 of each year with annual
payments of $8,120. Interest [totaling about $3,000] is considered to be
immaterial
88
<PAGE>
and has not been imputed.
39,360
---------
Total
$ 871,360
-----
=========
Annual maturities of notes and mortgages payable are as follows:
Year ended
December 31,
- ------------
1996 $1,069,697
1997 425,145
1998 26,939
1999 28,925
2000 29,880
Thereafter 551,624
----------
Total Notes and Mortgages Payable $2,132,210
==========
F-13
89
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- -----------------------------------------------------------------
- -------------
[6] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted SFAS No. 107, fair value of
financial investments which requires disclosing fair value to the extent
practicable for financial instruments which are recognized or unrecognized in
the balance sheet. The fair value of the financial instruments disclosed therein
is not necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences of
realization or settlement. The following table summarizes financial instruments
by individual balance sheet accounts as of December 31, 1995:
Carrying
Amount Fair
Value
------
- ----------
Debt Maturing Within One Year $1,100,937 $1,100,937
Long-Term Debt 1,031,273 1,031,273
----------
- ----------
Totals $2,132,210 $2,132,210
------ ==========
==========
For certain financial instruments, including cash and cash equivalents, trade
receivables and payables, customer deposits and short-term debt, it was assumed
that the carrying amount approximated fair value because of the near term
maturities of such obligations. The fair value of long-term debt is based on
current rates at which the Company could borrow funds with similar remaining
maturities. The carrying amount of long-term debt approximates fair value.
[7] Going Concern
The Company has a working capital deficit at December 31, 1995 of
90
<PAGE>
$1,206,453.
The Company's financial statements for the year ended December 31, 1995, have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. The continuation of the Company as a going concern is dependent upon
its ability to generate sufficient cash from operations and financing
activities. The Company's working capital deficit raises substantial doubt about
the entity's ability to continue as a going concern. Management's viable plans
include the following: (i) to generate additional equity financing through a
private placement with proceeds of $500,000, (ii) to close a proposed public
offering for common stock with anticipated net proceeds of approximately
$3,441,875, (iii) to continue to investigate additional lending opportunities
with more favorable terms, (iv) to expand into other areas of the real estate
market such as the commercial market, (v) to acquire income producing
properties, and (vi) to expand into new services such as construction
supervision and consulting services. Management believes that these plans can be
effectively implemented in the net twelve months. There can be no assurances
that management will be successful in these endeavors. The Company's ability to
continue as a going concern is dependent on the implementation and success of
these plans. The financial statements do not include any adjustments in the
event the Company is unable to continue as a going concern.
[8] Commitments and Contingencies
[A] Land Contract - Pursuant to an agreement dated December 1995,
the Harmat
Organization, Inc. has agreed to purchase three parcels of
undeveloped land
located in Westhampton, New York for $1,247,000. The Harmat
Organization, Inc.
has deposited $75,000 pursuant to the terms of such contract.
This contract is
subject to the Company receiving a commitment for the financing
of land
acquisitions.
F-14
91
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- -----------------------------------------------------------------
- -------------
[8] Commitments and Contingencies [Continued]
[B] Litigation - Harmat Homes, Inc. owns a mechanics lien and has instituted
legal action against an individual for damages and lost profits in an
undeterminable amount for wrongful termination of a contract. This individual
has instituted a counter claim in the amount of $250,000 claiming breach of
contract and the wrongful filing of a mechanics lien. Harmat's motion for
summary judgement to foreclose upon its mechanics lien has been denied and an
appeal from that order has been taken. The parties are now engaged in discovery
and at this time counsel has advised the Company that the outcome on this case
cannot be rendered. Therefore, no amounts have been accrued in the financial
statements regarding this case. The Company believes the action is without merit
and intends to vigorously contest this case. Nevertheless, due to the
uncertainties in the legal process, it is at least reasonably possible that
management's view of the outcome could change in the near term. In addition, a
subcontractor of Harmat Homes, Inc. has instituted claims against both Harmat
Homes, Inc. and the other individual for the sum of $30,000.
The Company is also involved in other legal proceedings which are considered
routine and incidental to its business. The Company believes that the legal
proceedings which are presently pending have no potential liability which would
have an adverse material effect on the financial condition and statement of
operations of the Company.
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<PAGE>
[9] Segment Information
The Company's operations are classified into two industry
segments: construction
and rental. The following is a summary of segment information for
1995 and 1994:
Construction Rental Consolidated
------------ ------ ------------
Revenue from Non-Affiliates:
1995 $ 2,140,126 $ 183,398 $ 2,323,524
=========== =========== ============
1994 $ 4,449,827 $ 69,045 $ 4,518,872
=========== =========== ============
Income [Loss] from Operations:
1995 $ 164,460 $ 72,250 $ 236,710
=========== =========== ============
1994 $ 22,221 $ (20,961) $ 1,260
=========== =========== ============
Identifiable Assets:
1995 $ 1,064,945 $ 1,629,610 $ 2,694,555
=========== =========== ============
1994 $ 1,227,785 $ 1,359,045 $ 2,586,830
=========== =========== ============
Depreciation and Amortization:
1995 $ 1,193 $ 28,221 $ 29,414
=========== =========== ============
1994 $ -- $ 17,091 $ 17,091
=========== =========== ============
Capital Expenditures:
1995 $ 14,594 $ 5,231 $ 19,825
=========== =========== ============
1994 $ -- $ 774 $ 774
=========== =========== ============
F-15
94
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- -----------------------------------------------------------------
- -------------
[10] Private Placement
In February of 1996, Harmat Organization, Inc. [Delaware] offered 500,000 units
at $1.00 per unit as part of a private placement transaction. The units consist
of one share of common stock, three Series A warrants entitling the holder to
purchase three shares of common stock for $6.00 for a period of four years and
one Series B warrant entitling the holder to purchase one share of common stock
for $9.00 for a period of four years. The shares of common stock and the Series
A warrants are being registered as part of the proposed initial public offering.
On February 22, 1996, the Company received proceeds of $500,000 from the private
placement.
The following is a schedule of warrants:
FMV at No. of
No. of Exercise Date of Warrants
Date of Grant Warrants Issued Price of Grant Exercised
Type
February 1996
Series A 1,500,000 $6.00 $ 5.75 $ --
February 1996
Series B 500,000 $9.00 $ 5.75 $ --
----------
Total 2,000,000
===== =========
[11] Subsequent Events [Unaudited]
[A] Proposed Initial Public Offering - The Company is offering for public sale
750,000 common shares at $5.75 per share. Although no assurance can be given
that the offering will be successful, the Company intended to utilize the net
proceeds from the proposed offering of approximately $3,451,875 are intended to
be used to develop properties and business opportunities, repay certain
indebtedness, and for general working capital needs.
The following supplementary earnings per share reflects on a pro forma basis the
repayment of indebtedness of $1,068,048 and the resulting
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<PAGE>
reduction of interest
expense and increase in net income as if it had taken place at
the beginning of
the respective periods [See Note 10].
June 30, December 31,
1996 1995
---- ----
[Loss] Income $ (136,762) $ 201,097
========== ==========
[Loss] Income Per
Share (.07) .10
========== ==========
Number of Shares 1,935,747 1,935,747
========== ==========
[B] Stock Option Plan - In 1996, the Board of Directors adopted a stock option
plan providing for the granting of up to 400,000 shares of the Company's common
stock. This Plan excludes the Company's chief executive officer and principal
shareholder. No shares have been granted pursuant to this stock option plan.
F-16
96
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- -----------------------------------------------------------------
[11] Subsequent Events [Unaudited] [Continued]
[C] Employment Agreement
On April 1, 1996, the Company entered into a five year employment agreement with
the President and Chief Executive Officer for a base salary of $105,000 with
increments of $50,000 each year thereafter. In addition, the Officer will
receive a bonus of 5% of pre tax annual earnings and is granted warrants to
purchase up to an aggregate of 500,000 shares of the Company common stock for
ten years exercisable at $5.75 per share with rights vesting upon attainment of
certain earnings levels [See Note 1].
[D] Litigation - The litigation described in Note 8B, was settled on June 20,
1996 without cost or liability to the Company.
[E] Capital Contribution of Common Stock - On August 3, 1996, the Company's
principal stockholder contributed 500,000 shares of the Company's common stock
to the Company in lieu of an escrow of 750,000 of his Company's shares [See Note
1]. The escrow was part of the "earnout" agreement [See Notes 1 and 11C]. The
500,000 contributed shares were canceled. The contribution has ben reflected
retroactively in these financial statements as a recapitalization.
[12] New Authoritative Pronouncement
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
recognition for stock options and similar equity instruments issued to employees
as contrasted to the intrinsic valued based method of accounting prescribed by
Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued
to Employees." The recognition requirements of SFAS No. 123 are effective for
97
<PAGE>
transactions entered into in fiscal years that begin after December 15, 1995.
The Company will continue to apply Opinion No. 25 in recognizing its stock based
employee arrangements. The disclosure requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995. The
Company adopted the disclosure requirements on January 1, 1996. SFAS 123 also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions must be
accounting for based on the fair value of the consideration received or the fair
value of the equity instrument issued, whichever is more reliably measurable.
This requirement is effective for transactions entered into after December 15,
1995.
[13] Unaudited Interim Statements
The financial statements for the six months ended June 30, 1996 and 1995 are
unaudited; however, in the opinion of management all adjustments which are
necessary in order to make the interim financial statements not misleading have
been made. The results for interim periods are not necessarily indicative of the
results to be obtained for a full fiscal year.
98
<PAGE>
THE HARMAT ORGANIZATION, INC.
BILTMORE SECURITIES, INC.
750,000 Shares of Common Stock
No dealer, salesperson or other person has been authorized to give any
information or to make any representations in connection with this Offering
other than those contained in this Prospectus and, if given or made, such
information or representations must not be relied on as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the securities offered
by this Prospectus, or an offer or solicitation of an offer to buy any
securities by any person in any jurisdiction in which such offer or solicitation
is not authorized or is unlawful. The delivery of this Prospectus shall not,
under any circumstances, create any implication that the information herein is
correct as of any time subsequent to the date of this Prospectus.
TABLE OF CONTENTS
Page
Available Information..........3
Prospectus Summary.............4
Risk Factors...................6
Use of Proceeds................22
Capitalization.................24
Dilution.......................25
Dividend Policy................27
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations.................28
Business.......................37
Management.....................42
Certain Transactions...........46
Principal Stockholder..........49
Selling Stockholders...........50
Description of Securities......53
Underwriting...................56
Concurrent Sales by Selling
Stockholders..................63
Legal Matters..................63
Experts........................63
Financial Statements...........F-1
u Until October 4, 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Debentures, whether or not participating
in the distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with regard to their unsold allotments or subscription.
99
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Alternate Cover Page
PROSPECTUS
THE HARMAT ORGANIZATION, INC.
1,250,000 Shares
This Prospectus relates to the offering of 1,250,000 shares of common stock
("Common Stock"), par value $.001 per share, of The Harmat Organization, Inc. a
Delaware corporation (the "Company"). This Prospectus also relates to the sale
of 1,500,000 shares of Common Stock of the Company issuable upon exercise of
1,500,000 Class A Redeemable Warrants issued in a private placement as well as
500,000 shares of Common Stock issuable upon exercise of 500,000 Class B
Warrants issued in a private placement. The securities offered hereby may not be
transferred for eighteen (18) months from the date hereof, subject to earlier
release at the sole discretion of Biltmore Securities, Inc., which is acting as
the underwriter in connection with a public offering of the Company's securities
(the "Underwriter"). Included in the 1,250,000 shares offered hereby are 750,000
shares held by Mr. Schilowitz, the President of the Company. The certificates
evidencing such securities include a legend with such restrictions. The
Underwriter may release the securities held by the Selling Stockholder at any
time after all securities subject to the Over-Allotment Option have been sold or
such option has expired. The Over-Allotment Option will expire thirty (30) days
from the date of this Prospectus. In other offerings where the Underwriter has
acted as the managing underwriter, it has release similar restrictions
applicable to Selling Stockholders prior to the expiration of the lock-up period
and in some cases immediately after the exercise of the Over-Allotment Option or
the expiration of the Over-Allotment Option period.
The Securities offered by this Prospectus may be sold from time to time by
the Selling Stockholders, or by their transferees. No underwriting arrangements
have been entered into by the Selling Stockholders. The distribution of the
securities by the Selling Stockholders may be effected in one or more
transactions that may take place on the over-the-counter market including
ordinary broker's transactions, privately-negotiated transactions or through
sales to one or more dealers for resale of such shares as principals at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Stockholders
in connection with sales of such securities. Transfers of the securities may
also be made pursuant to applicable exemptions under the Securities Act of 1933
(the "Securities Act") including but not limited to sales under Rule 144 under
the Securities Act.
The Selling Stockholders and intermediaries through whom such securities may
be sold may be deemed "underwriters" within the meaning of the Securities Act
with respect to the securities offered, and any profits realized or commissions
received may be deemed underwriting compensation. The Company has agreed to
indemnify the Selling Stockholders against certain liabilities, including
liabilities under the Securities Act.
On the date hereof, the Company commenced pursuant to the Registration
Statement of which this Prospectus is a part of a public offering of 750,000
shares of Common Stock. See "Concurrent Sales."
The Company will not receive any of the proceeds from the sale of the
securities by the Selling Stockholders. All costs in incurred in the
registration of the securities of the Selling Stockholders are being borne by
the Company. See "Selling Stockholders."
The Company intends to furnish its security holders with annual reports
containing audited financial statements and the audit report of the independent
certified public accountants and such interim reports as it deems appropriate or
as may be required by law. The Company's fiscal year ends December 31.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK AND
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS", WHICH BEGINS ON PAGE 10, AND "DILUTION" page 25.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS, ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE
ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Prospectus September 9, 1996
<PAGE>
The Offering
Securities Offered by
Selling Stockholders............. 1,250,000 Shares
2,000,000 Shares Issuable
upon exercise of outstanding
Class A and Class B Warrants
Shares of Common
StockOutstanding After Offering(1)...2,500,000 Shares
Use of Net Proceeds..................See "Use of Proceeds"
Proposed Symbol
Common Stock.........................HMAT
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(1) Does not include shares of Common Stock issuable upon the
exercise of (i) the Underwriter's Over-Allotment Option to
purchase up to 112,500 shares of Common Stock; (ii) the
Underwriter's Purchase Option to purchase up to 75,000
shares of Common Stock and (iii) 2,000,000 shares issuable
upon exercise of the Class A and Class B Warrants issued in
a private placement. See "Description of Securities."
<PAGE>
THE HARMAT ORGANIZATION, INC.
BILTMORE SECURITIES, INC.
1,250,000 Shares of Common Stock
2,000,000 Shares of Common Stock issuable
upon exercise of outstanding Warrants
No dealer, salesperson or other person has been authorized to give any
information or to make any representations in connection with this Offering
other than those contained in this Prospectus and, if given or made, such
information or representations must not be relied on as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the securities offered
by this Prospectus, or an offer or solicitation of an offer to buy any
securities by any person in any jurisdiction in which such offer or solicitation
is not authorized or is unlawful. The delivery of this Prospectus shall not,
under any circumstances, create any implication that the information herein is
correct as of any time subsequent to the date of this Prospectus.
TABLE OF CONTENTS
Page
Available Information..........3
Prospectus Summary.............4
Risk Factors...................6
Use of Proceeds................22
Capitalization.................24
Dilution.......................25
Dividend Policy................27
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations.................28
Business.......................37
Management.....................42
Certain Transactions...........46
Principal Stockholder..........49
Selling Stockholders...........50
Description of Securities......53
Underwriting...................56
Concurrent Sales by Selling
Stockholders..................63
Legal Matters..................63
Experts........................63
Financial Statements...........F-1
Until October 4, 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Debentures, whether or not participating
in the distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with regard to their unsold allotments or subscription.
<PAGE>
Securiites and Exchange Commission
Washington, DC
Re: The Harmat Organization
Registration No. 333-3501
Gentlemen:
In accordance with Rule 424(b) enclosed please find the final prospectus for
The Harmat Organization.
Very truly yours,
David W. Sass
