As filed with the Securities and Exchange Commission on August 21, 1996
Registration No. 333-3501
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment #3
to
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
THE HARMAT ORGANIZATION, INC.
(Name of small business issuer in charter)
Delaware 1521 11-2780723
--------------- ---------------------- -------------
(State or other (Standard Industrial (IRS Employer
jurisdiction of Primary Classification I.D. Number)
incorporation Code Number)
or organization)
(Address and telephone number, of registrant's
principal executive offices)
Old Country Road
P.O. Box 539
Quogue, New York 11959
(Address of principal place of business or
intended principal place of business)
(Name, address and telephone number, of agent for service)
MATTHEW SCHILOWITZ
c/o The Harmat Organization, Inc.
Old Country Road
P.O. Box 539
Quogue, New York 11959
(516) 653-3303
Please send a copy of all communications to:
DAVID W. SASS, ESQ. STEVEN WASSERMAN, ESQ.
McLaughlin & Stern, LLP Bernstein & Wasserman, LLP
260 Madison Avenue 950 Third Avenue
New York, New York 10016 New York, New York 10022
(212) 448-1100 (212) 826-0730
Fax(212) 448-0066 Fax (212) 371-4730
<PAGE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box [x]
------------------------------
2
<PAGE>
CALCULATION OF REGISTRATION FEE
Proposed
Maximum
Title of Each Amount Offering
Class of Security Being Price per
Being Registered Registered Unit/Share
(1)
- -------------------------------------------------------------------------------
Shares of Common Stock,
par value $.001(2) 862,500 $ 5.75
Units
Representative's Warrant
to Purchase Shares 75,000 $ .001
Warrants
Shares underlying
the Representative's
Warrant (3) 75,000 $ 6.90
Shares
Shares of Common Stock
$.001 par value offered 1,250,000 $ 5.75
by Selling Stockholders(4) Shares
Shares of Common Stock
$.001 par value underlying
the Series A Warrants issued
in a private placement (3) 1,500,000 $ 6.00
Shares of Common Stock
$.001 par value underlying
the Series B Warrants
issued in a private 500,000 $ 9.00
placement (3)(5) Shares
Total.............................. $ 9,022.29
Previously paid.................... $ 8,324.59
Balance Due........................ $ 697.70
3
<PAGE>
CALCULATION OF REGISTRATION FEE
Proposed
Maximum
Title of Each Aggregate Amount of
Class of Security Offering Registration
Being Registered Price Fee
- --------------------------------------------------------------------------------
Shares of Common Stock,
par value $.001 $ 4,959,375.00 $ 1,710.14
Representative's Warrant $ 75.00 $ .03
to Purchase Shares
Shares underlying
the Representative's
Warrant (3) $ 517,500 $ 178.45
Shares of Common Stock
$.001 par value offered $ 7,187,500 $ 2,478.47
by Selling Stockholders(4)
Shares of Common Stock
$.001 par value underlying
the Series A Warrants issued
in a private placement (3) $ 9,000,000 $ 3,103.47
Shares of Common Stock
$.001 par value underlying
the Series B Warrants
issued in a private $ 4,500,000 $ 1,551.73
placement (3)(5)
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 112,500 Shares which may be issued on exercise of a 30-day option
granted to the Underwriters to cover over-allotments. See "Underwriting".
4
<PAGE>
(3) Pursuant to Rule 416 there are also being registered such additional shares
as may be issued as a result of the anti-dilution provisions of the Common
Stock Purchase Warrants and the Representative's Warrant.
(4) Includes 500,000 shares of Common Stock sold in a private placement in
March 1996 contained in 500,000 Private Placement Units, each Unit
consisting of one share of Common Stock, three Series A Warrants and one
Series B Warrant. The Series A Warrants are exercisable at $6.00 per share
and the Series B Warrants are exercisable at $9.00 per share. Also includes
750,000 shares to be sold by a Selling Stockholder. These shares are being
registered for resale only pursuant to an alternate prospectus prepared in
connection with the Registration Statement.
(5) Represents shares of Common Stock underlying Series B Warrants sold in a
private placement in March 1996. These shares are being registered for
resale only pursuant to an alternate prospectus prepared in connection with
the Registration Statement.
------------------------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
-----------------------------
5
<PAGE>
EXPLANATORY NOTE
This registration statement covers the primary offering of Units by The
Harmat Organization, Inc. ("Company") and the offering of securities by certain
selling stockholders ("Selling Stockholders"). The Company is registering, under
the primary prospectus ("Primary Prospectus") 750,000 Shares. The Selling
Stockholders are registering, under an alternate prospectus ("Alternate
Prospectus"), 1,250,000 shares of Common Stock, and 2,000,000 shares of Common
Stock underlying outstanding Class A and Class B Warrants. The Alternate
Prospectus pages, which follow the Primary Prospectus, contain certain sections
which are to be combined with all of the sections contained in the Primary
Prospectus, with the following exceptions: The front and back cover pages, and
the sections entitled "The Offering" and "Selling Stockholders." In addition,
the sections entitled "Concurrent Sales" and "Plan of Distribution" will be
added to the Alternate Prospectus. Furthermore, all references contained in the
Alternate Prospectus to the "offering" shall refer to the Company`s offering
under the Primary Prospectus.
6
<PAGE>
THE HARMAT ORGANIZATION, INC.
Cross Reference Sheet
Item Caption Location
- ---- ------- --------
1. Forepart of Registration Statement Outside Front Cover Page
Page and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside
Outside Pages of Prospectus Back Cover Pages
3. Summary Information and Risk Factors Prospectus Summary; Risk
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Underwriting; Risk Factors
6. Dilution Dilution
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Underwriting
9. Legal Proceedings Business-Litigation
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Underwriting-
Indemnification for Securities Act Indemnification
7
<PAGE>
15. Organization Within Last Five Years The Company
16. Description of Business Business; Risk Factors;
Financial Statements;
Selected Financial Data;
Prospectus Summary; Use of
Proceeds
17. Management's Discussion and Analysis Management's Discussion
or Plan of Operation and Analysis of Financial
Condition and Results of
Operation
18. Description of Property Business-Properties
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Market Information;
Stockholder Matters Prospectus Summary
21. Executive Compensation Management-Executive
Compensation
22. Financial Statements Financial Statements
23. Changes In and Disagreements With Not Applicable
Accountants on Accounting and
Financial Disclosure
8
<PAGE>
Subject to Completion dated August 21, 1996
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
9
<PAGE>
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.
- --------------------------------------------------------------------------------
Price to Public Underwriting Discounts Proceeds to
and Commissions (1) Company(2)
- --------------------------------------------------------------------------------
Common Stock offered
by Company............ $ 5.75 $ .575 $ 5.175
- --------------------------------------------------------------------------------
Total(3).............. $ 4,312,500 $ 431,250 $ 3,881,250
- --------------------------------------------------------------------------------
BILTMORE SECURITIES, INC
The Date of this Prospectus is _______, 1996
- ----------
(1) Does not include additional underwriting compensation to be
10
<PAGE>
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 $439,375
(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 $3,441,875.
(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 $4,004,656, 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
11
<PAGE>
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
______, 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."
12
<PAGE>
AVAILABLE INFORMATION
Upon completion of its offering, the Company will be subject 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
13
<PAGE>
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." 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.
14
<PAGE>
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
- ----------
(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
15
<PAGE>
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," "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
$1,773,827, 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 and the six months ended June 30, 1996 and 1995 has been
derived from audited financial statements.
16
<PAGE>
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)
Balance Sheet Data
Working Capital (Deficit)................. (1,466,859) 1,827,368
Total Assets.............................. 3,534,875 5,908,702
Total Liabilities......................... 3,640,266 2,572,218
Total Long-Term Obligations............... 922,378 774,730
Stockholders' Equity...................... (105,391) 3,336,484
Six Months Ended June 30,
1996 1995
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................................ 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
17
<PAGE>
(1) Includes the effect of the proposed public offering with anticipated net
proceeds of $3,441,875.
(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 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.
18
<PAGE>
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
19
<PAGE>
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."
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
20
<PAGE>
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 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
$2,373,827 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
21
<PAGE>
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".
Working Capital - Use of Proceeds - Management's Discretion
A portion (approximately $1,773,827 or 51.5%) 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
22
<PAGE>
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".
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
23
<PAGE>
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 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
24
<PAGE>
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
25
<PAGE>
their securities in order for the Underwriter to engage in the 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".
26
<PAGE>
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 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
27
<PAGE>
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 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 May 15, 1996:
* to review the Underwriter's policies, practices and procedures in six
(6) areas relating to compliance and sales practices;
28
<PAGE>
* 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 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
29
<PAGE>
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 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
30
<PAGE>
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 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
31
<PAGE>
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 _________, 1996 (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".
32
<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 $3,441,875 (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 30.1%
General Working Capital (3).................. 1,773,827 51.5%
---------- ----
Total.............................. $3,441,875 100%
- ----------
(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
33
<PAGE>
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 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
34
<PAGE>
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.
35
<PAGE>
- --------------------------------------------------------------------------------
CAPITALIZATION
- --------------------------------------------------------------------------------
The following table sets forth the Company's capitalization on a pro forma basis
and as adjusted as if all of the Units 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 $ 3,742,188
Retained Earnings
(Deficit) $ (408,204) $ (408,204)
----------- -----------
Total
Capitalization $ 3,534,875 $ 5,908,702
=========== ===========
(1) Gives effect to the anticipated net proceeds of $3,456,875 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
36
<PAGE>
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. 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
37
<PAGE>
deficit of $(1,750,000) 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
$310,000 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
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
38
<PAGE>
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 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):
39
<PAGE>
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% $ 4,837,500 100%
(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."
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
40
<PAGE>
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.
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
41
<PAGE>
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 three months ended March 31, 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"].
42
<PAGE>
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.
43
<PAGE>
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.
Income from Operations
The Company's loss/gain from operations for the three months ended June 30, 1996
and 1995 was $(156,759) and $257,732, respectively. The decrease in results from
operations of approximately $400,000 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 losses of
$(51,359), representing unrealized losses on marketable securities. 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.
44
<PAGE>
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.
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 of $426,214 of accounts payable and accrued
expenses, $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
45
<PAGE>
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 $50,760 of distribution 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 $954,124 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
offering. This amount includes $928,180 which is included in current liabilities
at March 31, 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.
46
<PAGE>
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 $3,441,875 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 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
47
<PAGE>
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), 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
48
<PAGE>
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 $85,000 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 [15% 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 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 approximately $130,450 is primarily
49
<PAGE>
attributable to the improved gross profit in 1995 of approximately $350,000.
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 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.
50
<PAGE>
- --------------------------------------------------------------------------------
BUSINESS
- --------------------------------------------------------------------------------
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.
51
<PAGE>
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 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
52
<PAGE>
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.
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.
53
<PAGE>
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 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
54
<PAGE>
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.
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
55
<PAGE>
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.
56
<PAGE>
- --------------------------------------------------------------------------------
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
57
<PAGE>
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 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
58
<PAGE>
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.
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
All
Other Annual Restricted Other
Name and Compensation Stock Options LTIP Compen-
Principal Position Year Salary($) Bonus ($) Awards($) SARs Payouts(#) sation($)
- ------------------ ---- --------- ----- ------------ ---------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Matthew Schilowitz(1)(2) 1995 197,000
Chief Executive Officer, 1994 217,000
Chief Financial Officer 1993 154,000
</TABLE>
- ----------
(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
59
<PAGE>
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 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.
60
<PAGE>
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.
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
61
<PAGE>
(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.
62
<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
63
<PAGE>
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.
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.
64
<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
380 Lexington Ave.
New York, NY 10168
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.
65
<PAGE>
(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. 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
66
<PAGE>
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 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
67
<PAGE>
forms a part:
Number of
Shares Owned
Before
Name (1) Offering
- -------- --------
Matthew Schilowitz(2) 1,250,000
Dr. Irving Kraut (5) 250,000
Martin Rothstein (6) 200,000
Alan & Rita Robinson (7) 50,000
TOTAL
Number of Shares
Registered but
Subject to 18 Number of Shares Percentage
Month Owned After Owned After
Name (1) Restriction Offering Offering (3)(7)
- -------- ------------- ---------------- ---------------
Matthew Schilowitz(2) 750,000 500,000 20%
Dr. Irving Kraut (4) 250,000 -0- -
Martin Rothstein (5) 200,000 -0- -
Alan & Rita Robinson (6) 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.
68
<PAGE>
(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 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.
69
<PAGE>
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 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
70
<PAGE>
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 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.
71
<PAGE>
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 ___________, 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 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
72
<PAGE>
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 May, 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.
73
<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 ____ %
or $______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
74
<PAGE>
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 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.
75
<PAGE>
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 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.
76
<PAGE>
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 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
77
<PAGE>
(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 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
78
<PAGE>
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 May 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;
79
<PAGE>
* 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 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.
80
<PAGE>
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.
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
81
<PAGE>
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 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.
82
<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
<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
<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 -- --
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
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended Years ended
June 30, December 31,
-------------------------- --------------------------
1996 1995 1995 1994
---- ---- ---- ----
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C>
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
=========== ===========
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
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-4
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY [DEFICIT]
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Total
---------------------- Additional Retained Stockholder's
Number of Amount Paid-in Earnings Equity
Shares [At Par] Capital [Deficit] [Deficit]
------ -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
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)
========== ========== ========== ========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-5
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended Years ended
June 30, December 31,
-------------------------- --------------------------
1996 1995 1995 1994
---- ---- ---- ----
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C>
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)
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
</TABLE>
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
F-6
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended Years ended
June 30, December 31,
-------------------------- --------------------------
1996 1995 1995 1994
---- ---- ---- ----
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C>
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
=========== =========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 73,353 $ 57,665 $ 50,066 $ 38,585
Income Taxes $ -- $ -- $ -- $ --
</TABLE>
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
<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.
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
<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 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
<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, 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
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
<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
----------
Total Mortgages Payable $1,260,850
==========
F-12
<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
In 1994 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
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
<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 $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
<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.
[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
<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 Type Warrants Issued Price of Grant Exercised
- ------------- ---- --------------- ----- -------- ---------
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 $3,441,875 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 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
<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 Noes 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
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.
. . . . . . . . . .
F-17
<PAGE>
Alternate Cover Page
SUBJECT TO COMPLETION, DATED AUGUST 21, 1996
PROSPECTUS
1,250,000 Shares
THE HARMAT ORGANIZATION, INC.
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 __, AND "DILUTION" page __.
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 date of this Prospectus ___________________, 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
- ----------
(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>
------------
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..............
Prospectus Summary.................
Risk Factors.......................
Use of Proceeds....................
Capitalization.....................
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations.....................
Dilution...........................
Dividend Policy....................
Business...........................
Management.........................
Certain Transactions...............
Principal Stockholder..............
Selling Stockholders...............
Description of Securities..........
Underwriting.......................
Concurrent Sales by Selling
Stockholders......................
Legal Matters......................
Experts............................
Financial Statements...............
Until ____________, 199__ (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.
750,000 Shares of Common Stock
THE HARMAT ORGANIZATION, INC.
Biltmore Securities, Inc.
<PAGE>
------------
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..............
Prospectus Summary.................
Risk Factors.......................
Use of Proceeds....................
Capitalization.....................
Management's Discussion and
Analysis of Financial
Condition and Results
of Operations.....................
Dilution...........................
Dividend Policy....................
Business...........................
Management.........................
Certain Transactions...............
Principal Stockholder..............
Selling Stockholders...............
Description of Securities..........
Underwriting.......................
Concurrent Sales by Selling
Stockholders......................
Legal Matters......................
Experts............................
Financial Statements...............
Until ____________, 199 (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.
2,000,000 Shares of Common Stock Shares
of Common Stock issuable upon exercise of
outstanding Warrants
THE HARMAT ORGANIZATION, INC.
<PAGE>
PART II
Information Not Required in Prospectus
ITEM 24. Indemnification of Officers and Directors
Articles NINTH and TENTH of the Corporation's Certificate of Incorporation
provides:
"NINTH: The personal liability of the directors of the corporation is
hereby eliminated to the fullest extent permitted by the provisions of
paragraph (7) of subsection (b) of ss.102 of the General Corporation Law of
the State of Delaware, as the same may be amended and supplemented."
"TENTH: The corporation shall, to the fullest extent permitted by the
provisions of ss.145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify any and
all persons whom it shall have power to indemnify under said section from
and against any and all of the expenses, liabilities or other matters
referred to in or covered by said section, and the indemnification provided
for herein shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a
director, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of such person."
ITEM 25. Other Expenses of Issuance and Distribution
The expenses payable by Registrant in connection with the issuance and
distribution of the securities being registered (other than underwriting
discounts and commissions, non-accountable expenses of $129,375 ($148,781.25
additional if the over-allotment option is exercised) are estimated as follows:
Securities and Exchange Commission Fees.......... $ 7,987.80
NASDAQ Stock Market listing fee.................. $ 10,000.00
Transfer/Warrant Agent's Fee and Expenses........ $ 3,500.00
NASD filing fee.................................. $ 825.00
Accounting Fees and Expenses..................... $115,000.00
Blue Sky Fees and Expenses....................... $ 45,000.00
Tombstone Advertisement.......................... $ 10,000.00
Printing Expenses (including Securities)......... $ 35,000.00
Legal Fees....................................... $ 80,000.00
Miscellaneous.................................... $ 2,687.20
-----------
TOTAL................................ $310,000.00
II-1
<PAGE>
ITEM 26. Recent Sales of Unregistered Securities
In March 1996 the Company concluded a Private Placement of Units for
$500,000 to three people, each Unit consisting of one share of the Company's
Common Stock, three Series A Redeemable Common Stock Purchase Warrant and One
Series B Redeemable Common Stock Purchase Warrant.
On March 1, 1996, the Company entered into a Stock Purchase Agreement
pursuant to which the Company acquired all of the outstanding capital stock of
Harmat Homes, Inc., Harmat Capital Corp., Northside Woods, Inc., Harmat
Organization, Inc., Harmat Holding Corp. and a fifty (50%) percent interest in
Quick Storage, of Quogue, Inc. in exchange for 1,750,000 shares of Common Stock
of the Company.
Neither the Company nor any person acting on its behalf offered or sold the
securities described above by means of any form of general solicitation or
general advertising. Each purchaser represented in writing that he acquired the
securities for his own account. A legend was placed on the certificates stating
that the restrictions on their transferability and sale. Each purchaser signed a
written agreement that the securities will not be sold without registration
under the Act or exemption therefrom. The Registrant believes such issuances are
exempt transactions not involving a public offering under Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 27. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1* Form of Underwriting Agreement
1.2* Selected Dealer Agreement
3.1 Registrant's Articles of Incorporation
3.2 Registrant's By-Laws
4.1 Form of Common Stock Certificate
4.2 Form of Warrant and Warrant Agreement
4.3 Form of Series B Warrant
4.4* Form of Representative's Purchase Option
4.5 Registrant's Stock Option Plan
5* Opinion of McLaughlin & Stern, LLP
II-2
<PAGE>
10.1 Intentionally Left Blank
10.2* Employment Agreement dated April 1, 1996, and as amended August
3, 1996 between the Registrant and Matthew Schilowitz.
10.3 Stock Sale Agreement between the Registrant and Bennett Brokow,
Lloyd Brokow and Donald Cohen.
10.4 Stock Purchase Agreement dated March 1, 1996 between the
Registrant and Matthew Schilowitz.
II-3
<PAGE>
21 List of Subsidiaries
24.1* Consent of Mortenson and Associates, P.C.
(b) Financial Statement Schedules
* Filed herewith.
Schedules other than those listed above have been omitted since they are either
not required, are not applicable or the required information is shown in the
financial statements or related notes.
ITEM 28. Undertakings
The undersigned Registrant hereby undertakes to:
(a)(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution;
II-4
<PAGE>
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement for the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering;
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering; and
(b) Provide to the underwriter at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names as
required by the Underwriter to permit prompt delivery to each purchaser.
(c) If the Registrant requests acceleration of the effective date of the
Registration Statement under Rule 461 under the Securities Act, the Registrant
acknowledges that:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the
II-5
<PAGE>
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, an the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
The Harmat Organization, Inc. and Subsidiaries
Quogue, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated March 27, 1996, relating
to the consolidated financial statements of Harmat Organization, Inc. and
subsidiaries which is contained in the Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
Moore Stephens, P.C.
Certified Public Accountants
Cranford, New Jersey
August 21, 1996
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment to the
registration statement to be signed on its behalf by the undersigned, in the
City of Quogue, State of New York, on August 21, 1996.
THE HARMAT ORGANIZATION, INC.
By: /s/ Matthew Schilowitz
---------------------------------
Matthew Schilowitz
President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
/s/ Matthew Schilowitz President and Director August 21, 1996
- ------------------------ Principal Executive,
Matthew Schilowitz Operating and Financial
Officer
/s/ Seymour G. Siegel Treasurer and Director August 21, 1996
- ------------------------
Seymour G. Siegel
/s/ Scott Prizer Secretary and Director August 21, 1996
- ------------------------
Scott Prizer
/s/ David S. Eiten Director August 21, 1996
- ------------------------
David S. Eiten
/s/ David W. Sass Director August 21, 1996
- ------------------------
David W. Sass
II-7
EXHIBIT 1.1
750,000 Shares of Common Stock
THE HARMAT ORGANIZATION, INC.
UNDERWRITING AGREEMENT
New York, New York
August , 1996
Biltmore Securities, Inc.
6700 North Andrews Avenue
Fort Lauderdale, FL 33309
The Harmat Organization, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to you (the "Underwriter") an aggregate of 750,000
shares of Common Stock, par value $.001 per share ("Common Stock"). In addition,
the Company proposes to grant to the Underwriter the option referred to in
Section 2(b) to purchase all or any part of an aggregate of 112,500 additional
Shares of Common Stock.
Unless the context otherwise requires, the aggregate of 750,000 Shares of
Common Stock to be sold by the Company, together with all or any part of the
112,500 additional Shares of Common Stock which the Underwriter has the option
to purchase, are herein called the "Shares", or the "Securities."
You have advised the Company that you desire to purchase the Securities.
The Company confirms the agreements made by them with respect to the purchase of
the Securities by the Underwriter as follows:
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with you that:
(a) A registration statement (File No. 333-03501) on Form SB-2
relating to the public offering of the Securities and including certain
securities owned by certain investors to the Company, including a form of
prospectus subject to completion, copies of which have heretofore been delivered
to you, has been prepared in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the
<PAGE>
Securities and Exchange Commission (the "Commission") thereunder, and has been
filed with the Commission under the Act and one or more amendments to such
registration statement may have been so filed. After the execution of this
Agreement, the Company will file with the Commission either (i) if such
registration statement, as it may have been amended, has been declared by the
Commission to be effective under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act and as have been provided to and approved by you prior
to the execution of this Agreement, or (ii) if such registration statement, as
it may have been amended, has not been declared by the Commission to be
effective under the Act, an amendment to such registration statement, including
a form of prospectus, a copy of which amendment has been furnished to and
approved by you prior to the execution of this Agreement. As used in this
Agreement, the term "Registration Statement" means such registration statement,
as amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto and including any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); and the term "Prospectus" means the prospectus first filed
with the Commission pursuant to Rule 424(b) under the Act, or, if no prospectus
is required to be filed pursuant to said Rule 424(b), such term means the
prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended, and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus. At the time the Registration Statement
becomes effective and at all times subsequent thereto up to and on the First
Closing Date (as hereinafter defined) or the Option Closing Date, as the case
may be, (i) the Registration Statement and Prospectus will in all respects
conform to the requirements of the Act and the Rules and Regulations; and (ii)
neither the Registration Statement nor the Prospectus will include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make statements therein not misleading; provided,
however, that the Company makes no representations, warranties or agreements as
to information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of the Underwriter specifically for use
in the preparation thereof. It is understood that the statements set forth in
the Prospectus on page 2 with respect to the Underwriter's practices relating to
the release of lock-up restrictions, the paragraph under the heading
"Underwriting" relating to concessions to certain dealers, the last paragraph on
the cover page of the Prospectus, the three legends on page 2 of the Prospectus,
all descriptions involving litigation of the Underwriter, the "Underwriting"
Section of the Prospectus and the identity of counsel to the Underwriter under
the
2
<PAGE>
heading "Legal Matters" constitute for purposes of this Section and Section 6(b)
the only information furnished in writing by or on behalf of the Underwriter for
inclusion in the Registration Statement and Prospectus, as the case may be.
(c) The Company and each of its subsidiaries ("the Subsidiaries") have
been duly incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, with full
corporate power and authority to own its properties and conduct its business as
described in the Prospectus and is duly qualified or licensed to do business as
a foreign corporation and is in good standing in each other jurisdiction in
which the nature of its business or the character or location of its properties
requires such qualification, except where the failure to so qualify will not
materially adversely affect the Company's or Subsidiaries' business, properties
or financial condition.
(d) The authorized, issued and outstanding capital stock of the
Company, including the predecessors of the Company, as of _______, 1996 is as
set forth in the Prospectus under "Capitalization"; the shares of issued and
outstanding capital stock of the Company set forth thereunder have been duly
authorized, validly issued and are fully paid and nonassessable; except as set
forth in the Prospectus, no options, warrants, or other rights to purchase,
agreements or other obligations to issue, or agreements or other rights to
convert any obligation into, any shares of capital stock of the Company have
been granted or entered into by the Company; the Stock Purchase Agreement
referred to in the "Certain Transactions" section of the Prospectus has been
consummated such that the Corporation owns all of the issued and outstanding
capital stock of Harmat Homes, Inc., Harmat Capital Corp., Northside Woods,
Inc., Harmat Holding Corp., Harmat Organization, Inc., and Quick Storage of
Quogue, Inc. and that there are 1,750,000 shares of Common Stock of the Company
issued and outstanding prior to the effective date; and the capital stock
conforms to all statements relating thereto contained in the Registration
Statement and Prospectus.
(e) The Securities are duly authorized, and when issued and delivered
pursuant to this Agreement, will be duly authorized, validly issued, fully paid
and nonassessable and free of preemptive rights of any security holder of the
Company. Neither the filing of the Registration Statement nor the offering or
sale of the Securities as contemplated in this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or relating to
the registration of any shares of Common Stock, except as described in the
Registration Statement.
The Shares, contained in the Purchase Option (as defined as the
Underwriter's Purchase Option in the Registration Statement) have been duly
authorized. The shares of Common Stock included in the Purchase Option when
issued and sold, will be duly authorized, validly issued, fully paid and
non-assessable and free of preemptive rights and no personal liability will
attach to the ownership thereof.
(f) This Agreement and the Purchase Option have been duly and validly
authorized, executed, and delivered by the Company. The Company has full power
and authority to authorize, issue, and sell the Securities to be sold by it
hereunder on the terms and conditions
3
<PAGE>
set forth herein, and no consent, approval, authorization or other order of any
governmental authority is required in connection with such authorization,
execution and delivery or in connection with the authorization, issuance, and
sale of the Securities or the Purchase Option, except such as may be required
under the Act or state securities laws.
(g) Except as described in the Prospectus, or which would not have a
material adverse effect on the condition (financial or otherwise), business
prospects, net worth or properties of the Company and Subsidiaries taken as a
whole (a "Material Adverse Effect"), the Company and Subsidiaries are not in
material violation, breach, or default of or under, and consummation of the
transactions herein contemplated and the fulfillment of the terms of this
Agreement will not conflict with, or result in a material breach or violation
of, any of the terms or provisions of, or constitute a material default under,
or result in the creation or imposition of any material lien, charge, or
encumbrance upon any of the property or assets of the Company or the
Subsidiaries pursuant to the terms of any material indenture, mortgage, deed of
trust, loan agreement, or other material agreement or instrument to which the
Company or the Subsidiaries is a party or by which the Company or the
subsidiaries may be bound or to which any of the property or assets of the
Company or the Subsidiaries is subject, nor will such action result in any
violation of the provisions of the articles of incorporation or the by-laws of
the Company or the Subsidiaries, as amended, or any statute or any order, rule
or regulation applicable to the Company of any court or of any regulatory
authority or other governmental body having jurisdiction over the Company or the
Subsidiaries.
(h) Subject to the qualifications stated in the Prospectus, the
Company and Subsidiaries have good and marketable title to all properties and
assets described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to their business; subject to the
qualifications stated in the Prospectus, all of the material leases and
subleases under which the Company or the Subsidiaries is the lessor or sublessor
of properties or assets or under which the Company or the Subsidiaries holds
properties or assets as lessee or sublessee as described in the Prospectus are
in full force and effect, and, except as described in the Prospectus, the
Company and Subsidiaries are not in default in any material respect with respect
to any of the terms or provisions of any of such leases or subleases, and, to
the best knowledge of the Company, no claim has been asserted by anyone adverse
to rights of the Company or the Subsidiaries as lessor, sublessor, lessee, or
sublessee under any of the leases or subleases mentioned above, or affecting or
questioning the right of the Company or the Subsidiaries to continued possession
of the leased or subleased premises or assets under any such lease or sublease
except as described or referred to in the Prospectus; and the Company and
Subsidiaries own or lease all such properties described in the Prospectus as are
necessary to its operations as now conducted and, except as otherwise stated in
the Prospectus, as proposed to be conducted as set forth in the Prospectus.
(i) Moore Stephens, P.C., which has given its reports on certain
financial statements filed with the Commission as a part of the Registration
Statement, is with respect to the Company, independent public accountants as
required by the Act and the Rules and Regulations.
4
<PAGE>
(j) The combined/consolidated financial statements, and schedules
together with related notes, set forth in the Prospectus or the Registration
Statement present fairly the financial position and results of operations and
changes in cash flow position of the Company and the Subsidiaries on the basis
stated in the Registration Statement, at the respective dates and for the
respective periods to which they apply. Said statements and schedules and
related notes have been prepared in accordance with generally accepted
accounting principles applied on a basis which is consistent during the periods
involved except as disclosed in the Prospectus and Registration Statement. The
information set forth under the caption "Selected Financial Data" in the
Prospectus fairly present, on the basis stated in the Prospectus, the
information included therein.
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus and except as otherwise
disclosed or contemplated therein, the Company and the Subsidiaries have not
incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or entered into any transaction not in the ordinary
course of business, which would have a Material Adverse Effect, and there has
not been any change in the capital stock of, or any incurrence of short-term or
long-term debt by, the Company or the Subsidiaries or any issuance of options,
warrants or other rights to purchase the capital stock of the Company or the
Subsidiaries or any Material Adverse Effect or any development involving, so far
as the Company or the Subsidiaries can now reasonably foresee a prospective
Material Adverse Effect.
(l) Except as set forth in the Prospectus, there is not now pending
or, to the knowledge of the Company, threatened, any action, suit or proceeding
to which the Company or the Subsidiaries is a party before or by any court or
governmental agency or body, which might result in any Material Adverse Effect,
nor are there any actions, suits or proceedings related to environmental matters
or related to discrimination on the basis of age, sex, religion or race which
might be reasonably expected to have a Material Adverse Effect; and no labor
disputes involving the employees of the Company or the Subsidiaries exist or to
the knowledge of the Company, are threatened which might be reasonably expected
to have a Material Adverse Effect.
(m) Except as disclosed in the Prospectus, the Company and the
Subsidiaries have filed all necessary federal, state, and foreign income and
franchise tax returns required to be filed as of the date hereof and have paid
all taxes shown as due thereon; and there is no tax deficiency which has been
asserted against the Company or the Subsidiaries.
(n) Except as disclosed in the Registration Statement, the Company and
each of the Subsidiaries has sufficient licenses, permits, and other
governmental authorizations currently necessary for the conduct of its business
or the ownership of its properties as described in the Prospectus and is in all
material respects complying therewith and owns or possesses adequate rights to
use all material patents, patent applications, trademarks, service marks,
trade-names, trademark registrations, service mark registrations, copyrights,
and licenses necessary for the conduct of such business and has not received any
notice of conflict with the asserted rights of others in respect thereof. To the
best knowledge of the Company, none of the activities or business of the Company
5
<PAGE>
and the Subsidiaries are in violation of, or cause the Company or the
Subsidiaries to violate, any law, rule, regulation, or order of the United
States, any state, county, or locality, or of any agency or body of the United
States or of any state, county or locality, the violation of which would have a
Material Adverse Effect.
(o) The Company and the Subsidiaries have not, directly or indirectly,
at any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
and the Subsidiaries to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(p) On the Closing Dates (as hereinafter defined) all transfer or
other taxes, (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Securities to the Underwriter
hereunder will have been fully paid or provided for by the Company and all laws
imposing such taxes will have been complied with in all material respects.
(q) All contracts and other documents of the Company and the
Subsidiaries which are, under the Rules and Regulations, required to be filed as
exhibits to the Registration Statement have been so filed.
(r) Except as disclosed in the Registration Statement, the Company has
no other subsidiaries.
(s) Except as disclosed in the Registration Statement, the Company and
the Subsidiaries have not entered into any agreement pursuant to which any
person is entitled either directly or indirectly to compensation from the
Company or the Subsidiaries for services as a finder in connection with the
proposed public offering.
(t) Except as disclosed in the Prospectus, no officer, director, or
stockholder of the Company has any National Association of Securities Dealers,
Inc. (the "NASD") affiliation.
(u) No other firm, corporation or person has any rights to underwrite
an offering of any of the Company's securities.
2. Purchase, Delivery and Sale of the Securities.
(a) Subject to the terms and conditions of this Agreement, and upon
the basis of the representations, warranties, and agreements herein
contained,(i) the Company agrees to issue and sell to the Underwriter, and the
Underwriter agrees to buy from the Company at $5.175 per Share (the "Share
Price"), at the place and time hereinafter specified, 750,000 Shares of
6
<PAGE>
Common Stock (the "First Shares").
Delivery of the First Shares against payment therefor shall take place
at the offices of Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New
York (or at such other place as may be designated by agreement between the
Underwriter and the Company) at 10:00 a.m., New York time, on , 1996, or at such
later time and date as the Underwriter may designate in writing to the Company
at least two business days prior to such purchase, but not later than , 1996
such time and date of payment and delivery for the First Shares being herein
called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants an option to the Underwriter to
purchase all or any part of an aggregate of an additional 112,500 Shares of
Common Stock at the same price per Share as the Underwriter shall pay for the
First Shares being sold pursuant to the provisions of subsection (a) of this
Section 2 (such additional Shares being referred to herein as the "Option
Shares"). This option may be exercised within 30 days after the effective date
of the Registration Statement upon written notice by the Underwriter to the
Company advising as to the amount of Option Shares as to which the option is
being exercised, the names and denominations in which the certificates for such
Option Shares are to be registered and the time and date when such certificates
are to be delivered. Such time and date shall be determined by the Underwriter
but shall not be earlier than four nor later than ten full business days after
the exercise of said option (but in no event more than 40 days after the First
Closing Date), nor in any event prior to the First Closing Date, and such time
and date is referred to herein as the "Option Closing Date." Delivery of the
Option Shares against payment therefor shall take place at the offices of
Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New York (or at such
other place as may be designated by agreement between the Underwriter and the
Company). The Option granted hereunder may be exercised only to cover
over-allotments in the sale by the Underwriter of First Shares referred to in
subsection (a) above. No Option Shares shall be delivered unless all First
Shares shall have been delivered to the Underwriter as provided herein.
(c) The Company will make the certificates for the securities
comprising the Shares to be purchased by the Underwriter hereunder available to
the Underwriter for checking at least two full business days prior to the First
Closing Date or the Option Closing Date (which are collectively referred to
herein as the "Closing Dates"). The certificates shall be in such names and
denominations as the Underwriter may request, at least three full business days
prior to the Closing Dates. Delivery of the certificates at the time and place
specified in this Agreement is a further condition to the obligations of the
Underwriter.
Definitive certificates in negotiable form for the Shares to be
purchased by the Underwriter hereunder will be delivered by the Company to the
Underwriter for the account of the Underwriter against payment of the respective
purchase prices by the Underwriter, by wire transfer in immediately available
funds, payable to the Company.
7
<PAGE>
In addition, in the event the Underwriter exercises the option to
purchase from the Company all or any portion of the Option Shares pursuant to
the provisions of subsection (b) above, payment for such Shares shall be made to
or upon the order of the Company by certified or bank cashier's checks payable
in immediately available funds at the offices of Bernstein & Wasserman, LLP, 950
Third Avenue, New York, New York (or at such other place as may be designated by
agreement between the Underwriter and the Company), at the time and date of
delivery of such Shares as required by the provisions of subsection (b) above,
against receipt of the certificates for such Shares by the Underwriter for the
Underwriter's account registered in such names and in such denominations as the
Underwriter may reasonably request.
It is understood that the Underwriter proposes to offer the Shares to
be purchased hereunder to the public upon the terms and conditions set forth in
the Registration Statement, after the Registration Statement becomes effective.
3. Covenants of the Company. The Company covenants and agrees with the
Underwriter that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective. If required, the Company will file the Prospectus
and any amendment or supplement thereto with the Commission in the manner and
within the time period required by Rule 424(b) under the Act. Upon notification
from the Commission that the Registration Statement has become effective, the
Company will so advise the Underwriter and will not at any time, whether before
or after the effective date, file any amendment to the Registration Statement or
supplement to the Prospectus of which the Underwriter shall not previously have
been advised and furnished with a copy or to which the Underwriter or its
counsel shall have reasonably objected in writing or which is not in compliance
with the Act and the Rules and Regulations. At any time prior to the later of
(A) the completion by the Underwriter of the distribution of the Securities
contemplated hereby (but in no event more than nine months after the date on
which the Registration Statement shall have become or been declared effective)
and (B) 25 days after the date on which the Registration Statement shall have
become or been declared effective, the Company will prepare and file with the
Commission, promptly upon the Underwriter's request, any amendments or
supplements to the Registration Statement or Prospectus which, in the opinion of
counsel to the Company and the Underwriter, may be reasonably necessary or
advisable in connection with the distribution of the Securities.
As soon as the Company is advised thereof, the Company will advise the
Underwriter, and provide the Underwriter copies of any written advice, of the
receipt of any comments of the Commission, of the effectiveness of any
post-effective amendment to the Registration Statement, of the filing of any
supplement to the Prospectus or any amended Prospectus, of any request made by
the Commission for an amendment of the Registration Statement or for
supplementing of the Prospectus or for additional information with respect
thereto, of the issuance by the Commission or any state or regulatory body of
any stop order or other order or threat thereof suspending the effectiveness of
the Registration Statement or any order preventing or suspending
8
<PAGE>
the use of any preliminary prospectus, or of the suspension of the qualification
of the Shares for offering in any jurisdiction, or of the institution of any
proceedings for any of such purposes, andwill use its best efforts to prevent
the issuance of any such order, and, if issued, to obtain as soon as possible
the lifting thereof.
The Company has caused to be delivered to the Underwriter copies of
each Preliminary Prospectus, and the Company has consented and hereby consents
to the use of such copies for the purposes permitted by the Act. The Company
authorizes the Underwriter and dealers to use the Prospectus in connection with
the sale of the Securities for such period as in the opinion of counsel to the
Underwriter and the Company the use thereof is required to comply with the
applicable provisions of the Act and the Rules and Regulations. In case of the
happening, at any time within such period as a Prospectus is required under the
Act to be delivered in connection with sales by the Underwriter or dealer of any
event of which the Company has knowledge and which has a Material Adverse Effect
on the Company or the securities of the Company, or which in the opinion of
counsel for the Company and counsel for the Underwriter should be set forth in
an amendment of the Registration Statement or a supplement to the Prospectus in
order to make the statements therein not then misleading, in light of the
circumstances existing at the time the Prospectus is required to be delivered to
a purchaser of the Securities, or in case it shall be necessary to amend or
supplement the Prospectus to comply with law or with the Rules and Regulations,
the Company will notify the Underwriter promptly and forthwith prepare and
furnish to the Underwriter copies of such amended Prospectus or of such
supplement to be attached to the Prospectus, in such quantities as the
Underwriter may reasonably request, in order that the Prospectus, as so amended
or supplemented, will not contain any untrue statement of a material fact or
omit to state any material facts necessary in order to make the statements in
the Prospectus, in the light of the circumstances under which they are made, not
misleading. The preparation and furnishing of any such amendment or supplement
to the Registration Statement or amended Prospectus or supplement to be attached
to the Prospectus shall be without expense to the Underwriter, except that in
case the Underwriter is required, in connection with the sale of the Securities
to deliver a Prospectus nine months or more after the effective date of the
Registration Statement, the Company will upon request of and at the expense of
the Underwriter, amend or supplement the Registration Statement and Prospectus
and furnish the Underwriter with reasonable quantities of prospectuses complying
with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and Regulations and
the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and
regulations thereunder in connection with the offering and issuance of the
Securities.
(b) The Company will furnish such information as may be required and
to otherwise cooperate and use its best efforts to qualify to register the
Shares for sale under the securities or "blue sky" laws of such jurisdictions as
the Underwriter may designate and will make such applications and furnish such
information as may be required for that purpose and to comply with such laws,
provided the Company shall not be required to qualify as a foreign corporation
or a dealer in securities or to execute a general consent of service of process
in any jurisdiction in any
9
<PAGE>
action other than one arising out of the offering or sale of the Shares. The
Company will, from time to time, prepare and file such statements and reports as
are or may be required to continue such qualification in effect for so long a
period as the counsel to the Company and the Underwriter deem reasonably
necessary.
(c) If the sale of the Shares provided for herein is not consummated
as a result of the Company not performing its obligations hereunder in all
material respects, the Company shall pay all costs and expenses incurred by it
which are incident to the performance of the Company's obligations hereunder,
including but not limited to, all of the accountable out of pocket expenses of
the Underwriter up to $100,000.00 (including the reasonable fees and expenses of
counsel to the Underwriter).
(d) The Company will use its best efforts to (i) cause a registration
statement under the Securities Exchange Act of 1934 to be declared effective
concurrently with the completion of this offering and will notify you in writing
immediately upon the effectiveness of such registration statement, and (ii)
obtain and keep current a listing in the Standard & Poors or Moody's OTC
Industrial Manual.
(e) For so long as the Company is a reporting company under either
Section 12(g) or 15(d) of the Securities Exchange Act of 1934, the Company, at
its expense, will furnish to its stockholders and warrant holders, if any, an
annual report (including financial statements audited by independent public
accountants), in reasonable detail and at its expense, will furnish to the
Underwriter during the period ending five (5) years from the date hereof, (i) as
soon as practicable after the end of each fiscal year, but no earlier than the
filing of such information with the Commission a balance sheet of the Company
and any of its subsidiaries as at the end of such fiscal year, together with
statements of income, surplus and cash flow of the Company and any subsidiaries
for such fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as
practicable after the end of each of the first three fiscal quarters of each
fiscal year, but no earlier than the filing of such information with the
Commission, consolidated summary financial information of the Company for such
quarter in reasonable detail; (iii) as soon as they are publicly available, a
copy of all reports (financial or other) mailed to security holders; (iv) as
soon as they are available, a copy of all non-confidential reports and financial
statements furnished to or filed with the Commission or any securities exchange
or automated quotation system on which any Series of securities of the Company
is listed; and (v) such other information as you may from time to time
reasonably request. Notwithstanding the above, reports provided by the Company
to the Commission shall be deemed satisfactory for the foregoing purposes.
(f) So long as the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
10
<PAGE>
(g) The Company will deliver to the Underwriter at or before the First
Closing Date two signed copies of the Registration Statement including all
financial statements and exhibits filed therewith, and of all amendments
thereto, and will deliver to the Underwriter such number of conformed copies of
the Registration Statement, including such financial statements but without
exhibits, and of all amendments thereto, as the Underwriter may reasonably
request. The Company will deliver to or upon the Underwriter's order, from time
to time until the effective date of the Registration Statement, as many copies
of any Preliminary Prospectus filed with the Commission prior to the effective
date of the Registration Statement as the Underwriter may reasonably request.
The Company will deliver to the Underwriter on the effective date of the
Registration Statement and thereafter for so long as a Prospectus is required to
be delivered under the Act, from time to time, as many copies of the Prospectus,
in final form, or as thereafter amended or supplemented, as the Underwriter may
from time to time reasonably request.
(h) The Company will make generally available to its security holders
and to the registered holders of its Warrants which were issued in connection
with the Company's private placement of securities (the "Private Warrants") and
deliver to the Underwriter as soon as it is practicable to do so but in no event
later than 90 days after the end of twelve months after its current fiscal
quarter, an earnings statement (which need not be audited) covering a period of
at least twelve consecutive months beginning after the effective date of the
Registration Statement, which shall satisfy the requirements of Section 11(a) of
the Act.
(i) The Company will apply the net proceeds from the sale of the Units
substantially for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Units and the application of the proceeds therefrom as may be
required pursuant to Rule 463 under the Act.
(j) The Company will promptly prepare and file with the Commission any
amendments or supplements to the Registration Statement, Preliminary Prospectus
or Prospectus and take any other action, which in the opinion of counsel to the
Underwriter and counsel to the Company, may be reasonably necessary or advisable
in connection with the distribution of the Units and Selling Securities and will
use its best efforts to cause the same to become effective as promptly as
possible.
(k) The Company will reserve and keep available that maximum number of
its authorized but unissued securities which are issuable upon exercise of the
Purchase Option outstanding from time to time.
(l) (1) For a period of eighteen (18) months from the First Closing
Date, no officer, director or 5% shareholder prior to the offering will,
directly or indirectly, offer, sell (including any short sale), grant any option
for the sale of, acquire any option to dispose of, or otherwise dispose of any
shares of Common Stock (other than with respect to the Selling Securities)
without the prior written consent of the Underwriter, other than as set forth in
this Agreement and in the Registration Statement. In order to enforce this
covenant, the Company shall impose
11
<PAGE>
stop-transfer instructions with respect to the shares owned by every shareholder
prior to the offering until the end of such period (subject to any exceptions to
such limitation on transferability set forth in the Registration Statement). If
necessary to comply with any applicable Blue-sky Law, the shares held by such
shareholders will be escrowed with counsel for the Company or otherwise as
required.
(2) Except for the issuance of shares of capital stock by the Company
in connection with a dividend, recapitalization, reorganization or similar
transactions or as result of the exercise of warrants or options disclosed in or
issued or granted pursuant to plans disclosed in the Registration Statement, the
Company shall not, for a period of twenty four (24) months following the First
Closing Date, directly or indirectly, offer, sell, issue or transfer any shares
of its capital stock, or any security exchangeable or exercisable for, or
convertible into, shares of the capital stock, without the prior written consent
of the Underwriter, which shall not be unreasonable withheld.
(m) Upon completion of this offering, the Company will make all
filings required, including registration under the Securities Exchange Act of
1934, to obtain and at the Underwriter's request, will use its best efforts to
effect and maintain the listing of the Common Stock in the NASDAQ system or
listing on another national or regional securities exchange for at least five
years from the date of this Agreement.
(n) Except for the transactions contemplated by this Agreement or as
otherwise permitted by law, the Company represents that it has not taken and
agrees that it will not take, directly or indirectly, any action designed to or
which has constituted or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of the or to facilitate the
sale or resale of the Securities.
(o) On the First Closing Date and simultaneously with the delivery of
the Securities, the Company shall execute and deliver to you the Purchase
Option. The Purchase Option will be substantially in the form filed as an
Exhibit to the Registration Statement.
(p) On the Effective Date, the Company will have in force key person
life insurance on the life of Matthew C. Shilowitz in an amount of not less than
$1,000,000.00, payable to the Company, and will use its best efforts to maintain
such insurance for a three year period.
(q) So long as any Private Warrants are outstanding and the exercise
price of the Private Warrants is less than the market price of the Common Stock,
the Company shall use its best efforts to cause post-effective amendments to the
Registration Statement to become effective in compliance with the Act and
without any lapse of time between the effectiveness of any such post-effective
amendments and cause a copy of each Prospectus, as then amended, to be delivered
to each holder of record of a Private Warrant and to furnish to the Underwriter
and each dealer as many copies of each such Prospectus as such Underwriter or
dealer may reasonably request. The Company shall not call for redemption any of
the Private Warrants unless a registration statement covering the securities
underlying the Warrants has been declared effective by the Commission and
12
<PAGE>
remains current at least until the date fixed for redemption.
(r) For a period of five (5) years from the Effective Date, the
Company, at its expense, shall cause its regularly engaged independent certified
public accountants to review (but not audit) the Company's financial statements
for each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's 10-QSB quarterly
report and the mailing of quarterly financial information to stockholders,
provided that the Company shall not be required to file a report of such
accountants relating to such review with the Commission.
(s) The Company agrees to allow a representative designated by the
Underwriter from time to time to receive timely, written notice of all Board of
Directors meetings and notice of all telephonic Board meetings and the right to
attend all Board meetings and participate in all telephonic Board meetings. The
Underwriter shall also have the right to obtain copies of the minutes form all
Board of Directors meetings for five (5) years following the Effective Date of
the Registration Statement, whether or not a representative of the Underwriter
attends or participates in any such Board meeting. The Company agrees to
reimburse the Underwriter immediately upon the Underwriter's request therefor of
any reasonable travel and lodging expenses directly incurred by the Underwriter
in connection with its representative attending Company Board meetings on the
same basis for other Board members.
(t) The Company agrees to pay to the Underwriter a finder's fee of
5.0% of the first $3,000,000.00, 4.0% of the next $3,000,000.00, 3.0% of the
next $2,000,000.00, 2% of next $2,000,000.00 and 1% of the excess, if any, over
$10,000,000.00, of the aggregate consideration received by the Company with
respect to any transaction (including, but not limited to, mergers,
acquisitions, joint ventures, and any other capital business transaction for the
Company) introduced to the Company by the Underwriter and consummated by the
Company (an "Introduced Consummated Transaction") during the five (5) year
period commencing on the First Closing Date. The entire amount of any such
finder's fee due and payable to Underwriter shall be paid in full by certified
funds or cashier's check payable to the order of Underwriter or in cash, in each
case in the discretion of the Company, at the first closing of the Introduced
Consummated Transaction for which the finder's fee is due. For the purposes
hereof, a party shall not be deemed to be introduced by the Underwriter unless
and until (a) a written disclosure of the identity of such prospective party
shall have been given by the Underwriter and received by the Company during the
period; (b) such party was not previously known to the Company; and (c) such
party shall have commenced substantive negotiations with the Company relating to
a Introduced Consummated Transaction during such five (5) year period.
Additionally, the Company shall have the right to reject any proposed deal, for
any reason whatsoever, without incurring any liability hereunder to the
Underwriter.
(u) The Company agrees to pay the Underwriter a warrant solicitation
fee of 4.0% of the exercise price of any of the Private Warrants exercised
beginning one (1) year after the Effective Date (not including warrants
exercised by the Underwriter) if (a) the market price of
13
<PAGE>
the Company's Common Stock on the date the Private Warrant is exercised is
greater than the exercise price of the Private Warrant, (b) the exercise of the
Private Warrant was solicited by the Underwriter and the holder of the Warrant
designates the Underwriter in writing as having solicited such Private Warrant,
(c) the Private Warrant is not held in a discretionary account, (d) disclosure
of the compensation arrangement is made upon the sale and exercise of the
Private Warrants, (e) soliciting the exercise is not in violation of Rule 10b-6
under the Securities Exchange Act of 1934, and (f) solicitation of the exercise
is in compliance with the NASD Notice to Members 81-38 (September 22, 1981).
4. Conditions of Underwriters' Obligation. The obligations of the
Underwriter to purchase and pay for the Securities which it has agreed to
purchase hereunder, are subject to the accuracy (as of the date hereof, and as
of the Closing Dates) of and compliance with the representations and warranties
of the Company herein, to the performance by the Company of its obligations
hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and you
shall have received notice thereof not later than 10:00 a.m., New York time, on
the day following the date of this Agreement, or at such later time or on such
later date as to which the Underwriter may agree in writing; on or prior to the
Closing Dates no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that or a similar
purpose shall have been instituted or shall be pending or, to the Underwriter's
knowledge or to the knowledge of the Company shall be contemplated by the
Commission; any request on the part of the Commission for additional information
shall have been complied with to the satisfaction of the Commission; and no stop
order shall be in effect denying or suspending effectiveness of such
qualification nor shall any stop order proceedings with respect thereto be
instituted or pending or threatened. If required, the Prospectus shall have been
filed with the Commission in the manner and within the time period required by
Rule 424(b) under the Act.
(b) At the First Closing Date, you shall have received the opinion,
dated as of the First Closing Date, of McLaughlin & Stern, LLP, counsel for the
Company, in form and substance satisfactory to counsel for the Underwriter, to
the effect that:
(i) the Company and each of its Subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation, with all requisite
corporate power and authority to own its properties and conduct its business as
described in the Registration Statement and Prospectus and is duly qualified or
licensed to do business as a foreign corporation and is in good standing in each
other jurisdiction in which the ownership or leasing of its properties or
conduct of its business requires such qualification except where the failure to
qualify or be licensed will not have a Material Adverse Effect;
(ii) the authorized capitalization of the Company as of the date
set forth
14
<PAGE>
under "Capitalization" in the Prospectus; all shares of the Company's
outstanding Common Stock requiring authorization for issuance by directors have
been duly authorized and upon payment of consideration therefor, will be validly
issued, fully paid and non-assessable and conform in all material respects to
the description thereof contained in the Prospectus; to such counsel's knowledge
under "Capitalization" in the Prospectus; all shares of the Company's
outstanding Common Stock requiring authorization for issuance by directors have
been duly authorized and upon payment of consideration therefor, will be validly
issued, fully paid and non-assessable and conform in all material respects to
the description thereof contained in the Prospectus; to such counsel's knowledge
the outstanding shares of Common Stock of the Company have not been issued in
violation of the preemptive rights of any shareholder and the shareholders of
the Company do not have any preemptive rights or other rights to subscribe for
or to purchase, nor are there any restrictions upon the voting or transfer of
any of the Common Stock except as provided in the Prospectus; the Common Stock,
the Private Warrants, the Purchase Option, and the Warrant Agreement conform in
all material respects to the respective descriptions thereof contained in the
Prospectus; the Shares have been, and the shares of Common Stock to be issued
upon exercise of the Private Warrants and the Purchase Option, upon issuance in
accordance with the terms of such Private Warrants, the Warrant Agreement and
Purchase Option will have been duly authorized and, when issued and delivered in
accordance with their respective terms, will be duly and validly issued, fully
paid, non-assessable, free of preemptive rights and no personal liability will
attach to the ownership thereof; all prior sales by the Company of the Company's
securities have been made in compliance with or under an exemption from
registration under the Act and applicable state securities laws; a sufficient
number of shares of Common Stock has been reserved for issuance upon exercise of
the Private Warrants and Purchase Option and to the best of such counsel's
knowledge, neither the filing of the Registration Statement nor the offering or
sale of the Securities as contemplated by this Agreement gives rise to any
registration rights other than those which have been waived or satisfied for or
relating to the registration of any shares of Common Stock or as otherwise being
exercised in connection with the concurrent offering; and each of the Stock
Purchase Agreements referred to in "Certain Transactions" have been consummated
such that the Corporation owns all of the issued and outstanding capital stock
of Harmat Homes, Inc., Harmat Capital Corp., Northside Woods, Inc., Harmat
Holding Corp., Southhampton Golf Course Community, LLC, and Quick Storage of
Quogue, Inc. and that there were 1,750,000 shares of Common Stock of the Company
issued and outstanding prior to the sale of the Shares to the public.
(iii) this Agreement, the Purchase Option, and the Warrant
Agreement have been duly and validly authorized, executed, and delivered by the
Company;
(iv) the certificates evidencing the shares of Common Stock
comply with the Delaware General Corporation Law; the Warrants will be
exercisable for shares of Common Stock in accordance with the terms of the
Warrants and at the prices therein provided for;
(v) except as otherwise disclosed in the Registration Statement,
to the best of counsel's knowledge such counsel knows of no pending or
threatened legal or governmental proceedings to which the Company or any
Subsidiary is a party which would materially adversely affect the business,
property, financial condition, or operations of the Company or any Subsidiary;
or which question the validity of the Securities, this Agreement, the Warrant
Agreement, or the Purchase Option, or of any action taken or to be taken by the
Company pursuant to this Agreement, the Warrant Agreement, or the Purchase
Option; to the best of counsel's knowledge there are no
15
<PAGE>
governmental proceedings or regulations required to be described or referred to
in the Registration Statement which are not so described or referred to;
(vi) the execution and delivery of this Agreement, the Purchase
Option, or the Warrant Agreement and the incurrence of the obligations herein
and therein set forth and the consummation of the transactions herein or therein
contemplated, will not result in a breach or violation of, or constitute a
default under the certificate or articles of incorporation or by-laws of the
Company or any Subsidiary, or to the best knowledge of counsel after due
inquiry, in the performance or observance of any material obligations,
agreement, covenant, or condition contained in any bond, debenture, note, or
other evidence of indebtedness or in any material contract, indenture, mortgage,
loan agreement, lease, joint venture, or other agreement or instrument to which
the Company or any Subsidiary is a party or by which it or any of its properties
is bound or in violation of any order, rule, regulation, writ, injunction, or
decree of any government, governmental instrumentality, or court, domestic or
foreign;
(vii) the Registration Statement has become effective under the
Act, and to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement is in effect, and no proceedings for
that purpose have been instituted or are pending before, or threatened by, the
Commission; the Registration Statement and the Prospectus (except for the
financial statements and other financial data contained therein, or omitted
therefrom, as to which such counsel need express no opinion) as of the Effective
Date comply as to form in all material respects with the applicable requirements
of the Act and the Rules and Regulations;
(viii) in the course of preparation of the Registration Statement
and the Prospectus such counsel has participated in conferences with the
President and Chief Executive Officer of the Company with respect to the
Registration Statement and Prospectus and such discussions did not disclose to
such counsel any information which gives such counsel reason to believe that the
Registration Statement or any amendment thereto at the time it became effective
contained any untrue statement of a material fact required to be stated therein
or omitted to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus or any
supplement thereto contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make statements therein, in light of
the circumstances under which they were made, not misleading (except, in the
case of both the Registration Statement and any amendment thereto and the
Prospectus and any supplement thereto, for the financial statements, notes
thereto, and other financial information (including without limitation, the pro
forma financial information) and schedules contained therein, as to which such
counsel need express no opinion);
(ix) all descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts and other
agreements to which the Company or any Subsidiary is a party are accurate and
fairly present in all material respects the information required to be shown,
and such counsel is familiar with all contracts and other agreements referred to
in the Registration Statement and the Prospectus and any such amendment or
supplement or filed
16
<PAGE>
as exhibits to the Registration Statement, and such counsel does not know of any
contracts or agreements to which the Company or any Subsidiary is a party of a
character required to be summarized or described therein or to be filed as
exhibits thereto which are not so summarized, described, or filed;
(x) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in connection with
the authorization, issuance, transfer, sale, or delivery of the Securities by
the Company in connection with the execution, delivery, and performance of this
Agreement by the Company or in connection with the taking of any action
contemplated herein, or the issuance of the Purchase Option or the Securities
underlying the Purchase Option, other than registrations or qualifications of
the Securities under applicable state or foreign securities or Blue Sky laws and
registration under the Act; and
(xi) the Common Stock has been duly authorized for quotation on
the OTC Bulletin Board ("OTC").
Such opinion shall also cover such matters incident to the
transactions contemplated hereby as the Underwriter or counsel for the
Underwriter shall reasonably request. In rendering such opinion, such counsel
may rely upon certificates of any officer of the Company or public officials as
to matters of fact; and may rely as to all matters of law other than the laws of
the United States or of the States of Delaware and New York upon opinions of
counsel satisfactory to the Underwriter, in which case the opinion shall state
that they have no reason to believe that the Underwriter and they are not
entitled to so rely.
(c) All corporate proceedings and other legal matters relating to this
Agreement, the Registration Statement, the Prospectus and other related matters
shall be satisfactory to or approved by Bernstein & Wasserman, LLP, counsel to
the Underwriter.
(d) The Underwriter shall have received a letter prior to the
effective date of the Registration Statement and again on and as of the First
Closing Date from Moore Stephens, P.C., independent public accountants for the
Company, substantially in the form reasonably acceptable to the Underwriter.
(e) At the Closing Dates, (i) the representations and warranties of
the Company contained in this Agreement shall be true and correct in all
material respects with the same effect as if made on and as of the Closing Dates
taking into account for the Option Closing Dates the effect of the transactions
contemplated hereby and the Company shall have performed all of its obligations
hereunder and satisfied all the conditions on its part to be satisfied at or
prior to such Closing Date; (ii) the Registration Statement and the Prospectus
and any amendments or supplements thereto shall contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and shall in all material respects conform to the requirements
thereof, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto shall contain any untrue statement of a material
fact or omit to state any material fact required to be
17
<PAGE>
stated therein or necessary to make the statements therein not misleading; (iii)
there shall have been, since the respective dates as of which information is
given, no Material Adverse Effect, or to the Company's knowledge, any
development involving a prospective Material Adverse Effect from that set forth
in the Registration Statement and the Prospectus, except changes which the
Registration Statement and Prospectus indicate might occur after the effective
date of the Registration Statement, and the Company and the Subsidiaries shall
not have incurred any material liabilities or entered into any material
agreement not in the ordinary course of business other than as referred to in
the Registration Statement and Prospectus; (iv) except as set forth in the
Prospectus, no action, suit, or proceeding at law or in equity shall be pending
or threatened against the Company or any Subsidiaries which would be required to
be set forth in the Registration Statement, and no proceedings shall be pending
or threatened against the Company or any Subsidiary before or by any commission,
board, or administrative agency in the United States or elsewhere, wherein an
unfavorable decision, ruling, or finding would have a Material Adverse Effect,
(v) the Underwriter shall have received, at the First Closing Date, a
certificate signed by the President and the Chief Executive Officer of the
Company, dated as of the First Closing Date, evidencing compliance with the
provisions of this subsection (e) and (vi) the Underwriter shall have received,
at the First Closing Date, such opinions, certificates, letters and other
documents as it reasonably requests.
(f) Upon exercise of the option provided for in Section 2(b) hereof,
the obligations of the Underwriter to purchase and pay for the Option Shares
referred to therein will be subject (as of the date hereof and as of the Option
Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, and no stop order suspending the effectiveness thereof
shall have been issued and no proceedings for that purpose shall have been
instituted or shall be pending, or, to the Underwriter's knowledge or the
knowledge of the Company, shall be contemplated by the Commission, and any
reasonable request on the part of the Commission for additional information
shall have been complied with to the satisfaction of the Commission.
(ii) At the Option Closing Date there shall have been delivered
to the Underwriter the signed opinion of McLaughlin & Stern, counsel to the
Company, dated as of the Option Closing Date, in form and substance reasonably
satisfactory to Bernstein & Wasserman, LLP, counsel to the Underwriter, which
opinion shall be substantially the same in scope and substance as the opinion
furnished to you at the First Closing Date pursuant to Sections 4(b) hereof,
except that such opinion, where appropriate, shall cover the Option Shares.
(iii) At the Option Closing Date there shall have be delivered to
the Underwriter a certificate of the President and the Chief Executive Officer
of the Company and such other opinions, certificates, letters and other
documents as it reasonably requests, dated the Option Closing Date, in form and
substance reasonably satisfactory to Bernstein & Wasserman, LLP, counsel to the
Underwriter, substantially the same in scope and substance as the certificate or
certificates furnished to you at the First Closing Date pursuant to Section 4(e)
hereof.
18
<PAGE>
(iv) At the Option Closing Date there shall have been delivered
to the Underwriter a letter in form and substance satisfactory to the
Underwriter from Moore Stephens, P.C., dated the Option Closing Date and
addressed to the Underwriter confirming the information in their letter referred
to in Section 4(d) hereof and stating that nothing has come to their attention
during the period from the ending date of their review referred to in said
letter to a date not more than five business days prior to the Option Closing
Date, which would require any change in said letter if it were required to be
dated the Option Closing Date.
(g) All proceedings taken at or prior to the Option Closing Date in
connection with the sale and issuance of the Option Shares shall be reasonably
satisfactory in form and substance to you, and you and Bernstein & Wasserman,
LLP, counsel to the Underwriter, shall have been furnished with all such
documents, certificates, and opinions as you may reasonably request in
connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties, or statements of the
Company or its compliance with any of the covenants or conditions contained
herein.
(h) No action shall have been taken by the Commission or the NASD the
effect of which would make it improper, at any time prior to either of the
Closing Dates, for members of the NASD to execute transactions (as principal or
agent) in the Securities and no proceedings for the taking of such action shall
have been instituted or shall be pending, or, to the knowledge of the
Underwriter or the Company, shall be contemplated by the Commission or the NASD.
The Company represents that at the date hereof it has no knowledge that any such
action is in fact contemplated by the Commission or the NASD.
(i) If any of the conditions herein provided for in this Section shall
not have been fulfilled in all material respects as of the date indicated, this
Agreement and all obligations of the Underwriter under this Agreement may be
cancelled at, or at any time prior to, either of the Closing Dates by the
Underwriter notifying the Company of such cancellation in writing or by telegram
at or prior to the applicable Closing Date. Any such cancellation shall be
without liability of the Underwriter to the Company.
5. Conditions of the Obligations of the Company. The obligation of the
Company to sell and deliver the Securities is subject to the following
conditions:
(a) The Registration Statement shall have become effective not later
than 10:00 a.m. New York time, on the day following the date of this Agreement,
or on such later date as the Company and the Underwriter may agree in writing.
(b) At the Closing Dates, no stop orders suspending the effectiveness
of the Registration Statement shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company provided for in
this
19
<PAGE>
Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Option Shares on exercise of
the option provided for in Section 2(b) hereof shall be affected.
6. Indemnification.
(a) The Company agrees (i) to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against
any losses, claims, damages, or liabilities, joint or several (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees), to which
such Underwriter or such controlling person may become subject, under the Act or
otherwise, and (ii) to reimburse, as incurred, the Underwriter and such
controlling persons for any legal or other expenses reasonably incurred in
connection with investigating, defending against or appearing as a third party
witness in connection with any losses, claims, damages, or liabilities; insofar
as such losses, claims, damages, or liabilities (or actions in respect thereof)
relating to (i) and (ii) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in (A) the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, (B) any blue sky application or other document executed by
the Company specifically for that purpose containing written information
specifically furnished by the Company and filed in any state or other
jurisdiction in order to qualify any or all of the Securities under the
securities laws thereof (any such application, document or information being
hereinafter called a "Blue Sky Application"), or arise out of or are based upon
the omission or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or
in any Blue Sky Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company will not be required to indemnify the Underwriter and any
controlling person or be liable in any such case to the extent, but only to the
extent, that any such loss, claim, damage, or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation of the Registration Statement or any
such amendment or supplement thereof or any such Blue Sky Application or any
such preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto, provided, further that the indemnity with respect to any
Preliminary Prospectus shall not be applicable on account of any losses, claims,
damages, liabilities, or litigation arising from the sale of Securities to any
person if a copy of the Prospectus was not delivered to such person at or prior
to the written confirmation of the sale to such person. This indemnity will be
in addition to any liability which the Company may otherwise have.
(b) The Underwriter will indemnify and hold harmless the Company, each
of its directors, each nominee (if any) for director named in the Prospectus,
each of its officers who have signed the Registration Statement and each person,
if any, who controls the Company within the meaning of the Act, against any
losses, claims, damages, or liabilities (which shall, for all purposes
20
<PAGE>
of this Agreement, include, but not be limited to, all costs of defense and
investigation and reasonable attorneys' fees) to which the Company or any such
director, nominee, officer, or controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or any Blue Sky Application in reliance upon and in
conformity with written information furnished to the Company by the Underwriter
specifically for use in the preparation thereof and for any violation by the
Underwriter in the sale of such Securities of any applicable state or federal
law or any rule, regulation or instruction thereunder relating to violations
based on unauthorized statements by Underwriter or its representative, provided
that such violation is not based upon any violation of such law, rule, or
regulation or instruction by the party claiming indemnification or inaccurate or
misleading information furnished by the Company or its representatives,
including information furnished to the Underwriter as contemplated herein. This
indemnity agreement will be in addition to any liability which the Underwriter
may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that the reasonable fees and expenses of such
counsel shall be at the expense of the indemnifying party if (i) the employment
of such counsel has been specifically authorized in writing by the indemnifying
party or (ii) the named parties to any such action (including any impleaded
parties) include both the indemnified party and the indemnifying party and in
the reasonable judgment of the counsel to the indemnified party, it is advisable
for the indemnified party to be represented by separate counsel (in which case
the
21
<PAGE>
indemnifying party shall not have the right to assume the defense of such action
on behalf of such indemnified party, it being understood, however, that the
indemnifying party shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for the
indemnified party, which firm shall be designated in writing by the indemnified
party). No settlement of any action against an indemnified party shall be made
without the consent of the indemnified party, which shall not be unreasonably
withheld in light of all factors of importance to such indemnified party. If it
is ultimately determined that indemnification is not permitted, then an
indemnified party will return all monies advanced to the indemnifying party.
7. Contribution. In order to provide for just and equitable contribution
under the Act in any case in which the indemnification provided in Section 6
hereof is requested but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 6 provide for indemnification in such case,
then the Company and the Underwriter shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees) (after
contribution from others) in such proportions that the Underwriter is
responsible in the aggregate for that portion of such losses, claims, damages,
or liabilities represented by the percentage that the underwriting discount per
Share appearing on the cover page of the Prospectus bears to the public offering
price appearing thereon and the Company shall be responsible for the remaining
portion, provided, however, that if such allocation is not permitted by
applicable law, then allocated in such proportion as is appropriate to reflect
relative benefits but also the relative fault of the Company and the
Underwriter, in the aggregate, in connection with the statements or omissions
which resulted in such damages and other relevant equitable considerations shall
also be considered. The relative fault shall be determined by reference to,
among other things, whether in the case of an untrue statement of a material
fact or the omission to state a material fact, such statement or omission
relates to information supplied by the Company or the Underwriter and the
parties' relative intent, knowledge, access to information, and opportunity to
correct or prevent such untrue statement or omission. The Company and the
Underwriter agree that it would not be just and equitable if the respective
obligations of the Company and the Underwriter to contribute pursuant to this
Section 7 were to be determined by pro rata or per capita allocation of the
aggregate damages or by any other method of allocation that does not take
account of the equitable considerations referred to in this Section 7. No person
guilty of a fraudulent misrepresentation (within the meaning of Section 1(f) of
the Act) shall be entitled to contribution from any person who is not guilty of
such fraudulent misrepresentation. If the full amount of the contribution
specified in this paragraph is not permitted by law, then the Underwriter and
each person who controls the Underwriter shall be entitled to contribution from
the Company and the Company, its officers, directors, and controlling persons
shall be entitled to contribution from the Underwriter to the full extent
permitted by law. The foregoing contribution agreement shall in no way affect
the contribution liabilities of any persons having liability under Section 11 of
the Act
22
<PAGE>
other than the Company and the Underwriter. No contribution shall be requested
with regard to the settlement of any matter from any party who did not consent
to the settlement; provided, however, that such consent shall not be
unreasonably withheld in light of all factors of importance to such party.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or the sale of the
Securities to the Underwriter is consummated, the Company will pay all costs and
expenses incident to the performance of this Agreement by the Company including,
but not limited to, the fees and expenses of counsel to the Company and of the
Company's accountants; the costs and expenses incident to the preparation,
printing, filing, and distribution under the Act of the Registration Statement
(including the financial statements therein and all amendments and exhibits
thereto), Preliminary Prospectus, and the Prospectus, as amended or
supplemented, the fee of the NASD in connection with the filing required by the
NASD relating to the offering of the Securities contemplated hereby; all
expenses, including reasonable fees not to exceed $45,000 (which does not
include blue sky filing fees) and disbursements of counsel to the Underwriter,
of which $45,000 has already been paid in full to such counsel, in connection
with the qualification of the Securities under the state securities or blue sky
laws which the Underwriter shall designate; the cost of printing and furnishing
to the Underwriter copies of the Registration Statement, each Preliminary
Prospectus, the Prospectus, this Agreement, and the Blue Sky Memorandum, any
fees relating to the listing of the Common Stock on OTC or NASDAQ or any other
securities exchange; the cost of printing the certificates representing the
Securities; fees for bound volumes and prospectus memorabilia; and the fees of
the transfer agent and warrant agent. The Company shall pay any and all taxes
(including any transfer, franchise, capital stock, or other tax imposed by any
jurisdiction) on sales to the Underwriter hereunder. The Company will also pay
all costs and expenses incident to the furnishing of any amended Prospectus or
of any supplement to be attached to the Prospectus as called for in Section 3(a)
of this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at the
First Closing Date pay to the Underwriter a non-accountable expense allowance of
$129,375 (net of any payments previously made to the Underwriter, including
payment of $25,000 previously made to the Underwriter). In the event the
over-allotment option is exercised, the Company shall pay to the Underwriter at
the Option Closing Date an additional amount in the aggregate equal to 3.0% of
the gross proceeds received upon exercise of the over-allotment option. In the
event the transactions contemplated hereby are not consummated by reason of any
action by the Underwriter (except if such prevention is based upon a breach by
the Company of any covenant, representation, or warranty contained herein or
because any other condition to the Underwriter's obligations hereunder required
to be fulfilled by the Company is not fulfilled) the Company shall not be liable
for any expenses of the Underwriter, including the Underwriter's legal fees. In
the event the transactions contemplated hereby are not consummated by reason of
the Company being unable to perform its obligations hereunder in all material
respects, the Company shall be liable for the actual accountable out-of-pocket
expenses of the Underwriter, including reasonable legal fees, not to
23
<PAGE>
exceed in the aggregate $100,000.00.
(c) Except as disclosed in the Registration Statement, no person is
entitled either directly or indirectly to compensation from the Company, from
the Underwriter or from any other person for services as a finder in connection
with the proposed offering, and the Company agrees to indemnify and hold
harmless the Underwriter, against any losses, claims, damages, or liabilities,
joint or several (which shall, for all purposes of this Agreement, include, but
not be limited to, all costs of defense and investigation and all reasonable
attorneys' fees), to which the Underwriter or person may become subject insofar
as such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon the claim of any person (other than an employee
of the party claiming indemnity) or entity that he or it is entitled to a
finder's fee in connection with the proposed offering by reason of such person's
or entity's influence or prior contact with the indemnifying party.
9. Effective Date. The Agreement shall become effective upon its execution
except that the Underwriter may, at its option, delay its effectiveness until
11:00 a.m., New York time on the first full business day following the effective
date of the Registration Statement, or at such earlier time on such business day
after the effective date of the Registration Statement as the Underwriter in its
discretion shall first commence the initial public offering of the Securities.
The time of the initial public offering shall mean the time of release by the
Underwriter of the first newspaper advertisement with respect to the Securities,
or the time when the Securities are first generally offered by the Underwriter
to dealers by letter or telegram, whichever shall first occur. This Agreement
may be terminated by the Underwriter at any time before it becomes effective as
provided above, except that Sections 3(c), 6, 7, 8, 12, 13, 14, and 15 shall
remain in effect notwithstanding such termination.
10. Termination.
(a) After this Agreement becomes effective, this Agreement, except for
Sections 3(c), 6, 7, 8, 12, 13, 14, and 15 hereof, may be terminated at any time
prior to the First Closing Date, and the option referred to in Section 2(b)
hereof, if exercised, may be cancelled at any time prior to the Option Closing
Date, by the Underwriter if in the Underwriter's judgment it is impracticable to
offer for sale or to enforce contracts made by the Underwriter for the resale of
the Securities agreed to be purchased hereunder by reason of (i) the Company
having sustained a material loss, whether or not insured, by reason of fire,
earthquake, flood, accident, or other calamity, or from any labor dispute or
court or government action, order, or decree, which has caused a Material
Adverse Effect, (ii) trading in securities on the New York Stock Exchange or the
American Stock Exchange having been suspended or limited, (iii) material
governmental restrictions having been imposed on trading in securities generally
(not in force and effect on the date hereof), (iv) a banking moratorium having
been declared by federal or New York state authorities, (v) an outbreak of major
international hostilities involving the United States or other substantial
national or international calamity having occurred, (vi) a pending or threatened
legal or governmental proceeding or action relating generally to the Company's
or any of the Subsidiaries' business, or a
24
<PAGE>
notification having been received by the Company or any Subsidiary, of the
threat of any such proceeding or action, which would have a Material Adverse
Effect;(vii) except as contemplated by the Prospectus, the Company is merged
with or consolidated into or acquired by another company or group or there
exists a binding legal commitment for the foregoing or any other material change
of ownership or control occurs; (viii) the passage by the Congress of the United
States or by any state legislative body of similar impact, of any act or
measure, or the adoption of any orders, rules or regulations by any governmental
body or any authoritative accounting institute or board, or any governmental
executive, which is reasonably believed likely by the Underwriter to have a
material adverse impact on the business, financial condition, or financial
statements of the Company and its Subsidiaries taken as a whole, (ix) any
material adverse change in the financial or securities markets beyond normal
market fluctuations having occurred since the date of this Agreement, or (x) any
Material Adverse Effect having occurred, since the respective dates of which
information is given in the Registration Statement and Prospectus.
(b) If the Underwriter elects to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 10, the
Company shall be promptly notified by the Underwriter, by telephone or telegram,
confirmed by letter.
11. Purchase Option. At or before the First Closing Date, the Company will
sell the Underwriter or its designees for a consideration of $75.00, and upon
the terms and conditions set forth in the form of Purchase Option annexed as an
exhibit to the Registration Statement, a Purchase Option to purchase an
aggregate of 75,000 Shares. In the event of conflict in the terms of this
Agreement and the Purchase Option with respect to language relating to the
Purchase Option, the language of the Purchase Option shall control.
12. Representations and Warranties of the Underwriter. The Underwriter
represents and warrants to the Company that it is registered as a broker-dealer
in all jurisdictions in which it is offering the Units and Selling Securities
and that it will comply with all applicable state or federal laws relating to
the sale of the Securities, including but not limited to, violations based on
unauthorized statements by the Underwriter or its representatives.
13. Representations, Warranties and Agreements to Survive Delivery. The
respective indemnities, agreements, representations, warranties, and other
statements of the Company and the Underwriter and the undertakings set forth in
or made pursuant to this Agreement will remain in full force and effect until
three years from the date of this Agreement, regardless of any investigation
made by or on behalf of the Underwriter, the Company or any of its officers or
directors or any controlling person and will survive delivery of and payment of
the Securities and the termination of this Agreement.
14. Notice. Any communications specifically required hereunder to be in
writing, if sent to the Underwriter, will be mailed, delivered, or telecopied
and confirmed to them at Biltmore Securities, Inc., 6700 North Andrews Avenue,
Fort Lauderdale, FL 33309, with a copy sent to Bernstein & Wasserman, LLP, 950
Third Avenue, New York, NY 10022, Attention: Hartley T.
25
<PAGE>
Bernstein, Esq., or if sent to the Company will be mailed, delivered, or
telecopied and confirmed to it at The Harmat Organization, Inc., Old Country
Road, P.O. Box 539, Quogue, NY 11959, Attention: President with a copy to
McLaughlin & Stern, LLP, 380 Lexington Avenue, New York, NY 10168, Attention:
David W. Sass, Esq. Notice shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication.
15. Parties in Interest. The Agreement herein set forth is made solely for
the benefit of the Underwriter, the Company any person controlling the Company
or the Underwriter, and directors of the Company, nominees for directors (if
any) named in the Prospectus, its officers who have signed the Registration
Statement, and their respective executors, administrators, successors, assigns
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser, as
such purchaser, from the Underwriter of the Securities.
16. Applicable Law. This Agreement will be governed by, and construed in
accordance with, of the laws of the State of New York applicable to agreements
made and to be entirely performed within New York.
17. Counterparts. This agreement may be executed in one or more
counterparts each of which shall be deemed to constitute an original and shall
become effective when one or more counterparts have been signed by each of the
parties hereto and delivered to the other parties (including by fax, followed by
original copies by overnight mail).
18. Entire Agreement; Amendments. This Agreement constitutes the entire
agreement of the parties hereto and supersedes all prior written or oral
agreements, understandings, and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in writing, signed by the
Underwriter and the Company.
26
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return this agreement, whereupon it will become a binding
agreement between the Company and the Underwriter in accordance with its terms.
Very truly yours,
THE HARMAT ORGANIZATION, INC.
By: ______________________________
Name: Matthew C. Schilowitz
Title: President
27
<PAGE>
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
BILTMORE SECURITIES, INC.
By:_______________________________
Its
The undersigned are executing this Agreement solely to be bound by the
provisions of Section 3(l) hereof.
_________________________________
Matthew C. Schilowitz
_________________________________
Dr. Irving Kraut
_________________________________
Martin Rothstein
_________________________________
Alan Robinson
_________________________________
Rita Robinson
28
EXHIBIT 1.2
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. NO
OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE
CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY
SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY
KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE
DATE.
THE HARMAT ORGANIZATION, INC.
750,000 SHARES OF COMMON STOCK
SELECTED DEALERS AGREEMENT
_____________________, 1996
Dear Sirs:
1. Biltmore Securities, Inc., named as the Underwriter in the enclosed
Preliminary Prospectus (the "Representative" or "Underwriter"), proposes to
offer on a firm commitment basis, subject to the terms and conditions and
execution of the Underwriting Agreement, 750,000 Shares of Common Stock par
value $.001 per share (the "Common Stock" or the "Shares") (including any
additional units offered pursuant to an over-allotment option, the "Firm
Shares") of The Harmat Organization, Inc. (the "Company") . The Firm Shares are
more particularly described in the enclosed Preliminary Prospectus, additional
copies of which as well as the Prospectus (after effective date) will be
supplied in reasonable quantities upon request.
2. The Underwriter is soliciting offers to buy Shares, upon the terms and
conditions hereof, from Selected Dealers, who are to act as principals,
including you, who are (i) registered with the Securities and Exchange
Commission ("the Commission") as broker-dealers under the Securities Exchange
Act of 1934, as amended ("the 1934 Act"), and members in good standing with the
National Association of Securities Dealers, Inc. ("the NASD"), or (ii) dealers
of institutions with their principal place of business located outside the
United States, its territories and possessions and not registered under the 1934
Act who agree to make no sales within the United States, its territories and
possessions or to persons who are nationals thereof or residents therein and, in
making sales, to comply with the NASD's interpretation with respect to
free-riding and withholding. Shares are to be offered to the public at a price
of $5.75 per Share. Selected Dealers will be allowed a concession of not
<PAGE>
less than _____% of the offering price. You will be notified of the precise
amount of such concession prior to the effective date of the Registration
Statement. The offer is solicited subject to the issuance and delivery of the
Shares and their acceptance by the Underwriter, to the approval of legal matters
by counsel and to the terms and conditions as herein set forth.
3. Your offer to purchase may be revoked in whole or in part without
obligation or commitment of any kind by you any time prior to acceptance and no
offer may be accepted by us and no sale can be made until after the registration
statement covering the Shares has become effective with the Commission. Subject
to the foregoing, upon execution by you of the Offer to Purchase below and the
return of same to us, you shall be deemed to have offered to purchase the number
of Shares set forth in your offer on the basis set forth in paragraph 2 above.
Any oral notice by us of acceptance of your offer shall be immediately followed
by written or telegraphic confirmation preceded or accompanied by a copy of the
Prospectus. If a contractual commitment arises hereunder, all the terms of this
Selected Dealers Agreement shall be applicable. We may also make available to
you an allotment to purchase Shares, but such allotment shall be subject to
modification or termination upon notice from us any time prior to an exchange of
confirmations reflecting completed transactions. All references hereafter in
this Agreement to the purchase and sale of the Shares assume and are applicable
only if contractual commitments to purchase are completed in accordance with the
foregoing.
4. You agree that in re-offering the Shares, if your offer is accepted
after the Effective Date, you will make a bona fide public distribution of same.
You will advise us upon request of the Shares purchased by you remaining unsold,
and we shall have the right to repurchase such Shares upon demand at the public
offering price less the concession as set forth in paragraph 2 above. Any of the
Shares purchased by you pursuant to this Agreement are to be re-offered by you
to the public at the public offering price, subject to the terms hereof and
shall not be offered or sold by you below the public offering price before the
termination of this Agreement.
5. Payment for Shares which you purchase hereunder shall be made by you on
such date as we may determine by certified or bank cashier's check payable in
New York Clearinghouse funds to Biltmore Securities, Inc. Certificates for the
securities shall be delivered as soon as practicable at the offices of Biltmore
Securities, Inc., 6700 North Andrews Avenue, Fort Lauderdale, FL 33309. Unless
specifically authorized by us, payment by you may not be deferred until delivery
of certificates to you.
6. A registration statement covering the offering has been filed with the
Commission in respect to the Shares. You will be promptly advised when the
registration statement becomes effective. Each Selected Dealer in selling the
Shares pursuant hereto agrees (which agreement shall also be for the benefit of
the Company) that it will comply with the applicable requirements of the
Securities Act of 1933 and of the 1934 Act and any
2
<PAGE>
applicable rules and regulations issued under said Acts. No person is authorized
by the Company or by the Representative to give any information or to make any
representations other than those contained in the Prospectus in connection with
the sale of the Shares. Nothing contained herein shall render the Selected
Dealers a member of the underwriting group or partners with the Representative
or with one another.
7. You will be informed by us as to the states in which we have been
advised by counsel the Shares have been qualified for sale or are exempt under
the respective securities or blue sky laws of such states, but we have not
assumed and will not assume any obligation or responsibility as to the right of
any Selected Dealer to sell Shares in any state.
8. The Underwriter shall have full authority to take such action as we may
deem advisable in respect of all matters pertaining to the offering or arising
thereunder. The Underwriter shall not be under any liability to you, except such
as may be incurred under the Securities Act of 1933 and the rules and
regulations thereunder, except for lack of good faith and except for obligations
assumed by us in this Agreement, and no obligation on our part shall be implied
or inferred herefrom.
9. Selected Dealers will be governed by the conditions herein set forth
until this Agreement is terminated. This Agreement will terminate when the
offering is completed. Nothing herein contained shall be deemed a commitment on
our part to sell you any Shares; such contractual commitment can only be made in
accordance with the provisions of paragraph 3 hereof.
10. You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc. ("Association") and registered as a
broker-dealer or are not eligible for membership under Section I of the By-Laws
of the Association who agree to make no sales within the United States, its
territories, or possessions or to persons who are nationals thereof or residents
therein and, in making sales, to comply with the NASD's interpretation with
respect to free-riding and withholding. Your attention is called to the
following: (a) Article III, Sections 1, 8, 24, 25, 26 and 36 of the Rules of
Fair Practice of the Association and the interpretations of said Section
promulgated by the Board of Governors of such Association including the
interpretation with respect to "Free-Riding and Withholding"; (b) Section 10(b)
of the 1934 Act and Rules 10b-6 and 10b-10 of the general rules and regulations
promulgated under said Act; (c) Securities Act Release #3907; (d) Securities Act
Release #4150; and (e) Securities Act Release #4968 requiring the distribution
of a Preliminary Prospectus to all persons reasonably expected to be purchasers
of Shares from you at least 48 hours prior to the time you expect to mail
confirmations. You, if a member of the Association, by signing this Agreement,
acknowledge that you are familiar with the cited law, rules, and releases, and
agree that you will not directly and/or indirectly violate any provisions of
applicable law in connection with your participation in the distribution of the
Shares.
3
<PAGE>
11. In addition to compliance with the provisions of paragraph 10 hereof,
you will not, until you have advised us that you have distributed your
allocation of Shares, bid for or purchase Shares in the open market or otherwise
make a market in such securities or otherwise attempt to induce others to
purchase such securities in the open market. Nothing contained in this paragraph
11 shall, however, preclude you from acting as agent in the execution of
unsolicited orders of customers in transactions effectuated for them through a
market maker.
12. You understand that the Underwriter may in connection with the offering
engage in stabilizing transactions. If the Underwriter contracts for or
purchases in the open market in connection with such stabilization any Shares
sold to you hereunder and not effectively placed by you, the Underwriter may
charge you the Selected Dealer's concession originally allowed you on the Shares
so purchased, and you agree to pay such amount to us on demand.
13. By submitting an Offer to Purchase you confirm that your net capital is
such that you may, in accordance with Rule 15c3-1 adopted under the 1934 Act,
agree to purchase the number of Shares you may become obligated to purchase
under the provisions of this Agreement.
14. You agree that (i) you shall not recommend to a customer the purchase
of Firm Shares unless you shall have reasonable grounds to believe that the
recommendation is suitable for such customer on the basis of information
furnished by such customer concerning the customer's investment objectives,
financial situation and needs, and any other information known to you, (ii) in
connection with all such determinations, you shall maintain in your files the
basis for such determination, and (iii) you shall not execute any transaction in
Firm Shares in a discretionary account without the prior specific written
approval of the customer.
4
<PAGE>
15. All communications from you should be directed to us at the office of
the Underwriter, Biltmore Securities, Inc., 6700 North Andrews Avenue, Fort
Lauderdale, FL 33309. All communications from us to you shall be directed to the
address to which this letter is mailed.
Very truly yours,
BILTMORE SECURITIES, INC.
By: ______________________________
Its
ACCEPTED AND AGREED TO AS OF THE _____
DAY OF _____________________, 1996
[Name of Dealer]
By: ______________________________
Its
5
<PAGE>
To: Biltmore Securities, Inc.
6700 North Andrews Avenue
Fort Lauderdale, FL 33309
We hereby subscribe for _____________ Shares of Common Stock, par value
$.001 per share (the "Common Stock" or the "Shares") of The Harmat Organization,
Inc. in accordance with the terms and conditions stated in the foregoing letter.
We hereby acknowledge receipt of the Prospectus referred to in the first
paragraph thereof relating to said Shares. We further state that in purchasing
said Shares we have relied upon said Prospectus and upon no other statement
whatsoever, whether written or oral. We confirm that we are a dealer actually
engaged in the investment banking or securities business and that we are either
(i) a member in good standing of the National Association of Securities Dealers,
Inc. (the "NASD") or (ii) a dealer with its principal place of business located
outside the United States, its territories and its possessions and not
registered as a broker or dealer under the Securities Exchange Act of 1934, as
amended, who hereby agrees not to make any sales within the United States, its
territories or its possessions or to persons who are nationals thereof or
residents therein. We hereby agree to comply with the provisions of Section 24
of Article III of the Rules of Fair Practice of the NASD, and if we are a
foreign dealer and not a member of the NASD, we also agree to comply with the
NASD's interpretation with respect to free-riding and withholding, to comply, as
though we were a member of the NASD, with the provisions of Sections 8 and 36 of
Article III thereof as that Section applies to non-member foreign dealers.
[Name of Dealer]
------------------------------
By: ______________________________
Address
------------------------------
------------------------------
Dated _____________________, 1996
EXHIBIT 4.4
Option to Purchase
75,000 Shares of Common Stock
THE HARMAT ORGANIZATION, INC.
PURCHASE OPTION
Dated: ________, 1996
THIS CERTIFIES that BILTMORE SECURITIES, INC., 6700 North Andrews Avenue,
Ft. Lauderdale, FL 33309 (hereinafter sometimes referred to as the "Holder"
which shall include any permitted transferee hereunder), is entitled to purchase
from THE HARMAT ORGANIZATION, INC., a Delaware corporation (hereinafter referred
to as the "Company"), at the prices and during the periods as hereinafter
specified, up to 75,000 Shares of the Company's Common Stock par value $.001 per
share (the "Common Stock" or "Shares").
The Shares have been registered under a Registration Statement on Form SB-2
(File No. 333-03501) declared effective by the Securities and Exchange
Commission on ______, 1996 (the "Registration Statement"). This Option (the
"Option") to purchase 75,000 Shares (the "Option Shares") was originally issued
pursuant to an underwriting agreement between the Company and Biltmore
Securities, Inc. as underwriter (the "Underwriter"), in connection with a public
offering of 750,000 Shares (the "Public Shares") through the Underwriter, in
consideration of $75.00 received for the Option.
Except as specifically otherwise provided herein, the Common Stock issued
pursuant to this Option shall bear the same terms and conditions as described
under the caption "Description of Securities" in the Registration Statement and
except that the Holder shall have registration rights under the Securities Act
of 1933, as amended (the "Act"), for the Option, the Common Stock, as more fully
described in paragraph 6 of this Option.
<PAGE>
1. The rights represented by this Option shall be exercised at the prices,
subject to adjustment in accordance with paragraph 8 of this Option, and during
the periods as follows:
(a) Between _____, 1997 and _____, 2001, inclusive, the Holder shall
have the option to purchase Shares hereunder at a price of $6.90 per Share
(subject to adjustment pursuant to paragraph 8 hereof) (the "Exercise Price").
(b) After _____, 2001, the Holder shall have no right to purchase any
Shares hereunder.
2. The rights represented by this Option may be exercised at any time
within the period above specified, in whole or in part, by (i) the surrender of
this Option (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); (ii) payment to the Company
of the applicable Exercise Price then in effect for the number of Shares
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any; and (iii) delivery to the Company of a duly executed
agreement signed by the person(s)' designated in the purchase form to the effect
that such person(s) agree(s) to be bound by the provisions of paragraph 6 and
subparagraphs (b), (c) and (d) of paragraph 7 hereof. This Option shall be
deemed to have been exercised, in whole or in part to the extent specified,
immediately prior to the close of business on the date this Option is
surrendered and payment is made in accordance with the foregoing provisions of
this paragraph 2, and the person or persons in whose name or names the
certificates for shares of Common Stock shall be issuable upon such exercise
shall become the Holder or Holders of record of such Common Stock at that time
and date. The Common Stock and the certificates for the Common Stock so
purchased shall be delivered to the Holder within a reasonable time, not
exceeding ten (10) days, after the rights represented by this Option shall have
been so exercised.
3. This Option shall not be transferred, sold, assigned, or hypothecated,
except that it may be transferred to successors of the Holder, and may be
assigned in whole or in part to any person who is an officer of the Holder
during such period. Any such assignment shall be effected by the Holder (i)
executing the form
2
<PAGE>
of assignment at the end hereof and (ii) surrendering this Option for
cancellation at the office or agency of the Company referred to in paragraph 2
hereof, accompanied by a certificate (signed by an officer of the Holder if the
Holder is a corporation), stating that each transferee is a permitted transferee
under this paragraph 3 hereof; whereupon the Company shall issue, in the name or
names specified by the Holder (including the Holder) a new Option or Options of
like tenor and representing in the aggregate rights to purchase the same number
of Shares as are purchasable hereunder.
4. The Company covenants and agrees that all shares of Common Stock which
may be purchased hereunder will, upon issuance, be duly and validly issued,
fully paid and nonassessable, and no personal liability will attach to the
Holder thereof. The Company further covenants and agrees that during the periods
within which this Option may be exercised, the Company will at all times have
authorized and reserved a sufficient number of shares of its Common Stock to
provide for the exercise of this Option.
5. This Option shall not entitle the Holder to any voting, dividend, or
other rights as a stockholder of the Company.
6. (a) During the period set forth in paragraph l(a) hereof, the Company
shall advise the Holder or its transferee, whether the Holder holds the Option
or has exercised the Option and holds Shares by written notice at least
thirty (30) days prior to the filing of any post-effective amendment to the
Registration Statement or of any new registration statement or post-effective
amendment thereto under the Act covering any securities of the Company, for its
own account or for the account of others (other than a registration statement on
Form S-4 or S-8 or any successor forms thereto), and will for a period of five
years from the effective date of the Registration Statement, upon the request of
the Holder, include in any such post-effective amendment or registration
statement, such information as may be required to permit a public offering of
the Option, all or any of the Shares underlying the Option, (the
"Registrable Securities"). The Company shall supply prospectuses and such other
documents as the Holder may reasonably request in order to facilitate the public
sale or other disposition of the Registrable Securities, use its best efforts to
register and qualify any of the Registrable Securities for sale in such states
as such Holder designates;
3
<PAGE>
provided that the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or execute a general consent to service of
process in any jurisdiction in any action; and do any and all other acts and
things which may be reasonably necessary or desirable to enable such Holders to
consummate the public sale or other disposition of the Registrable Securities,
and furnish indemnification in the manner provided in paragraph 7 hereof. The
Holder shall furnish information and indemnification as set forth in paragraph
7, except that the maximum amount which may be recovered from the Holder shall
be limited to the amount of proceeds received by the Holder from the sale of the
Registrable Securities. The Company shall use its best efforts to cause the
managing underwriter or underwriters of a proposed underwritten offering to
permit the Holders of Registrable Securities requested to be included in the
registration to include such securities in such underwritten offering on the
same terms and conditions as any similar securities of the Company included
therein. Notwithstanding the foregoing, if the managing underwriter or
underwriters of such offering advises the Holders of Registrable Securities that
the total amount of securities which they intend to include in such offering is
such as to materially and adversely affect the success of such offering, then
the amount of securities to be offered for the accounts of Holders of
Registrable Securities shall be eliminated, reduced, or limited to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount, if any, recommended by such managing underwriter or
underwriters (any such reduction or limitation in the total amount of
Registrable Securities to be included in such offering to be borne by the
Holders of Registrable Securities proposed to be included therein pro rata). The
Holder will pay its own legal fees and expenses and any underwriting discounts
and commissions on the securities sold by such Holder and shall not be
responsible for any other expenses of such registration.
(b) If any 50% Holder (as defined below) shall give notice to the Company
at any time during the period set forth in paragraph l(a) hereof to the effect
that such Holder desires to register under the Act this Option, or any of the
Shares underlying the Option under such circumstances that a public distribution
(within the meaning of the Act) of any such securities will be involved then the
Company will promptly, but no later than sixty (60) days after receipt of such
notice, file a post-effective amendment to the current Registration Statement or
a new
4
<PAGE>
registration statement pursuant to the Act, to the end that the Option, the
Shares may be publicly sold under the Act as promptly as practicable thereafter
and the Company will use its best efforts to cause such registration to become
and remain effective for a period of 120 days (including the taking of such
steps as are reasonably necessary to obtain the removal of any stop order);
provided that such Holder shall furnish the Company with appropriate information
in connection therewith as the Company may reasonably request in writing. The
50% Holder (which for purposes hereof shall mean any direct or indirect
transferee of such Holder) may, at its option, request the filing of a
post-effective amendment to the current Registration Statement or a new
registration statement under the Act with respect to the Registrable Securities
on only one occasion during the term of this Option. The Holder may at its
option request the registration of the Option and/or any of the securities
underlying the Option in a registration statement made by the Company as
contemplated by Section 6(a) or in connection with a request made pursuant to
this Section 6(b) prior to acquisition of the Shares issuable upon exercise of
the Option and even though the Holder has not given notice of exercise of the
Option. The 50% Holder may, at its option, request such post-effective amendment
or new registration statement during the described period with respect to the
Option, or the Common Stock, and such registration rights may be exercised by
the 50% Holder prior to or subsequent to the exercise of the Option. Within ten
(10) business days after receiving any such notice pursuant to this subsection
(b) of paragraph 6, the Company shall give notice to the other Holders of the
Options, advising that the Company is proceeding with such post-effective
amendment or registration statement and offering to include therein the
securities underlying the Options of the other Holders. Each Holder electing to
include its Registrable Securities in any such offering shall provide written
notice to the Company within twenty (20) days after receipt of notice from the
Company. The failure to provide such notice to the Company shall be deemed
conclusive evidence of such Holder's election not to include its Registrable
Securities in such offering. Each Holder electing to include its Registrable
Securities shall furnish the Company with such appropriate information (relating
to the intentions of such Holders) in connection therewith as the Company shall
reasonably request in writing. All costs and expenses of the first such
post-effective amendment or new registration statement shall be borne by the
Company, except that the Holders shall bear the fees
5
<PAGE>
of their own counsel and any underwriting discounts or commissions applicable to
any of the securities sold by them.
The Company shall be entitled to postpone the filing of any registration
statement pursuant to this Section 6(b) otherwise required to be prepared and
filed by it if (i) the Company is engaged in a material acquisition,
reorganization, or divestiture, (ii) the Company is currently engaged in a
self-tender or exchange offer and the filing of a registration statement would
cause a violation of Rule 10b-6 under the Securities Exchange Act of 1934, (iii)
the Company is engaged in an underwritten offering and the managing underwriter
has advised the Company in writing that such a registration statement would have
a material adverse effect on the consummation of such offering or (iv) the
Company is subject to an underwriter's lock-up as a result of an underwritten
public offering and such underwriter has refused in writing, the Company's
request to waive such lock-up. In the event of such postponement, the Company
shall be required to file the registration statement pursuant to this Section
6(b), within sixty (60) days of the consummation of the event requiring such
postponement.
The Company will use its best efforts to maintain such registration
statement or post-effective amendment current under the Act for a period of at
least six (6) months (and for up to an additional three (3) months if requested
by the Holder) from the effective date thereof. The Company shall supply
prospectuses, and such other documents as the Holder may reasonably request in
order to facilitate the public sale or other disposition of the Registrable
Securities, use its best efforts to register and qualify any of the Registrable
Securities for sale in such states as such Holder designates, provided that the
Company shall not be required to qualify as a foreign corporation or a dealer in
securities or execute a general consent to service of process in any
jurisdiction in any action and furnish indemnification in the manner provided in
paragraph 7 hereof.
(c) The term "50% Holder" as used in this paragraph 6 shall mean the Holder
of at least 50% of the Common Stock underlying the Option and shall include any
owner or combination of owners of such securities, which ownership shall be
calculated by determining the number of shares of Common Stock issued pursuant
to this Option held by such owner or owners.
6
<PAGE>
(d) Notwithstanding anything in Section 6 contained to the contrary (i) the
demand registration rights granted hereunder will expire no later than five (5)
years from the effective date of the Registration Statement and (ii) the
piggyback registration rights granted hereunder will expire no later than seven
(7) years from the effective date of the Registration Statement.
7. (a) Whenever pursuant to paragraph 6 a registration statement relating
to the Option or any shares or warrants issued or issuable upon the exercise of
any Options, is filed under the Act, amended or supplemented, the Company will
indemnify and hold harmless each Holder of the securities covered by such
registration statement, amendment, or supplement (such Holder being hereinafter
called the "Distributing Holder"), and each person, if any, who controls (within
the meaning of the Act) the Distributing Holder, and each underwriter (within
the meaning of the Act) of such securities and each person, if any, who controls
(within the meaning of the Act) any such underwriter, against any losses,
claims, damages, or liabilities, joint or several, to which the Distributing
Holder, any such controlling person or any such underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any such registration statement or any preliminary prospectus or final
prospectus constituting a part thereof or any amendment or supplement thereto,
or arise out of or are based upon the omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and will reimburse the Distributing Holder and each such controlling
person and underwriter for any legal or other expenses reasonably incurred by
the Distributing Holder or such controlling person or underwriter in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage, or liability arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in said registration statement, said preliminary
prospectus, said final prospectus, or said amendment or supplement in reliance
upon and in conformity with written information furnished by such Distributing
Holder or any other Distributing Holder, for use in the preparation thereof.
7
<PAGE>
(b) The Distributing Holder will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed said registration
statement and such amendments and supplements thereto, each person, if any, who
controls the Company (within the meaning of the Act) against any losses, claims,
damages, or liabilities, joint and several, to which the Company or any such
director, officer, or controlling person may become subject, under the Act or
otherwise, insofar as such losses, claims, damages, or liabilities arise out of
or are based upon any untrue or alleged untrue statement of any material fact
contained in said registration statement, said preliminary prospectus, said
final prospectus, or said amendment or supplement, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in said registration statement, said preliminary prospectus, said final
prospectus, or said amendment or supplement in reliance upon and in conformity
with written information furnished by such Distributing Holder for use in the
preparation thereof; and will reimburse the Company or any such director,
officer, or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability, or action.
(c) Promptly after receipt by an indemnified party under this paragraph 7
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this Paragraph 7.
(d) In case any such action is brought against any indemnified party, and
it notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense
8
<PAGE>
thereof, the indemnifying party will not be liable to such indemnified party
under this paragraph 7 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof.
8. With respect to the Option Shares, the Exercise Price in effect at
any time and the number and kind of securities purchasable upon the exercise of
this Option shall be subject to adjustment from time to time upon the happening
of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision, combination or reclassification shall be
adjusted so that it shall equal the price determined by multiplying the Exercise
Price by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding after giving effect to such action, and the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such action. Such adjustment shall be made successively whenever any
event listed above shall occur.
(b) In case the Company shall fix a record date for the issuance of
rights or warrants to all Holders of its Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than the current market price of the Common Stock (as
defined in Subsection (e) below) on the record date mentioned below, the
Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the number of shares then comprising an Option Share
by the product of the Exercise Price in effect immediately prior to the date of
such issuance multiplied by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the
9
<PAGE>
convertible securities so offered) would purchase at such current market price
per share of the Common Stock, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding on such record date and the
number of additional shares of Common Stock offered for subscription or purchase
(or into which the convertible securities so offered are convertible). Such
adjustment shall be made successively whenever such rights or warrants are
issued and shall become effective immediately after the record date for the
determination of shareholders entitled to receive such rights or warrants; and
to the extent that shares of Common Stock are not delivered (or securities
convertible into Common Stock are not delivered) after the expiration of such
rights or warrants the Exercise Price shall be readjusted to the Exercise Price
which would then be in effect had the adjustments made upon the issuance of such
rights or warrants been made upon the basis of delivery of only the number of
shares of Common Stock (or securities convertible into Common Stock) actually
delivered.
(c) In case the Company shall hereafter distribute to the holders of
its Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and-dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the number of shares
then comprising an Option Share by the product of the Exercise Price in effect
immediately prior thereto multiplied by a fraction, the numerator of which shall
be the total number of shares of Common Stock outstanding multiplied by the
current market price per share of Common Stock (as defined in Subsection (e)
below), less the fair market value (as determined by the Company's Board of
Directors) of said assets or evidences of indebtedness so distributed or of such
rights or warrants, and the denominator of which shall be the total number of
shares of Common Stock outstanding multiplied by such current market price per
share of Common Stock. Such adjustment shall be made successively whenever such
a record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such
distribution.
(d) Whenever the Exercise Price payable upon exercise of this Option
is adjusted pursuant to Subsections (a), (b), or (c),
10
<PAGE>
above, the number of Option Shares purchasable upon exercise of this Option
shall simultaneously be adjusted by multiplying the number of Option Shares
initially issuable upon exercise of this Option by the Exercise Price in effect
on the date hereof and dividing the product so obtained by the Exercise Price,
as adjusted.
(e) For the purpose of any computation under Subsections (b) or (c)
above, the current market price per share of Common Stock at any date shall be
deemed to be the average of the daily closing prices for twenty (20) consecutive
business days before such date. The closing price for each day shall be the last
sale price regular way or, in case no such reported sale takes place on such
day, the average of the last reported bid and asked prices regular way, in
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Board of Directors.
(f) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least ten cents ($0.10)
in such price; provided, however, that any adjustments which by reason of this
Subsection (i) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Section 8 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this Section 8
to the contrary notwithstanding, the Company shall be entitled, but shall not be
required, to make such changes in the Exercise Price, in addition to those
required by this Section 8, as it shall determine, in its sole discretion, to be
advisable in order that any dividend or distribution in shares of Common Stock,
or any subdivision, reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal Income tax liability to the
holders of Common Stock or securities convertible into Common Stock (including
Warrants issuable upon exercise of this Option).
(g) Whenever the Exercise Price is adjusted, as herein
11
<PAGE>
provided, the Company shall promptly, but no later than twenty(20) days after
any request for such an adjustment by the Holder, cause a notice setting forth
the adjusted Exercise Price and adjusted number of Option Shares issuable upon
exercise of this Option and, if requested, information describing the
transactions giving rise to such adjustments, to be mailed to the Holder, at the
address set forth herein, and shall cause a certified copy thereof to be mailed
to its transfer agent, if any. The Company may retain a firm of independent
certified public accountants selected by the Board of Directors (who may be the
regular accountants employed by the Company) to make any computation required by
this Section 8, and a certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(h) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (a) above, the Holder thereafter shall become entitled to
receive any shares of the Company, other than Common Stock, thereafter the
number of such other shares so receivable upon exercise of this Option shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in Subsections (a) to (g), inclusive above.
9. This Agreement shall be governed by and in accordance with the laws of
the State of New York.
IN WITNESS WHEREOF, The Harmat Organization, Inc. as caused this Option to
be signed by its duly authorized officers under its corporate seal, and this
Option to be dated ________, 1996.
THE HARMAT ORGANIZATION, INC.
By: ______________________________
Its
(Corporate Seal)
12
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of option)
THE UNDERSIGNED, the holder of the foregoing Option, hereby irrevocably
elects to exercise the purchase rights represented by such Option for, and to
purchase thereunder,
Shares of common stock of THE HARMAT ORGANIZATION, INC. par value $.001 per
share (the "Common Stock"), and herewith makes payment of $_______ therefore,
are requests that the certificates for the shares of Common Stock be issued in
the name(s) of, and delivered to _______________ whose address(es) is (are)
______________________.
Dated:
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and transfers
unto _________________________________ the right to purchase Shares represented
by the foregoing Option to the extent of _____ Shares, and appoints
_________________________________ attorney to transfer such rights on the books
of THE HARMAT ORGANIZATION, INC. with full power of substitution in the
premises.
Dated:
By: ______________________________
Address:
______________________________
______________________________
______________________________
In the presence of:
EXHIBIT 5
[Letterhead of McLaughlin & Stern, LLP]
August 21, 1996
United States Securities
and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Re: The Harmat Organization, Inc. (the "Company")
Gentlemen:
Reference is made to the registration statement ("Registration Statement")
on Form SB-2 Registration Statement number 333-3501 filed with the Securities
and Exchange Commission by the Company.
We hereby advise you that we have examined originals or copies certified to our
satisfaction of the Certificate of Incorporation and amendments thereto and the
By-Laws and amendments thereto of the Company, minutes of the meetings of the
Board of Directors and Shareholders and such other documents and instruments,
and we have made such examination of law as we have deemed appropriate as the
basis for the opinions hereinafter expressed.
Based on the foregoing, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing and in
good standing under the laws of the State of Delaware.
2. The 862,500 shares of Common Stock (including the Underwriter's Over-
Allotment Option) which are due to be sold pursuant to the Underwriting
Agreement have been duly and validly authorized and when issued and paid for in
accordance with the terms of the Underwriting Agreement ("Agreement") between
the Company and Biltmore Securities, Inc. ("Underwriter"), will be
<PAGE>
validly issued, fully paid and non-assessable.
3. The 1,250,000 shares of the Company's Common Stock, and the 1,500,000 of
Common Stock issuable upon exercise of such Series A Warrants as well as 500,000
shares of Common Stock issuable upon exercise of outstanding Series B Warrants
all to be sold by Selling Stockholders have been duly and validly authorized and
issued and are fully paid and non-assessable. The 2,000,000 shares of Common
Stock underlying such Series A Warrants and Series B Warrants have been reserved
for issuance upon exercise thereof, and when issued and paid for in accordance
with the terms of the Series A Warrants and Series B Warrants will be validly
issued, fully paid and non-assessable shares of Common Stock of the Company.
4. The Underwriter's Purchase Option ("Purchase Option") to be sold to the
Underwriter entitling it to purchase 75,000 shares of Common Stock in accordance
with the Agreement, have been duly and validly authorized, and when issued and
paid for, will be validly issued and exercisable in accordance with their terms.
The 75,000 shares of Common Stock issuable upon full exercise of the Purchase
Option have been duly reserved for issuance upon exercise thereof, and when
issued, and paid for in accordance with their terms, will be validly issued,
fully paid and non-assessable shares of Common Stock of the Company.
We hereby advise you tht David W. Sass, a member of this firm, is a
director of the Company.
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the prospectus forming part of such Registration Statement and to
the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
McLAUGHLIN & STERN,LLP
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement"), dated as of the 1st day of April,
1996, as amended on August 3, 1996 by and between The Harmat Organization, Inc.
(the "Company") with offices at 2 Old Country Road, Quogue, New York 11959 and
Matthew Schilowitz ("Schilowitz") at 189 South Country Road, Remsenberg, New
York 11960.
WHEREAS, Schilowitz and the Company have agreed that Schilowitz shall
render services to the Company in the capacity of President and Chief Executive
Officer pursuant to the terms of this Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual
agreements herein set forth, the parties hereto have agreed and do hereby
mutually agree as follows:
1. Employment Term: The term of this Agreement shall commence on the date
that the initial public offering is declared effective by the Securities and
Exchange Commission and shall expire five years thereafter (the "Employment
Period") subject to the provisions of Section 5.
2. Duties of Executive: Schilowitz shall serve as President and Chief
Financial Officer of the Company and shall be required to perform such duties as
may from time to time be required by the Board of Directors of the Company.
3. Compensation:
<PAGE>
(a) As compensation for his services hereunder, the Company shall pay
Schilowitz, during the Employment Period, a base salary ("Base Salary") payable
as follows:
(i) One Hundred Five Thousand Dollars ($105,000.00) for the
first year;
(ii) One Hundred Fifty Five Thousand Dollars ($155,000.00) for
the second year;
(iii) Two Hundred Five Thousand Dollars ($205,000.00) for the
third year;
(iv) Two Hundred Fifty Five Thousand Dollars ($255,000.00) for
the fourth year; and
(v) Three Hundred Five Thousand Dollars ($305,000.00) for the
fifth year.
(b) Schilowitz shall also receive a bonus equal to 5% of the pre-tax
earnings of the Company in each fiscal year during the Employment Period payable
within ten (10) days after the completion of the year end audit for each such
fiscal year.
(c) In addition to the compensation provided under Sections 3(a) and (b)
above, Schilowitz is hereby granted a ten (10) year option to purchase up to an
aggregate of 500,000 shares of the Company's Common Stock (the "Common Stock")
at an exercise price of $5.75 per share (the "Option"), which Option commences
at the time of vesting. Schilowitz may exercise the Option as follows: (i) the
right to purchase 250,000 shares of Common Stock such right to vest upon the
Company realizing earnings before taxes equalling or exceeding $750,000.00; and
(ii) the right to purchase 250,000 additional shares of Common Stock such right
to vest upon the Company realizing earnings before taxes equalling or exceeding
$1,500,000.00 on a cumulative basis. Shares subject to options granted to
Schilowitz pursuant to this Section 3(c) are subject to adjustment in the event
of the Company's declaration of stock dividends, stock splits,
2
<PAGE>
reclassification, and the occurrence of other similar events. Schilowitz agrees
to accept such Options when they vest as well as the shares underlying the
Options when the same are exercised for investment and not with the view toward
the public distribution thereof.
(d) The Company may withhold from payments of Employee's salary amounts
required to be withheld by the Company from time to time from such salary under
applicable Federal, State, and local laws and regulations then in effect.
(e) Upon submission of written statements and bills in accordance with the
then regular procedures of the Company, Schilowitz shall be entitled to
reimbursement for reasonable out-of-pocket expenses necessarily incurred in the
performance of his duties hereunder, including, but not limited to,
reimbursement for travel and car expenses.
4. Employee Benefits:
(a) Schilowitz shall be included to the extent eligible thereunder (at the
expense of the Company, if appropriate) in any and all existing plans (and any
plans which may be adopted in the future) providing benefits for the Company's
employees generally, including, but not limited to, group life and disability
insurance, hospitalization, medical, vacation, retirement, stock option plans
and any and all similar or comparable benefits.
(b) Due to the fact that the Company's success is dependent upon the
activities of Schilowitz, the Company will provide keyman insurance on the life
of Mr. Schilowitz in the amount of $1,000,000.00 and Schilowitz will cooperate
in obtaining and maintaining such policy.
5. Termination:
(a) The Company may terminate Schilowitz's employment hereunder at any time
3
<PAGE>
by written notice but only after a decision by the Board of Directors of the
Company which is communicated to Schilowitz in writing thirty (30) days prior to
the effective date of termination; provided however, that the Company pays to
Schilowitz a severance payment equal to the aggregate Base Salary otherwise owed
to him over the remaining term of the Employment Period and allow Schilowitz to
retain any options granted under Section 3(c) above notwithstanding the fact
that such options may not be vested and/or exercisable at the time of
termination under this Section 5(a).
(b) Notwithstanding the provisions of Section 5(a) above, the Company shall
not be required to pay the amount owed under such Section if Schilowitz is
terminated "for cause." For purposes of this Agreement "For Cause" shall mean:
(i) Deliberate misappropriating any funds or properties of the
Company;
(ii) Gross mismanagement of the Company;
(c) In the event Schilowitz is not nominated or re-elected to serve as a
member of the Board of Directors during the Employment Period, either party may
terminate this Agreement and Schilowitz shall be entitled to continue to receive
his Base Salary as set forth in Section 3(a) above for the remainder of the
Employment Period and retain any options granted under Section 3(c) above
notwithstanding the fact that such options may not be vested and/or exercisable
at the time of termination under this Section 5(c).
(d) If, during the term of this Agreement, Schilowitz personally guarantees
any indebtedness of the Company to banks or others, this Agreement cannot be
terminated by the Company until such time as Schilowitz is relieved of all
obligations as such guarantor.
(e) In the event that Schilowitz dies or becomes disabled so as not to be
able to
4
<PAGE>
perform his duties as set forth herein for a period exceeding twelve (12)
months, this Agreement shall terminate and no further compensation shall be
payable to Schilowitz, except as may otherwise be provided under any insurance
policy, employee benefit plan, or similar instrument; provided however, that
during any such period of disability, Schilowitz shall be entitled to his base
salary as provided under Section 3(a) for a period not to exceed twelve (12)
months.
6. Covenant Not to Compete:
(a) Schilowitz agrees that, commencing the date hereof and continuing until
the due date of his final payment of salary due hereunder, he will not, except
on behalf of the Company or with the written consent of the Company (i) engage
in any business activity in Nassau or Suffolk county, directly or indirectly, on
his own behalf or as a partner, stockholder (except by ownership of less than
ten percent (10%) of the outstanding stock of a publicly-held corporation),
director, trustee, principal, agent, employee, consultant or otherwise of any
person, firm or corporation which then is competitive with an activity in which
the Company or any parent or subsidiary of the Company is then engaged at the
time; (ii) allow the use of his name by or in connection with any business
activity in Nassau and Suffolk county which then is principally competitive with
any activity in which the Company or any of its parents or subsidiaries is then
engaged; or (iii) offer employment to or employ, for himself or on behalf of any
then competitor of the Company or any of its parents or subsidiaries, any
persons in Nassau of Suffolk county who at any time within the prior 6 months
shall have been employed by the Company or any parent or subsidiary of the
Company.
(b) In the event Schilowitz is terminated without cause, the term during
which
5
<PAGE>
Schilowitz shall not be permitted to engage in the activities described in
Section 6(a) above shall commence on the date thereof and continue until the
date of final payment of salary due hereunder.
7. Default - Remedies: In the event of proof of breach by Schilowitz, the
Company shall be entitled to pursue any remedy at law or equity, and shall
specifically have the right to terminate any further payments of any kind or
nature to be made under this Agreement.
8. Confidential Information: Except as otherwise required by law,
Schilowitz shall not disclose or use at any time, except as part of his
employment by the Company, either during or subsequent to such employment, any
secret or confidential information or knowledge obtained by Schilowitz while
employed by the Company. Without limiting the generality of the foregoing,
Schilowitz shall not disclose or use any information pertaining to the business
of the Company or any parent or subsidiary of the Company, including, but not
limited to, profit figures, names of or relationships with customers or
advertisers, or the terms of any contracts to which it or they may be a party.
The obligation imposed by this Section 8 shall survive the expiration or other
termination of this Agreement.
9. Surrender of Documents: Schilowitz shall, at the request of the Company,
promptly surrender to the Company or its nominee, upon any termination of his
employment hereunder, or at any time prior thereto, any document, memorandum,
record, letter, specification or other paper in his possession or under his
control relating to the operations, business, customers, or affairs of the
Company or its affiliates.
6
<PAGE>
10. Waiver of Breach: The waiver be either the Company or Schilowitz of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either the Company or Schilowitz.
11. Severability: The invalidity or unenforceability of any provision of
this Agreement, whether in whole or in part, shall not in any way affect the
validity or enforceability of any other part of such provision or of any
provision herein contained, and any invalid or unenforceable provision or part
thereof shall be deemed severable to the extent of any such invalidity or
unenforceability. If such invalidity or unenforceability is due to the
unreasonableness of the time or geographical area covered by the covenants or
restrictions of such provision, such covenants and restrictions shall
nevertheless be effective for such period of time and for such area as may be
determined to be reasonable by a court of competent jurisdiction.
12. Assignment; Binding Effect: The obligations of Schilowitz hereunder may
not be assigned or delegated without the prior written consent of the Company.
The rights and obligations of the parties shall inure to the benefit of, and be
binding upon, their respective heirs, personal representatives, successors and
assigns.
13. Notices:
(a) All notices, requests, demands, and other communications hereunder must
be in writing and shall be deemed to have been given if delivered by hand or
mailed within the continental United States by first class, certified mail,
return receipt requested, postage and registry fees prepaid, or sent by
telecopier (with receipt confirmation), to the applicable party and
7
<PAGE>
addressed as follows:
(i) if to the Company:
The Harmat Organization, Inc.
P.O. Box 339
Quogue, New York 11959
(ii) if to Schilowitz:
189 South Country Road
Remsenberg, New York 11960
(b) Any notice or other communication given by certified mail shall be
deemed given at the time of certification thereof, except for a notice changing
a party's address which shall be deemed given at the time of receipt thereof.
Any notice or other communication sent by telecopier transmission shall be
deemed given at the time of written confirmation of receipt.
13. Entire Agreement of the Parties: This Agreement expresses the entire
agreement of the parties, and all promises, representations, understandings,
arrangements and prior agreements are merged herein and superseded hereby. No
person, other than pursuant to a resolution of the Board, shall have any
authority on behalf of the Company to agree to modify or change this Agreement
or anything in reference thereto, and any such modification or change must be in
writing and signed by both parties hereto.
14. Laws Governing: This Agreement has been entered into in the State of
New York and shall be construed, interpreted and governed in accordance with the
laws of the State of New York without regard to the choice of laws provisions
thereof.
15. Counterparts: This Agreement may be executed in one or more
8
<PAGE>
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one document.
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer, and Schilowitz has hereunto set his hand as of the
day and year first above written.
THE HARMAT ORGANIZATION, INC.
By:/s/ Matthew Schilowitz
-------------------------
Name: Matthew Schilowitz
Title: President
Accepted and Agreed
By:/s/ Matthew Schilowitz
-------------------------
Matthew Schilowitz
10
