SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[ ] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the Fiscal Year Ended September 30, 1996 or
[x] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No Fee Required)
For the transition period from December 31, 1995 to September 30, 1996
Commission file number 333-3501
The Harmat Organization, Inc.
(Name of Small Business Issuer in Its Charter)
NEW YORK 11-2780723
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.)
Old Country Road, P.O. Box 539, Quogue, New York 11959
(Address of Principal Executive Offices) (Zip Code)
Issuers Telephone Number: (516) 653-3303
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
__________None__________
(Title or Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve
(12) months (or such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
ninety (90) days.
Yes X No
<PAGE>
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to
security-holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act
of 1933 (the "Securities Act"). The listed documents should be clearly
described for identification purposes:
3.1 Registrant's Articles of Incorporation as amended
to date, incorporated herein by Reference to Exhibit
3.1 to Registrant's Registration Statement on Form
SB-2, File No. 333-3501.
3.2 Registrant's By-Laws, as amended to date,
incorporated herein by Reference to Exhibit 3.2 to
Registrant's Registration Statement on Form SB-2,
File No.333-3501.
4.1 Form of Common Stock Certificate, incorporated
herein by Reference to Exhibit 4.1 to Registrant's
Registration Statement on Form SB-2, File No. 333-
3501.
4.2 Form of Warrant and Warrant Agreement, incorporated
herein by Reference to Exhibit 4.2 to Registrant's
Registration Statement on Form SB-2, File No. 333-
3501.
4.3 Form of Series B Warrant, incorporated herein by
Reference to Exhibit 4.3 to Registrant's
Registration Statement on Form SB-2, File No. 333-
3501.
4.4* Form of Representative's Purchase Option,
incorporated herein by Reference to Exhibit 4.4 to
Registrant's Registration Statement on Form SB-2,
File No. 333-3501.
<PAGE>
4.5 Registrant's 1996 Stock Option Plan (Exhibit 4.5 to
Registrants Registration Statement on Form SB-2,
File No.333-3501).
10.2* Employment Agreement dated April 1, 1996,
incorporated herein by Reference to Exhibit 10.2 to
Registrant's Registration Statement on Form SB-2,
File No. 333-3501 and as amended August 3, 1996
between the Registrant and Matthew Schilowitz.
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10.3 Stock Sale Agreement between the Registrant and
Bennett Brokow, Lloyd Brokow and Donald Cohen
incorporated herein by Reference to Exhibit 10.3 to
Registrant's Registration Statement on Form SB-2,
File No. 333-3501.
10.4 Stock Purchase Agreement dated March 1, 1996 between
the Registrant and Matthew Schilowitz incorporated
herein by Reference to Exhibit 10.4 to Registrant's
Registration Statement on Form SB-2, File No. 333-
3501.
The Registrant has 2,500,000 shares of Common Stock outstanding as of
December 15, 1996.
The Issuers revenues for its most recent fiscal year ended September
30, 1996 is $2,727,870.
The aggregate market value of the outstanding common stock held by
non-affiliates of the Registrant on December 15, 1996 was $10,000,000.
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PART I
Item 1. Business
(a) General Development of Business
The Harmat Organization, Inc. (hereinafter with its
Subsidiaries collectively "Harmat", or the "Company," or the "Registrant"), 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.
(b) Financial Information about Industry Segments
The Company engages in only one industry segment.
(c) Narrative Description of Business
General
The Company has, since its inception in 1985, built in
excess of 150 single-family homes in the Hamptons resorts area of Long Island.
New York. It has also been able to acquire residential and commercial rental
properties which generated additional cash flow for the Company. In addition,
the Company has acquired a 12 lot subdivision, Polo grounds, which is currently
in development. The Company is marketing Polo Grounds and currently has three
contracts. The Company is also in contract with a 57 unit subdivision in
Westhampton Beach [Jaegger] which it closed on during the summer of 1996,
marketed immediately thereafter and delivered homes from such
<PAGE>
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
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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 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.
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
<PAGE>
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
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to market the balance with minimal exposure. The Company believes that such
sources and terms of financing will be available for future projects, although
no assurances can be given that this will be the case.
These projects have involved the construction of single-family homes as well as
the development and construction of luxury 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, 11 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, 5 of which have
been sold). All of these projects are located in prime areas where the bulk of
the lots abut either a nature preserve, golf course or farm land. The Company
also anticipates performing construction services for the "Bridal Path"
development in Westhampton. The real property for all of the foregoing projects
is owned by entities affiliated with the Company.
The Company has built homes ranging in price from $200,000 to $2,000,000. While
the bulk of the homes built in the Hamptons are vacation homes, the Company
believes that approximately 25% of its clients live in their homes on a
year-round basis.
Strategy
Harmat is now seeking to expand, by providing first class construction, design
and homeowner and management services to not only residential buyers but to a
broad array of commercial clients as well.
For example, the Company is considering developing or investing in luxury
single-family developments, senior citizen condominium units and undeveloped
real property (including oceanfront acreage) in such areas as western Suffolk
County, the Hamptons, Florida and the Washington, D.C./Maryland area that
management believes provide attractive opportunities. The Company further
believes that it could obtain financing similar to that used in its previous
projects, (i.e. a modest down payment and no recourse against the Company) and
that such projects would enhance its growth. Furthermore, Management of Harmat
is of the opinion that all of such potential projects involve lots in prime
locations where homes (or commercial buildings) could
<PAGE>
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
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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.
Employees
As of December 31, 1996, 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.
<PAGE>
Item 2. 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
- 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 - acre building lots with all road improvements
completed located in East Quogue, N.Y., - The lots will be
marketed whereby the Company shall construct a single
family house complete with pool and tennis court.
(c) Vacant parcel located adjacent to the Company`s mini
storage facility in Quogue, N.Y. The Company intends to
develop this property to expand its current facility by
constructing approximately 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
<PAGE>
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.
Item 3. Legal Proceedings
The Company is involved in 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, operations or cash
flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
During the last quarter of the Company's fiscal period ended
September 30, 1996, no matter was submitted to a vote of the security holders of
the Company.
10
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PART II
Item 5. Market for Common Equity and Related
Shareholder Matters
(a) The Company completed its initial public offering on
September 9, 1996. The Company's Common Stock is traded in the over-the-counter
market and is generally quoted either by the market makers for the Company's
Common Stock or in brokers' bid and asked quotations on the Bulletin Board. The
following table sets forth the high and low closing bid quotations for the
Company's Common Stock for the last two quarters since the Company's initial
public offering.
1996 High Bid Low Bid
3rd Quarter 9 6
(commencing
September 9, 1996)
4th Quarter 7 1/2 3
The above quotations represent prices between dealers
and do not include retail markups, markdowns or commissions, nor do
they represent actual transactions.
(b) As of December 15, 1996, there were 25 record
holders of the Company's Common Stock.
(c) The Company has not paid any cash dividends to its
shareholders and has no present intention of paying any cash
dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis or
Plan of Operations
Review of 1996 Results
The nine months ended September 30, 1996 and the year ended December
<PAGE>
31, 1995
Total revenues for the nine months ended September 30, 1996 were $2,727,870
compared to revenues of $2,323,524 for the year ended September 30, 1995, an
increase of approximately $404,000 or 17%.
Construction Sales. Deliveries of 6 homes resulted in housing revenues of
$2,496,926 for the nine months ended September 30, 1996. For the year ended
December 31, 1995, the Company delivered 6 homes which generated $2,065,126 of
housing revenues. Housing revenues in 1996 increased $431,800. The Company's
plan is to move into the commercial construction market and concentrate its
residential inventory toward affordable housing and the upscale market. Although
the same number of homes were delivered in 1995 and 1996, the gross
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profit margin decreased [see gross profit margin]. The Company's first
commercial construction venture included the completion of The Hamptons
Synagogue in Westhampton Beach in 1994 which generated $650,000 in additional
revenues for the year ended September 30, 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.
Rental Income. Acquisition of additional rental based properties resulted in
rental income of $183,398 for the year ended December 31, 1995. For the nine
months ended September 30, 1996, the Company generated rental income of
$153,944. Rental income in 1996 decreased by $29,454 which reflects nine months
rental income of Quick Storage of Quogue, Inc., a self storage facility with 111
units. This facility generated rental income of $77,100 for the nine months
ended September 30, 1996. The Company plans to expand the existing facility by
purchasing, constructing and expanding rental based properties.
Construction Management Revenue. Construction Management Services for the year
ended December 31, 1995 generated $75,000 compared to $25,000 for the nine
months ended September 30, 1996. This decrease reflects the completion of 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 twenty percent [20%] during the nine months ended September 30,
1996, compared to twenty-nine percent [29%] in the year ended December 31, 1995.
The gross profit margin on homes decreased due to the competitive pricing of the
homes built in 1996. In 1995, the Company positioned itself in the upscale
market segment.
Selling, General and Administrative Expenses. The Company's Selling, General and
Administrative expenses increased to $702,290 [26% of Revenues] for the nine
months ended September 30, 1996, compared to $367,498 [16% of revenues] for the
year ended December 31, 1995. The increase percentage is principally due to
<PAGE>
expenditures necessary to accomplish the completed initial public offering -
Administrative Staffing and Professional Fees ($225,000), additional Insurance
Coverage, Office Expense and Improvements ($55,000).
Charge for Executive Compensation Capitalized. The $14,750 for the nine months
ended September 30, 1996 and the $105,000 for the year ended December 31, 1995,
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 loss from operations
for the nine months ended September 30, 1996 and for the year ended
December 31, 1995 was $227,939 and $131,710 respectively. This
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decrease of approximately $359,649 is primarily attributable to the increase in
Selling, General and Administrative Expenses for the nine months ended September
30, 1996 of approximately $335,000.
Gross Interest Costs. Gross interest costs were $175,972 for the nine months
ended September 30, 1996 compared to $157,678 for the year ended December 31,
1995. The increase in gross interest cost for the nine months ended September
30, 1996 resulted from the acquisition of Quick Storage of Quogue, Inc. [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 $47,976 for
the nine months ended September 30, 1996. 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 rise 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. Effective March 1, 1996, each of the "S" Corporations terminated their
"S" Corporation status and became "S" Corporations. The Company has net
operating losses of approximately $370,000 available to reduce future taxes as
at September 30, 1996.
<PAGE>
Item 7. Financial Statements
The financial information required by item 8 is included
elsewhere in this Report. (See Part IV, Item 13).
13
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Item 8. Changes in and Disagreements with Accountants
on Accounting and Financing Disclosure
None.
14
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PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a)
of the Registrant
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
Seymour G. Siegel 53 Treasurer & Director
David W. Sass 61 Director
David S. Eiten 36 Director
All of the foregoing persons are elected as directors
for a term of one year or until their successors are duly elected and qualified.
There are no arrangements or understandings between any director and any other
person(s), pursuant to which a director was elected as a director. The foregoing
officers serve at the pleasure of the Board of Directors for a term of one year,
or until their successors are duly elected and qualified. See Item 13 with
regard to contractual obligations of the Company regarding certain officers of
the Company.
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
<PAGE>
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.
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
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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.
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Item 10. Executive Compensation
(a) Cash Compensation
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>
<S> <C> <C> <C> <C> <C> <C>
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards Payout
All Payouts
Other Annual Restricted Other
Name and Compensation Stock Options LTIP
Compen-
Principal Position Year Salary($) Bonus ($) Awards($) SARs Payouts(#) sation($)
Matthew Schilowitz(1)(2) 1996 $52,000
Chief Executive Officer 1995 197,000
Chief Financial Officer, 1994 217,000
</TABLE>
- -------
(1) See the discussion of the Company`s employment agreement with
Mr. Schilowitz as described in Item 13.
(2) During the nine months ended September 30, 1996 and the two 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 during 1994 and 1995.
(3) For the nine months ending September 30, 1996, the Company
distributed to Matthew Schilowitz marketable securities with a
fair market value of $14,750 as additional compensation.
(b) Compensation Pursuant to Plans
<PAGE>
None
(c) Other Compensation
None
17
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(d) Compensation of Directors
The directors of the Company receive $2,500 per meeting, but
not to exceed $10,000 per year as compensation for serving in such capacity.
(e) Termination of Employment and Change of Control
Arrangement.
None.
Item 11. Security Ownership of Certain Beneficial Owners
and Management
(a) Security Ownership of Certain Beneficial Owners
The following table provides, on a pro forma basis, information as of December
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
Beneficial Owner Beneficially Owned After Offering
Matthew C. Schilowitz 500,000(1) 20%
c/o Harmat Homes Inc.
P.O. Box 539
Quogue, NY 11959
Scott Prizer -0- 0%
145 W.67th St.
New York, NY 10023
Seymour G. Siegel -0- 0%
c/o Siegel Rich Resources, Inc.
1180 Avenue of the Americas
New York, NY 10036
David W. Sass -0- 0%
c/o McLaughlin & Stern, LLP
380 Lexington Ave.
New York, NY 10168
<PAGE>
David S. Eiten -0- 0%
7 Thorngrove Lane
Dix Hills, New York 11746
18
<PAGE>
All officers and directors 500,000 20%
as a group (5 persons)
- ------------------
* No shares owned.
Item 12. Certain Relationships and Related Transactions
The Company has entered into an employment agreement with Matthew C.
Schilowitz, as described below.
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.
The foregoing employment agreement terminates upon death or disability of the
employee and permits the Company to terminate the Schilowitz Agreement upon the
occurrence of certain events or the commission of certain acts or for any other
reason provided that the Company pays to such employee a severance payment equal
to the aggregate base salary otherwise owed to such employee over the remaining
term of the employment agreement (other than for instances in which such
employee is terminated for "cause" as defined in such agreement). Pursuant to
the provisions of his employment agreement in the event that Mr. Schilowitz is
not nominated or re-elected to serve as member of the Board of Directors, either
may terminate his employment with the Company and will, in such event, be
entitled to continue to receive his base salary as set forth in such employment
with the Company for the remainder of the term thereof. The employment agreement
also contains certain confidentiality and non-competition provisions which are
operative during the term of the agreement and for given periods of time after
termination thereof.
<PAGE>
The Plan for Incentive Compensation of Matthew Schilowitz (the "Schilowitz
Incentive Plan") was adopted by the Board of Directors and approved by the
Company`s 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
19
<PAGE>
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.
The law firm of McLaughlin & Stern, LLP., of which Mr. Sass is a principal,
received aggregate legal fees of $110,000 during 1996 for services rendered to
the Company.
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's interest therein, and its transactions (either current or
contemplated), if any, with the Company:
Company Name Mr. Schilowitz's 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.
<PAGE>
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.
There
<PAGE>
is only one
available lot.
Fairways owns no
other property.
Bridal Path Development Corp. 50% shareholder
Services Bridle Path
had a 14-lot
subdivision.
There are 10
available
lots. The
Company may
provide
construction
services to
Bridle Path in
the future.
Woodland Development
Association, a partnership 1/9th interest
Woodland owns
4 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.
In connection with the Company`s initial public offering, 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 Arnaud escrow of
750,000 shares.
<PAGE>
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 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 Carol
21
<PAGE>
Bernstein, 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. The monies due to Carol Bernstein, and the three
former owners of the Quick Storage of Quogue, Inc., have been repaid in full
subsequent to September 30, 1996.
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.
22
<PAGE>
PART IV
Item 13. Exhibits, Lists and Reports
on Form 8-K
(a) 1. Financial Statements Page Number
Report of Independent Certified
Public Accountants F-1
Balance Sheets as of September 30,
1996 and December 31, 1995 F-2
Consolidated Statement of Operations
for the nine months ended
September 30, 1996 and the year
ended December 31, 1995 F-4
Consolidated Statements of Shareholders Equity and
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and the year ended
December 31, 1995 F-5
Notes to Financial Statements F-8
Schedules other than those listed above are omitted for the reason that they are
not required, are not applicable, or the required information is shown on the
financial statements or notes thereto.
(a)(2) Exhibits
3.1 Registrant's Articles of
Incorporation as amended to
date, incorporated herein by
Reference to Exhibit 3.1 to
Registrant's Registration
Statement on Form SB-2, File
No. 333-3501.
3.2 Registrant's By-Laws, as
<PAGE>
amended to date, incorporated herein by Reference
to Exhibit 3.2 to Registrant's Registration
Statement on Form SB-2, File No.333-3501.
4.1 Form of Common Stock
Certificate, incorporated
herein by Reference to Exhibit
4.1 to Registrant's
Registration Statement on Form
SB-2, File No. 333-3501.
4.2 Form of Warrant and Warrant
Agreement, incorporated herein
by Reference to Exhibit 4.2 to
Registrant's Registration
23
<PAGE>
Statement on Form SB-2, File
No. 333-3501.
4.3 Form of Series B Warrant,
incorporated herein by
Reference to Exhibit 4.3 to
Registrant's Registration
Statement on Form SB-2, File
No. 333-3501.
4.4* Form of Representative's
Purchase Option, incorporated
herein by Reference to Exhibit
4.4 to Registrant's
Registration Statement on Form
SB-2, File No. 333-3501.
4.5 Registrant's 1996 Stock Option
Plan (Exhibit 4.5 to
Registrant`s Registration
Statement on Form SB-2, File
No.333-3501).
10.2* Employment Agreement dated
April 1, 1996, incorporated
herein by Reference to Exhibit
10.2 to Registrant's
Registration Statement on Form
SB-2, File No. 333-3501 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 incorporated herein by
Reference to Exhibit 10.3 to
Registrant's Registration
Statement on Form SB-2, File
No. 333-3501.
10.4 Stock Purchase Agreement dated
March 1, 1996 between the
<PAGE>
Registrant and Matthew
Schilowitz incorporated herein
by Reference to Exhibit 10.4 to
Registrant's Registration
Statement on Form SB-2, File
No. 333-3501.
24
<PAGE>
(b) Reports on Form 8-K
One report on Form 8-K was filed during the last quarter of the
fiscal year ended September 30, 1996.
25
<PAGE>
To the Board of Directors and Stockholders of
The Harmat Organization, Inc. and its Subsidiaries, Quogue, New York
We have audited the accompanying consolidated balance sheet of
The Harmat Organization, Inc. and its subsidiaries as of September 30, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the nine month period ended September 30, 1996, and the year
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 its subsidiaries as of September
30, 1996, and the consolidated results of their operations and their cash flows
for the nine month period ended September 30, 1996, and the year ended December
31, 1995, in conformity with generally accepted accounting principles.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
December 17, 1996
F-1
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- ----------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996.
- -----------------------------------------------------------------------
Assets:
Current Assets:
Cash and Cash Equivalents $3,203,669
Marketable Securities 22,507
Accounts Receivable 27,594
Land and Construction Costs 698,185
Prepaid Expenses 43,498
Total Current Assets 3,995,453
Property and Equipment - Net 1,152,115
Other Assets:
Goodwill - Net 66,346
Investment in Partnership 26,447
Land Deposits 85,000
Total Other Assets 177,793
Total Assets $5,325,361
The Accompanying Notes are an Integral Part of these Consolidated
Financial Statements.
F-2
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996.
- ---------------------------------------------------------------------------
Liabilities and Stockholder's Equity:
Current Liabilities:
Current Portion of Mortgage Payable $ 230,668
Notes Payable - Related Parties 90,000
Other Notes and Loans Payable 171,500
Accounts Payable and Accrued Expenses 224,790
Customer and Security Deposits 11,924
Total Current Liabilities 728,882
Commitment and Contingencies [9] --
Other Liability:
Mortgages Payable - Net of Current Maturities 905,563
Stockholders' Equity:
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,
2,612,500 Shares Issued and Outstanding 2,612
Additional Paid-in Capital - Common Stock 4,253,604
Accumulated [Deficit] (565,300)
Total Stockholders' Equity 3,690,916
Total Liabilities and Stockholders' Equity $ 5,325,361
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
- --------------------------------------------------------------------
Nine months ended Year ended
September 30, December 31
1 9 9 6 1 9 9 5
Revenues:
Construction Sales $2,496,926 $2,065,126
Sale of Land Held for Development 52,000 --
Rental Income 153,944 183,398
Management Fee Income 25,000 75,000
Total Revenues 2,727,870 2,323,524
Cost of Sales and Direct Operating
Expenses 2,238,769 1,719,316
Gross Profit 489,101 604,208
Selling, General and Administrative
Expenses 702,290 367,498
Charge for Executive Compensation
Capitalized 14,750 105,000
[Loss] Income from Operations (227,939) 131,710
Other Income [Expense]:
Gain on Sale of Marketable
Securities 47,976 245,022
Unrealized Gain on Marketable
Securities 4,394 5,575
Interest and Dividend Income 5,050 11,274
Interest Expense (175,972) (157,678)
Total Other [Expense] Income (118,552) 104,193
Net [Loss] Income: Historical $(346,491) 235,903
Charge in Lieu of Income Taxes [1] (94,903)
Pro Forma Net Income [2] $ 141,000
[Loss] Per Share: Historical $(.19) $ ---
Pro Forma Earnings Per Share:
Net Income $.08
Weighted Average Number of Shares 1,806,661 1,750,000
The Accompanying Notes are an Integral Part of these Consolidated
Financial Statements.
F-4
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------
Common Stock Additional Total
Number of Amount Paid-in Accumulated
Stockholders'
Shares [At Par] Capital [Deficit] Equity
Balance -
January 1, 1995 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
Net Proceeds from an Initial
Public Offering of Common Stock
on September 13,
1996 862,500 862 3,928,811 -- 3,929,673
Contribution of
Capital by a
Shareholder -- -- 23,730 -- 23,730
Executive Compensation
Capitalized -- -- 14,750 -- 14,750
Net [Loss] -- -- -- (346,491) (346,491)
Distribution to
Stockholder -- -- -- (248,816) (248,816)
Balance - September
30, 1996 2,612,500 $2,612 $4,253,604 ($565,300) $3,690,916
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
- ---------------------------------------------------------------------------
Nine months ended Year ended
September 30, December 31,
1 9 9 5 1996
Operating Activities:
Net [Loss] Income (346,491) $235,903
Adjustments to Reconcile Net
[Loss] Income to Net Cash [Used for] Provided by
Operating Activities:
Depreciation and Amortization 27,063 29,414
Gain on Sale of Marketable
Securities (47,976) (245,022)
Change in Unrealized [Gain]
Loss on Investments (4,394) 8,228
Loss on Partnership Investment 3,280 1,000
Executive Compensation Capitalized 14,750 105,000
Changes in Assets and Liabilities:
Contract Receivables (12,830) 153,706
Accrued Interest Receivable -- (16,665)
Purchase of Marketable
Securities (242,148) (2,905,276)
Sales of Marketable Securities 456,105 3,402,329
Costs and Profits in Excess of Billings on
Uncompleted Contacts -- 345,123
Billing in Excess of Costs and Profits on
Uncompleted Contracts -- (32,478)
Prepaid Expenses (42,323) 1,080
Accounts Payable and Accrued Expenses (421,985) 135,234
Customer Deposits (85,576) 97,500
Total Adjustments (356,034) 1,079,173
Net Cash - Operating Activities -
Forward (702,525) 1,315,076
Investing Activities:
Acquisition of Quick Storage -- (150,000)
Less: Cash of Quick
Storage at Acquisition -- 4,737
Acquisition of Property
and Equipment (48,079) (19,825)
Deposit on Land (10,000) (75,000)
Land and Construction Costs 193,031 (406,070)
Advances from/to Affiliates
and Related Parties -- 92,152
Land Held for Development: 72,298 --
Net Cash -
Investing Activities - Forward $207,250 $(554,006)
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
- ----------------------------------------------------------
Nine months ended Year ended
September 30, December 31,
1 9 9 6 1 9 9 5
Net Cash - Operating Activities -
Forwarded ($702,525) $1,315,076
Net Cash - Investing Activities -
Forwarded 207,250 (554,006)
Financing Activities:
Contribution by Shareholder 23,730 --
Repayment of Notes Payable -
Related Party (125,000) --
Net Proceeds of Sale of
Common Stock 3,929,673
Proceeds from New Loans -- 309,500
Proceeds of Mortgage Payable 500,000 --
Repayments of Mortgages Payable (624,619) (14,764)
[Repayments] Proceeds of Notes
Payable - Stockholder (277,000) 150,000
Proceeds of Notes Payable - Other 38,700 --
Repayments of Notes Payable - Other (6,560) (8,120)
[Repayment] of Due to Stockholder -- (608,463)
Distribution to Stockholders (65,419) (587,322)
Proceeds of Private Placement 500,000 --
Repayment to Bank (240,000) --
Deferred Offering Costs 30,000 (30,000)
Net Cash - Financing Activities 3,683,505 (789,169)
Net Increase [Decrease] in Cash
and Cash Equivalents 3,188,230 (28,099)
Cash and Cash Equivalents - Beginning
of Periods 15,439 43,538
Cash and Cash Equivalents - End
of Periods $ 3,203,669 $15,439
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 180,319 $ 50,666
Income Taxes $ 14,567 $ --
Supplemental Disclosures on Non-Cash Investing and Financing Activities:
During the nine moths ended September 30, 1996, the Company distributed
marketable securities with a fair value of $186,400 to its then sole stockholder
as a distribution.
On August 3, 1996, the major stockholder of the Company contributed
F-7
<PAGE>
500,000 shares of the Company's common stock to the Company [See Note
8A].
The Accompanying Notes are an Integral Part of these Consolidated
Financial Statements.
F-7(continued)
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
[1] Principles of Consolidation and Business
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].
The September 30, 1996 and December 31, 1995 financial statements reflect the
financial position and results of operations of The Harmat Organization, Inc.
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
Holding Company
Harmat Companies: [Subsidiaries]
Harmat Homes, Inc. ["Harmat"] Construction of custom homes and
residential and commercial rental
properties, in the eastern
portion of Long Island, New York.
Harmat Holding Corp. ["Harmat Holding"] Subdivision and development of
undeveloped land
in the eastern portion of Long
Island, New York.
Northside Woods, Inc. ["Northside"] Rental of residential property in
the eastern portion
F-8
<PAGE>
of Long Island, New York.
Harmat Capital Corp. ["Harmat Capital"] Rental of residential
property in the
eastern portion of
Long Island, New York.
Harmat Organization, Inc. - New York Limited Partner in real estate
partnership in the
eastern portion of Long Island,
New York.
F-8(Continued)
<PAGE>
Quick Storage, Inc. Short-term rental of storage
facilities in the eastern
portion of Long Island, New York.
The construction industry poses certain inherent risks to the Company, such as a
shortage of skilled labor. 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. 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.
F-8(continued)
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- -----------------------------------------------------------------------
[1] Principles of Consolidation and Business [Continued]
The principal stockholder of the Company is a general partner in the partnership
in which the Harmat Organization, Inc. - New York has a limited partnership
interest.
The Plan for Incentive Compensation of Matthew Schilowitz [the "Schilowitz
Incentive Plan"] who is the principal, was adopted by the Board of Directors and
approved by the Company's sole 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 of 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.
[2] Summary of Significant Accounting Policies
Accounting Period - Effective September 30, 1996, the Company changed to a
fiscal year ending on September 30th. Prior to 1996, the Company utilized a
calender year end. The accompanying financial statements include audited
financial statements for the nine month period transaction period ended
September 30, 1996 and the previously
F-9
<PAGE>
reported fiscal year ended December 31, 1995.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents totaled approximately $1,000,000 at September 30, 1996.
Concentration of Credit Risk - Financial instruments which potentially subject
the Company to concentrations of credit risk are cash and cash equivalents and
accounts receivable arising from the normal business
activities. The Company routinely assesses the financial strength of its
customers and based upon factors surrounding the credit risk of its customers,
establishes an allowance for uncollectible accounts, and as a consequence,
believes that its accounts receivable credit risk exposure beyond such
allowances is limited. Deposits are usually required on house construction
contracts. The Company places its cash and cash equivalents with high credit
quality financial institutions. The amount on deposit in any one institution
that exceeds federally insured limits is subject to credit risk. Such amount was
approximately $2,900,000 at September 30, 1996. The Company believes no
significant concentration of credit risk exists with respect to these cash
equivalents.
F-9(continued)
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Economic Dependency - There were five and six construction contracts which were
deemed major customers and accounted for approximately 99% of total construction
sales for the nine months ended September 30, 1996 and the year ended December
31, 1995. For the nine months ended September 30, 1996, these contracts
represented 25%, 20%, 19%, 18% and 17% of total sales. For the year ended
December 31, 1995, five contracts represented 16% each of total sales and one
contract represented 19% of total sales. At September 30, 1996, there was
$25,000 due under one contract. 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 accounts for its investments pursuant to
Statement of Financial Accounting Standards ["SFAS"] No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." 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.
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 September 30, 1996, 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
F-10
<PAGE>
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
Earnings [Loss] Per Share - Earnings [Loss] per share are computed by dividing
the net income [loss] for the year by the weighted average number of common
shares outstanding. Stock options and warrants are assumed converted to common
stock, when dilutive.
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.
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.
F-10(continued)
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- -------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Revenue Recognition
- - Harmat Holding and Harmat Homes - Harmat Holding and Harmat Homes
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 September
30, 1996, such land and construction costs totaled $698,185. Customer
deposits received on such contracts totaled $11,924 at September 30,
1996.
- - 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 - Under FAS No. 109, "Accounting for Income Tax", deferred income
taxes reflect the net tax effects of (a) temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, and (b) operating loss carryforwards.
The tax effects of significant items comprising the Company's net deferred tax
liability as of September 30,1996 are as follows:
Deferred Tax Liabilities:
Difference between book and tax basis of property, plant and
equipment $(36,500)
F-11
<PAGE>
Deferred Tax Assets:
Federal and State Net Operating Loss Carryforwards 77,800
Less: Valuation Allowance (41,300)
Net Deferred Tax Liability $ --
The provision for income taxes arises from the amount computed by applying
statutory rates for the reasons summarized below:
Provision Based on Statutory 34 %
Benefit of Graduated Rates (19) %
State Taxes Net of Federal Benefit 6 %
Benefit of NOL Carryforward (21) %
Total -- %
The Company will have net operating loss carryforwards of approximately $370,000
available to reduce future taxes. These carryforward losses expire in 2011.
Pursuant to Section 382 of the Internal Revenue Code regarding substantial
changes in company ownership, utilization of these losses may be limited.
F-11(continued)
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- -------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Income Taxes [Continued] - For the year ended December 31, 1995, each of the
subsidiaries had elected S-corporation status under the Internal Revenue Code
and similar state statutes and, therefore, did not incur federal or state income
taxes except for a New York State equalization tax on S-corporation earnings.
Taxes are passed through to the individual shareholder for S-corporations. 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.
Goodwill - The cost 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. The Company has decided to amortize its goodwill over a period of up
to ten years under the straight-line method. Accumulated amortization at
September 30, 1996 was $14,073. 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 Accounting Principal Board Opinion No. 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 $31,592.
F-12
<PAGE>
The change in the unrealized gain account for the nine month period ended
September 30, 1996 and for the year ended December 31, 1995 was $4,394 and
$5,575, respectively.
[4] Property and Equipment
Property and equipment consist of the following at September 30, 1996:
Land $ 450,496
Building and Building Improvements 821,566
Furniture and Office Equipment 44,566
Total 1,316,628
Less: Accumulated Depreciation 164,513
Property and Equipment - Net $ 1,152,115
Depreciation expense for the nine months ended September 30, 1996, and for the
year ended December 31, 1995 totaled $21,032 and $21,580, respectively.
F-12(continued)
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- -------------------------------------------------------------------
[5] Notes and Mortgages Payable
[A] Mortgages - At September 30, 1996, the mortgages payable consist of the
following:
Two mortgages payable, dated August 19, 1996, in the original
amount of $250,000 each, payable in monthly installments of
$1,971 each, bearing interest at 8.25% and maturing on September 1,
2021. The mortgages are secured by rental properties having a
cost of approximately $500,000. The proceeds of the mortgages
were used to repay previously existing mortgages secured by the
rental properties. $ 499,496
Mortgage payable, dated November 30, 1992, in the original
principal 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 principal stockholder of the Company. 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 becomes due. For the nine
months ended September 30, 1996, three subdivided lots were
sold under this participation agreement. Pursuant to such sales,
mortgage repayments totaling $120,000 and interest participation
payments totaling $54,000 were made. 280,000
F-13
<PAGE>
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 is past due, however, the Company
and the bank have reached an agreement to extend this obligation.
The mortgage is secured by land and building having 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 [9.875% at September 30,
1996] which is determined annually. The mortgage is secured
by land and building having a cost of approximately $200,000. 141,335
Total 1,136,231
Less: Current Portion 230,668
Total Mortgages Payable $ 905,563
F-13(continued)
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- -------------------------------------------------------------------------
[5] Notes and Mortgages Payable [Continued]
[B] Related Party Notes Payable
Notes payable to two related parties due on demand for
$70,000 and $20,000, bearing interest at 8% and 6% per
annum, respectively. $90,000
In September 1996, the Company repaid a related party
note payable of $125,000.
[C] Other Notes and 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 January 31, 1997.
Repayment of this loan is guaranteed by the principal
stockholder of the Company. $ 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. 32,800
Notes payable dated September 24, 1996, issued pursuant to the
purchase and financing of a commercial insurance policy.
Such note is payable in monthly installments of $4,048 including
principal and interest calculated at 9.95% per annum through
July 9, 1997. 38,700
Total $ 171,500
F-14
<PAGE>
[D] Other Notes Repayment - A note payable to a bank
in the amount of $240,000 and notes payable to
shareholders totaling $277,000 were repaid in September
1996.
Annual maturities of mortgages payable are as follows:
For the Period Ended
September 30,
1997 $ 230,668
1998 297,371
1999 19,133
2000 21,076
2001 23,192
Thereafter 544,791
Total Notes and Mortgages Payable $ 1,136,231
F-14(continued)
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ---------------------------------------------------------------
[6] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted SFAS No. 107, "Disclosure about
Fair Value Financial Instruments", 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 herein 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 September 30, 1996:
Carrying
Amount Fair Value
Debt Maturing Within One Year $ 492,168 $ 492,168
Long-Term Debt 905,563 905,563
Totals $ 1,397,731 $ 1,397,731
For certain financial instruments, including cash and cash equivalents, trade
receivables and payables, customer deposits and short-term debt, it is estimated
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] 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
F-15
<PAGE>
Series A warrants were registered as part of the 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
[8] Common Stock
[A] Capital Contribution - 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 shares [See Note 1]. The escrow
was part of the "Arnaud" agreement [See Note 1]. The 500,000 contributed shares
were canceled. The contribution has been reflected retroactively in these
financial statements as a recapitalization.
[B] Initial Public Offering - In September 1996, the Company completed the
initial public offering of 862,500 units [including the 112,500 underwriter's
over-allotment shares] at 5.75 per unit resulting in net proceeds to the Company
of $3,929,673.
F-15 (continued)
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- -----------------------------------------------------------------------
[9] 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.
[B] Legal Proceedings - The Company is involved in 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, operations or
cash flows of the Company. Due the inherent uncertainty of the legal process,
however, this assessment may be subject to change in the near term.
[C] Commitments and 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.
[D] Employment Agreement - On April 1, 1996, the Company entered into a five
year employment agreement with the President and Chief Executive Officer, who is
also the Company's principal shareholder 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].
[10] Segment Information
The Company's operations are classified into two industry segments:
construction and rental. The following is a summary of segment
F-16
<PAGE>
information for 1996 and 1995:
Construction Rental Consolidated
Revenue from Non-Affiliates:
1996 $ 2,573,836 $ 153,944 $ 2,727,780
1995 $ 2,140,126 $ 183,398 $ 2,323,524
[Loss] Income from Operations:
1996 $ (251,043) $ 23,104 $ (227,939)
1995 $ 69,460 $ 62,250 $ 131,710
Identifiable Assets:
1996 $ 3,932,763 $ 1,392,598 $ 5,325,361
1995 $ 1,064,945 $ 1,629,610 $ 2,694,555
Depreciation and Amortization:
1996 $ 4,658 $ 22,405 $ 27,063
1995 $ 1,193 $ 28,221 $ 29,414
F-16(continued)
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------
[10] Segment Information [Continued]
Construction Rental Consolidated
Capital Expenditures:
1996 $ 16,457 $ 31,622 $ 48,079
1995 $ 14,594 $ 5,231 $ 19,825
[11] New Authoritative Pronouncement
The FASB has 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 value based method of accounting prescribed by Accounting
Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to
Employees." The optional accounting 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 APB Opinion No. 25 in
recognizing its stock based employee arrangements as permitted under generally
accepted accounting principles. 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.
F-17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 4, 1997
The Harmat Organization, Inc.
BY: /s/ Matthew C. Schilowitz
Matthew C. Schilowitz,
President and Chairman of
the Board of Directors
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities on the dates
indicated.
Name Titles Date
/s/ Matthew C. Schilowitz President and Chairman March 4, 1997
Matthew C. Schilowitz of the Board of Directors
(Chief Executive Officer)
/s/ Seymour G. Siegel Treasurer and a Director March 4, 1997
Seymour G. Siegel (Chief financial and
Accounting officer)
/s/ Scott Prizer Secretary and a Director March 4, 1997
Scott Prizer
/s/ David W. Sass Director March 4, 1997
David W. Sass
/s/ David S. Eiten Director March 4, 1997
David S. Eiten
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FINANCIAL STATEMENTS CONTAINED IN THE COMPANY"S FORM 10KSB/A AND IS
QUAILIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMEENT.S
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,203,669
<SECURITIES> 22,507
<RECEIVABLES> 27,594
<ALLOWANCES> 0
<INVENTORY> 698,185
<CURRENT-ASSETS> 3,995,453
<PP&E> 1,316,627
<DEPRECIATION> (164,452)
<TOTAL-ASSETS> 5,325,361
<CURRENT-LIABILITIES> 728,882
<BONDS> 0
0
0
<COMMON> 2,612
<OTHER-SE> 4,253,604
<TOTAL-LIABILITY-AND-EQUITY> 5,325,361
<SALES> 2,496,926
<TOTAL-REVENUES> 2,727,870
<CGS> 2,238,769
<TOTAL-COSTS> 717,040
<OTHER-EXPENSES> (57,420)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175,972
<INCOME-PRETAX> (346,491)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (346,495)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> 0
</TABLE>
