SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
(Mark One)
(X) Quarterly report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934, for the quarterly period ended March 31, 1998.
( ) Transition report pursuant to section 13 or 15 (d) of the
Securities Exchange Act of 1934, for the transition period from
to .
Commission file number
THE HARMAT ORGANIZATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2780723
(State of Incorporation) (I.R.S. Employer ID No.)
22 Old Country Road
Quogue, New York 11959
(516) 653-3303
(Address of Principal Executive Offices
and Principal Place of Business and Telephone Number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 31, 1997
Common Stock, $.001 par value 2,612,500 shares
<PAGE>
The Harmat Organization, Inc.
Index to Form 10-Q
Page
Item Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
March 31, 1998 3-4
Consolidated Statements of Operations -
Three months ended March 31, 1998
and March 31, 1997 5
Consolidated Statements of Cash Flows - 6-8
Three months ended March 31, 1998
and March 31, 1997
Notes to Consolidated Financial Statements 9-20
Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,168,967
Marketable securities 10,639
Accounts receivable 58,970
Notes receivable 218,000
Notes receivable - shareholder 165,939
Prepaid expenses 56,218
--------------
Total Current Assets 1,678,733
---------
PROPERTY AND EQUIPMENT - NET 1,239,125
---------
OTHER ASSETS
Construction costs 1,201,266
Land held for development 729,579
Due from affiliated companies 89,467
Goodwill - net 54,279
Investment in Partnership 76,447
Land deposits 85,000
-------------
2,236,038
TOTAL ASSETS $5,153,896
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes and mortgages payable $ 35,400
Notes payable 228,120
Other notes payable 5,525
Accounts payable and accrued expenses 83,160
Customer and security deposits 330,090
---------
Total Current Liabilities 682,295
OTHER LIABILITIES
Mortgages payable - net of current maturities 780,944
Construction loans payable - net of current maturities 622,002
Total other liabilities 1,402,946
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 2,613
Additional paid-in capital - common stock 4,253,603
Retained earnings (Deficit) (1,187,561)
Total Stockholders' Equity 3,068,655
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,153,896
===========
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Six Months Six Months
Ended Ended
March 31 March 31,
1998 1997
------ -----
REVENUES
Construction sales $ 957,936 $ 1,476
Sale of land held for development 3,105,705 -
Rental income 90,712 69,934
------------ -------------
Total Revenues 4,154,353 71,410
COST OF SALES AND DIRECT OPERATING EXPENSES 3,191,710 20,306
------------ --------------
Gross profit 962,643 51,104
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 611,073 530,272
CHARGE FOR EXECUTIVE COMPENSATION CAPITALIZED - -
------------------- -----------------
(LOSS) INCOME FROM OPERATIONS 351,570 (479,168)
------------- -------------
OTHER INCOME (EXPENSE)
Gain on sale of marketable securities 37,227 53,780
Interest and dividend income 35,814 52,780
Interest expense (84,853) (43,279)
-------------- ---------------
Total Other Income (Expense) (11,812) 63,281
--------------- --------------
Net Income (LOSS) 339,758 (415,887)
Charge in lieu of income taxes - -
----------------- ------------------
Pro Forma net income (loss) $ 339,758 $ (415,887)
============= =============
Income and (Loss) per share $ 0.13 $ (0.17)
============ ================
Weighted average number of shares 2,575,596 2,510,683
============ ===========
</TABLE>
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Common Stock
Additional Total
Number of Amount Paid-In Accumulated Stockholders'
Shares (At Par) Capital (Deficit) Equity
Balance - September 30, 1996 2,612,500 $ 2,613 $ 4,253,604 $ (565,300) $ 3,690,917
Net (Loss) for period (415,888) (415,888)
Balance - March 31, 1997 2,612,500 $ 2,613 $4,253,604 $ (981,188) $3,275,029
=========== =========== ========== ============= ==========
Common Stock
Additional Total
Number of Amount Paid-In Accumulated Stockholders'
Shares (At Par) Capital (Deficit) Equity
Balance - September 30, 1997 2,612,500 $ 2,613 $ 4,253,604 $ (1,527,319) $ 2,728,898
Net (Loss) for period 339,759 339,758
Balance - March 31, 1998 2,612,500 $ 2,613 $4,253,604 $(1,187,561) $3,068,656
=========== =========== ========== ============ ==========
</TABLE>
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Six Months Six Months
Ended Ended
March 31, March 31,
1998 1997
----- -----
OPERATING ACTIVITIES:
Net (loss) income $ 339,758 $ (415,887)
------------ ---------------
Adjustments to reconcile net (loss) income to net cash
(used for) provided by operating activities:
Depreciation and amortization 10,968 12,704
Gain on sale of marketable securities - (53,780)
Changes in assets and liabilities:
Contracts receivable (25,507) (63,716)
Purchase of marketable securities - (4,212)
Sales of marketable securities - 66,918
Prepaid expenses 752 (38,825)
Accounts payable and accrued expenses (301,187) 61,996
Refundable deposits 45,749 253,694
Customer deposits 273,624 -
------------ ------------------
Total Adjustments 4,399 234,779
-------------- ------------
Net Cash Used by Operating Activities Forward 344,157 (181,108)
------------ ------------
INVESTING ACTIVITIES:
Advances from/to affiliates and related parties (21,867) (31,364)
Acquisition of land, property and equipment - (96,269)
Investment in partnership (50,000) -
Land deposits 25,000 (6,000)
Land and construction costs 1,771,694 (1,313,069)
---------- -------------
Net Cash from (used by) Investing Activities Forward 1,724,827 (1,446,702)
----------- -------------
</TABLE>
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Six Months Six Months
Ended Ended
March 31, March 31,
1998 1997
------ -----
FINANCING ACTIVITIES:
Repayment of notes payable - related party - (90,000)
Repayments of mortgages payable (951,013) (6,862)
Repayments of other notes payable & loan payable (143,000) (32,360)
Net Cash from Financing Activities (1,094,013) (129,222)
-------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 974,971 (1,757,032)
CASH AND CASH EQUIVALENTS - beginning of period 193,996 3,203,669
------------- -------------
CASH AND CASH EQUIVALENTS - end of period $ 1,168,967 $ 1,446,637
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the periods for:
Interest $ 84,853 $ 43,799
============= ==============
Income taxes $ 2,280 $ 20,545
============== ==============
</TABLE>
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
NOTE 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 March 31, 1998 and 1997 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Entity Nature of Business
Parent Company:
The Harmat Organization, Inc. - Delaware Holding Company
Subsidiaries:
Harmat Homes, Inc. ("Harmat Homes") 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 of Long Island, New York.
Harmat Capital Corp. ("Harmat Capital") Rental of residential property in the
eastern portion of Long Island, New York
Harmat Management, Inc. Limited Partner in real estate
partnership in the eastern portion of
Long Island, New York
Quick Storage, Inc. Short-term rental of storage facilities
in the eastern portion of Long Island,
New York
</TABLE>
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
NOTE 1: PRINCIPLES OF CONSOLIDATION AND BUSINESS (continued)
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.
The principal stockholder of the Company is a general partner
in the partnership in which Harmat Management, Inc. has a
limited partnership interest.
NOTE 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 calendar year end. The accompanying financial
statements include financial statements for the six-month
period ended March 31, 1998 and March 31, 1997.
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 $1,168,967
at March 31, 1998. Cash includes $77,500 set aside to satisfy
a Suffolk County bonding requirement.
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 its 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 (as necessary), 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 $10,639 at March
31, 1998. The Company believes no significant concentration of
credit risk exists with respect to these cash equivalents.
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Economic Dependency
There were five and zero construction contracts which were
deemed major customers and accounted for total construction
sales for the six months ended March 31, 1998 and the six
months ended March 31, 1997. For the six-month ended March 31,
1998, these contracts represented 74%, 11%, 7%, 3% and 5% 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 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; trade securities; and available-for-sale
securities.
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 March 31, 1998, 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.
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 for buildings 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
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 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.
Revenue Recognition
The Company 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. This
method provides that all construction costs be recorded as
incurred and monies received from the purchases be
recorded as deposits until the purchase contracts close at
which time all revenue costs and profits are recognized.
The Company classifies all land and construction costs
that are expected to be completed within one year as a
current asset. At March 31, 1998, such land and
construction costs totaled $729,579 and $1,201,226.
Customer deposits on such contracts totaled $330,090 at
March 31, 1998.
Rental income is recognized as it is earned pursuant to
the term of each lease on a straight-line basis. Leases
generally have an initial or remaining term of one year or
less.
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 deferred taxes as of March 31, 1998 are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Deferred Tax Liabilities:
Difference between book and tax basis of property,
plant and equipment $ (36,500)
Deferred Tax Assets:
Federal and State Net Operating Loss Carryforwards 279,700
Less: Valuation Allowance (243,200)
Net Deferred Tax Liability $ -
================
The provision for income taxes for both 1996 and 1997 arises
from the amount computed by applying statutory rates for the
reasons summarized below:
Provision Based on Statutory Rates 34%
Benefit of Graduated Rates (19)%
State Taxes Net of Federal Benefit 6%
Benefit of NOL Carryforward (21)%
-----
Total -%
</TABLE>
The Company will have net operating loss carryforwards of
approximately $1,332,000 available to reduce future taxes.
These carryforward losses expire through the year 2012.
Pursuant to Section 382 of the Internal Revenue Code regarding
substantial changes in Company ownership, utilization of these
losses may be limited.
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 10 years under
the straight-line method. Accumulated amortization at March
31, 1998 was $38,200. 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 recorded goodwill is less than
the projected undiscounted cash flow from acquired assets or
business.
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock Options and Similar Equity Instruments Issued to Employees
The Company currently accounts for its stock-based
compensation plans using the accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (see Note 10). Since the Company is
not required to adopt the fair value based recognition
provisions prescribed under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, it
has elected only to comply with the disclosure requirements
set forth in the Statement, which includes disclosing pro
forma net income as if the fair value based method of
accounting had been applied (See Note 10).
NOTE 3: MARKETABLE SECURITIES
Marketable securities consist of investments in equity and
debt securities at fair value. The cost of such securities is
$10,639 as of March 31, 1998.
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31,
1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Land $ 523,974
Building and building improvements 858,529
Furniture and office equipment 68,905
--------------
Total 1,451,408
Less: Accumulated depreciation 212,283
Property and Equipment - Net $ 1,239,125
===========
</TABLE>
Depreciation expense for the six months ended March 31, 1998
and for the six months ended March 31, 1997 totaled $17,210
and $11,844, respectively.
NOTE 5: LOANS RECEIVABLE
Stockholder
The Company loaned Mr. Schilowitz, its primary stockholder,
$200,000 in July 1997. The loan is evidenced by a Promissory
Note with simple interest at the Prime Rate charged by Chase
Manhattan Bank, NA. Mr. Schilowitz pledged 500,000 shares of
Common Stock of the Company as collateral security. The
balance of this loan as of March 31, 1998 is $165,939.
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
NOTE 5: LOANS RECEIVABLE (continued)
Other
The Company loaned $175,000 to Axxess, Inc., an unaffiliated
third party. The loan is evidenced by a $175,000 Promissory
Note dated August 15, 1997. The note bears interest at 2%
above prime rate and unpaid interest and principal is due
August 15, 1998. Axxess, Inc. pledged 600,000 shares of its
common stock as security collateral and authorized the
issuance of rights to purchase 1,000,000 warrants for a price
of $.50 per share (as amended) expiring August 14, 2000.
The Company loaned $28,000 to a Rabbi Marc Schnieer an
unaffiliated third party. The loan is evidenced by a
promissory note dated September 30, 1997. The note bears no
interest and principle is due January 15, 1999. The balance of
this loan at March 31, 1998 is $18,000.
The Company loaned $25,000 to an unaffiliated third party. The
loan is evidenced by a Promissory Note dated August, 1997. The
Note bears interest at 12% per annum and is due August, 1998.
NOTE 6: NOTES AND MORTGAGES PAYABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
At March 31, 1998, the notes and 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. $ 487,406
Mortgage payable dated March 26, 1997, in the original amount of $215,400, with
monthly interest at prime plus 1.5% payable in monthly installments until April,
1999 when unpaid principal and interest is due. The mortgage is secured by land
and building having a cost of approximately $415,000. 203,717
<PAGE>
Page 14
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
NOTE 6: NOTES AND MORTGAGES PAYABLE (continued)
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 (10.125% at September 30, 1997) which is
determined annually. The mortgage is secured by land and
building having a cost of approximately $200,000
125,221
Three construction loans, in the original amount totaling $1,065,000,
payable monthly with interest only at 9.75% until June 1999 when the
principal and unpaid interest is due. The loan is secured by a building
lot at the development know Emerald Woods Lot 4, crossing Lot 13 and
Beach Lane 622,002
Notes payable with no interest is due upon sale of Crossings Lot 13 Spec
home. 115,000
Loan payable with interest at 12% per annum and is due on demand.
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. 13,120
Other notes and mortgages 5,525
------------
Total Notes and Mortgages Payable 1,671,991
Less: Current Portion 35,400
------------
Total Long Term Notes and Mortgages Payable $1,636,591
==========
</TABLE>
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
NOTE 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 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
No. of FMV at No. of
Date of Warrants Exercise Date of Warrants
Grant Type Issued Price 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>
NOTE 8: COMMON STOCK
Capital Contribution
On August 3, 1996, the Company's principal stockholder
contributed 500,000 shares of the Company's common stock to
the Company. The 500,000 contributed shares were cancelled.
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.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Land Contract
In July 1997, the Company deposited $75,000 in escrow relating
to the proposed acquisition of certain real estate properties
in Greenport, NY. In October 10, 1997 the Company entered into
a contract to purchase a parcel of unimproved land in
Westhamption Beach, N.Y. for $227,000 and made a $10,000
deposit pursuant to such contract as of March 31, 1998.
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 to the inherent uncertainty
of the legal process, however, this assessment may be subject
to change in the near term.
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
Commitments and Stock Option Plans
The Company has two stock-based compensation plans, which are described below.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized.
a) The Plan for Incentive Compensation of Matthew Schilowitz (the "Schilowitz
Incentive Plan"), who is the principal stockholder, 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 ($1.125, as amended). 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 Taxes Shares to be 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 may result in substantial
compensation expense to the Company in future years.
b) In February 1996, the Board of Directors adopted the 1996
Joint Incentive and Non-Qualified Stock Option Plan (the
"Plan") providing for the granting of up to 400,000 shares
of the Company's common stock. In January 1997, the
Company granted five year options under the Plan providing
for 10,000 shares at a price of $2.125 per share to four
directors and two key employees of the Company. In March
1997, the Company's chief executive officer and principal
shareholder was granted 300,000 shares at an exercise
price of $2.337 per share ($1.25, as amended).
The fair value of each option grant is estimated on the grant
date using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in
1997: dividend yield of 0%, risk-free interest rate of 6.3%,
expected volatility of 109%, and expected lives of 5 years for
the options.
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
A summary of the status of the Company's stock option plan as
of December 31, 1997, and the changes during the year ending
December 31, 1997 is presented below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Weighted-Averaged
Fixed Options Shares Exercise Price
------------- ------ --------------
October 1, 1996 0 -
Granted 360,000 $ 1.40
Exercised 0 -
Forfeited 0 -
----------- ---------------------
March 31, 1998 360,000 $ 1.40
======= ===================
Exercisable at March 31, 1998 360,000
Weighted-average fair value of
options granted during the year $ 1.71
The following table summarizes information about fixed stock
options outstanding at March 31, 1998.
Outstanding Options Exercisable Options
Number Weighted average Weighted - Number
Outstanding Outstanding Remaining Average Exercisable Weighted-average
Exercise Price 9/30/97 Contractual Life Exercise Price At 9/30/97 Exercise Price
$1.25 to $2.215 360,000 4.5 years $ 1.40 360,000 $ 1.40
</TABLE>
If the Company had used the fair value based method of
accounting for its employee stock option plan, as prescribed
by Statement of Financial Accounting No. 123, compensation
cost included in the net loss for the year ended March 31,
1998 would have increased by approximately $614,000, resulting
in a net loss of $(1,576,000), net of tax, and loss per share
of $(.60).
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 stockholder,
effective September 1996, 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 options to purchase up to an aggregate of
500,000 shares of the Company common stock for ten years,
exercisable at $1.125 per share with rights vesting upon
attainment of certain earnings levels (see above).
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
NOTE 10: RELATED PARTY TRANSACTIONS
In April, 1997, the Company purchased a building lot from
Emerald Woods Development Corp. ("Emerald Woods") (of which
Matthew Schilowitz is a 50% owner) for $195,000 and is in
contract to construct a house on such lot. The Company
purchased 2 additional building lots from Emerald Woods in
December, 1997 for $190,000 and simultaneously sold them to an
unaffiliated third party for $200,000 (see Note 13).
The Company loaned $89,467 to entities related to Matthew
Schilowitz. Such loans are due on demand and have no stated
interest rate.
The Company paid legal fees of approximately $5,894 in the
three months ended March 31, 1998 to a firm in which a
director of the company is a partner.
<PAGE>
The Harmat Organization, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE
SIX MONTHS ENDED MARCH 31, 1997
Total revenues for the six months ended March 31, 1998 were $4,154,353 compared
to revenues of $71,410 for the six months ended March 31, 1997, an increase of
approximately $4,082,943 due to sale of Jagger Woods Development, Polo Ground
Lot 5, and three home sales.
Construction Sales
Deliveries of three homes, Jagger Woods Development and Polo Ground Lot #5
resulted in revenues of $4,063,641 for the six months ended March 31, 1998. For
the six months ended March 31, 1997 there were no sales rendered. The reasons
for the increase in revenues is the Company sold Jagger Woods Development, which
consisted of 57 Lots, for $2,998,205 and three single family homes for $957,936.
The Company shifted its focus and moved into the hotel and motel construction
market and to provide hospitality services in addition to successfully
completing current projects under development.
Rental Income
Rental based properties resulted in rental income of $90,712 for the six months
ended March 31, 1998. For the six months ended in March 31, 1997 the Company
generated rental income of $69,934. Rental income is increased by $20,278. Quick
Storage of Quogue a Self Storage Facility, generated rental income for the six
months ended March 31, 1998, $55,342. The reason for the increase is the rental
properties were fully rented at higher rates of rents than six months ended
March 31, 1997.
Gross Profit Margin
The Company's gross profit margin on homes and development delivered was
approximately twenty-four (24%) percent during the six months ended March 31,
1998, compared to no percent in the six months ended March 31, 1997, because
there were no sales reported. The increase in gross profit margin resulted from
the sale of three single family homes, a developed Lot and Jagger Woods
Development.
Cost of sale for the six months ended March 31, 1998 was $3,191,710 as compared
to $20,306 for the six months ended March 31, 1997. The increase in cost of sale
resulted primarily from the sale of Jagger Woods Development.
<PAGE>
Selling and general administration expenses were $611,073 for the six months
ended March 31, 1998 as compared to $530,272 for the six months ended March 31,
1997. The increase is due to primarily increasing costs of administration staff
marketing and professional fees.
Gross Interest Costs
Gross interest costs were $84,853 for the six months ended March 31, 1998
compared to $43,279 for the six months ended March 31, 1997. During December
1997 the company had funds available from the sale of Jagger Woods Development
which enabled it to satisfy various of its existing debts and obligations.
Subsequent Events
The Company has entered into a contract to sell five lots from its
development known as "Polo Ground" for $505,000. In addition, the Company
has entered into a separate contract to sell a lot from North Side Woods
located in Westhampton, New York for $70,000.
<PAGE>
The Harmat Organization, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been the proceeds of its initial
public offering, cash generated from sales, and borrowings from its officers and
related parties.
During the six months ended March 31, 1998, the Company had positive cash flows
from operating activities of $344,157 versus a negative cash flow of $181,108
for the six months ended March 31, 1997. Investing activities used cash of
$1,724,827 for the six months ended March 31, 1998 and $1,446,702 for the six
months ended March 31, 1997.
<PAGE>
The Harmat Organization, Inc.
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits - None
b. Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
The Harmat Organization, Inc.
(Registrant)
By: /s/ Matthew C. Schilowitz
Chief Executive Officer
By: /s/ Ray Dhir
Chief Financial Officer
Date: May 13, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Company's Form 10-QSB and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,168,967
<SECURITIES> 10,639
<RECEIVABLES> 442,909
<ALLOWANCES> 0
<INVENTORY> 729,579
<CURRENT-ASSETS> 1,678,733
<PP&E> 1,451,407
<DEPRECIATION> 212,283
<TOTAL-ASSETS> 5,153,896
<CURRENT-LIABILITIES> 682,295
<BONDS> 0
0
0
<COMMON> 2,613
<OTHER-SE> 3,066,042
<TOTAL-LIABILITY-AND-EQUITY> 5,153,896
<SALES> 4,063,641
<TOTAL-REVENUES> 4,154,353
<CGS> 3,191,710
<TOTAL-COSTS> 3,802,783
<OTHER-EXPENSES> 11,812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84,853
<INCOME-PRETAX> 339,758
<INCOME-TAX> 0
<INCOME-CONTINUING> 339,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 339,758
<EPS-BASIC> .13
<EPS-DILUTED> 0
</TABLE>
