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 June 30, 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 June 30, 1998
Common Stock, $.001 par value 2,612,500 shares
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The Harmat Organization, Inc.
Index to Form 10-Q
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Page
Item Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet -
June 30, 1998 3-4
Consolidated Statements of Operations -
Nine months ended June 30, 1998
and June 30, 1997 5
Consolidated Statements of Cash Flows - 6-8
Nine months ended June 30, 1998
and June 30, 1997
Notes to Consolidated Financial Statements 9-15
Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-17
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
June 30, 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 613,971
Marketable securities 10,639
Accounts receivable 240,962
Notes receivable 218,000
Notes receivable - shareholder 165,939
Prepaid expenses 64,098
Total Current Assets 1,313,609
PROPERTY AND EQUIPMENT - NET
1,213,603
OTHER ASSETS
Construction costs 1,091,998
Land held for development 744,579
Due from affiliated companies 234,467
Goodwill - net 54,279
Investment in Partnership 76,447
Land deposits 85,000
2,286,770
TOTAL ASSETS $4,831,983
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Page 2
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes and mortgages payable $ 17,700
Notes payable 128,120
Other notes payable 5,525
Accounts payable and accrued expenses (33,853)
Customer and security deposits 446,095
Total Current Liabilities 563,586
OTHER LIABILITIES
Mortgages payable - net of current maturities 792,242
Construction loans payable - net of current maturities 552,556
Total other liabilities 1,344,798
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) (1,332,618)
Total Stockholders' Equity 2,923,598
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,831,983
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
June 30, 1998
Nine Months
Ended
June 30,
1998
Nine Months
Ended
June 30,
1997
REVENUES
Construction sales $ 1,427,760 $ 1,254,405
Sale of land held for development 3,105,705 -
Rental income 185,691 60,616
Total Revenues 4,719,156 1,315,021
COST OF SALES AND DIRECT OPERATING EXPENSES 3,618,475 1,173,907
Gross profit 1,100,681 141,114
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 862,798 418,323
CHARGE FOR EXECUTIVE COMPENSATION CAPITALIZED - -
(LOSS) INCOME FROM OPERATIONS 237,883 (277,209)
OTHER INCOME (EXPENSE)
Gain on sale of marketable securities 37,227 8,495
Unrealized gain on marketable securities - (11,066)
Interest and dividend income 40,180 12,628
Interest expense (120,588) (15,323)
Total Other Income (Expense) (43,182) (5,266)
Net Income (LOSS) 194,701 (282,475)
Charge in lieu of income taxes - -
Pro Forma net income (loss) $ 194,701 $ (282,475)
Income and (Loss) per share $ 0.08 $ (0.11)
Weighted average number of shares 2,564,593 2,585,402
<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 - 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 - June 30, 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 194,701 194,701
Balance - June 30, 1998 2,612,500 $ 2,613 $4,253,604 $(1,332,618) $2,923,599
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
June 30, 1998
Nine Months
Ended
June 30,
1998
Nine Months
Ended
June 30,
1997
OPERATING ACTIVITIES:
Net (loss) income $ 194,701 $ (698,362)
Adjustments to reconcile net (loss) income to net cash
(used for) provided by operating activities:
Depreciation and amortization 18,490 19,483
Gain on sale of marketable securities - (62,274)
Change in unrealized gain(loss) on investments - 11,066
Changes in assets and liabilities:
Contracts receivable (207,496) (33,689)
Purchase of marketable securities - -
Sales of marketable securities - 62,647
Prepaid expenses (7,128) (37,931)
Accounts payable and accrued expenses (418,199) 197,384
Refundable deposits 45,749 29,914
Customer deposits 389,629 -
Total Adjustments (178,955) 186,600
Net Cash Used by Operating Activities Forward 15,746 (511,762)
INVESTING ACTIVITIES:
Advances from/to affiliates and related parties (166,867) (81,109)
Acquisition of land, property and equipment - (99,850)
Investment in partnership (50,000) -
Land deposits 25,000 -
Land and construction costs 1,865,962 (1,262,223)
Net Cash from (used by) Investing Activities Forward 1,674,095 (1,443,182)
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months
Ended
June 30,
1998
Six Months
Ended
June 30,
1997
FINANCING ACTIVITIES:
Repayment of notes payable - related party - (90,000)
Repayments of mortgages payable (1,126,863) (71,977)
Repayments of other notes payable & loan payable (143,000) (44,426)
Net Cash from Financing Activities (1,269,863) (206,403)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 419,975 (2,161,347)
CASH AND CASH EQUIVALENTS - beginning of period 193,996 3,203,669
CASH AND CASH EQUIVALENTS - end of period $ 613,971 $ 1,042,322
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the periods for:
Interest $ 120,588 $ 68,422
Income taxes $ 2,280 $ 48,620
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<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 June 30, 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.
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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
Harmat Hospitality, Inc.
Construction hotels and
motels, and provide
hospitality services.
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<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 nine-month period
ended June 30, 1998 and June 30, 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 $613,971 at June 30, 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
June 30, 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
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Economic Dependency
There were six and three construction contracts which were deemed
major customers and accounted for total construction sales for
the nine months ended June 30, 1998 and the nine months ended
June 30 1997. 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
June 30, 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
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.
<PAGE>
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 June 30, 1998,
such land and construction costs totaled $744,579 and $1,091,998. Customer
deposits on such contracts totaled $446,095 at June 30, 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
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 June 30, 1998 are as follows:
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 $ -
<PAGE>
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 -%
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 June 30, 1998 was $44,232.
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
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.
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.
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 June 30, 1998.
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31,
1998:
Land $ 523,974
Building and building improvements 858,529
Furniture and office equipment 70,229
Total 1,452,773
Less: Accumulated depreciation 221,130
Property and Equipment - Net $ 1,231,603
Depreciation expense for the nine months ended June 30, 1998 and for the nine
months ended June 30, 1997 totaled $18,490 and $19,483, 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 June 30, 1998 is $165,939.
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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
June 30, 1998 is $8,000.
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
At June 30, 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 $486,846
$1,971 each, bearing interest at 8.25% and maturing on
September 1, 2021. The mortgages are secured by rental
roperties.
Mortgage payable dated March 26, 1997, in the original amount
of $215,400, with monthly interest at prime plus 1.5% payable 200,531
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.
<PAGE>
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, 122,565
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
Three construction loans, in the original amount totaling
$1,065,000, payable monthly with interest only at 9.75% until 552,556
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
Notes payable with no interest is due upon sale of Crossings 115,000
Lot 13 Spec home.
Loan payable with interest at 12% per annum and is due on 100,000
demand. Repayment of this loan is guaranteed by the principal
stockholder of the Company.
Legal settlement obligation from 1991 to a contractor is
payable in equal semi-annual installments on June 1 and 13,120
December 1 of each year with annual payments of $8,120.
Other notes and mortgages 5,525
Total Notes and Mortgages Payable 1,596,143
Less: Current Portion 17,700
Total Long Term Notes and Mortgages Payable $1,578,443
<PAGE>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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
<PAGE>
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.
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
June 30, 1998
NOTE 9: COMMITMENTS AND CONTINGENCIES (continued)
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.
<PAGE>
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:
<PAGE>
Earnings
Before Taxes
Shares to be Issued
$ 750,000
250,000
$1,500,000
250,000
<PAGE>
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.
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
NOTE 9: COMMITMENTS AND CONTINGENCIES (continued)
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:
Fixed Options Shares Weighted-Averaged
Exercise Price
October 1, 1996 0 -
Granted 360,000 $ 1.40
Exercised 0 -
Forfeited 0 -
June 30, 1998 360,000 $ 1.40
Exercisable at June 30, 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Outstanding Options Exercisable Options
Outstanding Number Weighted average Weighted- Number
Exercise Price Outstanding Remaining Average Exercisable Weighed-average
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>
<PAGE>
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 June 30, 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
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 $234,467 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
nine months ended June 30, 1998 to a firm in
which a director of the company is a partner.
NOTE 11: SUBSEQUENT EVENTS
In July and August 1998, the Company sold the following
properties:
Harmat Homes
Selling Price
Costo Home (x 13) $ 475,000
Harmat Holding
Pologrounds
lots # 1,3,7,8
& 12 505,000
Quick Storage, Inc.
Quick Storage
Facility 710,000
North Side Woods
Lot #10 70,000
$ 1,760,000
<PAGE>
The Harmat Organization, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE
NINE MONTHS ENDED MARCH 31, 1998
The total revenues for the nine months ended June 30, 1998 were $4,719,156
compared to revenues of $1,315,021 for the nine months ended June 30, 1997. An
increase of approximately $3,404,135 due to sale of Jagger Woods Development,
Polo Ground lot #5, and four home sales.
Construction Sales
Deliveries of four homes, Jagger Woods Development and Polo Ground Lot #5
resulted in revenues of $4,533,465 for the nine months ended June 30, 1998. For
the nine months ended June 30, 1997 there were sales of $1,315,021. The reason
for the increase in revenues is the Company sold Jagger Woods Development, which
consisted of 57 Lots, for $2,998,205 andand Polo Ground lot #5 for $105,000 and
four homes for $1,430,260.
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 $185,691 for the nine
months ended June 30, 1998. For the nine months ended June 30, 1997 the Company
generated rental income of $60,618. Rental income is increased by $125,075.
Quick Storage of Quogue a Self Storage Facility, generated rental income of
$83,845 for the nine months ended June 30, 1998. The reason for the increase is
the rental properties were fully rented at higher rates of rents than nine
months ended June 30, 1997.
Gross Profit Margin
The Company's gross profit margin on homes and development delivered was
approximately twenty-one (21%) percent during nine months and June 30, 1998
compared to seven (7%) percent during nine months ended June 30, 1997. The
increase is gross profit margin resulted from the sale of four homes, a devloped
lot, 6 Jagger Woods Development.
Cost of sale for the nine months ended June 30, 1998 was $3,618,475 as compared
to $1,173,907 for nine months ended June 30, 1997. The increase in cost of sale
resulted primarily from the sale of Jagger Woods Development.
Selling and general administrative expenses were $862,798 for nine months ended
June 30, 1998 as compared to $418,323 for nine months
- 4 -
<PAGE>
ended June 30, 1997. The increase is due to primarily increasing costs of
administrative staff, marketing, and professional fees.
Gross Interest Costs
Gross interest costs were $120,588 for the nine months ended June 30, 1998
compared to $15,323 for the nine months ended June 30, 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. The
Company used construction financing to build homes and paid financing and
interest costs.
Subsequent Events
The Company sold the following:
Selling Price
1. Harmat Homes $475,000
Custom Home x13
2. Harmat Holding $505,000
Polo Grounds
Lots 1,3,7,8 & 12
3. Quick Storage of Quogue $710,000
Quick Storage, a self
storage facility
4. Northside Woods $ 70,000
Lot #10
Total $1,760,000
- 5 -
<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 nine months ended June 30, 1998, the Company had positive cash flows
from operating activities of $15,746 versus a negative cash flow of $511,762 for
the nine months ended June 30, 1997.
- 6 -
<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
- 7 -
<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: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the financial statements for the nine months ended June 30, 1998
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> JUN-30-1998
<CASH> 613,971
<SECURITIES> 10,639
<RECEIVABLES> 240,962
<ALLOWANCES> 0
<INVENTORY> 1,091,998
<CURRENT-ASSETS> 1,313,609
<PP&E> 1,231,603
<DEPRECIATION> 26,057
<TOTAL-ASSETS> 4,831,983
<CURRENT-LIABILITIES> 563,586
<BONDS> 0
0
0
<COMMON> 2,613
<OTHER-SE> 2,920,985
<TOTAL-LIABILITY-AND-EQUITY> 4,831,983
<SALES> 4,533,465
<TOTAL-REVENUES> 4,719,156
<CGS> 3,618,475
<TOTAL-COSTS> 4,481,273
<OTHER-EXPENSES> 43,182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 120,588
<INCOME-PRETAX> 194,701
<INCOME-TAX> 194,701
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 194,701
<EPS-PRIMARY> .08
<EPS-DILUTED> 0
</TABLE>
