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
December 31, 1997.
( ) 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
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The Harmat Organization, Inc.
Index to Form 10-Q
Page
Item Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets -
December 31, 1997 and December 31, 1996 3-4
Consolidated Statements of Operations -
Three months ended December 31, 1997
and December 31, 1996 5
Consolidated Statements of Cash Flows - 6-8
Three months ended December 31, 1996
and December 31, 1995
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
Financial Statements
December 31, 1997
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The Harmat Organization, Inc. and subsidiaries
Table of Contents
Page
======================
Consolidated Balance Sheet - As of December 31, 1997 1
Consolidated Statements of Operations -
For the Three Months Ended December 31, 1997 and
the Three Months Ended December 31, 1996 2
Consolidated Statements of Stockholders' Equity 3
Consolidated Statements of Cash Flows -
For the Three Months Ended December 31, 1997
and the Three Months Ended December 31, 1996 4,5
Notes to Consolidated Financial Statements 6-18
</TABLE>
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Page 1
The Harmat Organization, Inc. and subsidiaries
Consolidated Balance Sheet
December 31, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 943,275
Marketable securities 10,639
Accounts receivable 507,776
Land and construction costs 883,007
Prepaid expenses 34,490
Total Current Assets 2,379,187
Property and Equipment - net 1,241,229
OTHER ASSETS
Land and construction costs 534,868
Land held for development 195,000
Due from stockholders 165,939
Due from affiliated companies 56,629
Goodwill - net 54,279
Investment in Partnership 76,447
Deferred offering costs -
Land deposits 85,000
1,168,162
Total Assets $4,788,579
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Page 2
The Harmat Organization, Inc. and subsidiaries
Consolidated Balance Sheet
December 31, 1997
ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes and mortgages payable $ 53,100
Notes payable - shareholders -
Notes payable - related parties -
Loans payable - bank -
Other notes payable and accrued expenses 118,645
Accounts payable and accrued expenses 62,720
Customer and security deposits 487,029
Total Current Liabilities 721,494
OTHER LIABILITIES
Mortgages payable - net of current maturities 773,066
Construction loans payable - net of current maturities 178,254
Notes payable - related party -
Total other liabilities 951,320
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) (1,140,450)
Total Stockholders' Equity 3,115,766
Total Liabilities and Stockholders' Equity $ 4,788,579
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Page 3
The Harmat Organization, Inc. and subsidiaries
Consolidated Statements of Operations
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Three Months Three Months
Ended Ended
December 31 December 31,
1997 1996
REVENUES
Construction sales $ 451,300 $ 1,476
Sale of land held for development 2,998,205 -
Rental income 46,099 32,533
Management fee income - -
Total Revenues 3,495,604 34,009
COST OF SALES AND DIRECT OPERATING EXPENSES 2,764,723 10,418
Gross profit 730,882 23,591
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 317,798 232,731
CHARGE FOR EXECUTIVE COMPENSATION CAPITALIZED - -
(LOSS) INCOME FROM OPERATIONS 413,084 (209,140)
OTHER INCOME (EXPENSE)
Gain on sale of marketable securities - 1,070
Unrealized gain (loss) on marketable securities - (24)
Interest and dividend income 9,168 27,318
Interest expense (35,383) (18,700)
Total Other Income (Expense) (26,215) 9,664
Net Income (LOSS) 386,869 (199,476)
Charge in lieu of income taxes - -
Pro Forma net income (loss) $ 386,869 $ (199,476)
Income and (Loss) per share $ 0.15 $ (0.08)
Weighted average number of shares 2,575,596 2,422,758
</TABLE>
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Page 4
The Harmat Organization, Inc. and subsidiaries
Consolidated Statements of Stockholders' Equity
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Common Stock
Additional Total
Number of Amount Paid-In Accumulated Stockholders'
Shares (At Par) Capital (Deficit) Equity
Balance - September 30, 2,612,500 $ 2,613 $ 4,253,604 $ (565,300) $ 3,690,917
1996
Net (Loss) for period (199,477) (199,477)
Balance - December 31, 1996 2,612,500 $ 2,613 $4,253,604 $ (764,777) $3,491,440
Common Stock
Additional Total
Number of Amount Paid-In Accumulated Stockholders'
Shares (At Par) Capital (Deficit) Equity
Balance - September 30, 2,612,500 $ 2,613 $ 4,253,604 $ $ 2,728,898
1997 (1,527,319)
Net (Loss) for period 386,869 386,869
Balance - December 31, 1997 2,612,500 $ 2,613 $4,253,604 $(1,140,450) $3,115,767
</TABLE>
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Page 5
The Harmat Organization, Inc. and subsidiaries
Consolidated Statements of Cash Flows
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Three Months Three Months
Ended Ended
December 31, December 31,
1997 1996
OPERATING ACTIVITIES:
Net (loss) income $ 386,869 $ (199,477)
Adjustments to reconcile net (loss) income to net cash
(used for) provided by operating activities:
Depreciation and amortization 8,864 5,922
Gain on sale of marketable securities - (1,070)
Change in unrealized (gain) loss on investments - 24
Executive compensation capitalized - -
Changes in assets and liabilities:
Contracts receivable (6,310) (550)
Purchase of marketable securities - (4,212)
Sales of marketable securities - 3,057
Prepaid expenses 22,480 (27,365)
Accounts payable and accrued expenses (321,627) (7,905)
Refundable deposits 45,749 -
Customer deposits 430,563 126,890
Total Adjustments 179,719 94,791
Net Cash Used by Operating Activities 566,588 (104,686)
INVESTING ACTIVITIES:
Advances from/to affiliates and related parties 10,791 (8,790)
Acquisition of land, property and equipment - (83,179)
Investment in partnership (50,000) -
Land deposits (25,000) 10,000
Land and construction costs 2,089,660 (292,432)
Payment of deferred offering costs - -
Net Cash from (used by) Investing Activities forward 2,075,631 (374,401)
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Page 6
The Harmat Organization, Inc. and subsidiaries
Consolidated Statements of Cash Flows
Nine Months
Year Ended Ended
September 30, September 30,
1997 1996
FINANCING ACTIVITIES:
Repayment of notes payable - related party - (70,000)
Repayments of notes and mortgages payable (1,499,940) (7,856)
Proceeds of mortgage payable - -
Repayments of other notes payable & loan payable (393,000) (19,460)
Repayments of notes payable - stockholder - -
Distribution to stockholders - -
Proceeds of private placement - -
Net Cash from Financing Activities (1,892,940) (97,316)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 749,279 (576,403)
CASH AND CASH EQUIVALENTS - beginning of period 193,996 3,203,669
CASH AND CASH EQUIVALENTS - end of period $ 943,275 $2,627,266
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the periods for:
Interest $ 35,383 $ 18,700
Income taxes $ 5,070 $ -
</TABLE>
<PAGE>
Page 7
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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 December 31, 1997 and 1996 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
</TABLE>
<PAGE>
Page 8
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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
three-month period ended December 31, 1997 and December 31, 1996.
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 $943,275 at December 31, 1997. 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 December 31, 1997. The
Company believes no significant concentration of credit risk exists with respect
to these cash equivalents.
<PAGE>
Page 9
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Economic Dependency
There were two and four construction contracts which were deemed major customers
and accounted for total construction sales for the three months ended December
31, 1997 and the three months ended December 31, 1996. For the three-month ended
December 31, 1997, these contracts represented 87% and 13% 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 December 31, 1997, 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
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Page 10
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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 December 31, 1997, such land
and construction costs totaled $1,417,875. Customer deposits on such contracts
totaled $463,058 at December 31, 1997.
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.
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Page 11
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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 December 31,
1997 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 $ -
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 December 31, 1997
was $32,168. 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.
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Page 12
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ock 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 December 31, 1997.
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1997:
Land $ 523,974
Building and building improvements 855,844
Furniture and office equipment 64,929
Total 1,444,747
Less: Accumulated depreciation 203,578
Property and Equipment - Net $ 1,241,229
Depreciation expense for the three months ended December 31, 1997 and for the
three months ended September 30, 1996 totaled $8,864 and $5,922, 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 December 31, 1997 is $165,939.
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Page 13
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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 $250,000 to Java Centrale Inc., an unaffiliated third party.
The loan is evidenced by a $250,000 promissory note dated November 19, 1997. The
note bears interest at 15% and principal is due December 31, 1997. The loan is
still outstanding. Java Centrale, Inc. pledged 500,000 share of its common stock
as security collateral and authorized the issuance of rights to purchase 100,000
warrants for a price of .05 per share expiring November 19, 1999.
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 December 31, 1997 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
At December 31, 1997, 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.
$ 491,354
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.
207,001
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Page 14
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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
127,811
Construction loan dated December 1997, in the original amount of $300,000,
payable monthly with interest only at 9.75% until December 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
178,254
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 1,023,065
Less: Current Portion 53,100
Total Long Term Notes and Mortgages Payable 1,069,965
<PAGE>
Page 15
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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.
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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 December 31, 1997.
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>
Page 16
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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.
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.
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>
Page 17
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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:
Weighted-Averaged
Fixed Options Shares Exercise Price
October 1, 1996 0 -
Granted 360,000 $ 1.40
Exercised 0 -
Forfeited 0 -
December 31, 1997 360,000 $ 1.40
Exercisable at December 31, 1997 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 December 31, 1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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 December
31, 1997 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>
Page 18
The Harmat Organization, Inc. and subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
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 $56,629 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
December 31, 1997 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 THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE
THREE MONTHS ENDED DECEMBER 31, 1996
Total revenues for the three months ended December 31, 1997 were
$3,495,604 compared to revenues of $34,009 for the three months ended
December 31, 1996, an increase of approximately $3,441,595 due to sale
of Jagger Woods Development and one house sale.
Construction Sales
Deliveries of one home and Jagger Woods Development resulted in
revenues of $3,449,505 for the three months ended December 31, 1997.
For the three months ended December 31, 1996 there were no sales
rendered. The reasons for the increase in revenues is the Company sold
Jagger Woods Development for $2,998,205.
The Company shifted its focus and moved into the hotel and motel
construction market and to provide hospitality serves in addition to
successfully completing current projects under development.
Rental Income
Rental based properties resulted in rental income of $46,099 for the
three months ended December 31, 1997. For the three months ended in
December 31, 1996 the Company generated rental income of $32,533.
Rental income is increased by $13,566. Quick Storage of Quogue and
Self Storage Facility, generated rental income for the three months
ended December 31, 1997 $26,859. The reason for the increase is the
rental properties were fully rented at higher rates of rents than three
months ended December 31, 1996.
Gross Profit Margin
The Company's gross profit margin on homes and development delivered
was approximately twenty (20%) percent during the three months ended
December 31, 1997, compared to no percent in the three months ended
December 31, 1996, because there were no sales reported. The increase
in gross profit margin resulted from the sale of one home and Jagger
Woods Development.
Cost of sale for the three months ended December 31, 1997 was
$2,764,723 as compared to $10,418 for the three months ended December
31, 1996. The increase in cost of sale resulted primarily from the
sale of Jagger Woods Development.
- 4 -
<PAGE>
Selling and general administration expenses were $317,798 for the three
months ended December 31, 1997 as compared to $232,731 for the three
months ended December 31, 1996. The increase is due to primarily
increasing costs of administration staff marketing and professional
fees.
Gross Interest Costs
Gross interest costs were $35,383 for the three months ended December
31, 1997 compared to $18,700 for the three months ended December 31,
1996. 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.
- 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 three months ended December 31, 1997, the Company had
positive cash flows from operating activities of $566,586 versus a
negative cash flow of $104,686 for the three months ended December 31,
1996. Investing activities used cash of $2,075,631 for the three
months ended December 31, 1997 and $374,401 for the three months ended
December 31, 1996.
- 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: February 27, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for the six months ended December 31, 1997 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> DEC-31-1997
<CASH> 943,275
<SECURITIES> 10,639
<RECEIVABLES> 507,776
<ALLOWANCES> 0
<INVENTORY> 883,007
<CURRENT-ASSETS> 2,379,187
<PP&E> 1,444,747
<DEPRECIATION> 203,518
<TOTAL-ASSETS> 4,788,579
<CURRENT-LIABILITIES> 721,494
<BONDS> 0
0
0
<COMMON> 2,613
<OTHER-SE> 3,113,153
<TOTAL-LIABILITY-AND-EQUITY> 4,788,579
<SALES> 3,449,508
<TOTAL-REVENUES> 3,495,604
<CGS> 2,764,723
<TOTAL-COSTS> 3,082,521
<OTHER-EXPENSES> 26,215
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,383
<INCOME-PRETAX> 386,869
<INCOME-TAX> 0
<INCOME-CONTINUING> 386,869
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 386,869
<EPS-PRIMARY> .15
<EPS-DILUTED> 0
</TABLE>
