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,
1999.
( ) 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.)
P.O. Box 549 Speonk, New York 11972 (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 March 31, 1999
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 Sheets -
March 31, 1999 and March 31, 1998 3
Consolidated Statements of Operations -
Six months ended March 31, 1999
and March 31, 1998 4
Consolidated Statements of Stockholders Equity
for March 31, 1998 and March 31, 1999 5
Consolidated Statements of Cash Flows - 6-7
Six months ended March 31, 1999
and March 31, 1998
Notes to Consolidated Financial Statements 8-15
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 19
Signatures 20
- 2 -
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 1
CONSOLIDATED BALANCE SHEET
March 31, 1999
Assets
Current Assets
Cash and Cash Equivalents $ 182,155
Marketable Securities 2,721,250
. Accounts Receivable 89,830
Loan Receivable - Stockholder 235,828
Loans Receivable - Other 139,250
Other Receivables - Related Parties 246,039 Land and
Construction Costs 1,271,333
Prepaid Expenses 29,433
---------
Total Current Assets $ 4,915,118
Property and Equipment - Net 441,373
- ----------------------------
Other Assets
Investment in Partnership 76,449
Land Deposits 85,000
---------
Total Other Assets 161,449
---------
Total Assets $5,517,940
=========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable and Accrued Expenses $ 112,121
Accrued Interest 11,728
Customer and Security Deposits 487,199
Current Portion of Mortgages Payable 12,416
---------
Total Current Liabilities $ 623,464
Other Liabilities
Notes and Mortgages Payable -
Net of Current Maturities 775,864
Commitments & Contingencies
Stockholders' Equity
Preferred Stock - $.001 Par Value, 5,000,000 Shares
Authorized, No Shares Issued and Outstanding
Common Stock - $.001 par value, 25,000,000 Shares
Authorized, 2,612,500 Shares Issued and Outstanding 2,612
Additional Paid-in Capital - Common Stock 4,253,604
Retained Earnings (137,604)
---------
Total Stockholders' Equity 4,118,612
---------
Total Liabilities and Stockholders' Equity $ 5,517,940
=========
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 2
CONSOLIDATED STATEMENTS OF OPERATIONS
March 31,
Six Months Six Months
Ended Ended
March 31, March 31,
1999 1998
Revenues
Sale of Developed and Undeveloped Real Estate $ - $ 4,063,641
Rental Income 18,951 90,712
--------- ---------
Total Revenues 18,951 4,154,353
Cost of Sales and Direct Operating Expenses 0 3,191,710
--------- --------
Gross Profit 18,951 962,643
Selling, General and Administrative Expenses 423,284 611,073
--------- ---------
Income (Loss) From Operations (404,333) 351,570
--------- ---------
Other Income (Expense)
Gain on Sale of Real Estate 4,429 -
Miscellaneous Income 21,725 -
Gain (Loss) on Sale of Marketable Securities (1,539) 37,227
Interest and Dividend Income 41,914 35,814
Interest Expense (22,931) (84,853)
--------- ---------
Total Other Income (Expense) 43,598 (11,812)
--------- ---------
Income (Loss) Before Income Taxes (360,735) 339,758
Income Taxes - -
--------- ---------
Net Income (Loss) $ (360,735) $ 339,758
========= =========
Earnings (Loss) per Share $ (.14) $ 0.13
========= =========
Weighted Average Number of Shares 2,612,500 2,575,596
========= =========
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
Additional Other Total
Number Amount Paid - In Accumulated Comprehensive Stockholders'
of Shares (at par) Capital (Deficit) Income Equity
Balance - September 30, 1997 2,612,500 $2,612 $4,253,604 $(1,527,319) $ - $2,728,897
Net Income For Period - - - 339,759 339,759
Balance - March 31, 1998 2,612,500 $2,612 $4,253,604 $(1,187,560) $ - $3,068,656
========== ========== ========= ========= ========= =========
Common Stock
Additional Other Total
Number Amount Paid - In Accumulated Comprehensive Stockholders'
of Shares (at par) Capital (Deficit) Income Equity
Balance - September 30, 1998 2,612,500 $2,612 $4,253,604 $(1,666,869) $ - $2,589,347
Net Loss For Period - - - (360,735) (360,735)
Other Comprehensive Income
Unrealized Gain on Marketable Securities - - - - 1,890,000 1,890,000
---------- ---------- --------- --------- ---------- ----------
Balance - March 31, 1999 2,612,500 $2,612 $4,253,604 $ (2,027,604) $ 1,890,000 $4,118,612
========== ======== ========= ========= ========= =========
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THE HARMAT ORGANIZATION, INC. AND SUBSIDARIES Page 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Six Months
Ended Ended
March 31, March 31,
1999 1998
------------- -------------
Operating Activities:
Net Income (Loss) $ (360,735) $ 339,758
--------- ---------
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 15,143 10,968
Loss on Sale of Marketable Securities 1,539 -
Changes in Assets and Liabilities:
Marketable Securities - -
Accounts Receivable (27,918) -
Land and Construction Costs (241,512) -
Prepaid Expenses (884) 752
Accounts Payable and Accrued Expenses (54,177) (301,187)
Refundable Deposits - 45,749
Customer Deposits 81,328 273,624
Contracts Receivable (25,507)
---------- ---------
Total Adjustments (226,481) 4,399
--------- ---------
Net Cash Provided (Used) by Operating Activities (587,216) 344,157
--------- ----------
Investing Activities:
Advances from/to Affiliates and Related Parties (9,321) (21,867)
Loans Receivable - Other 25,000 -
Sale of Land, Property and Equipment 278,224 1,771,694
Investment in Partnership - (50,000)
Land Deposits - 25,000
Stock Warrants 43,750 -
Purchase of Marketable Securities (831,250) -
Sale of Marketable Securities 5,894 -
---------- ---------
Net Cash Used by Investing Activities (487,703) 1,724,827
---------- ---------
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
-------------- -------------
Financing Activities:
Repayments of Notes and Mortgages Payable (132,490) (951,013)
Repayments of Other Notes Payable & Loans Payable - (143,000)
--------- ---------
Net Cash Used By Financing Activities (132,490) (1,094,013)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (1,207,409) 974,971
Cash and Cash Equivalents - Beginning of Period 1,389,564 193,996
--------- ----------
Cash and Cash Equivalents - End of Period $ 182,155 $ 1,168,967
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Periods for:
Interest $ 22,931 $ 84,853
========= =========
Income Taxes $ - $ 2,280
========= =========
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A 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, 1999 and 1998 financial statements reflect the financial position
and results of operations of the 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 inter-company amounts have been eliminated in
consolidation.
Parent Company and It's Nature of Business:
The Harmat Organization, Inc. - Delaware
Holding Company
Subsidiaries and Their Nature of Business:
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. Asset sold in July 1998.
Harmat Hospitality, Inc.
Purchase and operate resort properties.
Interest In Limited Partnership
The principal stockholder of the Company is a general partner in a partnership
in which the Company has limited partnership interests.
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 $182,155 at March 31, 1999. Cash includes $59,482 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. The Company places its cash and cash
equivalents with high credit quality financial institutions. The amount of
deposit in any one institution that exceeds federally insured limits is subject
to credit risk. Such amount was approximately $86,946 at March 31, 1999. The
Company believes no significant concentration of credit risk exists with respect
to these cash equivalents.
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, 1999, all of the Company investments
were classified as available for sale 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. Available-for-sale securities are
investments not classified as Trading Securities. Thus, unrealized gains and
losses for available-for-sale securities are excluded from earnings and reported
as a net amount in a separate component of shareholders equity until realized.
The Company primarily uses the specific identification method for gains and
losses on the sales of marketable securities (see Note C).
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 10 to 40 Years
Furniture and Equipment 5 to 7 Years
Earnings (Loss) Per Share
Earnings (loss) per share are computed by dividing the net income (loss) for the
year by the weighted average number of common shares outstanding. Stock options
and warrants are assumed converted to 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.
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Land Development Costs
Costs that clearly relate to land development projects are capitalized. Costs
are allocated to project components by the specific identification method
whenever possible. Otherwise, acquisition costs are allocated based on their
relative fair value before development, and development costs are allocated
based on their relative sales value. Interest costs are capitalized while
development is in progress.
Revenue Recognition
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 current asset. At March 31, 1999 such land and
construction costs totaled $1,271,333. Customer deposits on such contracts
totaled $487,199 at March 31, 1999.
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.
Income Taxes
Under ("SFAS") 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, 1999 are as follows:
Deferred Tax Assets:
Federal and State Net Operating Loss Carryforwards $ 589,000
Less: Valuation Allowance (589,000)
---------
Net Deferred Tax Liability $ 0
=========
The Company will have net operating loss carryforwards of approximately
$1,472,000 avaliable to reduce future taxes. These carryforward losses expire
through the year 2013. Pursuant to Section 382 of the Internal Revenue Code
regarding substantial changes in Company ownership, utilization of these losses
may be limited.
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 H). 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 H).
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C MARKETABLE SECURITIES
Marketable securities consist of investments in equity and debt securities at
discounted market value, since they are unregistered, restricted securities. The
cost of such securities is $831,250. The change in the unrealized gain (loss)
account for the year ended March 31, 1999 was $1,890,000.
NOTE D PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31, 1999:
Building and Building Improvements $ 559,581
Furniture and Office Equipment 70,478
---------
Total 630,059
Less: Accumulated Depreciation (188,686)
---------
Property and Equipment - Net $ 441,373
=========
Depreciation expense for the six months ended March 31, 1999 and 1998 totaled
$15,143 and $17,210 respectively.
NOTE E LOANS RECEIVABLE
Stockholder
The loan to Mr. Schilowitz, its primary stockholder, 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. The balance of this loan as of March 31, 1999 was
$235,828.
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 were due
August 15, 1998. The note was granted a one year extension. Axxess, Inc. pledged
600,000 shares of its common stock as collateral and authorized warrants to
purchase its common stock for a price of $.25 per share (as amended) expiring
August 14, 2000. As of December 15, 1998 the Company notified Axxess, Inc. that
it was exercising its warrants to purchase 175,000 shares of Axxess, Inc. for an
aggregate subscription price of $43,750; with a current market price of
approximately $18 per a share or an aggregate of $3,150,000. On March 31, 1999,
the market price was $17 per share. A total of $43,750 was applied against the
loan in exchange for the exercise of stock warrants.
The Company made a $28,000 non-interest bearing loan to an unaffiliated third
party in October 1997. The balance due as of March 31, 1999 was $8,000 and is
due on demand.
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F NOTES AND MORTGAGES PAYABLE
At March 31, 1999, the notes and mortgages payable consisted 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. $ 483,936
Construction loan dated February 1998, in the original amount of
$465,000 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 on
Beach Lane, West Hampton. 304,344
----------
Total Notes and Mortgages Payable 788,280
Less: Current Portion (12,416)
---------
Total Long Term Notes and Mortgages Payable $ 775,864
=========
Annual maturities of notes and mortgages payable are as follows:
For the Period Ended
September 30,
-----------------
1999 $ 316,760
2000 21,146
2001 23,221
2002 25,507
2003 28,017
Thereafter 373,629
---------
Total Notes and Mortgages Payable $ 788,280
=========
During the period ended March 31, 1999, interest of $20,252 was incurred, of
which $7,540 has been capitalized.
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted SFAS No. 107, "Disclosure about
Fair Value Financial Instruments", fair value of financial investments which
requires disclosing fair value to the extent practicable for financial
instruments which are recognized or unrecognized in the balance sheet. The fair
value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
For certain financial instruments, including cash and cash equivalents, trade
receivables and payables, short term loans, customer deposits and short-term
debt, it is estimated that the carrying amount approximated fair value because
of the near term maturities of such obligations. The fair value of long-term
debt is based on current rates at which the Company could borrow funds with
similar remaining maturities. The carrying amount of long-term debt approximates
fair value. The fair value of other receivables - related parties is not
practicable to determine due to the nature of the transactions.
NOTE H COMMITMENTS AND CONTINGENCIES
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.
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. Schilowtz
has been granted an option to purchase up to an aggregate of 500,000 shares
of common stock at an exercise price of $5.75 per share ($.35, 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.
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H COMMITMENTS AND CONTINGENCIES (Continued)
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 $2.125 per share ($.35 as amended) to four directors
and two key employees of the Company. During 1998, 10,000 of these options
were forfeited with the termination of employment of a key employee. In
March 1998, the Company's chief executive officer and principal shareholder
was granted 300,000 shares at an exercise price of $2.337 per share ($.35,
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.
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 September
30, 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).
A summary of the status of the Company's stock option plan as of March 31, 1999,
and the changes during the period ending March 31, 1999 is presented below:
Weighted-Averaged
Fixed Options Shares Exercise Price
------------- ------ ----------------
October 1, 1998 360,000 $ .35
Granted 0 -
Exercised 0 -
Forfeited (10,000) -
--------- ---------
March 31, 1999 350,000 $ .35
========= ========
Exercisable at March 31, 1999 350,000
Weighted-average fair value of
options granted during the year $ -
The following table summarizes information about fixed stock options outstanding
at March 31, 1999.
Outstanding Options
-------------------------------------------
Number Weighted Average Weighted -
Outstanding Outstanding Remaining Average
Exercise Price 03/31/99 Contractual Life Exercise Price
$ .35 350,000 3.5 Years $ .35
Exercisable Options
-----------------------------
Number
Exercisable Weighted Average
03/31/99 Exercise Price
350,000 $ .35
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES Page 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H COMMITMENTS AND CONTINGENCIES (Continued)
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's common stock for
ten years, exercisable at $1.125 ($.35 as amended) per share with rights vesting
upon attainment of certain earnings levels (see above). During 1998, Mr.
Schilowitz received $24,512 as additional compensation.
Consulting Agreement
In February 1998, the Company entered into a one year consulting agreement with
Spencer Trask to advise the Company on financial matters in connection with the
operation of the business including acquisitions, mergers and other similar
business combinations. The Company paid Spencer Trask an initial $10,000
retainer fee and is required to pay an additional $3,500 per month. In addition,
Spencer Trask is to receive a transaction fee for any transactions consummated
by the Company during the term of the agreement or within two years after the
end of the term. In connection with this agreement Spencer Trask was granted
five year warrants to purchase 200,000 shares of the Company's common stock at
$.35 per share.
Subsequent Event
The Company is in contract to sell 15 acres of land know as the Agricultural
Reserve to an unaffiliated third party for $350,000. The Company will recognize
income of approximately $275,000 of this transaction.
The Company sold its headquarters in Quogue, New York in February, 1999 for a
gross sale of $165,000. The Company is paying rent based on a short term lease.
The Company is negotiating a new lease and will relocate its headquarters to
Hauppauge, New York.
On April 12, 1999 the Company extended its' Note Receivable to Axxess
Communications in the amount of $131,250 plus accrued interest until December
15, 1999, or upon Axxess raising $5,000,000 in gross proceeds, whichever is
sooner.
<PAGE>
The Harmat Organization, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 COMPARED WITH THE
SIX MONTHS ENDED MARCH 31, 1998
Total revenues for the six months ended March 31, 1999 were $18,951 compared to
revenues of $4,154,353 for the six months ended March 31, 1998, a decrease of
approximately $4,135,402 due to a prior year sale of Jagger Woods Development in
1997 and a change in business direction.
(See "Liquidity and Capital Resources")
Construction Sales
Deliveries of three homes and the sale of the remaining parcels in the Jagger
Woods Development resulted in revenues of $4,063,641 for the six months ended
March 31, 1998. For the six months ended March 31, 1999 there were no sales of
developed or undeveloped real estate.
Rental Income
Rental based properties resulted in rental income of $18,951 for the six months
ended March 31, 1999. For the six months ended in March 31, 1998 the Company
generated rental income of $90,712. Rental income is decreased by $71,761. Quick
Storage of Quogue and Self Storage Facility, generated rental income for the six
months ended March 31, 1998 of $55,342; the asset was sold in July 1998, thus
eliminating that source of rental income.
Gross Profit Margin
The Company's gross profit margin on homes and development delivered was
approximately twenty-four (24%) percent during the three months ended March 31,
1998, compared to no percent in the three months ended March 31, 1999, because
there were no sales reported.
Selling and general administration expenses were $423,284 for the six months
ended March 31, 1999 as compared to $611,073 for the six months ended March 31,
1998. The decrease is due to reduced professional fees, reduced administrative
payroll due to the change in Company focus. The Company believes that current
administrative expenses more accurately reflects ongoing costs.
- 4 -
<PAGE>
Gross Interest Costs
Gross interest costs were $22,931 for the six months ended March 31, 1999
compared to $84,853 for the six months ended March 31, 1998. The reduction in
interest is due to the Company being able to satisfy various of its existing
debts and obligations as a result of the sale of Jagger Woods Development, and
its office building in Quogue, New York.
- 5 -
</TABLE>
<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, 1999, the Company had negative cash flows
from operating activities of $587,216 versus a positive cash flow of $344,157
for the six months ended March 31, 1998. Investing activities used cash of
$487,703 for the six months ended March 31, 1999 and increased cash by
$1,724,827 for the six months ended March 31, 1998.
The Company has determined that it is in the best interest of shareholders if
the Company changes its direction away from the real estate business since the
real estate market in the area in which the Company concentrated on changed to a
market where management felt no significant profit opportunities were meaningful
to the Company's future.
The Company commenced its transition from a real estate development company into
a more diversified technologically oriented company. The Company made an
internet-related investment in FinancialWeb.com, Inc. (formerly "Axxess, Inc."),
a publicly traded company (FWEB). The Company currently has a $131,250 (reduced
from $175,000) loan to FinancialWeb.com, Inc. and 175,000 warrants to purchase
its common shares at $0.25 per share. As of December 15, 1998 the Company
notified FinancialWeb.com, Inc. that it was exercising the warrants for an
aggregate subscription price of $43,750.
FinancialWeb.com, Inc. produces and manages a family of branded financial
content Internet Web sites collectively under the trademark "Financial Web."
Financial Web distributes financial editorial content, stock quotes, charts,
securities data and news to investors via the internet free of charge with the
objective of earning its principal revenues from the sale of advertising.
Beginning with the
- 6 -
<PAGE>
acquisitions of The SmallCap Investor in 1997, Financial Web has grown from one
web site and less than 200,000 monthly impressions to twelve separately branded
web sites with over 5 million monthly impressions, including Quote Central Rapid
Research, Stock Detective, Wall Street Guru, The SmallCap Investor, Stock Tools,
The Bear Tracker, NewsVest, Mr. EDGAR, Strike Price, YourFunds.com and
InvesToons. Plans for up to 8 additional branded sites in the Financial Web
family are in various stages of development.
The Company on November 16, 1998 completed a private placement
investment of $750,000 in newly-issued equity securities of Socket
Communications, Inc., a publicly traded company (BB.SCKT). The Socket securities
include 750,000 shares of Series D Convertible Preferred Stock, convertible into
common shares (1,307,759) at $0.5735 per share, with dividends accruing at eight
percent per annum. In addition, the Company was issued three year warrants to
purchase an additional 250,000 shares of Socket common stock at an exercise
price of $0.5735 per share. Spencer Trask Securities, Inc. was the investment
banker for the transaction.
Socket Communications, Inc. develops and sells connection solutions
for Windows CE-based handheld computers and other mobile computers, including a
family of low power Battery FriendlyTM and PC Card plug-in adapters for Windows
CE operating system from Microsoft. Socket's products utilize the company's low
power chip technology, making them ideal for battery-operated mobile computers.
Socket has developed a family of handheld bar code scanner systems that can be
attached to mobile Windows CE - based computers. These products integrate with
Laser Scanners from Symbol Technologies.
On February 3, 1998 the Company entered into a corporate financial
consulting agreement with Spencer Trask Securities, Inc. pursuant to which the
Company paid to Spencer Trask an initial retainer of $10,000 and a five year
warrant to purchase 200,000 shares of the Company's common stock at an exercise
price at $.35 per share. In addition, the Company pays to Spencer Trask a
monthly retainer of $3,500 as well as a cash transaction fee on transactions
brought to the Company by Spencer Trask equal to the sum of: (a) five percent
(5%) of the first two million dollars of the aggregate consideration of a
Transaction (the "Aggregate Consideration"), (b) four percent (4%) of the second
two million dollars or portion thereof, (c) three percent (3%) of the third two
million dollars or portion thereof, and (d) two and one and one-half percent (2
1/2%) of the balance of the aggregate consideration; provided, however, that if
the Transaction involves a party not introduced by Spencer Trask, the applicable
cash fee will be
- 7 -
<PAGE>
90% of the aggregate amount as calculated using the foregoing percentages.
The Company will continue to liquidate its real estate holdings to
raise enough cash and capital to invest in Internet/Technology related companies
and to hire employees experienced in those fileds. The Company believes it is in
the best interest of shareholder value to continue as a technology related
investment company.
Competition
The business in which the Company engages and the investments that
it makes in companies engaged in the internet and computer related businesses is
subject to intense competition for investment opportunities as well as with
respect to the product lines offered by the companies in which investments are
made. In addition, the technologies relates to the product line of the companies
in which the Company invests are subject to rapid technological changes which
could affect the product lines and therefore the Company's investment. The
Company is not a significant factor in these areas and competes for the
investment with many other companies, many of whom have greater resources than
the Company.
Employees
As of March 31, 1999, the Company has two full-time employees.
Mr. Schilowitz and an administrative assistant.
Item 2. Properties
At March 31, 1999, the Company's wholly-owned subsidiaries hold
title to certain real property. Such properties include (i) One six bedroom home
in Westhampton Beach, New York; an 8 bedroom house in Southampton, New York both
rented on an annual basis; (ii) one building lot and an agricultural reserve
with large barn from which the Company receives rental income; (iii) Pond Side
Development in Westhampton, NY which consists of 16 acres of undeveloped land;
(iv) single family home on Beach Lane, Westhampton Beach, New York. Subsequent
to March 31, 1999, all but Pondside (which is being actively marketed for sale)
have been sold and closed.
- 8 -
<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
- 9 -
<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/ David M. Hasson
Chief Financial Officer
Date: May 20, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This legend contains summary financial information extracted from the
financial statements for the six months ended March 31, 1999 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 182,155
<SECURITIES> 2,721,250
<RECEIVABLES> 710,947
<ALLOWANCES> 0
<INVENTORY> 1,300,766
<CURRENT-ASSETS> 4,915,118
<PP&E> 630,059
<DEPRECIATION> 188,686
<TOTAL-ASSETS> 5,517,940
<CURRENT-LIABILITIES> 623,464
<BONDS> 0
0
0
<COMMON> 4,256,216
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,517,940
<SALES> 0
<TOTAL-REVENUES> 18,951
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 423,284
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,931
<INCOME-PRETAX> (360,735)
<INCOME-TAX> 0
<INCOME-CONTINUING> (360,735)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (360,735)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> 0
</TABLE>
