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, 1998.
( ) Transition report pursuant to section 13 or 15 (d) of the
Securities Exchange Act of 1934, for the transition period from
to .
Commission file number
THE HARMAT ORGANIZATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2780723
(State of Incorporation) (I.R.S. Employer ID No.)
22 Old Country Road
Quogue, New York 11959
(516) 653-3303
(Address of Principal Executive Offices
and Principal Place of Business and Telephone
Number) (Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 31, 1998
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 Sheet -
December 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three months ended December 31, 1998
and December 31, 1997 4
Consolidated Statements of Stockholders Equity
for September 30, 1997 and December 31, 1997 5
Consolidated Statements of Cash Flows - 6-7
Three months ended December 31, 1998
and December 31, 1997
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
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<S> <C> <C> <C> <C> <C> <C>
THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
Assets
Current Assets
Cash and Cash Equivalents $ 295,717
Marketable Securities 3,937,500
. Accounts Receivable 73,948
Loan Receivable - Stockholder 220,333
Loans Receivable - Other 139,250
Other Receivables - Related Parties 246,039
Land and Construction Costs 1,101,931
Prepaid Expenses 21,390
---------
Total Current Assets $ 6,036,108
Property and Equipment - Net 731,161
- ----------------------------
Other Assets
Investment in Partnership 76,449
Land Deposits 85,000
---------
Total Other Assets 161,449
---------
Total Assets $6,928,718
=========
Liabilities and Stockholders' Equity
Current Liabilities
Current Portion of Notes and Mortgages Payable $ 328,532
Accounts Payable and Accrued Expenses 110,838
Accrued Interest 9,262
Customer and Security Deposits 405,071
---------
Total Current Liabilities $ 853,703
Other Liabilities
Notes and Mortgages Payable -
Net of Current Maturities 588,009
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 1,230,790
---------
Total Stockholders' Equity 5,487,006
---------
Total Liabilities and Stockholders' Equity $ 6,928,718
=========
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31,
Three Months Three Months
Ended Ended
December 31, December 31,
1998 1997
Revenues
Sale of Developed and Undeveloped Real Estate $ - $ 3,449,505
Rental Income 10,830 46,099
--------- ---------
Total Revenues 10,830 3,495,604
Cost of Sales and Direct Operating Expenses 779 2,764,723
--------- --------
Gross Profit 10,051 730,881
Selling, General and Administrative Expenses 219,914 317,798
--------- ---------
Income (Loss) From Operations (209,863) 413,083
--------- ---------
Other Income (Expense)
Miscellaneous Income 568 -
Loss on Sale of Marketable Securities (1,537) -
Unrealized Gain on Marketable Securities 3,106,250 -
Interest and Dividend Income 22,493 9,168
Interest Expense (20,252) (35,383)
--------- ---------
Total Other Income (Expense) 3,107,522 (26,215)
--------- ---------
Income Before Income Taxes 2,897,659 386,868
Income Taxes - -
--------- ---------
Net Income $ 2,897,659 $ 386,868
========= =========
Earnings per Share $ 1.11 $ 0.15
========= =========
Weighted Average Number of Shares 2,612,500 2,575,596
========= =========
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
Additional Total
Number Amount Paid-In Accumulated Stockholders'
of Shares (at par) Capital (Deficit) Equity
Balance - September 30, 1997 2,612,500 $2,612 $4,253,604 $(1,527,319) $2,728,897
Net Income For Period - - - 386,868 386,868
Balance - December 31, 1997 2,612,500 $2,612 $4,253,604 $(1,140,451) $3,115,765
========== ========== ========= ======== =========
Common Stock
Accumulated
Additional (Deficit) Total
Number Amount Paid - In Retained Stockholders'
Stockholders' of Shares (at par) Capital Earnings Equity
Balance - September 30, 1998 2,612,500 $2,612 $4,253,604 $(1,666,869) $2,589,347
Net Income For Period - - - 2,897,659 2,897,659
Balance - December 31, 1998 2,612,500 $2,612 $4,253,604 $ 1,230,790 $5,487,006
========== ========== ========= ========= =========
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THE HARMAT ORGANIZATION, INC. AND SUBSIDARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
Ended Ended
December 31, December 31,
1998 1997
------------- -------------
Operating Activities:
Net Income $ 2,897,659 $ 386,868
--------- ---------
Adjustments to Reconcile Net Income to Net Cash
Provided (Used) by Operating Activities:
Depreciation and Amortization 7,929 8,864
Loss on Sale of Marketable Securities 1,537 -
Change in Unrealized Gain on Investments (3,106,250) -
Changes in Assets and Liabilities:
Marketable Securities (2)
Accounts Receivable (12,036) (6,310)
Land and Construction Costs (72,110) 2,089,664
Prepaid Expenses 7,159 22,480
Accounts Payable and Accrued Expenses (57,926) (321,628)
Refundable Deposits - 45,749
Customer Deposits (800) 430,563
---------- ---------
Total Adjustments (3,232,497) 2,269,380
--------- ---------
Net Cash Provided (Used) by Operating Activities (334,838) 2,656,248
--------- ----------
Investing Activities:
Advances from/to Affiliates and Related Parties 8,257 10,971
Loans Receivable - Other 25,000 (393,000)
Acquisition of Land, Property and Equipment (4,348) -
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 (752,697) (407,029)
---------- ---------
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
Ended Ended
December 31, December 31,
1998 1997
------------------ -------------
Financing Activities:
Repayments of Notes Payable - Related Party - -
Repayments of Notes and Mortgages Payable (4,229) (1,499,940)
Proceeds of Mortgage Payable - -
Repayments of Other Notes Payable & Loans Payable - -
Loan to Stockholder (2,083) -
--------- ---------
Net Cash Used By Financing Activities (6,312) (1,499,940)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents (1,093,847) 749,279
Cash and Cash Equivalents - Beginning of Period 1,389,564 193,996
--------- ----------
Cash and Cash Equivalents - End of Period $ 295,717 $943,275
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Periods for:
Interest $ 24,193 $ 35,383
========= =========
Income Taxes $ - $ 5,070
========= =========
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
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 December 31, 1998 and 1997 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
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 $295,717 at December 31, 1998. Cash includes $58,816 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 $295,717 at December 31, 1998. 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 December 31, 1998, all of the Company investments
were classified as trading securities. Trading securities are securities bought
and held principally for the purpose of selling them in the near term and are
reported at fair value, with unrealized gains and losses included in operations
for the current year. 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.
-9-
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
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 December 31, 1998 such land and
construction costs totaled $1,101,931. Customer deposits on such contracts
totaled $404,271 at December 31, 1998.
Rental income is recognized as it is earned pursuant to the term of each lease
on a straight-line basis. Leases generally have an initial or remaining term of
one year or less.
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
December 31, 1998 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C MARKETABLE SECURITIES
Marketable securities consist of investments in equity and debt securities at
fair value. The cost of such securities is $831,250. The change in the
unrealized gain (loss) account for the years ended December 31, 1998 and 1997
was $3,106,250 and $(3,206) respectively.
NOTE D PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1998:
Land $176,736
Building and Building Improvements698,887
Furniture and Office Equipment 70,478
---------
Total 946,101
Less: Accumulated Depreciation (214,940)
---------
Property and Equipment - Net $ 731,161
=========
Depreciation expense for the year ended December 31, 1998 and 1997 totaled
$7,929 and $8,864 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 December 31, 1998 was
$220,333.
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 is currently in default but the Company expects it
will be paid in full. 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 December 31, 1998, the market price was $11.125 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 December 31, 1998 was $8,000 and is
due on January 15, 1999.
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F NOTES AND MORTGAGES PAYABLE
At December 31, 1998, 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. $ 485,047
Mortgage payable dated January 17, 1991 and amended June 14, 1994 in
the original amount of $180,000 payable in monthly installments of
$1,934 including interest through February 1, 2006. Interest is payable
at an adjustable interest rate (10.125% at September 30, 1998) which is
determined annually. The mortgage is secured by land and building
having an original cost of
approximately $200,000. 117,006
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. 311,884
Other Notes and Mortgages 2,604
----------
Total Notes and Mortgages Payable 916,541
Less: Current Portion (328,532)
---------
Total Long Term Notes and Mortgages Payable $ 588,009
=========
Annual maturities of notes and mortgages payable are as follows:
For the Period Ended
September 30,
-----------------
1999 $ 328,532
2000 21,146
2001 23,221
2002 25,507
2003 28,017
Thereafter 490,118
---------
Total Notes and Mortgages Payable $ 916,541
=========
During the period ended December 31, 1998, interest of $20,252 was incurred, of
which $7,540 has been capitalized.
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
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
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 December 31,
1998, and the changes during the period ending December 31, 1998 is presented
below:
Weighted-Averaged
Fixed Options Shares Exercise Price
------------- ------ ----------------
October 1, 1998 360,000 $ .35
Granted 0 -
Exercised 0 -
Forfeited (10,000) -
--------- ---------
December 31, 1998 350,000 $ .35
========= ========
Exercisable at December 31, 1998 350,000
Weighted-average fair value of
options granted during the year $ -
The following table summarizes information about fixed stock options outstanding
at December 31, 1998.
Outstanding Options
-------------------------------------------
Number Weighted Average Weighted -
Outstanding Outstanding Remaining Average
Exercise Price 12/31/98 Contractual Life Exercise Price
$ .35 350,000 3.5 Years $ .35
Exercisable Options
-----------------------------
Number
Exercisable Weighted Average
12/31/98 Exercise Price
350,000 $ .35
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THE HARMAT ORGANIZATION, INC. AND SUBSIDIARIES
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.
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<PAGE>
The Harmat Organization, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE
THREE MONTHS ENDED DECEMBER 31, 1997
Total revenues for the three months ended December 31, 1998 were $10,830
compared to revenues of $3,495,604 for the three months ended December 31, 1997,
an decrease of approximately $3,484,774 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 one home and the sale of the remaining parcels in the 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, 1998 there were no
sales of developed or undeveloped real estate.
Rental Income
Rental based properties resulted in rental income of $10,830 for the three
months ended December 31, 1998. For the three months ended in December 31, 1997
the Company generated rental income of $32,533. Rental income is decreased by
$35,269. Quick Storage of Quogue and Self Storage Facility, generated rental
income for the three months ended December 31, 1997 $26,859, 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 (20%) percent during the three months ended December 31,
1997, compared to no percent in the three months ended December 31, 1998,
because there were no sales reported. The gross profit margin of December 31,
1999 resulted from the sale of one home and Jagger Woods Development.
Cost of sale for the three months ended December 31, 1998 was $779 as compared
to $27,747 for the three months ended December 31, 1997. The high cost of sale
at December 31, 1997 was due primarily to the sale of Jagger Woods Development.
-16-
<PAGE>
Selling and general administration expenses were $219,914 for the three months
ended December 31, 1998 as compared to $317,798 for the three months ended
December 31, 1997. The decrease is due to reduced professional fees, reduced
administrative payroll due to the change in Company focus. The Company believes
that current adminstrative expenses more accurately reflects ongoing costs.
Gross Interest Costs
Gross interest costs were $20,252 for the three months ended December 31, 1998
compared to $35,383 for the three months ended December 31, 1997. The reduction
in interest is due to the Company being able to satisfy various of its existing
debts and obligations in December 1997 as a result of the sale of Jagger Woods
Development.
-17-
<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, 1998, the Company had negative cash
flows from operating activities of $334,838 versus a positive cash flow of
$2,656,248 for the three months ended December 31, 1997. Investing activities
used cash of $752,697 for the three months ended December 31, 1998 and $407,029
for the three months ended December 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 whcih 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 Axxess, Inc., a publicly traded company
(BB.AXXS). The Company currently has a $175,000 loan to Axxess, Inc. and 175,000
warrants to purchase its common shares at $0.25 per share. As of December 15,
1998 the Company notified Axxess, Inc. that it was exercising the warrants for
an aggregate subscription price of $43,750.
-18-
</TABLE>
<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
-19-
<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: April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This legend contains summary financial information extracted from the
financial statements for the nine months ended June 30, 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-01-1998
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 679,570
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,036,108
<PP&E> 946,101
<DEPRECIATION> 214,940
<TOTAL-ASSETS> 6,928,718
<CURRENT-LIABILITIES> 853,703
<BONDS> 0
0
0
<COMMON> 2,612
<OTHER-SE> 5,484,394
<TOTAL-LIABILITY-AND-EQUITY> 6,928,718
<SALES> 0
<TOTAL-REVENUES> 10,830
<CGS> 0
<TOTAL-COSTS> 779
<OTHER-EXPENSES> 219,914
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,252
<INCOME-PRETAX> 2,897,659
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,897,659
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> 0
</TABLE>
