<PAGE>
Rule Number 424(b)(3)
Registration No. 333-9783
PROSPECTUS
1,100,000 UNITS,
EACH UNIT CONSISTING OF ONE
SHARE OF COMMON STOCK AND
TWO CLASS A WARRANTS
HERTZ TECHNOLOGY GROUP, INC.
------------------------
Hertz Technology Group, Inc. ('Company'), a Delaware corporation, is
offering 1,100,000 Units ('Units') at a price of $5.50 per Unit, each Unit
consisting of one share of Common Stock, $.001 par value per share ('Shares')
and two Class A Warrants ('Class A Warrants ' or 'Warrants'). The Units, Shares
and Class A Warrants are sometimes collectively referred to as the 'Securities'.
The Shares and Class A Warrants included in the Units are detachable and may
trade separately on issuance. See 'Risk Factors' and 'Description of
Securities.'
The Class A Warrants shall be exercisable commencing one year after the
date of this Prospectus ('Effective Date'). Each Class A Warrant entitles the
holder to purchase one Share at $5.50 per share during the four year period
commencing one year from the Effective Date. The Class A Warrants are redeemable
by the Company, commencing one year from the Effective Date for $.01 per Warrant
if the average closing price or bid price of the Shares, as reported by the
principal exchange on which the Shares are traded, equals or exceeds $8.75 per
share, for any twenty (20) consecutive trading days ending within five (5) days
prior to the date of the notice of redemption. See 'Description of Securities.'
The Company has applied for inclusion of the Units, Shares and Class A
Warrants on the Nasdaq SmallCap Market, although there can be no assurance that
such securities will be accepted for quotation or, if accepted, that an active
trading market will develop. Additionally, if the Company's Securities are
accepted for quotation and active trading develops, the Company is required to
maintain certain minimum criteria established by Nasdaq and there can be no
assurance that the Company will be able to continue to fulfill such criteria.
See 'Risk Factors.'
(Continued on next page)
------------------------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE SHARES AND
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF
THEIR ENTIRE INVESTMENT. SEE 'RISK FACTORS', WHICH BEGINS ON
PAGE 8, AND 'DILUTION.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) THE COMPANY(2)
<S> <C> <C> <C>
Per Unit........................ $5.50 $.55 $4.95
Total(3)........................ $6,050,000 $605,000 $5,445,000
</TABLE>
(1) The value of each Share and each Warrant included in a Unit is $5.00 and
$.25, respectively. The figures shown in this column do not include
additional compensation to be received by the Underwriter in the form of (i)
a nonaccountable expense allowance of $181,500 (or $208,725 if the
Underwriter's Over-Allotment Option (as defined below) is fully exercised);
and (ii) an option (exercisable for a period of three years commencing two
years after the Effective Date) entitling the Underwriter to purchase
110,000 Units at $9.08 per Unit ('Underwriter's Purchase Option'). In
addition, the Company and the Underwriter have agreed to indemnity and
contribution provisions regarding certain civil liabilities, including
liabilities under the Securities Act. See 'Underwriting.'
(2) Before deducting expenses of the offering payable by the Company, estimated
at $576,500, including the Underwriter's nonaccountable expense allowance.
See 'Underwriting.'
(3) The Company has granted the Underwriter an option to purchase up to 165,000
additional Units upon the same terms and conditions as set forth above
solely to cover over-allotments, if any ('Underwriter's Over-Allotment
Option'). If the Underwriter's Over-Allotment Option is exercised in full,
the total Price to the Public, Underwriting Discounts and Proceeds to the
Company will be $6,957,500, $695,750 and $6,261,750, respectively. See
'Underwriting.'
------------------------
The Securities are offered by the Underwriter subject to prior sale when,
as and if delivered to and accepted by the Underwriter, and subject to the
Underwriter's right to reject orders in whole or in part and to certain other
conditions. It is expected that delivery of certificates representing the
Securities will be made on or about November 18, 1996.
------------------------
BILTMORE SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 12, 1996
<PAGE>
(Continued from previous page)
The registration statement of which this Prospectus is a part covers the
offering of an additional 750,000 Shares, 375,000 of which are being offered by
Eli E. Hertz, Chairman, President and Chief Executive Officer of the Company,
and 375,000 of which are being offered by his wife, I. Marilyn Hertz, Vice
Chairperson and a director of the Company (Eli and Marilyn Hertz are sometimes
hereinafter referred to as the 'Selling Shareholders'). The Shares being offered
by the Selling Shareholders are not being underwritten. The Company will not
receive any of the proceeds from such sale. Of the 750,000 Shares being offered
by the Selling Shareholders, 225,000 shares may be sold during the twelve (12)
months from the Effective Date at such time within such 12 month period as is
acceptable to Biltmore Securities, Inc. (the 'Underwriter') and the balance,
consisting of 525,000 Shares, may be sold at any time after the expiration of
eighteen (18) months from the Effective Date, subject to earlier release at the
sole discretion of the Underwriter. Certificates evidencing these securities
will bear a legend reflecting such restrictions. The Underwriter may release the
Securities held by the Selling Shareholders at any time after all Securities
subject to the Over-Allotment Option (as hereinafter defined) have been sold or
such option has expired. The Underwriter's Over-Allotment Option period will
expire thirty (30) days following the date of this Prospectus. In other
offerings where Biltmore Securities, Inc. has acted as the managing underwriter,
it has released similar restrictions applicable to selling shareholders prior to
the expiration of the lock-up period and in some cases immediately after the
exercise of the Over-Allotment Option or the expiration of the Over-Allotment
Option period. The Underwriter has no present intention of releasing such
restriction and has advised the Company that it will base its decision upon the
facts and circumstances at such time, including but not limited to, general
market conditions, the price of the Company's securities and the liquidity of
the trading market. The resale of the Securities held by the Selling
Shareholders is subject to prospectus delivery and other requirements of the
Securities Act of 1933, as amended (the 'Securities Act'). Sales of such
securities or the potential for such sales at any time may have an adverse
effect on the market prices of the securities offered hereby. See 'Selling
Shareholders.'
Prior to this offering, there has been no public market for the Units,
Shares or Class A Warrants. The prices of the Units, Shares and Class A
Warrants, as well as the exercise price of the Class A Warrants, have been
determined by negotiation between the Company and the Underwriter, and do not
necessarily bear any relationship to the Company's assets, book value, net worth
or results of operations or any other established criteria of value. For
additional information regarding the factors considered in determining the
initial public offering price of the Securities and the exercise price of the
Class A Warrants, see 'Risk Factors--Arbitrary Offering Price,' 'Description of
Securities' and 'Underwriting.'
The Company does not presently file reports and other information with the
Securities and Exchange Commission ('Commission'). However, following the
completion of this offering, the Company intends to furnish its shareholders
with annual reports containing audited financial statements and such interim
reports, in each case as it may determine to furnish or as may be required by
law.
2
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
ALTHOUGH OTHER BROKER-DEALERS HAVE EXPRESSED AN INTENTION TO PARTICIPATE IN
THE OFFERING, ALL OR A SIGNIFICANT NUMBER OF THE SECURITIES TO BE SOLD IN THIS
OFFERING MAY BE SOLD, IN THE ORDINARY COURSE OF BUSINESS, TO CUSTOMERS OF THE
UNDERWRITER WHICH MAY AFFECT THE MARKET FOR AND LIQUIDITY OF THE COMPANY'S
SECURITIES IN THE EVENT THAT ADDITIONAL BROKER-DEALERS DO NOT MAKE A MARKET IN
THE COMPANY'S SECURITIES. ALTHOUGH OTHER BROKER-DEALERS HAVE EXPRESSED AN
INTENTION TO MAKE A MARKET IN THE COMPANY'S SECURITIES FOLLOWING THE OFFERING,
THERE CAN BE NO ASSURANCE THAT ANY OF SUCH BROKER-DEALERS WILL ACTUALLY COMMENCE
SUCH MARKET-MAKING ACTIVITIES OR, IF COMMENCED, THAT SUCH ACTIVITIES WILL BE
MAINTAINED. BASED UPON THE UNDERWRITER'S EXPERIENCE IN PAST OFFERINGS, IT IS
EXPECTED THAT SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN TRANSACTIONS FOR THE
SALE OR PURCHASE OF THE SECURITIES COVERED THEREBY THROUGH AND/OR WITH THE
UNDERWRITER. NO AGREEMENTS OR UNDERSTANDINGS, WRITTEN OR ORAL, EXIST WITH
RESPECT TO THE PURCHASE OR RESALE OF THE SECURITIES TO BE SOLD IN THIS OFFERING
THROUGH OR WITH THE UNDERWRITER AND/OR ITS AFFILIATES.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME TO
TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE MARKET FOR THE SHARES AND CLASS A WARRANTS. HOWEVER,
THERE IS NO ASSURANCE THAT THE UNDERWRITER WILL OR WILL CONTINUE TO BE A
DOMINATING INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED
HEREUNDER MAY BE SIGNIFICANTLY AFFECTED BY THE DEGREE OF THE UNDERWRITER'S
PARTICIPATION IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT
ANY TIME OR FROM TIME TO TIME. SEE 'RISK FACTORS-LACK OF PRIOR MARKET FOR
SECURITIES OF THE COMPANY' AND 'UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE
ADVERSE CONSEQUENCES.'
SPECIAL STANDARDS FOR SECURITIES SOLD IN CALIFORNIA
Each California investor must have an annual gross income of at least
$65,000 and a net worth, exclusive of home, furnishings and automobiles, of at
least $250,000, or in the alternative, a net worth exclusive of home,
furnishings and automobiles, of at least $500,000. In addition, an investor's
total purchase may not exceed 10% of such investor's net worth.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2, pursuant to the Securities Act, with respect to the securities offered by
this Prospectus. This Prospectus does not contain all of the information set
forth in said Registration Statement, and the exhibits thereto. For further
information with respect to the Company and the securities offered hereby,
reference is made to such Registration Statement and exhibits which may be
inspected without charge at the Commission's principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company intends to furnish its shareholders and holders of Class A
Warrants with annual reports containing audited financial statements and such
interim reports as it deems appropriate or as may be required by law. The
Company's fiscal year ends August 31.
The Company will provide without charge to each person who receives this
Prospectus, upon written or oral request of such person, a copy of any of the
information that is incorporated by reference herein (excluding exhibits) by
contacting the Company at Hertz Technology Group, Inc., 325 Fifth Avenue, New
York, New York 10016-5012, telephone (212) 684-4141, attention: I. Marilyn
Hertz, Vice Chairperson and Secretary.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including information contained under the caption 'Risk Factors,'
and financial statements, including notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise indicated, all information in this Prospectus (i)
assumes no exercise of the Class A Warrants included in the Units being offered
hereby, the Over-Allotment Option, the Underwriter's Purchase Option, or any of
the options issued to Eli E. Hertz or to employees of the Company and (ii)
reflects the effect of the Recapitalization described under 'Certain
Transactions' appearing elsewhere in this Prospectus. As used herein, unless the
context otherwise requires, the term Company includes Hertz Computer Corporation
(and its Israeli subsidiary, Hertz Computer Information System (1985) Ltd.),
'Hertz Israel', which, together with its parent, are referred to as 'Hertz
Computer') and Hergo Ergonomic Support Systems, Inc. ('Hergo').
THE COMPANY
The Company custom designs, assembles and sells microcomputers ('PCs') and
provides related technology support and services under the 'Hertz' name. The
Company also designs, manufactures and sells ergonomically engineered mounting
and support structures ('Modular Racking Systems') for PCs and related computer
peripheral equipment under the 'Hergo' name. Ergonomically engineered products
are designed to take into consideration the physical characteristics of computer
users and the manner in which they and their computers interact with each other.
The Company's sales are concentrated in the metropolitan New York area.
Hertz Customized Computers and Related Services. The Company designs and
sells customized PCs and provides a broad range of related services, including
system architecture design, consulting, installation, personnel training and
customer support. PCs are assembled in a number of different configurations
using standard component parts. Customization enables the Company to accommodate
customer computer needs with respect to storage capacity, speed, price,
applications, size, configuration and a range of other considerations that can
be accommodated in whole or in part by the selection of appropriate components.
Hertz PCs are primarily sold for use in network configurations. They are also
sold to original equipment manufacturers ('OEMs') for use in Magnetic Resonance
Imaging ('MRI') machines, to provide voice mail services, for use in military
radar systems and for use in shopping center kiosks to enable prospective
purchasers of music discs and tapes to select and hear their musical selections
prior to purchase.
Hergo Modular Racking Systems. The Company's Hergo Division designs,
manufactures and sells Modular Racking Systems which serve to conserve space and
help organize and facilitate the accessibility of all types of computer
hardware, communication and electronic devices, and other peripherals. Hergo
systems are suitable for use in any size computer room or technical environment.
The market for these Modular Racking Systems was created in large part by the
replacement of mainframe computers by multiple PCs. The Company provides a
cohesive, functional and architecturally attractive racking system that
vertically mounts and supports multiple computers, servers and related
peripherals, such as printers, monitors, scanners and modems, used in tandem
with each other, or in juxtaposition with each other and interconnected for
networking functions. Purchasers of the Company's Modular Racking Systems
include some of the largest industrial, commercial and financial companies in
the United States, such as Citibank, N.A., AT&T, Dow Jones, Bell Atlantic,
Pfizer, Hewlett Packard, The New York Times and Time Warner.
The Company's strategic plan is to strengthen its business lines by
updating their respective physical facilities and manufacturing equipment and
then intensifying their respective marketing efforts. With respect to the PC
business, the Company intends to develop a national sales force and increase its
efforts to market Hertz PCs to the Federal Government and OEMs. For the Hergo
line, the Company plans on bringing to market new products, including
'Hergolite', and on strengthening its relationships with its customer base of
large U.S. corporations. 'Hergolite' is a line of Modular Racking Systems,
specifically designed for the small business or home office user. The Company
also plans on actively pursuing a cross marketing program between its Hertz
Computer and Hergo Divisions with special emphasis on marketing the Company as a
PC supplier to its Hergo customers. Finally, the Company plans on establishing a
new division to offer a variety of Internet services, such as Internet access
and Web site design, to its corporate clients.
4
<PAGE>
The Company was incorporated in the State of Delaware, on June 18, 1996.
Immediately prior to the Effective Date, it will have acquired all the
outstanding stock of Hertz Computer and Hergo, which will become wholly owned
subsidiaries of the Company (the 'Recapitalization'). The principal executive
offices of the Company are located at 325 Fifth Avenue, New York, New York
10016-5012 and its telephone number is (212) 684-4141. On or about November 15,
1996, the Company plans to move its New York facilities, including its executive
offices, to 75 Varick Street, New York, New York , 10013.
See 'Risk Factors,' 'Management,' 'Business' and 'Certain Transactions' for
a discussion of certain factors which should be considered in evaluating the
Company and its business.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities Offered(1)..................... 1,100,000 Units
Securities outstanding prior to
Offering................................ 1,900,000 Shares
0 Warrants
Securities outstanding after
Offering(2)............................. 3,000,000 Shares
2,200,000 Warrants
Comparative Shares Ownership Upon
Completion of Offering:
Present Shareholders (1,900,000
Shares)(2)(3)........................... 63.3%
Public Shareholders (1,100,000
Shares)(3).............................. 36.7%
Use of Net Proceeds....................... The Company intends to use the net proceeds for debt retirement, an S
Corporation distribution, a Hertz PC marketing program, purchase of
new Hergo machinery, Hergo's new product development, establishment
of an Internet Service Division, updating computer systems, Hergo
marketing, upgrading new facility and production equipment of Hertz
Computer and for working capital purposes. See 'Use of Proceeds.'
<CAPTION>
PROPOSED NASDAQ SYMBOLS
<S> <C>
Units..................................... HERZU
Common Stock.............................. HERZ
Class A Warrants.......................... HERZW
</TABLE>
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(1) The Company is offering 1,100,000 Units (each Unit consisting of one Share
and two Warrants) at a price of $5.50 per Unit. Each Warrant entitles the
holder to purchase one Share at $5.50 per share during the four year period
commencing one year from the Effective Date. The Warrants are redeemable
upon certain conditions. Should the Warrants be exercised, of which there is
no assurance the Company will receive the proceeds therefrom aggregating up
to an additional $12,100,000. See 'Description of Securities.'
(2) Does not include Shares issuable upon the exercise of (i) the Warrants
included in the Units being offered hereby; (ii) the Underwriter's
Over-Allotment Option to purchase up to 165,000 Units; (iii) the
Underwriter's Purchase Option to purchase up to 110,000 Units; (iv) the
option held by Eli E. Hertz to purchase 900,000 Shares; (vi) the options to
purchase 750,000 Shares reserved for issuance under the Company's Stock
option Plan; and (vii) the issuance of 100,000 Shares reserved for issuance
under the Company's Employee Bonus Plan. See 'Description of Securities.'
(3) See 'Dilution.'
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the more
detailed financial statements appearing elsewhere in this Prospectus. This
information should be read in conjunction with the financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operation appearing elsewhere in this Prospectus. The following
consolidated data, insofar as it relates to the years ended August 31, 1995 and
August 31, 1994, has been derived from the audited financial statements and
notes thereto appearing elsewhere herein.
The data for the nine months ended May 31, 1996 and 1995 has been derived
from the unaudited financial statements also appearing elsewhere herein which,
in the opinion of management, includes all adjustments, consisting of only
normal, recurring adjustments, necessary for a fair presentation of the results
of operations for the unaudited periods. The results of operations for the nine
months ended May 31, 1996 and 1995 are not necessarily indicative of the results
to be expected for the entire year.
HERTZ TECHNOLOGY GROUP, INC.
<TABLE>
<CAPTION>
HERTZ TECHNOLOGY GROUP, INC.
------------------------------------------------------
NINE MONTHS ENDED YEARS ENDED
MAY 31, AUGUST 31,
------------------------ --------------------------
1996 1995 1995 1994
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net Sales.............................................. $9,375,857 $8,224,492 $11,220,183 $10,929,308
Cost of goods sold..................................... 6,532,666 6,117,860 8,102,977 8,386,365
Gross Profit........................................... 2,843,191 2,106,632 3,117,206 2,542,943
Selling, general & administrative expense.............. 2,072,389 1,942,355 2,868,665 2,288,388
Other expense, net..................................... 138,790 96,372 116,813 44,946
Income before Provision for income taxes............... 632,012 67,905 131,728 209,609
Provision for income taxes............................. 244,500 3,900 77,615 63,138
Net income............................................. 387,512 64,005 54,113 174,895
Pro forma net income(1)................................ 265,779 67,905 58,126 102,057
Pro forma net income per share......................... $ 0.14 $ 0.04 $ 0.03 $ 0.05
Weighted average number of shares outstanding.......... 1,900,000 1,900,000 1,900,000 1,900,000
Supplementary net income per share(2).................. $ 0.16 -- $ 0.06 --
</TABLE>
<TABLE>
<CAPTION>
HERTZ TECHNOLOGY GROUP, INC.
----------------------------
MAY 31, 1996
----------------------------
ACTUAL AS ADJUSTED(3)
---------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working Capital..................................................................... $ 546,750 $5,415,250
Total Assets........................................................................ 3,388,212 6,588,581
Capital lease obligation............................................................ 19,309 19,309
Distributions payable to shareholders............................................... 224,567 --
Total Liabilities................................................................... 2,484,301 816,170
Stockholders' Equity................................................................ 903,911 5,772,411
</TABLE>
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(1) Pro forma net income reflects a provision for income taxes as if Hergo had
been a C Corporation throughout such period.
(2) Supplementary net income per share is calculated for the nine month period
ended May 31, 1996 as if $1,443,564 of interest bearing debt obligations was
repaid from the net proceeds of this Offering as of September 1, 1995 and
assuming that (i) 288,713 Shares were issued as of September 1, 1995 to
repay the interest bearing debt obligations; (ii) $82,200 of interest
expense net of income tax expense was eliminated as
(Footnotes continued on next page)
6
<PAGE>
(Footnotes continued from previous page)
a result of such payment for the nine months ended May 31, 1996; and (iii)
pro forma net income of $265,779 (which reflects a provisions for income
taxes as if Hergo were a C corporation for the nine months ended May 31,
1996) was the base utilized in the calculation of supplementary net income
per share. Supplementary net income per share is calculated for the year
ended August 31, 1995 as if $1,559,743 of interest bearing debt obligations
was repaid from the net proceeds of this Offering as of September 1, 1994
and assuming that (i) 311,949 Shares were issued as of September 1, 1994 to
repay the interest bearing debt obligations; and (ii) $74,385 of interest
expense, net of income tax expense was eliminated as a result of such
payment for the twelve months ended August 31, 1995.
(3) Adjusted to reflect (i) the sale of Securities consisting of 1,100,000 Units
by the Company and the net proceeds therefrom and the uses thereof (assuming
an initial public offering price of $5.50 per Unit and after deducting the
underwriting discounts and commissions and expenses of this offering
estimated at $1,181,500), and (ii) the repayment of certain indebtedness
from the proceeds of this Offering. Does not include the proceeds from the
sale of Shares pursuant to the exercise of any Warrants or Options,
including the Underwriter's Purchase Option. See 'Underwriting.'
7
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY THOSE PERSONS ABLE TO LOSE THEIR ENTIRE INVESTMENT SHOULD PURCHASE
THESE SECURITIES. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT DECISION,
SHOULD CAREFULLY READ THIS PROSPECTUS AND CONSIDER, ALONG WITH OTHER MATTERS
REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
HIGHLY COMPETITIVE MICROCOMPUTER MARKET--PRESSURE ON PROFIT MARGINS.
The business of manufacturing and selling PCs is intensely competitive and
rapidly changing. The Company believes that the principal competitive factors in
the microcomputer sales and service industry include relative price and
performance, product availability, technical expertise, financial stability,
service, support and reputation. The Company's computers are constructed with
standardized parts which are available to others in the market. The Company's
competitors include established computer product manufacturers, some of which
supply products to the Company, computer resellers, distributors and service
providers. Some of the Company's current and potential competitors have
substantially greater financial, sales, marketing, technical and other
competitive resources than those of the Company. As a result, the Company's
competitors may be able to devote greater resources than the Company to the
sales and service of microcomputer products. As the computer market in which the
Company competes has matured, product price competition has intensified and is
likely to continue to intensify, which may make it too costly for the Company to
continue its 'made to order' method of doing business. One of the results of
this competition may be to lower sale prices and decrease profit margins. A
significant portion of the Company's computer business is to governmental
agencies where sales will depend on government budgets and government contracts,
which contracts are subject to renewal on a periodic basis. There can be no
assurance that the Company will win bids in the future just because it won
similar bids in the past. The Company has been increasing its selling efforts in
the private commercial market and particularly in the OEM market where margins
are expected to be higher. There can be no assurance, however, that the Company
will be successful in refocusing its computer business to the private commercial
market, or that it will be able to keep up with its competition and still
improve profit margins.
GEOGRAPHIC AND CUSTOMER CONCENTRATION; RISK OF EXPANSION.
The Company's sales are concentrated in the New York metropolitan area.
Approximately 61% and 66% of its total sales were concentrated in the New York
metropolitan area for the year ended August 31, 1995 and for the nine months
ended May 31, 1996, respectively. A majority of these sales (36% and 41% of
total sales for these respective periods) were to federal, state and city
agencies or government affiliated organizations, including hospitals and schools
('Governmental Entities'). Because these sales are pursuant to contracts awarded
by competitive bidding, there is no assurance that notwithstanding a favorable
past relationship with a particular Government Entity that the Company will be
the successful bidder in future contracts with such Entity. Moreover, spending
by Governmental Entities is subject to budgetary constraints and is vulnerable
to political challenges for over spending and the like. The result is that
projections based on continuing governmental sales are often unreliable and any
dependence by the Company on continuing governmental business may have
materially adverse consequences.
The Company is seeking to expand its market for computer sales to include
most of the United States, and intends to specifically target OEM accounts where
the markup is generally expected to be higher than governmental and commercial
accounts. While the Hertz name is known by many prospective customers within its
existing market area, it has less name recognition outside of the New York
metropolitan area. Consequently, there is no assurance that the Company's
efforts will be successful. A larger sales volume may require the Company to
maintain larger storage facilities, which it does not currently maintain, in
order to stock completed units pending shipment. The Company offers as one of
its options on-site servicing, and installation for its computer sales accounts.
As it expands its computer business, it might need to make arrangements either
for its own newly hired personnel, or with a third-party service provider
outside of the metropolitan area, to provide on-site servicing. The transition
of a company servicing a regional area into a company servicing a large portion
of the United States will require the Company to make some adjustments in its
methods of operation and in its
8
<PAGE>
orientation and focus, which, if not effectively made, could create serious
obstacles to achieving a successful expansion.
LIMITED OPERATING HISTORY OF HERGO'S PRODUCT LINE
The Company's Hergo Division provides Modular Racking Systems to house and
organize stand-alone or multiple computers and electronic devices used in tandem
or in juxtaposition with each other. The market for these support systems was
created in large part by the replacing of main frame computers by
microcomputers. Hergo's sales in its 1995 fiscal year represented a significant
increase over the prior year's sales. Moreover, Hergo's profit margins
historically have been higher than those obtained in the computer business.
There is no assurance, however, that growth in the Hergo business or its gross
profit margins will continue at the same pace as before, if at all. In addition,
as the profit margins in this line of business become better appreciated in the
trade, there is every reason to expect a larger number of companies to enter the
field as competitors.
The Company intends to use Hergo's customer list, which includes some of
the largest and best known companies in America, to create cross marketing
opportunities to promote the Hertz computer line to these existing Hergo
customers. However, in many of these companies, the personnel charged with the
responsibility for purchasing computers are not the same as the personnel buying
the Hergo Modular Racking System, and many companies prefer to do their computer
business with larger better known companies. and such cross marketing potential
may never be realized. Moreover, there is no assurance that the companies that
have purchased Hergo products will continue to favor the Company with their
structural support units and technical furniture needs. There are no long term
commitments from buyers in this business, and the Company has no significant
back-log. If for any of these reasons, the Company is unable to realize on the
potential which management sees in its Hergo operations to date, the Company's
overall profit margins and profits will suffer and its projected growth may
never materialize.
LACK OF PROPRIETARY RIGHTS; TRADEMARKS
The Company relies on trade secret protection and confidentiality
agreements with its employees, customers and others to protect its proprietary
rights in both of its business lines. The Company's computers are manufactured
in a number of configurations using standardized component parts and accessories
built by others, and available in the market place for others to purchase and
use in assembling computers. The Hertz computer does not enjoy any patent
protection. Similarly, modular component parts used by the Company in its Hergo
Modular Racking Systems are functional in nature and for the most part not
protectable. This is the opinion of the Company's management even though the
Company is currently a defendant in a lawsuit in which the plaintiff claims that
Hergo's modular designs infringe plaintiff's common law rights thereto. See
'Legal Proceedings.' Consequently, competitors of the Company, in one or both of
its product lines, may be able to replicate and improve on the Company's methods
of doing business and those with greater resources than the Company may more
effectively market their products.
The Hertz trademark has not yet been registered on the principal Registrar
of the United States Patent and Trademark Office. Although application for such
mark has been made, the Examining Attorney in the Trademark and Trial Appeals
Board refused to register the mark on the grounds that it was in conflict with
two registered marks of an affiliate of the Hertz Corporation (the car rental
company) (the 'Car Rental Company'). On March 8, 1995, the Company filed a
petition for partial cancellation of the Car Rental Company's registrations on
the ground that the registrations covered renting and leasing of heavy tools and
machines for industrial and construction purposes, did not cover computer and
computer peripherals and therefore did not conflict with the Company's proposed
use of the name. The Car Rental Company's answer is due on December 31, 1996.
The granting of the Company's registration application is being held in abeyance
pending resolution of this dispute. Some settlement discussions have also been
conducted in an effort to obtain the Car Rental Company's consent to the
Company's registration of the Hertz Computer Corporation name, although no such
settlement has been agreed to.
The Car Rental Company has an affiliate named Hertz Technology, Inc.,
incorporated in New York in 1991. No claim has been made against the Company
based on its use of the Hertz name. If any such claim were made, the Company
believes that it has good defense against any such claim. The Hertz name is
regarded as a very
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valuable asset of the Company, and in the event that the Company were enjoined
from using the Hertz Technology name, the Company believes it can adapt to the
use of Hertz Computer or some other form of the Hertz name as an alternative
with a minimum disruption and loss of good will.
1996 LOSS IN ISRAEL SUBSIDIARY; CHANGES IN IMPORT DUTIES
A significant portion (17% in fiscal 1995) of the Company's total sales are
accounted for by sales to Israel, to or through its Israel subsidiary. For the
first nine months of fiscal 1996, Hertz Israel had an operating loss of $83,000.
This loss was due in large part to a change in the Israeli tax law. Prior to
this change, computers imported to Israel were assessed a high tariff. Certain
companies and universities were exempt from this tax if the products were
purchased in the US. In August 1994, the tariffs on imported goods to Israel
were eliminated, a move that took away the price difference between a computer
imported from the Far East and a computer imported from the U.S. This in turn
made the purchase of computers in the local Israeli market, which is dominated
by Far East imports, a more convenient purchase than a purchase from the United
States. With the removal of the incentive to buy from the U.S., many of Hertz's
customers, such as the universities which had been purchasing directly from
Hertz in the U.S., chose to do most of their purchasing in Israel. To
accommodate these customers, the Company now ships computers for Israeli
customers to Hertz Israel which then reships such computers to the ultimate
customers. The new routing schedule involved increased expense which the Company
has not been able to completely pass on to its Israeli customers. The nine month
loss also reflects severance payments and other expenses incurred in connection
with the buy-out of a minority interest and in replacing the general manager of
the Israeli subsidiary. On a going forward basis, the Company has established
more effective cost controls and a better defined organization, which the
Company believes will help restore its Israel operations to profitability. The
Company also believes that the change in the Israel Duty Tax will not materially
affect sales. There cannot, however, be any assurance that either of the above
expectations will be confirmed, or that the subsidiary's losses will not
continue. If the losses in the subsidiary continue, the Company will consider
liquidating the subsidiary and replacing it with a manufacturer's representative
in Israel.
There is always a risk when selling in Israel (as in other foreign
countries) that changes (other than changes in the Importation Duty) in existing
laws, policies and conditions could materially affect Company operations. In
addition, the proceeds of sales to Israeli customers are always subject to
change in currency exchange valuations which could adversely affect profits from
overseas sales.
IMMEDIATE AND SUBSTANTIAL DILUTION
The Company had a net tangible book value of $862,327 or $.45 per share,
derived from the Company's May 31, 1996 consolidated balance sheet and based
upon 1,900,000 shares being outstanding immediately prior to the closing of this
offering. After projecting the effect of the sale of the Units offered hereby at
an offering price of $5.50 per Unit, after deducting underwriting discounts and
estimated offering expenses, adjusted net tangible book value will be $5,730,827
or $1.91 per share. The result will be an immediate increase in net tangible
book value per share of $1.46 to existing shareholders and an immediate dilution
to new investors of $3.09 per share (62%). See 'Dilution.'
LITIGATION INVOLVING UNDERWRITER MAY AFFECT SECURITIES
The Company has been advised by the Underwriter that on or about May 22,
1995, the Underwriter and Elliot Loewenstern and Richard Bronson, principals of
the Underwriter, and the Commission agreed to an offer of settlement (the 'Offer
of Settlement') in connection with a complaint filed by the Commission in the
United States District Court for the Southern District of Florida alleging
violations of the federal securities laws, Section 17(a) of the Securities Act
of 1933, Section 10(b) and 15(c) of the Securities Exchange Act of 1934, and
Rules 10b-5, 10b-6 and 15c1-2 promulgated thereunder. The complaint also alleged
that in connection with the sale of securities in three (3) IPO's in 1992 and
1993, the Underwriter engaged in fraudulent sales practices. The proposed Offer
of Settlement was consented to by the Underwriter and Messrs. Loewenstern and
Bronson
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without admitting or denying the allegations of the complaint. The Offer of
Settlement was approved by Judge Gonzales on June 6, 1995. Pursuant to the final
judgment (the 'Final Judgment'), the Underwriter:
o was required to disgorge $1,000,000 to the Commission, which amount
was paid in four (4) equal installments on or before June 22, 1995;
o agreed to the appointment of an independent consultant
('Consultant').
Such Consultant is obligated, on or about November 1, 1996 (or at such
later date as may be extended by the Consultant without Court approval):
o to review the Underwriter's policies, practices and procedures in
six (6) areas relating to compliance and sales practices;
o to formulate policies, practices and procedures for the Underwriter
that the Consultant deems necessary with respect to the
Underwriter's compliance and sales practices;
o to prepare a report devoted to and which details the aforementioned
policies, practices and procedures (the 'Report');
o to deliver the Report to the President of the Underwriter and to the
staff of the Southeast Regional office of the Commission;
o to prepare, if necessary, a supervisory procedures and compliance
manual for the Underwriter, or to amend the Underwriter's existing
manual; and
o to formulate policies, practices and procedures designed to provide
mandatory on-going training to all existing and newly hired
employees of the Underwriter. The Final Judgment further provides
that, within thirty (30) days of the Underwriter's receipt of the
Report, unless such time is extended, the Underwriter shall adopt,
implement and maintain any and all policies, practices and
procedures set forth in the Report.
As of the date of this Prospectus the Consultant has not delivered the
Report to the Underwriter. The Final Judgment also provides that an independent
auditor ('Auditor') shall conduct four (4) special reviews of the Underwriter's
policies, practices and procedures, the first such review to take place six (6)
months after the Report has been delivered to the Underwriter and thereafter at
six-month intervals. The Auditor is also authorized to conduct a review, on a
random basis and without notice to the Underwriter, to certify that any persons
associated with the Underwriter who have been suspended or barred by any
Commission order are complying with the terms of such orders.
On July 10, 1995, the action as against Messrs. Loewenstern and Bronson was
dismissed with prejudice. Mr. Bronson has agreed to a suspension from
associating in any supervisory capacity with any broker, dealer, municipal
securities dealer, investment advisor or investment company for a period of
twelve (12) months, dating from the beginning of such suspension. Mr.
Loewenstern has agreed to a suspension from associating in any supervisory
capacity with any broker, dealer, municipal securities dealer, investment
advisor or investment company for a period of twelve (12) months commencing upon
the expiration of Mr. Bronson's suspension.
In the event that the requirements of the foregoing judgment adversely
affect the Underwriter's ability to act as a market maker for the Shares, and
additional brokers do not make a market in the Company's securities, the market
for, and the liquidity of, the Company's securities may be adversely affected.
In the event that other broker dealers fail to make a market in the Company's
securities, the possibility exists that the market for and the liquidity of the
Company's securities may be adversely affected to such an extent that public
security holders may not have anyone to purchase their securities when offered
for sale at any price. In such event, the market for, liquidity and prices of
the Company's securities may not exist. See 'Underwriting.' For additional
information regarding the Underwriter, investors may call the National
Association of Securities Dealers, Inc. at (800) 289-9999.
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RECENT STATE ACTION INVOLVING THE UNDERWRITER--POSSIBLE LOSS OF LIQUIDITY
The State of Indiana has commenced an action seeking among other things to
revoke the Underwriter's license to do business in such state. A hearing in this
matter was scheduled for October 7, 1996 and has been adjourned pending
settlement discussions. Such proceeding if ultimately successful may adversely
affect the market for and liquidity of the Company's securities if additional
broker dealers do not make a market in the Company's securities. Moreover,
should Indiana investors purchase any of the securities sold in this offering
from the Underwriter prior to the possible revocation of the Underwriter's
license in Indiana, such investors will not be able to resell such securities in
such state through the Underwriter but will be required to retain a new broker
dealer firm for such purpose. The Company cannot ensure that other broker
dealers will make a market in the Company's securities. In the event that other
broker dealers fail to make a market in the Company's securities, the
possibility exists that the market for and the liquidity of the Company's
securities may be adversely affected to an extent that public security holders
may not have anyone to purchase their securities when offered for sale at any
price. In such event, the market for, liquidity and prices of the Company's
securities may not exist. The Company does not intend to seek qualification for
the sale of the Securities in the state of Indiana. It should be noted that
although the Underwriter may not be the sole market maker in the Company's
securities, it will most likely be the dominant market maker in the Company's
securities. See 'Underwriting.'
SUBSTANTIAL PORTION OF PROCEEDS TO BE USED TO REPAY INDEBTEDNESS
Approximately 25% of the net proceeds of this offering, or $1,241,000, is
intended to be used to repay existing indebtedness of the Company. Of this
amount, approximately $189,000 will be used to repay Eli and Marilyn Hertz for
advances and loans to the Company, and $895,000 will be used to pay down a bank
line from United Mizrachi Bank, which obligations of the Company have been
guaranteed by Eli and Marilyn Hertz. See 'Use of Proceeds.'
BENEFIT OF OFFERING TO PRINCIPAL SHAREHOLDERS
The Company has an outstanding loan balance to Mr. and Mrs. Hertz of
approximately $189,000 as of September 30, 1996. In addition, they have
guaranteed the payment of the Company's indebtedness to the United Mizrachi Bank
(the 'Bank'), which amount, as of September 30, 1996, was $895,000. The Company
intends to use a portion of the net proceeds of this offering to repay the
Company's borrowings from Eli and Marilyn Hertz, the Company's obligation to the
Bank guaranteed by them and also to fund a distribution to Eli and Marilyn Hertz
(See 'S Corporation Distribution') estimated at $225,000 as of May 31, 1996.
Consequently, both Eli and Marilyn Hertz stand to benefit from this
offering and the foregoing transactions including the manner in which the net
proceeds of this offering are to be allocated, represent a potential conflict of
interest for Mr. and Mrs. Hertz. See 'S Corporation Distribution' and 'Use of
Proceeds.'
DEPENDENCE ON MANAGEMENT
The Company's business is principally dependent on certain key management
personnel for the operation of its business. In particular, Eli E. Hertz has
played the primary role in the promotion, development and management of both
facets of the Company's business. The Company has entered into a five year
employment agreement with Mr. Hertz. Under this agreement, Mr. Hertz is to be
paid an annual salary of $225,000 per year. The Company is the owner and
beneficiary of a key-man life insurance on Mr. Hertz in the amount of $1
million. There can be no assurance, however, that the death of Mr. Hertz or his
departure from the Company for any reason would not have a materially adverse
effect on the operations of the Company. See 'Business' and 'Management.'
NEED TO DEVELOP SALES FORCE AND EXPAND EMPLOYEE BASE
The Company's plan for the future contemplates the training and development
of a national sales organization to sell and service Hertz Computer's products.
Heretofore, most of the Company's computer sales activity have been confined to
process unsolicited orders by telephone. Consequently, the Company does not have
a core of experienced sales persons upon which to build a sales force. It is
committed to allocating a significant amount of money which it expects to obtain
from this Offering, to the hiring of a sales force, including
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a national sales director of sufficient experience and stature, for the
marketing and selling of computers nationally. There can be no assurance,
however, that any such sales force developed by the Company will be successful
in marketing and selling its computers to an expanding geographic market.
The Company has approximately 56 employees as of July 1, 1996. This number
is expected to increase significantly in the next year as the Company expands
its manufacturing, sales and service operations. The Company's success depends
upon its ability to attract and retain highly qualified management and technical
personnel in addition to the national sales organization it is committed to
build. Competition for qualified employees is intense. In addition, the process
of locating needed personnel with the combination of skills and attributes
required to implement the Company's expansion plans may take more time than is
currently contemplated.
PENDING LITIGATION
The Company is a party to two pending suits one as a defendant and the
other as a plaintiff, in which the defendant has asserted a counterclaim seeking
a large amount of damage from the Company. Though the Company believes that the
outcome of these cases, taken together, will not have a materially adverse
effect on the Company, litigation results are often unpredictable and if a large
damage award were rendered against the Company in either case, the result could
adversely affect Company operations. See 'Legal Proceedings.'
VOTING CONTROL BY MANAGEMENT; POTENTIAL ANTI-TAKEOVER EFFECT
After giving effect to this offering (but without giving effect to the
sales of any securities by the Selling Shareholders), Eli and Marilyn Hertz will
beneficially own over 50% of the outstanding Shares. Accordingly, they may, by
themselves, have sufficient Shares to be able to approve major corporate
transactions including amending the Certificate of Incorporation of the Company,
the sale of substantially all of the Company's assets, the election all of the
directors of the Company and to control the Company's affairs. This voting
control may have the effect of delaying or preventing a change in control of the
Company and may adversely affect the rights of the shareholders of the Company.
In addition, the Company is subject to a State of Delaware statute regulating
business combinations which may also hinder or delay a change of control.
ABSENCE OF DIVIDENDS
Except for an S Corporation Distribution, the Company does not expect to
pay cash or stock dividends on its Shares in the foreseeable future, but
instead, intends to retain all earnings, if any, to invest in the Company's
operations. The payment of future dividends is within the discretion of the
Board of Directors and will depend upon the Company's future earnings, if any,
its capital requirements, financial condition and other relevant factors. See
'Dividend Policy.'
LIMITATION ON DIRECTOR LIABILITY
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation limits the liability of directors to the Company or
its shareholders for monetary damages for breach of a director's fiduciary duty,
except for liability in four specific instances. These are for (i) any breach of
the director's duty of loyalty to the Company or its shareholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or knowing
violations of law, (iii) unlawful payments of dividends or unlawful stock
purchases or redemption's as provided in Section 174 of the Delaware General
Corporation Law, or (iv) any transaction from which the director derived an
improper personal benefit. As a result of the Company's charter provision and
Delaware law, shareholders may have more limited rights to recover against
directors for breach of fiduciary duty. See 'Management--Limitation on Liability
of Directors.'
ARBITRARY OFFERING PRICE
There has been no prior public market for the Company's Securities. The
price to the public of the Units offered hereby has been arbitrarily determined
by negotiations between the Company and the Underwriter and bears no
relationship to the Company's earnings, book value or any other recognized
criteria of value. The value of $5.00 per Share reflected in the offering price
of the Units is substantially in excess of the net tangible book
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value of $.45 per Share, derived from the Company's May 31, 1996, consolidated
balance sheet and in excess of the price received by the Company for shares sold
in prior transactions. See 'Prospectus Summary--Selected Financial Data,'
'Underwriting,' 'Dilution' and 'Certain Transactions.'
REQUIREMENTS OF CURRENT PROSPECTUS AND POTENTIAL RESTRICTIONS ON EXERCISE OF THE
WARRANTS
The Company will be able to issue the Shares upon the exercise of the
Warrants and the Underwriter's Purchase Option only if (i) there is a current
prospectus relating to the Securities offered hereby under an effective
registration statement filed with the Commission, and (ii) such Shares are then
qualified for sale or exempt therefrom under applicable state securities laws of
the jurisdictions in which the various holders of Warrants reside. There can be
no assurance, however, that the Company will be successful in maintaining a
current registration statement. After a registration statement becomes
effective, it may require updating by the filing of a post-effective amendment.
A post effective amendment is required under the Securities Act (i) anytime
after nine (9) months subsequent to the Effective Date when any information
contained in the prospectus is over sixteen (16) months old; (ii) when facts or
events have occurred which represent a fundamental change in the information
contained in the registration statement; or (iii) when any material change
occurs in the information relating to the plan or distribution of the securities
registered by such registration statement. The Prospectus forming a part of this
Registration Statement will remain current within the meaning of the Securities
Act for not more than nine (9) months following the date of this Prospectus, or
until August 12, 1997, assuming a post-effective amendment is not filed by
the Company. The Company intends to qualify the sale of the Securities in a
limited number of states, although certain exemptions under certain state
securities ('Blue Sky') laws may permit the Warrants to be transferred to
purchasers in states other than those in which the Warrants were initially
qualified. The Company will be prevented, however, from issuing Shares upon
exercise of Warrants in those states where exemptions are unavailable and the
Company has failed to qualify the Shares issuable upon exercise of the Warrants.
The Company may decide not to seek, or may not be able to obtain qualification
of the issuance of such Shares in all of the states in which the ultimate
purchasers of the Warrants reside. In such a case, the Warrants of those
purchasers will expire and have no value if such warrants cannot be exercised or
sold. Accordingly, the market for the Warrants may be limited because of the
Company's obligation to fulfill both of the foregoing requirements. The Company
is either exempt or has filed applications to register its securities as of the
Effective Date in the following jurisdictions: California, Colorado,
Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois,
Louisiana, Maryland, Nevada, New York and Rhode Island.
ISSUANCE OF AUTHORIZED BUT UNISSUED SHARES AND SALES OF RESTRICTED SHARES MAY
ADVERSELY AFFECT THE MARKET
The Company is authorized to issue 25,000,000 Shares. If all of the
1,100,000 Units (containing 1,100,000 Shares and 2,200,000 Warrants) offered
hereby are sold, there will be a total of 3,000,000 Shares issued and
outstanding. In addition, the following Shares have been reserved for issuance:
2,200,000 Shares issuable upon exercise of the Warrants included in the Units
and offered to investors in this offering; 165,000 Shares issuable pursuant to
the Underwriter's Over-Allotment Option; 330,000 shares issuable upon the
exercise of the Warrants included in the Underwriter's Over-Allotment Option;
110,000 Shares issuable pursuant to the Underwriter's Purchase Option; 220,000
shares issuable upon exercise of the Warrants included in the Underwriter's
Purchase Option; 900,000 Shares issuable upon exercise of a stock option granted
to Eli E. Hertz, up to 750,000 Shares issuable upon exercise of options that may
be granted under the Company's Stock Option Plan for officers and key employees
and up to 100,000 Shares issuable pursuant to a Company Employee Bonus Plan.
After the exercise of all such warrants and options the Company will have
7,775,000 Shares outstanding and 17,225,000 Shares of authorized but unissued
capital stock available for issuance without further shareholder approval. As a
result, any issuance of additional Shares may cause current shareholders of the
Company to suffer significant dilution which may adversely affect the market.
All of the Company's currently outstanding Shares are 'restricted
securities' and, in the future, may be sold upon compliance with Rule 144,
adopted under the Securities Act. Rule 144 provides, in essence, that a person
holding 'restricted securities' for a period of two years may sell only an
amount every three months equal to the greater of (a) one percent of the
Company's issued and outstanding shares, or (b) the average weekly volume of
sales during the four calendar weeks preceding the sale. The amount of
'restricted securities' which a
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person who is not an affiliate of the Company may sell is not so limited, since
non-affiliates may sell without volume limitation their shares held for three
years if there is adequate current public information available concerning the
Company. A proposed rule which may be adopted by the Commission would reduce
these two and three year periods to one and two years, respectively. Upon the
sale of the Securities offered hereby, and assuming that there is no exercise of
any issued and outstanding Warrants, the Company will have 3,000,000 Shares
issued and outstanding, of which 1,150,000 Shares are 'restricted securities',
750,000 Shares are being registered under the registration statement of which
this Prospectus is a part and offered under the Alternative Prospectus and
1,100,000 are publicly traded shares. Therefore, during each three month period,
beginning February 12, 1997, a holder of restricted securities who has held
them for at least the two year period may sell under Rule 144, a number of
shares up to 30,000 Shares. Non-affiliated persons who hold for the three-year
period described above may sell unlimited shares once their holding period is
met. Notwithstanding the above, the current officers, directors and principal
shareholders have agreed, except as noted below, not to sell, transfer, assign
or issue any securities of the Company for a period of twenty-four (24) months
following the Effective Date without the consent of the Underwriter. The sale or
availability for sale of significant quantities of restricted securities could
adversely affect the market price of the Securities. See 'Selling Shareholders'
and 'Description of Securities--Restricted Shares Eligible for Future Sales.'
The registration statement of which this Prospectus is a part also covers
the offering of 750,000 Shares being offered by the Selling Shareholders. Of the
750,000 Shares being offered by the Selling Shareholders, 225,000 Shares may be
sold during the twelve (12) months from the Effective Date at such time within
this 12 month period as is acceptable to the Underwriter, and the balance,
consisting of 525,000 Shares after the expiration of 18 months from the
Effective Date, subject to earlier release at the sole discretion of the
Underwriter. In other offerings where the Underwriter has acted as the managing
Underwriter, it has released similar restrictions applicable to selling
shareholders prior to the expiration of the lock-up period and in some cases
immediately after the exercise of the Over-Allotment Option or the expiration of
the Over-Allotment Option period. The Underwriter has no present intention of
releasing such restriction and has advised the Company that it will base its
decision upon the facts and circumstances at such time, including but not
limited to, general market conditions, the price of the Company's securities and
the liquidity of the trading market. Certificates evidencing these securities
will bear a legend reflecting such restrictions. The resale of the Shares held
by the Selling Shareholders is subject to prospectus delivery and other
requirements of the Securities Act. Sales of such Shares or the potential of
such sales at any time may have an adverse effect on the market prices of the
Securities offered hereby. See 'Selling Shareholders.'
Prospective investors should be aware that the possibility of sales may, in
the future, have a depressive effect on the price of the Shares in any market
which may develop and therefore, the ability of any investor to market his
Shares may be dependent directly upon the number of shares that are offered and
sold. Affiliates of the Company may sell Shares during a favorable movement in
the market price of the Shares which may have a depressive effect on its price
per share. See 'Description of Securities.'
LACK OF PRIOR MARKET FOR SECURITIES OF THE COMPANY
No prior market has existed for the Securities offered hereby and no
assurance can be given that one will develop subsequent to this offering. The
Company has applied for inclusion of the Shares and Warrants on the Nasdaq
SmallCap Market, although there can be no assurance that an active trading
market will develop, even it the Shares and Warrants are accepted for quotation.
Additionally, if these Company Securities are accepted for quotation and active
trading develops, the Company is required to maintain certain minimum criteria
established by Nasdaq, the continued fulfillment of which by the Company cannot
be assured. The Company has been advised that the Units, Shares and Warrants
will be listed on the Nasdaq SmallCap Market upon the Effective Date of this
offering. The Underwriter may make a market in the Securities upon the closing
of this offering, but there is no assurance that it will be successful in its
efforts. The loss or failure of market makers for the Securities will have a
material adverse effect on the market for the Securities. See 'Description of
Securities.'
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WARRANTS SUBJECT TO REDEMPTION
The Class A Warrants shall be exercisable for a period of four (4) years
commencing one year after the Effective Date. Each Warrant entitles the holder
to purchase one Share at $5.50 per Share during the four year period commencing
one year from the Effective Date hereof. The Warrants are redeemable by the
Company for $.01 per Warrant, commencing one year from the Effective Date, if
the average closing price or bid price of the Shares, as reported by the
principal exchange on which the Shares are quoted, equals or exceeds $8.75 per
share, for any twenty (20) consecutive trading days ending within five (5) days
of the notice of redemption. In the event that the Warrants are called for
redemption, the Warrant holders may not be able to exercise their Warrants if
the Company has not updated this Prospectus in accordance with the requirements
of the Securities Act or these securities have not been qualified for sale under
the laws of the state where the warrant holder resides. See 'Requirements of
Current Prospectus and Potential Restrictions on Exercise of the Warrants'. In
addition, in the event that the Warrants have been called for redemption, such
call for redemption could force the warrant holder to either (i) assuming the
necessary updating to the prospectus and state blue sky qualifications have been
effected, exercise the Warrants and pay the exercise price at a time when, in
the event of a decrease in market price from the period preceding the issuance
of the call for redemption, it may be less than advantageous economically to do
so, or (ii) accept the redemption price, which, in the event of an increase in
the price of the Shares, could be substantially less than the market value
thereof at the time of redemption. See 'Certain Transactions,' 'Description of
Securities,' 'Selling Shareholders' and 'Underwriting.'
UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE CONSEQUENCES
A significant number of Securities may be sold, in the ordinary course of
business, to customers of the Underwriter. Such customers subsequently may
engage in transactions for the sale or purchase of such Securities through or
with the Underwriter. Although it has no legal obligation to do so, the
Underwriter from time to time in the future may make a market in and otherwise
effect transactions in the Company's Securities. To the extent the Underwriter
acts as market maker in the Securities, it may be a dominating influence in that
market. The price and liquidity of such Securities may be affected by the
degree, if any, of the Underwriter's participation in the market, inasmuch as a
significant amount of such securities may be sold to customers of the
Underwriter. Such customers subsequently may engage in transactions for the sale
or purchase of such securities through or with the Underwriter. Such market
making activities, if commenced, may be discontinued at any time or from time to
time by the Underwriter without obligation or prior notice. If a dominating
influence at such time, the Underwriter's discontinuance may adversely affect
the price and liquidity of the securities.
Further, unless granted an exemption by the Commission to its Rule 10b-6,
the Underwriter and any soliciting broker-dealers may be prohibited from
engaging in any market making activities with regard to the Securities for the
period from two or nine business days prior to any solicitation of the exercise
of Warrants until the later of the termination of such solicitation activity or
the termination, by waiver or otherwise, of any right that the Underwriter may
have to receive a fee for the exercise of Warrants following such solicitation.
As a result, the Underwriter and soliciting broker-dealers may be unable to
continue to provide a market for the Securities under certain periods while the
Warrants are exercisable which may adversely affect the price and liquidity of
the securities.
EXERCISE OF WARRANTS MAY HAVE DILUTIVE EFFECT ON MARKET
The Class A Warrants to be issued in connection with this offering will
provide, during their term, an opportunity for the holder to profit from a rise
in the market price, of which there is no assurance, with resulting dilution in
the ownership interest in the Company held by the then present shareholders.
Holders of the Warrants most likely would exercise the Warrants and purchase the
underlying Shares at a time when the Company may be able to obtain capital by a
new offering of securities on terms more favorable than those provided by such
Warrants, in which event the terms on which the Company may be able to obtain
additional capital would be affected adversely. See 'Underwriting.'
16
<PAGE>
'PENNY STOCK' REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF
SECURITIES
The Commission has adopted regulations which generally define 'penny stock'
to be any equity security that has a market price (as defined) of less than
$5.00 per share or an exercise price of less than $5.00 per share subject to
certain exceptions. In the event of authorization of the Shares offered hereby
for quotation on the Nasdaq SmallCap Market, such securities will initially be
exempt from the definition of 'penny stock.' If the Securities offered hereby
are removed from listing on Nasdaq at any time following the Effective Date, the
Securities may become subject to rules that impose additional sales practice
requirements on broker-dealers who sell such Securities to persons other than
established customers and accredited investors (generally, those persons with
assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with their spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
the Securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the rules require the delivery, prior to the
transaction, of a risk disclosure document mandated by the Commission relating
to the penny stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Consequently, the 'penny
stock' rules may restrict the ability of broker-dealers to sell the Securities
and may affect the ability of purchasers in this offering to sell the Securities
in the secondary market.
In the event that the Company were not able to qualify the Securities for
listing on the Nasdaq SmallCap Market, the Company would attempt to have the
Securities traded in the over-the-counter market via the Electronic Bulletin
Board or the 'pink sheets.' In such event, holders of the Securities may
encounter substantially greater difficulty in disposing of their securities
and/or in obtaining accurate quotations as to the prices of the Securities.
BENEFITS OF OFFERING TO UNDERWRITER
The Underwriter will receive substantial benefits from the Company in
connection with this offering. These benefits include underwriting
discounts/commissions, a non-accountable expense allowance and an Underwriter's
Purchase Option. In addition, the Underwriter has been granted certain rights
under the Unit Purchase Option, which rights include the ability to require the
Company to include the Underwriter's securities in a registration statement
under the Securities Act. The exercise of these rights will result in the
Company incurring substantial expenses and may cause the Company to register an
offering of its securities at a time which is detrimental to the Company's
plans. See 'Underwriting.'
S CORPORATION DISTRIBUTION
Hergo has elected to be treated for federal income tax purposes as an S
Corporation. As a result of Hergo's status as an S Corporation, Hergo's current
shareholders, rather than Hergo, have been taxed directly on the Hergo earnings
for federal and certain state income tax purposes, whether or not such earnings
were distributed. Shortly before the closing of this Offering, Hergo will
terminate its status as an S Corporation and will thereafter be subject to
federal and state income taxes at applicable C Corporation rates.
Prior to the termination of its S Corporation status, Hergo intends to
declare a distribution (the 'S Corporation Distribution') to Eli and Marilyn
Hertz, its current shareholders. The distribution (estimated at $225,000 as of
May 31, 1996), represents substantially all of Hergo's remaining undistributed S
Corporation earnings. The actual amount of the S Corporation Distribution will
be adjusted to include the taxable income of the Company for the period from
June 1, 1996 through the day immediately preceding the date on which S
Corporation status is terminated, less any New York City income tax payable by
the Company with respect to such income and any distributions made to the
current shareholders during that time period.
17
<PAGE>
USE OF PROCEEDS
After deducting underwriting discounts of $605,000 and other expenses of
the offering estimated to be $576,500 (which includes the Underwriter's
nonaccountable expense allowance), assuming an offering price of $5.50 per Unit,
the Company will receive net proceeds from the offering of approximately
$4,868,500, which does not include the exercise of the Underwriter's
Over-Allotment Option. These proceeds, excluding the exercise of any of the
Warrants, will be utilized by the Company substantially for the following:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT
OF NET PROCEEDS %
------------------ ------
<S> <C> <C>
Debt Retirement(1)...................................................... $1,289,000 26.5%
S Corporation distribution(2)........................................... 225,000 4.6%
Hertz Computer Marketing Program(3)..................................... 600,000 12.3%
Hergo Machinery(4)...................................................... 300,000 6.2%
Hergo New Product Development(5)........................................ 400,000 8.2%
Hertz Computer--Equipment to Provide Internet Services and other
communications(6)..................................................... 300,000 6.2%
Hertz Computer--Update Computer system.................................. 250,000 5.1%
Hergo Marketing(7)...................................................... 400,000 8.2%
Hertz up-grade of new facility and production line...................... 295,000 6.1%
Working Capital......................................................... 809,500 16.6%
</TABLE>
- ------------------
(1) Represents payment of $189,000 as of September 30, 1996 for advances and
loans to the Company by Mr. and Mrs. Hertz payable on demand carrying an
interest of 1% over prime, and $895,000 representing the balance as of
September 30, 1996 for loans from the United Mizrachi Bank (the 'Bank')
under a line of credit terminating on June 30, 1997, which loans bear
interest at Premium plus 1% and $205,000 for short-term loans from the Bank,
maturing on March 9, 1997 with interest at Libor plus 1%.
(2) See S Corporation Distribution.
(3) Includes hiring a national sales director, sales persons and sales
representatives and implementation of a national promotional campaign,
including focused marketing directed at sales to the General Service
Administration and to the OEM market.
(4) Modernizing and adding equipment in order to give Hergo greater production
capacity and flexibility.
(5) Estimated cost of developing new products, including Hergolite line for use
by small businesses and home users.
(6) Includes installing of high speed telecommunication lines.
(7) Hiring and training sale representatives and increasing promotion and
advertising levels.
Although it is uncertain that the price of Shares will rise to a level at
which the Warrants would be exercised, in the event subscribers in this offering
elect to exercise all of the Warrants included in the Units in this Offering,
the Company will realize gross proceeds of approximately $12,100,000. Management
anticipates that the proceeds from the exercise of the Warrants would be
contributed to working capital of the Company. Nonetheless, the Company may at
the time of exercise allocate a portion of the proceeds to any other corporate
purpose. Accordingly, investors who exercise their Warrants will entrust their
funds to management, whose specific intentions regarding the use of such funds
are not presently and specifically known.
The amounts set forth in the use of proceeds merely indicate the proposed
use of proceeds, and actual expenditures may vary substantially from these
estimates depending on market conditions, on the fiscal health of the Company,
the success, if any, for the Company's proposed business expansion, activities
and the availability of other financing arrangements, such as lines of credit
and loans. The Company is unable to predict whether the proceeds of this
Offering will be sufficient to accomplish all of the objectives sought to be
achieved as set forth above. The Company believes, however, that it should have
sufficient capital to pursue its objectives as outlined above for the next
twenty-four (24) months. Accordingly, at some future period, the Company may
need to seek additional funds through loans of other financing arrangements. No
such arrangement exists or are currently contemplated and there can be no
assurance that they may be obtained in the future should the need arise.
18
<PAGE>
DILUTION
As of May 31, 1996, the Company had a net tangible book value of $862,327
or $.45 per share (assuming that the Company had 1,900,000 Shares outstanding as
of that date ), derived from the Company's consolidated balance sheet as of that
date. Net tangible book value per Share means the tangible assets of the Company
less all liabilities, divided by the number of Shares outstanding. After giving
effect to the sale of the Shares included in the Units offered hereby at a price
of $5.00 per Share, after deducting underwriting discounts and estimated
offering expenses, net tangible book value as adjusted would be $5,730,827 or
$1.91 per share. The result will be an immediate increase in net tangible book
value per share of $1.46 to existing shareholders and an immediate dilution to
new investors of $3.09 (62%) per share. 'Dilution' is determined by subtracting
net tangible book value per share after the offering from the offering price to
investors. The following table illustrates this dilution.
<TABLE>
<S> <C> <C>
Assumed value of Shares included in Units offered hereby............................... $5.00
Net tangible book value per Share, before the offering............................... $ .45
Increase per share attributable to the sale by the Company of the Shares offered
hereby............................................................................ 1.46
-----
Pro forma net tangible book value per Share, after the offering........................ 1.91
-----
Dilution per Share to new investors.................................................... $3.09
-----
-----
</TABLE>
The above table assumes no exercise of the Warrants, the Underwriter's
Over-Allotment or the Underwriter's Purchase Option. If the Underwriter's
Over-Allotment Option is exercised in full, dilution to the public stockholder
will be $2.94 per share. See 'Description of Securities' and 'Selling
Shareholders.'
The following table summarizes the investments of all existing shareholders
and new investors after giving effect to the sales of the Securities offered
hereby assuming no exercise of the Underwriter's Over-Allotment Option:
<TABLE>
<CAPTION>
PERCENTAGE AGGREGATE PERCENTAGE AVERAGE
SHARES OF TOTAL CONSIDERATION OF TOTAL PRICE PER
PURCHASED SHARES PAID INVESTED SHARE
--------- ---------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders................... 1,900,000 63.3% $ 903,911 14.1% $ .48
Public Shareholders..................... 1,100,000 36.7% 5,500,000 85.9% 5.00
--------- ----- ------------- -----
Total.............................. 3,000,000 100% $ 6,403,911 100% $2.13
--------- ----- ------------- ----- ---------
--------- ----- ------------- ----- ---------
</TABLE>
If the Underwriter's Over-Allotment Option is exercised in full, the new
investors will have paid $6,325,000 as the assumed value of the Shares included
in the Units and will hold 1,265,000 Shares, representing 87.5 percent of the
total consideration and 40 percent of the total number of outstanding Shares.
See 'Description of Securities' and 'Underwriting.'
19
<PAGE>
CAPITALIZATION
The following tables sets forth the capitalization of the Company (i) as of
May 31, 1996, and (ii) as adjusted to reflect the sale of the Securities offered
hereby. The table should be read in conjunction with the Financial Statements,
the notes thereto and the pro forma financial information included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MAY 31, 1996
----------------------------
AS
ACTUAL ADJUSTED(1)(2)
---------- --------------
<S> <C> <C>
Short-term debt(3)................................................................... $1,673,519 $ 5,388
Long-term capital lease obligation................................................... 19,309 19,309
---------- --------------
Stockholders' Equity:
Common stock, $.001 par value; 25,000,000 authorized, issued and outstanding,
1,900,000 shares outstanding, as adjusted....................................... 1,900 3,000
Additional paid-in capital......................................................... 124,100 4,991,500
Retained earnings.................................................................. 777,911 777,911
---------- --------------
Total stockholders' equity...................................................... 903,911 5,772,411
---------- --------------
Total capitalization............................................................ $2,596,739 $5,797,108
---------- --------------
---------- --------------
</TABLE>
- ------------------
(1) Adjusted to reflect (i) the sale of 1,100,000 Units, each Unit consisting of
one Share and two Warrants by the Company and the net proceeds therefrom and
the uses thereof (assuming an initial public offering price of $5.50 per
Unit and after deducting the underwriting discounts and commissions and
expenses of this offering estimated at $1,181,500 and (ii) the repayment of
certain indebtedness from the use of proceeds. Does not include the proceeds
from the sale of shares pursuant to the exercise of any Warrants or the
exercise of the Underwriter's Purchase Option. See 'Underwriting.'
(2) Assumes no exercise of (i) the Warrants; (ii) the Underwriter's
Over-Allotment Option to purchase up to 165,000 Units; and (iii) the
Underwriter's option to purchase up to 110,000 Units. See 'Description of
Securities' and 'Underwriting.'
(3) Short term debt consists of:
<TABLE>
<S> <C>
Current N/P to banks to pay......................................................................... $1,117,093
Current Maturities of long-term capital
Lease obligation.................................................................................. 5,388
Dividend Payable.................................................................................... 224,567
Loans to shareholder................................................................................ 326,471
----------
Total short term debt............................................................................. $1,673,519
----------
----------
</TABLE>
DIVIDEND POLICY
Holders of the Company's Shares are entitled to cash dividends when, as and
if declared by the Board of Directors out of funds legally available therefor.
The Company does not anticipate the declaration or payments of any dividends in
the foreseeable future. The Company intends to retain earnings, if any, to
finance the developments and expansion of its business. Future dividend policy
will be subject to the discretion of the Board of Directors and will be
contingent upon future earnings, if any, the Company's financial condition,
capital requirements, general business conditions and other factors. Therefore,
there can be no assurance that cash dividends of any kind will ever be paid.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
The Company custom designs and assembles PC's and related products and
provides technological services and support under the 'Hertz' name through its
Hertz Computer subsidiary. It also designs, manufactures and sells ergonomically
engineered modular mounting support structures and technical furniture for micro
computers and electronic devices under the 'Hergo' name through its Hergo
subsidiary. Computer sales figures, as used herein and elsewhere in this
prospectus, include related services, such as systems architecture designs,
consulting, installation, personnel training and customer support, most of which
services are not separately charged to customers. The proceeds of those charges,
which are separately billed, are not material.
NINE MONTHS ENDED MAY 31, 1996 COMPARED TO NINE MONTHS ENDED MAY 31, 1995
Revenues. Company sales for the nine months ended May 31, 1996, were $9.38
million, compared to $8.22 million for the period ended May 31, 1995, an
increase of 14%. Hertz Computer sales increased from $6.81 million to $7.55
million, an 11% increase over the same period. Increased sales of computers to
OEMs and governmental agencies accounted for the majority of the increase. Hergo
sales increased from $1.41 million to $1.83 million, a 30% increase over the
same period. This increase was due primarily to increased advertising in trade
publications, and an increasing rate of repeat orders by existing clients.
Gross Profit. Gross profit of the Company for the nine months ended May
31, 1996, represented 30% of sales compared to 26% for the nine months ended May
31, 1995. The gross profit percentage for Hertz Computer in the period ending on
May 31, 1996 reflected a 5% increase over the same period last year, primarily
due to a larger share of sales to the OEM and Government markets. Additionally,
gross profit improved for the period due to cost reductions in memory and other
components, some of which benefits were not immediately passed on to customers.
The Hergo subsidiary, with its 56% gross profit margin accounted for $1.02
million in gross profit. This compares favorably with the gross profit amount
for the nine months ended May 31, 1995 of $0.81 million. The increase of
$210,000 in gross profit is primarily the result of an increase in the volume of
sales.
Selling, General and Administrative. For the nine months ended May 31,
1996, selling, general and administrative expenses, of the Company were $2.07
million as compared to $1.94 million for the nine months ended May 31, 1995
representing a favorable decrease as a percentage of sales from 24% to 22% of
sales.
For the period ending May 31, 1996 Hergo trade show and advertising
expenses decreased by approximately $81,000. A consulting agreement with a
former Hergo minority shareholder expired which resulted in savings of $63,000
for the nine months ending May 31, 1996. In September 1995 the Company purchased
a minority interest held by the former manager of its Hertz Israel subsidiary
and simultaneously entered into a consulting agreement with him. Such services
increased consulting fees by approximately $20,000 in the current period. In
addition, the termination of Israeli duties relating to computer purchases from
the Far East eliminated a competitive advantage that American exporters making
direct sales to Israeli purchasers enjoyed, and to accommodate its customers,
Hertz Israel was required to take deliver of computer purchases by Israeli
customers for redelivery to such customers. This circuitous routing resulted in
increased shipping costs and other costs associated with maintaining an
inventory in Israel. In addition, increased competition from Israeli suppliers
resulted in the reduction of the Company's gross margins with respect to sales
to Israeli customers. See 'Risk Factors--1996 Loss in Israeli Subsidiary;
Changes in Import Duties.'
Other professional fees increased by $20,000 in the current period, the
majority of which were expensed for additional accounting services for Hergo.
During the nine month period ending May 31,1996 sales salaries and commissions
increased by $91,000 as a result of new sales and marketing initiatives.
Salaries of the two principal officers increased by $48,000 in the current
period. In order to accommodate additional revenue growth, salaries and general
expense increased by about $95,000 in the current period.
21
<PAGE>
Interest Expense. The net interest expense for the nine month period ended
May 31, 1996 was $148,113 as compared to $96,650 for the nine month period ended
May 31,1995, an increase of $51,463, of which about $30,000 was attributable to
finance additional levels of inventories and working capital and about $21,000
was primarily due to a fluctuations in the exchange rate between the U.S. and
Israeli currencies (shekel) for that period. This fluctuation rate was
negligible in the comparable nine month period ended May 31, 1995 as currency
exchange rates were relatively stable during that period.
Provision for Income Taxes. Through May 31, 1996 Hergo was classified as a
subchapter 'S' corporation and incurred no federal corporate taxes. As a result,
net income of $387,512 includes a tax provision calculated at a blended tax rate
of Hergo and Hertz Computer of 10% and 46%, respectively. Had Hergo been a 'C'
corporation during this period, the tax provision would have been $366,233 as
compared to the actual tax expense of $244,500 for the nine months ended May 31,
1996.
Net Income. Net Income for the nine months ended May 31, 1996 was $387,512
as compared to $64,005 for the nine months ended May 31, 1995. This increase was
mainly due to improved cost controls and the overall increase in sales and gross
margins.
FISCAL YEAR ENDED AUGUST 31, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1994
REVENUES
Sales of the Company for the year ended August 31, 1995, were $11.22
million, compared to $10.93 million for the year ended August 31, 1994, an
increase of 3%. Although Hertz Computer sales to other corporate customers grew
by approximately $1.73 million, the completion in fiscal 1994 of a nationwide
corporate project for a particular customer caused the overall decrease in
revenues in the current period. Revenues, attributable to this project, were
reduced by a net of $2.40 million when comparing fiscal 1995 revenue to fiscal
1994 revenue. Offsetting the current period reduction in Hertz revenues of
approximately $670,000 were increased sales from Hergo of $960,000 in the
current period (from $1.27 million during fiscal 1994 to $2.23 million in fiscal
1995, a 76% increase). The sales increases are mainly attributable to new
marketing and sales programs.
Gross Profit. Gross profit for fiscal 1995 represented 28% of sales as
compared to 23% of sales for fiscal 1994. The primary reason for this is the
increased contribution Hergo has made as a percentage of total sales in fiscal
1995. The higher profit margin of Hergo sales allowed consolidated Company
margins to rise faster than consolidated Company sales.
Selling, General and Administrative. For the fiscal year ended, August 31,
1995, selling, general and administrative expenses were $2.87 million (26% of
sales ) as compared to $2.29 million (21% of sales) for fiscal year ended August
31, 1994, an increase of $580,000.
Legal fees increased $123,000, most of which are primarily attributable to
a Hergo litigation ($112,000). See 'Legal Proceedings.' Consulting fees
increased by $63,000 in the current period due to a consulting services
agreement with a former Hergo minority shareholder which commenced on August 26,
1994, which costs were offset in part by the eliminations of the minority
shareholder's annual salary of $50,000 as an employee. Other professional fees
increased by $50,000 in the current period primarily as a result of increased
computer programming fees for modifications of existing computer systems. Hertz
Computer and Hergo implemented new sales and marketing programs which were the
main reason for increased trade show expenses of $58,000, advertising expenses
of $36,000, telephone expenses of $45,000, and sales and marketing salaries and
associated expenses of $245,000. The establishment of a larger administrative
department to control the increased activities resulted in administrative
salaries and associated expenses to increase by $92,000 in the period ended
August 31, 1995. Other increases of $90,000, in the 1995 period , were due to
increased travel expenses and repair and maintenance expenses related mainly to
moves to new locations made by Hertz Israel and Hergo. In response to the
necessity of putting all the above programs in place, the shareholders reduced
their compensation in the period ended August 31, 1995 by approximately
$175,000.
Interest Expense. Net interest expense for the year ended August 31, 1995
was $131,484 as compared to $58,340 for the year ended August 31, 1994. Interest
to finance the increases in inventory and accounts receivable levels was the
primary reason for the increase in net interest expense of $73,144.
22
<PAGE>
Provision for Income Taxes. Through August 31, 1995 Hergo has been
classified as a subchapter 'S' corporation, and as such, incurred no federal
corporate taxes. As a result, net income of $54,113 includes a tax provision
calculated at a blended tax rate of Hergo and Hertz Computer of 10% and 46%,
respectively. Had Hergo been a 'C' corporation during this period, the tax
provision would have been $73,602, as compared to the actual tax expense of
$77,615 for the fiscal year ended August 31, 1995 as the Company would have been
able to offset the taxable losses incurred by Hergo during this period.
Net Income. Net Income for the year ended August 31, 1995 was $54,113 as
compared to $174,895 for the year ended August 31, 1994. Improved margins
generated through better customer and product mix sufficiently allowed for
expenses necessary for potential future growth.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE NINE MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995
The Company has available a total of $1,000,000 pursuant to a Revolving
Line of Credit secured by substantially all the personal property of the Company
and personally guaranteed by the principal shareholders. The borrowings bear
interest at the prime rate plus 1% (effective rate at May 31, 1996 was 9.25% as
compared to a rate at May 31, 1995 of 10%). As of May 31, 1996, the outstanding
balance under this agreement was $895,000 which remained unchanged from May 31,
1995.
In February 1996, the Company entered into a line of credit agreement with
the Bank through Hertz Israel for $300,000 with an interest rate at the six
month Libor Rate plus 1.25% (6.91% at May 31, 1996) which is effective through
March 9, 1997. As of May 31, 1996, the outstanding line of credit balance was
$211,375 which consists of two short term notes ($205,240 in total). These loans
were originally due on September 9, 1996, but were extended six months and are
presently due on March 9, 1997. The interest rate for the extension period is
the six month libor rate plus 1.0%. In addition, an overdraft of $6,135 is
outstanding at May 31, 1996.
For the nine months ended May 31, 1996, the Company generated positive cash
flow from operating activities of $336,419 as compared to a negative cash flow
of $409,185 for the previous nine month period. The primary reason for this
difference is due to the increase in sales and net income for the period ended
as of May 31, 1996 as compared to the period ended as of May 31, 1995, and the
improvement of collections of accounts receivable. The Company generated a
negative cash flow of $91,482 from financing activities for the nine months
ended May 31, 1996 as compared to a positive cash flow from financing activities
of $433,610 for the previous nine month period. The primary reason for the
negative financing activities is due to a repayment of a note payable to a
shareholder for $195,127 as compared to proceeds received from a shareholder of
$200,689 from the previous nine month period. In addition, the increase in net
bank borrowings for the nine months ended May 31, 1996 was $103,645 as compared
to $224,019 for the previous nine month period.
Net purchases of fixed assets in the nine months ended May 31, 1996 were
$82,623 as compared to $38,396 for the previous nine month period.
The Company currently anticipates that the gross proceeds from the sale of
the Units will generate $6,050,000 (or $6,957,500 if the Underwriter's
Overallotment Option is exercised in full) before commissions and offering
expenses of $1,181,500. The Company expects to utilize these proceeds to pay the
outstanding balance of notes payable to the current shareholders and the
revolving line of credit with the Bank. The Company further intends to make a
subchapter S Distribution of $224,567 to the current shareholders of Hergo. See
'Risk Factors--Litigation Involving Underwriter May Affect Securities.'
FOR THE FISCAL YEARS ENDED AUGUST 31, 1995 AND 1994
As of August 31, 1995, the Company had available a total of $1,000,000
($800,000 as of August 31, 1994) pursuant to a Revolving Line of Credit secured
by substantially all the personal property of the Company and is personally
guaranteed by the principal shareholders. The borrowings bear interest at the
prime rate plus 1% (effective rate at August 31, 1995 was 9.75% as compared to a
rate at August 31, 1994 of 7.7%). As of
23
<PAGE>
August 31, 1995, the outstanding balance under this agreement was $895,000 as
compared to $700,000 at August 31, 1994.
For the fiscal year ended August 31, 1995, the Company generated a negative
cash flow from operating activities of $394,587 as compared to a positive cash
flow of $22,721 for the fiscal year ended August 31, 1994. The negative
operating cash flow was due primarily to an increase in accounts receivable of
approximately $298,000 and ending inventory of $140,000 at year end. Inventory
levels rose as a primary result of two factors: (i) increased inventory levels
for Hergo to meet demands of rising sales; (ii) increased inventory levels for
Hertz-Israel due to the shift by certain customers to purchase goods directly
from Hertz-Israel as opposed to directly purchasing goods from Hertz Computer.
This shift was primarily attributable to a change in the import tax laws in
Israel effectuated in 1995. The increase in accounts receivable is mainly a
result of the increased sales of Hertz-Israel, which was due to a change in the
import tax laws, as discussed above. As the length of time to process sales
orders to customers increased, since Hertz Computer was no longer drop shipping
goods to the Israeli customers, the Hertz-Israel accounts receivable balances
increased by approximately $263,000.
Net purchases of fixed assets in the fiscal years ended August 31, 1995 and
1994 were $46,888 and $96,591, respectively.
The Company generated a positive cash flow from financing activities of
$489,119 as compared to a positive cash flow of $35,917 for the fiscal years
ended August 31, 1995 and August 31, 1994, respectively. The primary reasons for
this increase was the increased borrowing base generated from the Revolving Line
Of Credit and a shareholder loan of $176,083 in the 1995 fiscal year with an
interest rate of 10% due September 1, 1997.
24
<PAGE>
BUSINESS
The Company custom designs, assembles and sells PCs and related technology
and provides services under the 'Hertz' name. It also designs, manufactures and
sells ergonomically engineered modular mounting and support structures ('Modular
Racking Systems') for PCs and related peripherals under the 'Hergo' name.
PRODUCTS AND SERVICE
Hertz Customized Computers and Related Services. The Company designs and
sells customized PCs and provides a broad range of related services, including
system architecture design, consulting, installation, personnel training and
customer support. PCs are assembled in a number of different configurations
using standard component parts. Customization enables the Company to accommodate
customer computer needs with respect to storage capacity, speed, price,
applications, size, configuration and a range of other considerations that can
be accommodated in whole or in part by the selection of appropriate components.
Hertz PCs are currently being used to operate MRI machines, to provide voice
mail services, for use in military radar systems and for use in shopping center
kiosks to enable prospective purchasers of music discs and tapes to select and
hear their musical selections prior to purchase.
Most of the PCs sold by the Company are for use in a network configuration.
The Company, as an additional service, will configure the network for the
customer for which it will charge an additional hourly fee. The Company also
provides its customers with continuing support and assistance in the maintenance
and operation of Company purchased products.
Hergo Modular Racking Systems. The Company's Hergo division designs and
manufactures and sells Modular Racking Systems which serve to conserve space and
help organize and facilitate the accessibility of all types of computer
hardware, communication and electronic devices and other peripherals. Hergo
systems are suitable for use in any size computer room or technical environment.
The market for these Modular Racking Systems was created in large part by the
replacement of mainframe computers by multiple PCs. The Company was one of the
first companies to provide a cohesive, functional and architecturally attractive
racking system that vertically mounts and supports multiple computers, servers
and related peripherals, such as printers, monitors, scanners and modems, used
in tandem with each other, or in juxtaposition with each other and
interconnected for networking functions.
The Company has designed basic modular components in a variety of colors
that in combination can be used to create limitless mounting and support
structures. The components, made of a heavy-duty steel, are interchangeable so
as to permit the user to easily add new equipment or reconfigure existing
setups. The Modular Racking Systems are suitable for a variety of applications
including multiple LAN file servers and communication control centers, on
trading floors, in testing laboratories, in training rooms, in multimedia, video
and broadcast production centers and in manufacturing areas as well as for
personal workstations.
The basic charge by the Company for its Modular Racking Systems does not
include shipment or installation. The Company will ship the completed unit by
common carrier at the customer's expense, or if the customers wishes the Company
to install the unit, the Company will deliver the unit in a Company owned van
and arrange for its installation at the customer's premises. The charge for
theses additional services are usually determined on a percentage of the
purchase price charged for the basic unit.
NEW PRODUCTS AND SERVICES
'Hergolite'. The Company has recently begun development of a new line of
Modular Racking Systems, specially designed for the smaller business or the home
office user. These systems are lighter and smaller than those prepared for the
larger commercial company market. It is expected that this new line will be
called 'Hergolite.' Approximately $400,000 of the net proceeds of this Offering
has been allocated for use in the test marketing and promotion of the Hergolite
line and changes in the current line.
Internet Services. A number of the Company's commercial customers have
indicated an interest in establishing a presence on the World Wide Web. The
Company sees in this interest, an opportunity to provide
25
<PAGE>
Internet solutions to these customers in addition to serving their computer
hardware and/or computer racking needs. Beginning sometime toward the end of the
year, the Company plans to establish a new division to begin offering its
corporate customers a menu of Internet services, including Internet Access, Web
site design and consulting, and Web hosting services.
The Company currently has a high speed dedicated connection through a T1 to
the Internet from its corporate offices in New York. By building and installing
additional server equipment at its facilities, the Company believes it can
effectively sublease its Internet connection to its corporate customers in the
New York metropolitan area and corporate clients would be able to access the
Internet by dialing into the Company's facility. Web design involves the
transformation of the traditional paper brochure into a digitized format. The
Company has one Web designer in-house and intends to hire at least one more
designer. The Web designer is a graphic designer with programming skills in Web
protocol (hyper text markup language). The Company will offer assistance to its
customers in their planning and designing of home pages. Finally, the Company
will offer its clients the ability to publish their Web sites within their own
facilities or from the Company's computer facilities. Currently, the Company has
started to market a line of Web servers. For smaller companies, that are not
interested in the higher expense associated with publishing Web sites from their
own facilities, the Company can effectively rent server space from its
facilities to publish its clients Web sites.
STRATEGIC GROWTH PLAN
The Company's strategic growth plan consists of strengthening both of its
business lines by updating their respective physical facilities and equipment
and then intensifying their respective marketing efforts. With respect to the PC
business, the Company intends to develop a national sales force, increase its
efforts to market Hertz PCs with the Federal Government and expand its OEM
business. For the Hergo line, the Company plans on bringing to market new and
improved products including 'Hergolite' and on strengthening its relationships
with its already large company customer base. The Company also plans on actively
pursuing a cross marketing program between its Hertz Computer and its Hergo
Divisions with special emphasis on marketing the Company as a PC supplier to
Hergo Customers. Finally, the Company plans on establishing a new division to
offer a variety of Internet services to its corporate clients.
MANUFACTURE AND ASSEMBLY
Computers are manufactured at the Company's manufacturing facilities in New
York City, which has a capacity to produce between 30 and 35 computers a day.
The Company expects to move its New York facility to its new location on Varick
Street in November 1996, where the computer capacity per day should increase to
96. The Modular Racking Systems are manufactured at the Company's Woodside,
Queens facility. This facility has the capacity (with its existing space, not
including machinery) to double its current production rate.
The Company gives limited warranty coverage for its computers and Modular
Racking Systems for varying time periods depending on several factors including
the component parts affected, during which period the Company will repair or
replace defective products or parts at no cost to the customer. Where product
failure is the result of a defect in a component part, the Company is often
covered through warranty agreements with its vendors. The net cost to the
Company for its warranty service has not been significant to date.
SUPPLIERS
The Company stocks most of the component parts used both in the manufacture
of its computers and in the manufacture of its Modular Racking Systems. The cost
of some components used in the computers, such as central processing units
('CPU's') and memory, can fluctuate from week to week or from one day to the
next, and for this reason, the Company tries not to stock these items for use
over a long period of time. It generally seeks to purchase these price sensitive
items within about two weeks advance of use. To date, the Company has not
experienced any difficulty in receiving the needed items on short notice. Most
of the component parts purchased by the Company in connection with the computers
are obtained from a number of different sources. The Company believes that it is
not dependent on any single source, as alternative sources are available. Most
of the heavy duty steel components used in the Modular Racking Systems are made
by Hergo. The Company
26
<PAGE>
acquires its raw materials for these components from a number of different
companies and believes that adequate alternative raw material sources are
available if required.
MARKETING AND SALES
The customized computer and related services. Sales to commercial
customers are generally made by unsolicited telephone calls initiated by
prospective customers. Salespersons at the Company are trained to work with the
caller and elicit his company's computer needs and work out the specifications
of a computer which best satisfies its needs. In cases where a large potential
sale is involved or where a sale is regarded as a significant entree into a new
market or in other special situations, senior management may take an active role
in sales negotiations which may also involve a visit or visits to the customer's
premises. Government sales are made through competitive bidding in response to
published specifications, invitations to bid or requests for proposals. The
Company is an approved provider to the New York State Office of General Services
('OGS') and to the Federal Government's General Services Administration ('GSA').
Approximately 36% of the Company's total sales for its 1995 fiscal year
(41% of total sales for the nine month period ended on May 31, 1996) were to
Governmental Entities. The Company has been approved by OGS as an approved
provider to New York State governmental purchasing units and by GSA, which
monitors all U.S. government procurement of computers and equipment. While the
Company has concentrated its computer selling on state and some federal
agencies, it has not made any significant sales to the Federal Government,
though it has been accredited by it as an approved provider. The Company
believes this is an area that should be exploited and intends to allocate a
portion of the net proceeds to be received in this offering to support the
dedication of at least one person, whether he be newly hired or a current
employee, to the cultivation and development of the Federal Government market.
While the Company intends to expand its position in the governmental market, it
believes that such markets are generally more sensitive to budgetary
constraints. The Company has been focusing its sales efforts on the commercial
market and particularly on the OEM market where the gross margins are generally
higher.
The OEM market, broadly defined, includes any business where the final
product incorporates parts, assemblies or full products of a third party
manufacturer. For example, most of today's elevator controls, MRI machines and
voice mail phone systems all use PCs as integral components in their final
products. Many OEM's depend on PCs to operate their computer driven products.
Failure of their PCs would render their own products non-functional.
Consequently OEM's place a higher premium for quality and reliability in their
computers and for such computers, they are generally prepared to pay more.
For the year ended August 31, 1995, no single customer accounted for as
much as 10% of total sales. Sales of computers to Israel for the 1995 fiscal
year were approximately $1,900,000 or 17% of the Company's total sales for such
year. For the nine month period ending on May 31, 1996, sales of computers to
Governmental Entities accounted for 41% of total Company sales (as compared to
36% for the 1995 fiscal year) including sales to the New York Department of
Social Services which alone accounted for 18% of total sales.
The Company has exhibited its computers at trade shows and has, from time
to time, circulated brochures and articles containing excerpts from favorable
trade press reviews of one or more of its computers. Much of its computer
business is repeat business, and the source of new customers has been largely by
word of mouth and responses from favorable media product reviews. The Company's
small sales staff is primarily occupied with taking and filling orders by
telephone. The Company is now committed to developing a sale force that will
seek out new business and has allocated a portion of the net proceeds to be
received in this Offering for this purpose.
Hergo Modular Racking Systems. The Company constructed and sold Hergo
Modular Racking Systems to approximately 450 customers in 1995. These customers
included 15 to 20 of the largest and best known corporations in America.
Companies of the size and stature of Citibank, N.A., AT&T, Dow Jones, Bell
Atlantic, Pfizer, Hewlett Packard, the New York Times and Time Warner, all
purchased Hergo Structural Support Units in 1995. Sales are generated in large
part through advertising. The Company also deals with resellers who act as
intermediaries for the end user.
27
<PAGE>
The Company has an advertising budget for its Hergo Modular Racking
Systems. For the 12 month period ended August 31, 1995, the Company spent
approximately $167,000 on advertising the 'Hergo' product line, primarily in
trade publications and in the preparation and circulation of brochures. The
Company currently maintains a staff of five Hergo sales people who are paid on a
base salary plus commission.
COMPETITION
There are many companies selling computers that may be regarded as
competitors of the Company. Computers are sold directly to commercial and
government entities by manufacturers such as IBM, Hewlett Packard and Apple, by
large retail outlets such as Comp USA and Staples, by mail order houses,
electronic equipment catalogues and by assemblers and entities like the Company
selling computers under their own names. Many of these companies have
substantially greater financial, sales, marketing, technical and other
competitive resources then those of the Company. As a result, these competitors
may be able to devote greater resources than the Company to the sale and service
of microcomputer products. Some of these companies, by themselves, have the
economic power to control prices and the technical expertise to develop and
bring to market, improved versions of existing products long before they become
available to the Company. Many of the computers manufactured by the Company have
received favorable reviews in the trade press. By way of example, in the cover
story of the December 5, 1995 issue of PC Magazine(Registered) in which PC
Labs(Registered) tested 83 Windows 95-based PCs from 52 leading PC companies,
the Hertz Pentium 133e 'was the best performing 133-MHz Pentium system' in the
roundup. The Company's senior management tries to keep abreast of changes in the
computer technology market with respect to the claims and limitations of new
component parts and accessories. In many cases they are able to combine this
information with their intimate knowledge of their customers needs to fine tune
their selection of component parts to produce computers which better suit the
specific needs of their customers. The Company believes that management's
knowledge of the market, the Company's 15 years in business and the favorable
name recognition that the Hertz computer enjoys are factors that set the Company
apart from many of its competitors. However, whatever advantage the Company
enjoys from these factors can easily be lost if the Company's pricing and
technical features of its products will not be able to compete with the prices
and technology of comparable products from other suppliers.
The business of providing functional, architecturally attractive Modular
Racking Systems specifically designed to mount, support and allow easy access to
PCs and related equipment is a relatively new business. Nevertheless, there are
a number of companies already in the business, some of whom are considerably
larger and better established than the Company. Moreover, because of the
attractive profit margins in the business and the absence of any serious
barriers to entry, it is likely that a plethora of additional companies might
soon enter the field.
The market for Internet access and related services is extremely
competitive. The Company, however, intends to initially enter this market on a
very limited basis. Initially, at least, it intends to offer a narrow range of
Internet services to its existing customers, many of whom are not currently
being serviced by an Internet service provider. The Company believes that there
are some advantages , which it will seek to exploit, of being a single source
provider combining the ability to offer computers and related equipment with
Internet access, training and similar services.
INTELLECTUAL PROPERTY RIGHTS
The Company seeks to protect its proprietary rights by obtaining non
disclosure and confidentiality agreements from its employees and consultants.
The Company has trademark registrations for 'Hergo' and 'Hergonized.' It has
applied for registration of the Hertz Computer name, but such registration has
not been issued pending resolution of a claim by another party that claims
rights to use the name. Neither of the two principal products of the Company
enjoys patent protection. See 'Risk Factors,' 'Lack of Proprietary Rights;
Trademarks.'
EMPLOYEES
The Company employs 56 persons. In addition to three (3) executives at the
corporate level its computer division employs nine (9) persons, two of whom are
skilled in computer technology, in the actual production of computers, five (5)
persons in computer sales, five (5) in administration, and one (1) marketing
manager. For the
28
<PAGE>
Hergo operations, the Company employs fifteen (15) production workers, one (1)
plant manager, one (1) installation specialist, two (2) graphic designers, two
(2) in administration and five (5) sales persons. The Israeli office employs
seven (7) people.
FACILITIES
The Company currently occupies under leases which expired on August 31,
1996 an aggregate of approximately 10,000 square feet in two buildings on lower
Fifth Avenue at 33rd Street in New York City, which it uses for manufacturing
computers and as the principal sales office for both product lines. The Company
has leased new loft space on 75 Varick Street, consisting of 13,201 square feet
for a six year period beginning on September 1, 1996, at an annual rental of
$115,508 a year. The Company expects to move its entire operations on Fifth
Avenue to the Varick Street premises sometime in November. Until such move it is
able to continue at the Fifth Avenue premises on a month to month basis The
Company also leases an aggregate of 16,000 square feet in Woodside, Queens, New
York for its Hergo manufacturing facility. The leases for this space, which end
on February 28, 2000, provide for an annual rent of approximately $100,000. The
Company also leases space in Ashdod, Israel. The annual rental for such space is
$16,500, under a lease that expires on May 31, 1998 with the right to renew the
lease for three successive one year periods.
29
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors, persons elected to serve as directors commencing on
the Effective Date and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Eli E. Hertz............................... 47 Chairman, President and Chief Executive
Officer; Director
I. Marilyn Hertz........................... 45 Vice Chairperson, Secretary and Director
John C. Rudy............................... 54 Vice President, Principal Financial
Officer, and Chief Accounting Officer
Beryl Ackerman............................. 47 Director
Bruce Borner............................... 45 Director*
</TABLE>
- ------------------
* Elected as a director, effective as of the Effective date.
Each of the directors of the Company holds office until the next annual
meeting of shareholders, or until his successor is elected and qualified. At
present, the Company's bylaws provide for not less than one director nor more
than five directors. Currently, the Company has three directors. The Board will
be expanded to four directors following this Offering. The Board has elected
Bruce Borner to fill the vacancy on the Board, effective upon the Effective
Date. The bylaws permit the board of directors to fill any vacancies and
directors so elected may serve until the next annual meeting of shareholders or
until their successors are elected and qualified. Officers serve at the
discretion of the Board of Directors. I. Marilyn Hertz is the wife of Eli E.
Hertz. See 'Certain Transactions.'
The principal occupation and business experience for each officer and
director of the Company, including the director elected, effective as of the
Effective Date, for at least the last five years are as follows:
Eli E. Hertz was a co-founder of Hertz Computer and has been a principal
officer of Hertz Computer and Hergo since their respective formations in 1982
and 1991. He has a B.S. degree in Management Science and Economics and an MBA in
Accounting and Management from Long Island University.
I. Marilyn Hertz was a co-founder of Hertz Computer and the founder of
Hergo. She has been a principal officer of Hertz Computer and Hergo since their
respective formations in 1982 and 1991. Before becoming a full time employee of
the Company, Mrs. Hertz was an officer of Citibank in its computer systems
department. Mrs. Hertz is a graduate of Queens College, and for over 12 years,
has lectured on micro and mainframe computer programming at Queens College.
John C. Rudy was elected Vice President, Principal Financial Officer and
Chief Accounting Officer on October 10, 1996. Mr. Rudy's employment does not
require him to devote his full-time to the business of the Company. He is a
Certified Public Accountant, and, President, which he has been since 1992, of
Beacon Consulting Associates, a development and management company providing
financial and business consulting services. From 1990 to 1992, he was Director
of Turnaround Services at Coopers & Lybrand.
Bruce Borner has, for more than five years, been president of Computer
Projections, a company which is a consultant to, and developer of, a wide range
of information/database systems for diverse industries. Mr. Borner has a MBA
from the Harvard Business School, Management Development Institute (IMD) in
Lausanne, Switzerland.
Beryl Ackerman was elected to the Board on October 10, 1996. Since June
1994, Mr. Ackerman has been a consultant to Justified Computer System, a
computer consulting firm. Prior thereto, he was a computer specialist for the
New York City Department of Transportation. He is also a Coordinator for
Computer Systems in the Continuing Education Program at Queens College, and a
lecturer at Baruch College.
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<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee which will be comprised of
Bruce Borner and Beryl Ackerman. The Audit Committee recommends to the Board of
Directors the appointment of independent auditors, reviews and approves the
scope of the annual audit of the Company's financial statement, reviews and
approves any non-audit services performed by the independent auditors and
periodically reviews and approves major accounting policies and significant
internal accounting control procedures.
The Board of Directors also has a Compensation Committee which will be
comprised of Bruce Borner and Beryl Ackerman. The Compensation Committee reviews
and recommends compensation for officers and directors, administers stock option
plans and reviews major personnel matters.
REMUNERATION
The following table sets forth the combined remuneration paid by Hertz
Corporation and Hergo during fiscal years ended August 31, 1994, 1995 and 1996,
to the named officers and directors of the Company. For the periods shown, no
other executive officer received remuneration in excess of $100,000 per annum.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
- ------------------------------------------------------------ ---- -------- ----------
<S> <C> <C> <C>
Eli E. Hertz ............................................... 1996 $175,000 --
Chairman, President and 1995 140,769 --
Chief Executive Officer 1994 217,873 --
I. Marilyn Hertz ........................................... 1996 $165,000 --
Vice Chairperson 1995 180,769 --
1994 278,702 --
Barry J. Goldsammler ....................................... 1996 $111,500 --
Executive Vice President 1995 97,401 --
1994 105,395 --
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements ('Agreements') each
dated as of July 1, 1996 with Eli E. Hertz and with I. Marilyn Hertz. The term
of their employment will commence upon the Effective Date and will expire on the
fifth anniversary thereof. The annual salary under the Agreement with Mr. Hertz
is $225,000 and under the Agreement with Mrs. Hertz is $75,000. Their salaries
may not be increased during the first three years and can be increased
thereafter only with the approval of a disinterested majority of the Board of
Directors. Under Mr. Hertz' Agreement, he is granted options to purchase 900,000
Shares at the same exercise price and on the same terms as the Class A Warrants
issuable hereunder.
The Agreements provide, among other things, for participation in an
equitable manner in any profit-sharing or retirement, separation and disability
plans for employees or executives and for participation in other employee
benefits applicable to employees and executives of the Company. The Agreements
further provide for the use of an automobile and other fringe benefits
commensurate with their duties and responsibilities. The Agreement with Mr.
Hertz also provides for benefits in the event of retirement, separation and
disability.
Under the Agreements, employment may be terminated by the Company with
cause or by the executive with good reason. Termination by the Company without
cause, or by the executive for good reason, would subject the Company to
liability for liquidated damages in an amount equal to the terminated
executive's base salary for the remaining term of his employment agreement or 12
months, whichever is higher.
31
<PAGE>
STOCK OPTIONS
On August 7, 1996, in order to attract and retain persons necessary for the
success of the Company, the Company adopted its 1996 Stock Option Plan (the
'Option Plan') covering up to 750,000 of its Shares, pursuant to which officers,
directors and key employees of the Company and consultants' to the Company are
eligible to receive incentive and/or non-incentive stock options. The Option
Plan, which expires on August 6, 2006, will be administered by the Board of
Directors or a committee designated by the Board of Directors. The selection of
participants, allotment of shares, determination of price and other conditions
relating to the purchase of options will be determined by the Board of
Directors, or a committee thereof, in its sole discretion. Incentive stock
options granted under the Option Plan are exercisable for a period of up to 10
years from the date of grant at an exercise price which is not less than the
fair market value of the Shares on the date of the grant, except that the term
of an incentive stock option granted under the Option Plan to a shareholder
owning more than 10% of the outstanding Shares may not exceed five years and its
exercise price may be not less than 110% of the fair market value of the Shares
on the date of the grant. As of September 12, 1996, no options had been granted
under the Option Plan.
DISCRETIONARY SHARE BONUS AWARDS
The Company has reserved 100,000 Shares for issuance to employees as a
reward for past performance or as an incentive for future performance. The
determination of the persons to receive Share Bonus Awards, the amount of Shares
for each recipient and the time of vesting shall be determined by the Board of
Directors or by a committee to be designated by the Board of Directors. Shares
may be awarded with immediate vesting or with deferred vesting.
LIMITATIONS ON LIABILITY OF DIRECTORS
As permitted by Delaware law, the Company's Certificate of Incorporation
includes a provision which provides that a director of the Company shall not be
personally liable to the Company or its shareholders for monetary damages for a
breach of fiduciary duty as a director, except (i) for any breach of the
director's duty of loyalty to the Company or its shareholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, which prohibits the unlawful payment of dividends or the
unlawful repurchase or redemption of stock, or (iv) for any transaction from
which the director derives an improper personal benefit. This provision is
intended to afford directors protection against, and to limit their potential
liability for monetary damages resulting from, suits alleging a breach of the
duty of care by a director. As a consequence of this provision, shareholders of
the Company will be unable to recover monetary damages against directors for
action taken by them that may constitute negligence or gross negligence in the
performance of their duties unless such conduct falls within one of the
foregoing exceptions. The provision, however, does not alter the applicable
standard governing a director's fiduciary duty and does not eliminate or limit
the right of the Company or any shareholder to obtain an injunction or any other
type of nonmonetary relief in the event of a breach of fiduciary duty.
Management of the Company believes this provision will assist the Company in
securing and retaining qualified persons to serve as directors.
32
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the Company's
Shares owned on the date of this Prospectus and, as adjusted, to reflect the
sale of Shares offered by this Prospectus, by (i) each person who is known by
the Company to own beneficially more than five percent (5%) of the Company's
Shares; (ii) each of the Company' officers and directors; and (iii) all officers
and directors as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
------------------------
NUMBER OF BEFORE AFTER
NAME AND ADDRESS(1) POSITION WITH COMPANY SHARES OFFERING OFFERING(2)
- --------------------------------- --------------------------------- --------- -------- ------------
<S> <C> <C> <C> <C>
Eli E. Hertz .................... Chairman,
President and Chief
Executive Officer;
Director 920,000 48.4% 30.7%(3)
I. Marilyn Hertz ................ Vice Chairperson, Secretary and
Director 920,000 48.4% 30.7%(3)
John C. Rudy .................... Vice President,
Principal Financial Officer
and Chief Accounting Officer -- -- --
Beryl Ackerman .................. Director -- -- --
All Officers and
Directors as a Group
(4 persons).................... 1,840,000 96.8% 61.3%
</TABLE>
- ------------------
(1) Mr. Rudy's address is 450 Park Avenue, New York, New York 10022, Mr.
Ackerman's address is 1570 East 29th Street, Brooklyn, New York 11229 and
Mr. and Mrs. Eli Hertz' address is c/o Hertz Technology Group, Inc. 325
Fifth Avenue, New York, New York 10016-5012.
(2) Does not include the exercise of up to 2,200,000 Class A Warrants offered
herein, or any other option or warrant issued by the Company. The Company is
offering 1,100,000 Units, each Unit containing one Share and two Warrants,
at a price of $5.50 per Unit. Each Class A Warrant entitles the holder to
purchase one Share at $5.50 per Share during the four year period commencing
one year from the Effective Date. The Class A Warrants are redeemable upon
certain conditions. Should the Class A Warrants be exercised, of which there
is no assurance, the Company will receive the proceeds therefrom,
aggregating up to an additional $12,100,000, which does not include the
Class A Warrants in the Underwriter's Over-Allotment Option. See
'Description of Securities.'
(3) Assumes none of the 750,000 Shares offered under the Alternate Prospectus
are sold. If the 750,000 Shares are sold, Eli and Marilyn Hertz will own
18.2%, individually, and 36.3%, collectively, of the outstanding Shares.
33
<PAGE>
CERTAIN TRANSACTIONS
Since 1993, the Company has borrowed moneys from Mr. and Mrs. Hertz with
interest at rates ranging from 7% to 10% per annum. The outstanding amount of
such borrowings varied from time to time. The highest amount of such borrowing
in fiscal years ended on August 31, 1995 and August 31, 1994, were $353,338 and
$465,613, respectively. The highest amount of such borrowings since September 1,
1995 was $539,648. This amount was $189,000 as of September 30, 1996. In June of
1995, the Company entered into a Revolving Line of Credit with the United
Mizrachi Bank under which the Company could borrow up to $1,000,000. The
Company's obligation under this agreement was guaranteed by Eli and Marilyn
Hertz. As of September 30, 1996, the balance outstanding under this agreement
was $895,000.
Pursuant to an agreement dated August 26, 1994, by and among Eli E. Hertz,
Amir Rotlevi ('Rotlevi') and Hergo
(a) Eli E. Hertz acquired the 25% stock interest in Hergo, held by Rotlevi
(an original shareholder of Hergo) for $10,000; and
(b) Hergo reimbursed Rotlevi $18,345 for equipment which Rotlevi had
contributed to the Company. In connection with Rotlevi's sale of his stock
interest, Hergo entered into a consulting agreement for one year with AFC
Industries Inc., a corporation in which Rotlevi was the principal, under which
the corporation was paid $127,968, $34,800 on the execution of the agreement
$40,000 on January 3, 1995 and the balance in installments through June 1995.
As of July 31, 1996, the Company agreed to acquire all of Mr. and Mrs.
Hertz's shareholdings in Hertz Corporation and Hergo in exchange for which the
Company would issue to them an aggregate of 1,840,000 Shares. The exchange of
Shares under this Recapitalization will have been effected immediately prior to
the Effective Date. All unregistered securities issued by the Company prior to
this Offering are deemed 'restricted securities' within the meaning of that term
as defined in Rule 144 and have been issued pursuant to certain 'private
placement' exemptions under Section 4(2) of the Securities Act, and the rules
and regulations as promulgated by the Commission. See 'Description of
Securities.'
The Company intends to indemnify its officers and directors to the full
extent permitted by Delaware law. Under Delaware law, a corporation may
indemnify its agents for expenses and amounts paid in third party actions and,
upon court approval in derivative actions, if the agents acted in good faith and
with reasonable care. A majority vote of the Board of Directors, approval of the
shareholder or court approval is required to effectuate indemnification. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to officers, directors or persons controlling the Company, the Company
has been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in such Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by an officer,
director or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such officer, director or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in such Act and
will be governed by the final adjudication of such issue.
Any future transactions with affiliates will be on terms no less favorable
than could be obtained from unaffiliated parties and will be approved by a
majority of the independent and disinterested directors. Any future loans to
Company officers, directors, affiliates and/or shareholders will be approved by
a majority of the independent and disinterested directors.
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DESCRIPTION OF SECURITIES
UNITS
Each of the 1,100,000 Units offered hereby consists of one Share and two
Class A Warrants. The Shares and Class A Warrants are detachable and may trade
separately immediately upon issuance.
COMMON STOCK
The authorized capital stock of the Company consists of 25,000,000 Shares.
There are 1,900,000 issued and outstanding Shares. Holders of the Shares do not
have preemptive rights to purchase additional Shares or other subscription
rights. The Shares carry no conversion rights and are not subject to redemption
or to any sinking fund provisions. All Shares are entitled to share equally in
dividends from sources legally available therefor when, as and if declared by
the Board of Directors and, upon liquidation or dissolution of the Company,
whether voluntary or involuntary, to share equally in the assets of the Company
available for distribution to shareholders. All outstanding Shares are validly
authorized and issued, fully paid and nonassessable, and all Shares to be sold
and issued as contemplated hereby, will be validly authorized and issued, fully
paid and nonassessable. The Board of Directors is authorized to issue additional
Shares not to exceed the amount authorized by the Company's Certificate of
Incorporation, and to issue options and warrants for the purchase of such
shares, on such terms and conditions and for such consideration as the Board
deems appropriate without further shareholders' action. The above description
concerning the Shares does not purport to be complete. Reference is made to the
Company's Certificate of Incorporation and bylaws which are available for
inspection upon proper notice at the Company's offices, as well as to the
applicable statutes of the State of Delaware for a more complete descriptions
concerning the rights and liabilities of shareholders.
Prior to this offering, there has been no market for the Shares of the
Company, and no predictions can be made of the effect, if any, that market sales
of Shares and the availability of Shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of the
Shares in the public market may adversely effect prevailing market prices, and
may impair the Company's ability to raise capital at that time through the sale
of its Shares.
Each holder of Shares is entitled to one vote per share on all matters on
which such shareholders are entitled to vote. Since the Shares do not have
cumulative voting rights, the holders of more than fifty percent (50%) of the
Shares voting for the election of directors can elect all the directors if they
choose to do so and, in such event, the holders of the remaining shares will not
be able to elect any person on the Board of Directors.
CLASS A WARRANTS
The Company is offering 2,200,000 Warrants which are included in the
1,100,000 Units being offered.
The Class A Warrants shall be exercisable commencing one year after the
date of this Prospectus ('Effective Date'). Each Class A Warrant entitles the
holder to purchase one Share at $5.50 per share during the four year period
commencing one year from the Effective Date. The Shares underlying the Warrants
will, upon exercise of the Warrants, be validly issued, fully paid and
nonassessable. The Class A Warrants are redeemable by the Company for $.01 per
Warrant, commencing one year from the Effective Date, if the average closing
price or bid price of the Shares, as reported by the principal exchange on which
the Shares are traded, equals or exceeds $8.75 per share, for any twenty (20)
consecutive trading days ending within five (5) day prior to the date of the
notice of redemption.
The Warrants can only be exercised when there is a current effective
registration statement covering the Shares underlying the Warrants. If the
Company does not or is unable to maintain a current effective registration
statement the Warrant holders will be unable to exercise the Warrants and the
Warrants may become valueless. Moreover, if the Shares underlying the Warrants
are not registered or qualified for sale in the state in which a Warrant holder
resides, such holder might not be permitted to exercise the Warrants. See 'Risk
Factor--Requirements of Current Prospectus and State Blue Sky Registration in
Connection with the Exercise of the Warrants Which May Not Be Exercisable and
May Therefore Be Valueless.'
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The Company will deliver Warrant certificates to the purchaser of Units in
this Offering at the rate of two Warrants for each Unit purchased. Thereafter,
Warrant certificates may be exchange for new certificates of different
denominations, and may be exercised or transferred by presenting them at the
offices of the Transfer Agent. Holders of the Warrants may sell the Warrants if
a market exists rather than exercise them. However, there can be no assurance
that a market will develop or continue as to such Warrants. If the Company is
unable to qualify its Shares underlying such Warrants for sale in certain
states, holders of the Company's Warrants in those states will have no choice
but to either sell such Warrants or allow them to expire.
Each Warrant may be exercised by surrendering the Warrant certificate, with
the form of election to purchase on the reverse side of the Warrant certificate
properly completed and executed, together with payment of the exercise price to
the Warrant Agent. The Warrants may be exercised in whole or from time to time
in part. If less than all of the Warrants evidenced by a Warrant certificate are
exercised, a new Warrant certificate will be issued for the remaining number of
Warrants.
Holders of the Warrants are protected against dilution of the equity
interest represented by the underlying Shares upon the occurrence of certain
events, including, but not limited to, issuance of stock dividends. If the
Company merges, reorganizes or is acquired in such a way as to terminate the
Warrants, the Warrants may be exercised immediately prior to such action. In the
event of liquidation, dissolution or winding up of the Company, holders of the
Warrants are not entitled to participate in the Company's assets.
For the life of the Warrants, the holders thereof are given the opportunity
to profit from rise in the market price of the Shares. The exercise of the
Warrants will result in the dilution of the then book value of the Shares held
by the public investor and would result in a dilution of their percentage
ownership of the Company. The terms upon which the Company may obtain additional
capital may be adversely affected through the period that the Warrants remain
exercisable. The holders of these Warrants may be expected to exercise them at a
time when the Company would, in all likelihood, be able to obtain equity capital
on terms more favorable than those provided for by the Warrants.
Because the Warrants included in the Securities being offered hereby may be
transferred, it is possible that the Warrants may be acquired by persons
residing in states where the Company has not registered, or is not exempt from
registration such that the Shares underlying the Warrants may not be sold or
transferred upon exercise of the Warrants. Warrant holders residing in those
states would have no choice but to attempt to sell their Warrants or to let them
expire unexercised. Also, it is possible that the Company may be unable, for
unforeseen reasons, to cause a registration statement covering the Shares
underlying the Warrants to be in effect when the Warrants are exercisable. In
that event, the Warrants may expire unless extended by the Company as permitted
by the Warrant because a registration statement must be in effect, including
audited financial statements for companies acquired, in order for Warrant
holders to exercise their Warrants.
In the event that the Warrants are called for redemption, the Warrant
holders may not be able to exercise their Warrants in the event that the Company
has not updated this Prospectus in accordance with the requirements of the
Securities Act or these securities have not been qualified for sale under the
laws of the state where the Warrant holder resides. See 'Requirements of Current
Prospectus and State Blue Sky Registration in Connection with the Exercise of
the Warrants Which May Not Be Exercisable and May Therefore Be Valueless.' In
addition, in the event that the Warrants have been called for redemption, such
call for redemption could force the Warrant holder to either (i) assuming the
necessary updating to the Prospectus and state blue sky qualifications have been
effected, exercise the Warrants and pay the exercise price at a time when, in
the event of a decrease in market price from the period preceding the issuance
of the call for redemption, it may be less than advantageous economically to do
so, or (ii) accept the redemption price, which, in the event of an increase in
the price of the Shares, could be substantially less than the market value
thereof at the time of redemption.
RESTRICTED SHARES ELIGIBLE FOR FUTURE SALE
All of the Company's currently outstanding Shares are 'restricted
securities' and, in the future, may be sold upon compliance with Rule 144,
adopted under the Securities Act. Rule 144 provides, in essence, that a person
holding 'restricted securities' for a period of two years may sell only an
amount every three months equal to the greater of (a) one percent of the
Company's issued and outstanding shares, or (b) the average weekly volume of
sales during the four calendar weeks preceding the sale. The amount of
'restricted securities' which a
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person who is not an affiliate of the Company may sell is not so limited, since
non-affiliates may sell without volume limitation their shares held for three
years if there is adequate current public information available concerning the
Company. A proposed rule which may be adopted by the Commission would reduce
these two and three year periods to one and two years, respectively. Upon the
sale of the Securities, and assuming that there is no exercise of any issued and
outstanding warrants, the Company will have 3,000,000 Shares issued and
outstanding, of which 1,150,000 Shares are 'restricted securities', 750,000
share are being registered under the registration statement of which this
Prospectus is part and offered under the Alternative Prospectus and 1,100,000
are publicly traded shares. Therefore, during each three month period, beginning
February 12, 1997, a holder of restricted securities who has held them for at
least the two year period may sell under Rule 144, a number of shares up to
30,000 Shares. Non-affiliated persons who hold for the three-year period
described above may sell unlimited shares once their holding period is met.
Notwithstanding the above, the current officers, directors and principal
shareholders have agreed, except as noted below, not to sell, transfer, assign
or issue any securities of the Company for a period of twenty-four (24) months
following the Effective Date without the consent of the Underwriter.
The registration statement of which this Prospectus is a part also covers
the offering of 750,000 Shares being offered by the Selling Shareholders. Of the
750,000 Shares being offered by the Selling Shareholders, 225,000 Shares may be
sold during the twelve (12) months from the Effective Date at such time within
this 12 month period as is acceptable to the Underwriter and the balance
consisting of 525,000 Shares may be sold after eighteen (18) months from the
Effective Date, subject to earlier release at the sole discretion of the
Underwriter. In other offerings where the Underwriter has acted as the managing
Underwriter, it has released similar restrictions applicable to selling
shareholders prior to the expiration of the lock-up period and in some cases
immediately after the exercise of the Over-Allotment Option or the expiration of
the Over-Allotment Option period. The Underwriter has no present intention of
releasing such restriction and has advised the Company that it will base its
decision upon the facts and circumstances at such time, including but not
limited to, general market conditions, the price of the Company's securities and
the liquidity of the trading market. Certificates evidencing these securities
will bear a legend reflecting such restrictions. The Underwriter may release the
securities held by the Selling Shareholders at any time after all securities
subject to the Over-Allotment Option have been sold or such option has expired.
The resale of the securities held by the Selling Shareholders is subject to
prospectus delivery and other requirements of the Securities Act. Sales of such
securities or the potential of such sales at any time may have an adverse effect
on the market prices of the Securities offered hereby. See 'Selling
Shareholders.'
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the securities of the Company is the
American Stock Transfer and Trust Company located at 40 Wall Street, New York,
New York 10005.
REPORTS TO SHAREHOLDERS AND WARRANTHOLDERS
The Company will furnish to holders of the Shares and Warrants annual
reports containing audited financial statements. The Company may issue other
unaudited interim reports to such persons as it deems appropriate.
Contemporaneously, with this Offering, the Company shall register its
Shares with the Commission, under the provisions of Section 12(g) of the
Securities Exchange Act of 1934, as amended (the 'Exchange Act'), and, in
accordance therewith, the Company will be required to comply with certain
reporting, proxy solicitation and other requirements of the Exchange Act.
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SELLING SHAREHOLDERS
The registration statement of which this Prospectus is a part also covers
the offering of 750,000 Shares being officered by the Selling Shareholders. Of
the 750,000 Shares being offered by the Selling Shareholders, 225,000 Shares may
be sold during the twelve (12) months from the Effective Date at such time
within this 12 month period as is acceptable to the Underwriter and the balance
consisting of 525,000 Shares may be sold after eighteen (18) months after the
Effective Date, subject to earlier release at the sole discretion of the
Underwriter. In other offerings where the Underwriter has acted as the managing
Underwriter, it has released similar restrictions applicable to Selling
Shareholders prior to the expiration of the lock-up period and in some cases
immediately after the exercise of the Over-Allotment Option or the expiration of
the Over-Allotment Option period. The Underwriter has no present intention of
releasing such restriction and has advised the Company that it will base its
decision upon the facts and circumstances at such time, including but not
limited to, general market conditions, the price of the Company's securities and
the liquidity of the trading market. Certificates evidencing these securities
will bear a legend reflecting such restrictions. The Underwriter may release the
securities held by the Selling Shareholders at any time after all securities
subject to the Over-Allotment Option have been sold or such option has expired.
The resale of the securities held by the Selling Shareholders is subject to
prospectus delivery and other requirements of the Securities Act. Sale of such
securities or the potential of such sales at any time may have an adverse effect
on the market prices of the securities offered hereby.
The securities offered hereby may be sold from time to time directly by the
Selling Shareholders. The Company will not receive any of the proceeds from such
sale. Alternatively, the Selling Shareholders may from time to time offer such
securities through underwriters, dealers or agents. The Selling Shareholders are
not required to effect sales through the Underwriter. The distribution of
securities by the Selling Shareholders may be effected in one or more
transactions that may take place on the over-the-counter market, including
ordinary broker's transactions, privately-negotiated transactions or through
sales to one or more broker-dealers for resale of such shares as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Shareholders in connection with such sales of securities. The securities offered
by the Selling Shareholders may be sold by one or more of the following methods,
without limitations: (a) a block trade in which a broker or dealer so engaged
will attempt to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers, and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Shareholders may
arrange for other brokers or dealers to participate. The Selling Shareholders
and intermediaries through whom such securities are sold may be deemed
'underwriters' within the meaning of the Act with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
At the time a particular offer of Securities is made by or on behalf of a
Selling Shareholder, to the extent required, a Prospectus will be distributed
which will set forth the numbers of Shares being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for shares purchased from the
Selling Shareholders and any discounts, commissions or concessions allowed or
reallowed or paid to dealers, and the proposed selling price to the public.
Under the Exchange Act, and the regulations thereto, any person engaged in
a distribution of the Securities of the Company offered by this Prospectus may
not simultaneously engage in market-making activities with respect to such
Securities of the Company during the applicable 'cooling off' period (nine days)
prior to the commencement of such distribution. In addition, and without
limiting the foregoing, the Selling Shareholders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation, Rule 10b-6 and 10b-7, in connection with the
transactions in such securities, which provisions may limit the timing of
purchases and sales of such securities by the Selling Shareholders.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriter has agreed to purchase from the Company
1,100,000 Units offered hereby from the Company on a 'firm commitment' basis, if
any are purchased. The Underwriter has advised the Company that it proposes to
offer to the public the Units at $5.50 per Unit as set forth on the cover page
of this Prospectus and that they may allow to certain dealers who are NASD
members, and such dealers may reallow, concessions not to exceed $.20 per
Unit. After the initial public offering, the public offering prices, concession
and reallowance may be changed by the Underwriter.
The public offering price of the Securities and the exercise price and
other terms of the Warrants were arbitrarily determined by negotiations between
the Company and the Underwriter and do not necessarily relate to the assets,
book value or results of operations of the Company or any other established
criteria of value.
The Company has granted an option to the Underwriter, exercisable during
the 30-day period from the date of this Prospectus, to purchase up to a maximum
of 165,000 additional Units at the offering price, less the underwriting
discount, to cover over-allotments, if any.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
Insofar as indemnification for liabilities under the Securities Act may be
provided to officers, directors or persons controlling the Company, the Company
has been informed that in the opinion of the Commission, such indemnification is
against public policy and is therefore unenforceable.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance of three percent (3%) of the aggregate offering price of the
Securities offered hereby, including any Securities purchased pursuant to the
Over-Allotment Option. The Underwriter's Expenses in excess of the stated
expense allowance will be borne by the Underwriter. To the extent that the
expenses of the Underwriter are less than the stated expense allowance, the
difference may be deemed compensation to the Underwriter in addition to the
sales commission payable to the Underwriter.
The Company has agreed to grant to the Underwriter, or its designees an
option ('Underwriter's Purchase Option') to purchase up to an aggregate of
110,000 Units. The Underwriter's Purchase Option shall be exercisable during the
three-year period commencing two (2) years after the Effective Date. The
Underwriter's Purchase Option may not be assigned, transferred, sold or
hypothecated by the Underwriter after the Effective Date of this Prospectus,
except to officers or partners of the Underwriter or of selling group members in
this offering. Any profits realized by the Underwriter upon the sale of the
Securities issuable upon exercise of the Underwriter's Securities Purchase
Option may be deemed to be additional underwriting compensation. The exercise
price of the Units issuable upon exercise of the Underwriter's Purchase Option
during the period of exercisability shall be 165% of the initial public offering
prices of such Units. The exercise price of the Underwriter's Purchase Option
and the number of Units covered thereby are subject to adjustment in certain
events to prevent dilution. For the life of the Underwriter's Purchase Option,
the holders thereof are given, at a nominal cost, the opportunity to profit from
a rise in the market price of the Company's Shares and Warrants with a resulting
dilution in the interest of other shareholders. The Company may find it more
difficult to raise capital for its business if the need should arise while the
Underwriter's Purchase Option is outstanding. At any time when the holders of
the Underwriter's Purchase Option might be expected to exercise it, the Company
would probably be able to obtain additional capital on more favorable terms.
If the Company enters into a transaction (including a merger, joint venture
or the acquisition of another entity) introduced to the Company by the
Underwriter, the Company has agreed to pay the Underwriter a fee equal to five
percent of the first $3 million of consideration received by the Company, four
percent of the next $3 million, three percent of the next $2 million, two
percent of the next $2 million and one percent of the excess, if any, over $10
million.
Prior to the date of this Prospectus, except as set forth below, all
holders of the Shares as of the Effective Date have agreed in writing not to
sell, assign or transfer any of the Company's securities without the
Underwriter's prior written consent for a period of twenty-four (24) months from
the Effective Date. 750,000 Shares are being offered by the Selling Shareholders
under this Offering of which 225,000 Shares may be sold during the twelve (12)
months from the Effective Date at such time within such twelve month period as
is acceptable to the Underwriter, and the balance consisting of 525,000 Shares
may be sold at any time after the
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eighteen (18) months from the Effective Date, subject to earlier release at the
sole discretion of the Underwriter. The Company has also agreed not to issue any
additional securities except for designated purposes for a period of twenty four
(24) months following the Effective Date without the consent of the Underwriter.
The Company will also pay a warrant solicitation fee to the Underwriter
equal to four percent (4%) of the exercise price of the Class A Warrants
beginning one year from the date of this Prospectus, if the Underwriter causes
the exercise of such Warrants prior to the expiration thereof as set forth in
the Warrant Agreement, subject to the Underwriter's compliance with the rules
and regulations of the NASD. In accordance with NASD Notice to Members 81-38, no
warrant solicitation fee shall be paid (i) upon exercise where the market price
of the underlying Common Stock is lower than the exercise price, (ii) for the
exercise of warrants held in any discretionary account; (iii) upon the exercise
of warrants where disclosure of compensation arrangements has not been made in
documents provided to customers both as part of the original offering and at the
time of exercise; and (iv) upon the exercise of warrants in unsolicited
transactions. The broker-dealer to receive the warrant solicitation fee must be
designated, in writing, as the soliciting broker. See 'Risk Factors-Exercise of
Class A Warrants May Have Dilutive Effect on Market' and 'Underwriter's
Influence on the Market May Have Adverse Consequences.'
The Underwriter, for three (3) years after the Effective Date, shall have
the option to designate a director to serve on the Company's Board of Directors
or at its option a non-director observer to attend meetings of the Company's
Board of Directors. The Underwriter has indicated that it will designate a
person as a non-director observer.
Following the consummation of this offering, the Underwriter intends to
seek others to make a market in the Company's Securities in addition to the
Underwriter. The foregoing is a summary of certain provisions of the
Underwriting Agreement and Underwriter's Purchase Option which have been filed
as exhibits hereto.
LITIGATION INVOLVING UNDERWRITER MAY AFFECT SECURITIES
The Company has been advised by the Underwriter that on or about May 22,
1995, the Underwriter and Elliot Loewenstern and Richard Bronson, principals of
the Underwriter, and the Commission agreed to an offer of settlement (the 'Offer
of Settlement') in connection with a complaint filed by the Commission in the
United States District Court for the Southern District of Florida alleging
violations of the federal securities laws, Section 17(a) of the Securities Act
of 1933, Section 10(b) and 15(c) of the Securities Exchange Act of 1934, and
Rules 10b-5, 10b-6 and 15c1-2 promulgated thereunder. The complaint also alleged
that in connection with the sale of securities in three (3) IPO's in 1992 and
1993, the Underwriter engaged in fraudulent sales practices. The proposed Offer
of Settlement was consented to by the Underwriter and Messrs. Loewenstern and
Bronson without admitting or denying the allegations of the complaint. The Offer
of Settlement was approved by Judge Gonzales on June 6, 1995. Pursuant to the
final judgment (the 'Final Judgment'), the Underwriter:
o was required to disgorge $1,000,000 to the Commission, which amount
was paid in four (4) equal installments on or before June 22, 1995;
agreed to the appointment of an independent consultant
('Consultant').
Such Consultant is obligated, on or about November 1, 1996 (or at such
later date as may be extended by the Consultant without Court approval):
o to review the Underwriter's policies, practices and procedures in
six (6) areas relating to compliance and sales practices;
o to formulate policies, practices and procedures for the Underwriter
that the Consultant deems necessary with respect to the
Underwriter's compliance and sales practices;
o to prepare a report devoted to and which details the aforementioned
policies, practices and procedures (the 'Report');
o to deliver the Report to the President of the Underwriter and to the
staff of the Southeast Regional office of the Commission;
o to prepare, if necessary, a supervisory procedures and compliance
manual for the Underwriter, or to amend the Underwriter's existing
manual; and
o to formulate policies, practices and procedures designed to provide
mandatory on-going training to all existing and newly hired
employees of the Underwriter. The Final Judgment further provides
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that, within thirty (30) days of the Underwriter's receipt of the
Report, unless such time is extended, the Underwriter shall adopt,
implement and maintain an and all policies, practices and procedures
set forth in the Report.
The Final Judgment also provides that an independent auditor ('Auditor')
shall conduct four (4) special reviews of the Underwriter's policies, practices
and procedures, the first such review to take place six (6) months after the
Report has been delivered to the Underwriter and thereafter at six-month
intervals. The Auditor is also authorized to conduct a review, on a random basis
and without notice to the Underwriter, to certify that any persons associated
with the Underwriter who have been suspended or barred by any Commission order
are complying with the terms of such orders.
On July 10, 1995, the action as against Messrs. Loewenstern and Bronson was
dismissed with prejudice. Mr. Bronson has agreed to a suspension from
associating in any supervisory capacity with any broker, dealer, municipal
securities dealer, investment advisor or investment company for a period of
twelve (12) months, dating from the beginning of such suspension. Mr.
Loewenstern has agreed to a suspension from associating in any supervisory
capacity with any broker, dealer, municipal securities dealer, investment
advisor or investment company for a period of twelve (12) months commencing upon
the expiration of Mr. Bronson's suspension.
In the event that the requirements of the foregoing judgment adversely
affect the Underwriter's ability to act as a market maker for the Shares, and
additional brokers do not make a market in the Company's securities, the market
for, and the liquidity of, the Company's securities may be adversely affected.
In the event that other broker dealers fail to make a market in the Company's
securities, the possibility exists that the market for and the liquidity of the
Company's securities may be adversely affected to such an extent that public
security holders may not have anyone to purchase their securities when offered
for sale at any price. In such event, the market for, liquidity and prices of
the Company's securities may not exist. See 'Underwriting.' For additional
information regarding the Underwriter, investors may call the National
Association of Securities Dealers, Inc. at (800) 289-9999.
RECENT STATE ACTION INVOLVING THE UNDERWRITER--POSSIBLE LOSS OF LIQUIDITY
The State of Indiana has commenced an action seeking among other things to
revoke the Underwriter's license to do business in such state. A hearing in this
matter was scheduled for October 7, 1996 and has been adjourned pending
settlement discussions. Such proceeding if ultimately successful may adversely
affect the market for and liquidity of the Company's securities if additional
broker dealers do not make a market in the Company's securities. Moreover,
should Indiana investors purchase any of the securities sold in this offering
from the Underwriter prior to the possible revocation of the Underwriter's
license in Indiana, such investors will not be able to resell such securities in
such state through the Underwriter but will be required to retain a new broker
dealer firm for such purpose. The Company cannot ensure that other broker
dealers will make a market in the Company's securities. In the event that other
broker dealers fail to make a market in the Company's securities, the
possibility exists that the market for and the liquidity of the company's
securities may be adversely affected to an extent that public security holders
may not have anyone to purchase their securities when offered for sale at any
price. In such event, the market for, liquidity and prices of the Company's
securities may not exist. The Company does not intend to seek qualification for
the sale of the Securities in the state of Indiana. It should be noted that
although the Underwriter may not be the sole market maker in the Company's
securities, it will most likely be the dominant market maker in the Company's
securities.
DETERMINATION OF PUBLIC OFFERING PRICE
Prior to this offering, there has been no public market for the Shares or
the Class A Warrants. The initial public offering price for the Units and the
exercise price of the Class A Warrants have been determined by negotiations
between the Company and the Underwriter. Among the factors considered in the
negotiations were an analysis of the areas of activity in which the Company is
engaged, the present state of the Company's business, the Company's financial
condition, the Company's prospects, an assessment of management, the general
condition of the securities market at the time of this offering and the demand
for similar securities of comparable companies. The public offering price of the
Units and the exercise prices of the Class A Warrants does not necessarily bear
any relationship to assets, earnings, book value or other criteria of value
applicable to the Company.
41
<PAGE>
LEGAL PROCEEDINGS
Hergo and Hertz Computer have been sued by Ergotron, Inc. in federal court
in the Southern District of New York. The plaintiff, a competitor, claims that
Hergo has been infringing its rights in a computer support system marketed and
sold by plaintiff. The action was commenced on August 23, 1993. On March 26,
1996, the Court granted Hergo summary judgment on plaintiff's 'trade dress'
infringement claims, its principal claims in the suit. The Company is presently
discussing settlement of the remaining issues. These consist of plaintiff's
remaining claims consisting of its claim against Hergo for copyright
infringement and its claim against Hertz for contributing to copyright
infringement and Hergo's claims against plaintiff consisting of unfair
competition and violation of Sections 349 and 350 of the New York General
Business Law, dealing with deceptive acts and practices and false advertising.
In light of the Court decision, the Company believes that it has limited risks
with respect to the remaining claims. Plaintiff, however, has indicated that it
may wish to appeal the summary judgment decision of the lower court when such
appeal becomes timely. The Company believes that if such appeal were made, it
would be dismissed, but there can be no assurance of such a result, and if
plaintiff were able to prevail on appeal, and to thereafter succeed in a
subsequent trial, Hergo might be liable for damages for its past sales. In
addition, Hergo might be required to redesign some of its products so as to
avoid any of the claimed infringement of plaintiff's products, which in turn
could have an adverse affect on the Company's plans for expanding this part of
the business. On or about October 15, 1996 the parties reached a complete
settlement of the matter in principle, which the parties expect to reduce to a
writing within the next 30 days. Under the terms of the proposed settlement,
Hergo will pay plaintiff $50,000 and will redesign one item in its product line.
On or about August 9, 1995, Hertz Computer commenced an action against A.C.
Purchasing Securities, Inc. and others in Federal Court in the Southern
District, New York to collect approximately $140,000 for goods sold and
delivered to defendant which was purchasing computers for resale to the
Government of Israel. The defendants have counterclaimed, charging that Hertz
Computer sold computers directly to the Government of Israel, thereby,
tortiously interfering with defendants business arrangement with the Government
of Israel. The Company believes that Hertz Computer has meritorious defenses to
the counterclaim and that notwithstanding defendants large claim for damages,
the maximum amount it could reasonably expect to recover if it were successful
in this suit would be the amount of the profits it was deprived of by reason of
Plaintiff's allegedly tortious conduct.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon for
the Company by Morse, Zelnick, Rose & Lander, LLP, 450 Park Avenue, New York,
New York 10022-2605. Morse, Zelnick, Rose & Lander, LLP is the owner of 60,000
Shares. Certain legal matters will be passed upon for the Underwriter by
Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New York 10022.
EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen,
LLP, independent public accountants, as set forth in its report. In that report,
that firm states that with respect to Hertz-Israel its opinion is based on the
reports of other independent public accountants, namely, Shlomo Ziv & Co. The
financial statements and supporting schedules referred to above have been
included herein in reliance upon the authority of those firms as experts in
giving said reports.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HERTZ TECHNOLOGY GROUP INC.
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheet as of August 31, 1995........................................................... F-3
Consolidated Statements of Operations for the Years Ended August 31, 1995 and 1994 (unaudited)............. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended August 31, 1995 and 1994............... F-5
Consolidated Statements of Cash Flows for the Years Ended August 31, 1995 and 1994......................... F-6
Notes to Consolidated Financial Statements as of August 31, 1995 and 1994.................................. F-7
Report of Independent Public Accountants for Hertz Computer Information System (1985) Ltd.................. F-13
Consolidated Balance Sheet as of May 31, 1996 (unaudited).................................................. F-14
Consolidated Statements of Operations Nine Months Ended May 31, 1996 and 1995 (unaudited).................. F-15
Consolidated Statements of Cash Flows Nine Months Ended May 31, 1996 and 1995 (unaudited).................. F-16
Notes to Consolidated Financial Statements Nine Months Ended May 31, 1996 and 1995 (unaudited)............. F-17
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Hertz Technology Group, Inc.:
We have audited the accompanying consolidated balance sheet of Hertz Technology
Group, Inc. (a New York Corporation) as of August 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended August 31, 1995 and 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of Hertz Computers Information System (1985) Ltd.
('Hertz-Israel'), which statements reflect total assets and revenues of 23
percent and 17 percent, respectively in 1995 and total revenues of 9 percent in
1994 of the consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
the amounts included for this entity, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Hertz Technology Group, Inc. as of August 31, 1995 and
the results of its operations and its cash flows for each of the two years in
the period ended August 31, 1995, in conformity with generally accepted
accounting principles.
As explained in Note 8 to the financial statements, effective September 1, 1993,
the Company changed its method of accounting for income taxes.
New York, New York Arthur Andersen, LLP
November 30, 1995 except with respect
to the first paragraph in Note 1,
and Note 11, for which the date is
November 12, 1996
F-2
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEET
AUGUST 31, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash.............................................................................................. $ 121,929
Accounts receivable, less allowance for doubtful accounts of $22,000.............................. 1,931,848
Inventories....................................................................................... 958,209
Due from related parties.......................................................................... 17,276
Prepaid expenses and other current assets......................................................... 46,641
----------
Total current assets................................................................................ 3,075,903
----------
Property and equipment--net......................................................................... 214,097
----------
Goodwill, net of accumulated amortization of $31,684................................................ 47,525
----------
Other assets........................................................................................ 28,678
----------
Total assets................................................................................... $3,366,203
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks and others................................................................. $1,028,295
Accounts payable and accrued expenses............................................................. 1,038,500
Income taxes payable.............................................................................. 11,377
Note payable to stockholder....................................................................... 205,515
----------
Total current liabilities........................................................................... 2,283,687
----------
Notes payable to banks and others................................................................... 9,850
----------
Note payable to related party and stockholder (Note 4).............................................. 316,083
----------
Other liabilities................................................................................... 15,617
----------
Commitments and contingencies (Note 6.)
Stockholders' equity:
Common stock, $.001 par value: 25,000,000
authorized, issued and outstanding 1,900,000 shares............................................ 1,900
Additional paid-in capital........................................................................ 124,100
Retained earnings................................................................................. 614,966
----------
Total stockholders' equity..................................................................... 740,966
----------
Total liabilities and stockholder's equity..................................................... $3,366,203
----------
----------
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net Sales.......................................................................... $11,220,183 $10,929,308
Cost of Goods Sold................................................................. 8,102,977 8,386,365
----------- -----------
Gross Profit.................................................................. 3,117,206 2,542,943
Selling, General and Administrative Expenses....................................... 2,868,665 2,288,388
----------- -----------
Operating income.............................................................. 248,541 254,555
Other Income (expense):
Other income..................................................................... 14,671 13,394
Interest, net of interest income of $6,266 and $22,219........................... (131,484) (58,340)
----------- -----------
Income before provision for income taxes and cumulative effect of change in
accounting principle......................................................... 131,728 209,609
Provision for Income Taxes......................................................... 77,615 63,138
----------- -----------
Income before cumulative effect of change in accounting principle............. 54,113 146,471
Cumulative Effect of Change in Accounting Principle................................ -- 28,424
----------- -----------
Net Income $ 54,113 $ 174,895
----------- -----------
----------- -----------
Historical Income Before Provision for Income Taxes................................ $ 131,728 $ 209,609
Pro Forma Provision for Income Taxes............................................... 73,602 107,552
----------- -----------
Pro Forma Net Income............................................................... $ 58,126 $ 102,057
----------- -----------
----------- -----------
Pro Forma Net Income Per Share..................................................... $ 0.03 $ 0.05
----------- -----------
----------- -----------
Weighted Average Numver of Common Shares Outstanding............................... 1,900,000 1,900,000
----------- -----------
----------- -----------
Supplementary Net Income Per Share................................................. $ 0.06
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- --------
<S> <C> <C> <C> <C>
Balance at August 31, 1993........................................... $1,900 $ 124,100 $385,958 $511,958
------ ---------- -------- --------
Net income for the year ended August 31, 1994........................ -- -- $174,895 174,895
Balance at August 31, 1994........................................... 1,900 124,100 560,853 686,853
------ ---------- -------- --------
Net income for the year ended August 31, 1995........................ -- -- 54,113 54,113
Balance at August 31, 1995........................................... $1,900 $ 124,100 $614,966 $740,966
------ ---------- -------- --------
------ ---------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................... $ 54,113 $ 174,895
Adjustments to reconcile net income to net cash (used in) provided by operating
activities.
Depreciation and amortization..................................................... 21,200 29,103
Bad debt expense.................................................................. 14,000 --
Changes in operating assets and liabilities
Accounts receivable............................................................. (298,293) (130,577)
Inventories..................................................................... (140,849) (27,254)
Due from related parties........................................................ (22,366) (115,125)
Prepaid expenses and other assets............................................... 10,131 (46,822)
Accounts payable and accrued expenses........................................... (15,616) 214,266
Income taxes payable............................................................ (31,758) 19,135
Deferred income taxes payable................................................... -- (64,400)
Other liabilities............................................................... 1,621 --
Note payable to stockholder..................................................... 13,230 (30,500)
---------- ---------
Net cash (used in) provided by operating activities.......................... (394,587) 22,721
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment.............................................. (46,888) (96,591)
Proceeds from repayment of note receivable from related party........................ 8,902 --
---------- ---------
Net cash used in investing activities........................................ (37,986) (96,591)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note receivable from related party...................................... -- 103,625
Principal payments under notes payable to banks...................................... (715,259) (6,734)
Borrowings under notes payable to banks.............................................. 1,028,295 20,078
Borrowings (Payments) under note payable to stockholder.............................. 176,083 (81,052)
---------- ---------
Net cash provided by financing activities.................................... 489,119 35,917
Net increase (decrease) in cash.............................................. 56,546 (37,953)
CASH, beginning of year................................................................ 65,383 103,336
CASH, end of year...................................................................... $ 121,929 $ 65,383
---------- ---------
---------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid........................................................................ $ 111,927 $ 68,984
---------- ---------
Income taxes paid.................................................................... $ 82,947 $ 158,709
---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995 AND AUGUST 31, 1994
1. COMPANY BACKGROUND AND SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES
Recapitalization
The Hertz Technology Group, Inc. ('Company') was formed on June 18, 1996.
Effective November 12, 1996, the date of the initial public offering ('IPO')
(see Note 11), Hertz Computer Corporation ('Hertz Computer') and Hergo Ergonomic
Support Systems, Inc. ('Hergo'), two entities under common control, will be
acquired by the Company (which is owned by the same shareholders) and become
wholly owned subsidiaries. Accordingly, the financial statements are presented
as consolidated. Hertz Computer owns 100% of Hertz Computers Information System
(1985) Ltd. ('Hertz-Israel').
Nature of Business
Hertz Computer and Hergo are both located in New York City and Hertz-Israel
is located in Ashod, Israel. Hertz Computer assembles and sells personal
computers in the United States primarily within the New York Metropolitan area
and also exports to customers in Israel. Hertz-Israel primarily sells and
services Hertz Computer manufactured personal computers in Israel. Hergo
manufactures and sells space saving modular racks and technical furniture to
help organize all types of computer hardware, communication and electronic
equipment.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Hertz Computer, Hertz-Israel and Hergo. All
intercompany transactions have been eliminated in consolidation.
Revenue Recognition
Sales are recognized when the products are shipped. Payments received for
products not yet shipped are recorded as a current liability. The provision for
warranties is not material as all components are warrantied to the Company by
the manufacturers.
Inventories
Inventories, which consist primarily of finished goods, raw material,
components, and work in process, are valued at the lower of cost or market on
the first-in, first-out (FIFO) basis.
Inventories as of August 31, 1995 consist of:
<TABLE>
<CAPTION>
1995
--------
<S> <C>
Components.................................................... $527,551
Raw materials and work in process............................. 86,316
Finished goods and evaluation units........................... 344,342
--------
$958,209
--------
--------
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed under
the straight-line method over estimated useful lives ranging from 5 to 10 years.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful lives of the assets.
F-7
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995 AND AUGUST 31, 1994
1. COMPANY BACKGROUND AND SUMMARY AND SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
Goodwill
Goodwill, which arose in 1991 in connection with the acquisition of
Hertz-Israel, is amortized on a straight-line basis over a period of 10 years.
Amortized expense for the years ended August 31, 1995 and 1994 was $7,921.
Translation of Foreign Currency
The functional currency of Hertz-Israel is the U.S. dollar. The accounts of
Hertz-Israel have been translated in accordance with Statement of Financial
Accounting Standards No. 52. The financial statements of Hertz-Israel have been
remeasured into U.S. dollars as follows: at rates prevailing during the year for
revenue and expense items (except depreciation and amortization); at year-end
rates for assets and liabilities except for equipment and leasehold
improvements, which are translated at the rate in effect at the time of their
acquisition. Depreciation and amortization are remeasured based on the
historical dollar cost of underlying assets. The effect of translation has been
reflected currently in the Consolidated Statement of Operations and it is not
material.
Income Taxes
Hergo, with the consent of its stockholders, elected to be treated as an S
Corporation for federal and state tax purposes, which provides that, in lieu of
Hergo paying income taxes, the stockholders separately account for their pro
rata shares of Hergo's items of income, deductions, losses, and credits. As
such, Hergo does not incur federal income tax expense, although it does incur
state and local tax expense. Hertz Computer is a C corporation which incurs
federal, state and local income tax expense.
Pro Forma Net Income
Pro forma net income is calculated as if Hergo was a C corporation for tax
filing purposes during the years ended August 31, 1995 and August 31, 1994. As
such, an effective tax rate of approximately 46% was used in calculating both
Hergo's and Hertz's pro forma income tax provision.
Net Income Per Share
Pro forma net income per share has been computed by dividing proforma net
income by the weighted average number of shares of common stock outstanding
during the period as if the company were recapitalized on September 1, 1994.
Supplementary net income per share is calculated for the year ended August
31, 1995. Supplementary net income per share is computed as if $1,559,743 of
interest bearing debt obligations was repaid from the net proceeds of the IPO as
of September 1, 1994 and assuming that (i) 311,949 of common shares were issued
as of September 1, 1994 to repay the interest bearing debt obligations; (ii)
$74,385 of interest expense, net of income tax expense, was eliminated as a
result of such payment for the twelve months ended August 31, 1995.
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 amount 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.
F-8
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995 AND AUGUST 31, 1994
1. COMPANY BACKGROUND AND SUMMARY AND SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
Risks
The Company faces a number of risks, including a highly competitive
microcomputer market environment which places pressure on profit margins,
customer and geographic concentrations, the potential continual operating losses
of Hertz-Israel, dependence on key personnel, limited operating history of
Hergo's product line whose current margins may not be indicative of future
margins, no assurance of attainment of proprietary rights and trademarks of the
Hertz and Hergo names and businesses and the ability to manage the growth of the
sales force and employee base of which the Company expects to expand with the
proceeds from the IPO. Such risks could impact the future results of the
Company.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at August 31, 1995:
<TABLE>
<CAPTION>
1995
--------
<S> <C>
Furniture, fixtures and equipment............................. $219,305
Warehouse equipment........................................... 60,187
Leasehold improvements........................................ 39,683
--------
319,175
Less: Accumulated depreciation and amortization............... 105,078
--------
Property and equipment, net.............................. $214,097
--------
--------
</TABLE>
3. NOTES PAYABLE TO BANKS AND OTHERS
Line of Credit
In June 1995, Hertz Computer entered into a Revolving Line of Credit
('Agreement') with a bank under which the Company could borrow up to $1,000,000
with interest accruing on any outstanding balance at the prime rate of the bank,
plus 1% (effective rate at August 31, 1995 was 9.75%). Repayment of the
borrowings is secured by a general security interest in substantially all
personal property of Hertz Computer and is personally guaranteed by the
stockholders. The Agreement expires May 30, 1996. As of August 31, 1995, the
balance outstanding under this agreement was $895,000.
Hertz-Israel has a bank overdraft of $114,133. The interest rate on the
overdraft is the Israeli prime rate plus 1.2% (15.9% at August 31, 1995).
Long Term
Hertz-Israel has notes payable due with banks, aggregating $29,012 and are
payable as follows:
<TABLE>
<S> <C>
1995........................................................... $19,162
1996........................................................... 9,850
-------
29,012
-------
Less: current maturities....................................... 19,162
-------
$ 9,850
-------
-------
</TABLE>
F-9
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995 AND AUGUST 31, 1994
4. RELATED PARTY TRANSACTIONS
Note Payable to Stockholder--Short-term
Hertz Computer has a note payable to a stockholder due on demand at August
31, 1995, in the amount of $140,000, which is collateralized by the Company's
assets and subordinated to the notes payable to bank described in Note 3. The
interest rate on this note payable is prime plus 1.4 % (10.2 % at August 31,
1995) and interest expense for the years ended August 31, 1995 and 1994 were
$9,643 and $9,629, respectively.
Hergo has a 10%, due on demand note payable for $145,515 and $132,287 at
August 31, 1995 and August 31, 1994, respectively, owed to a stockholder. The
note is collateralized by the Company's assets. The individual has represented
that $80,000 will not be demanded before September 1, 1996. Interest expense
incurred on this note payable for the years ended August 31, 1995 and August 31,
1994 was $13,229 and $9,260, respectively.
Note Payable to Stockholder--Long-Term
Hertz Computer has a 10%, due on demand note payable to a stockholder in
the amount of $176,083. The note is collateralized by the Company's assets and
subordinated to the notes payable to bank described in Note 3. The individual
has represented that the note will not become due before September 1, 1997.
Interest expense for the year ended August 31, 1995 was $15,985.
Note Payable to Related Party
Hertz Computer has a 9%, due on demand note payable for $60,000 owed to an
individual related to a stockholder. The note is collateralized by the Company's
assets and subordinated to the notes payable to bank described in Note 3. The
individual has represented that the note will not become due before September 1,
1997. Interest expense for the years ended August 31, 1995 and August 31, 1994
was $5,400 and $6,446, respectively.
5. LIFE INSURANCE
Hertz Computer is the beneficiary of a life insurance policy in the amount
of $1,140,897 on the life of an officer of Hertz Computer. The policy's related
cash surrender value is included in other assets in the accompanying
consolidated balance sheet and amounted to $26,191, as of August 31, 1995.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
Hertz Computer and Hergo occupy their premises under operating leases
expiring in August 1996 and March 2000, respectively.
The future minimum lease payments of all operating leases as of August 31,
1995 for the Company are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- --------------------------------------------------------------
<S> <C>
1996.......................................................... $ 199,587
1997.......................................................... 117,871
1998.......................................................... 107,723
1999.......................................................... 104,788
2000.......................................................... 51,924
-----------
Total.................................................... $ 581,893
</TABLE>
F-10
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995 AND AUGUST 31, 1994
6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Total rent expense related to the Company's premises for the periods ended
August 31, 1995 and August 31, 1994 was $153,404 and $148,276, respectively.
Litigation
The Company is currently involved in litigation regarding, tradedress, and
copyright infringement. Mangement believes it has valid defenses against these
claims; however, there is no certainty as to the possible outcome, nor is there
any reasonable estimation of possible monetary exposure.
Hertz Computer commenced an action against A.C. Purchasing Securities, Inc.
and others in Federal Court in the Southern District, New York to collect
approximately $140,000 for goods sold and delivered to defendant which was
purchasing computers for resale to the Government of Israel. The defendants have
counterclaimed, charging that Hertz Computer sold computers directly to the
Government of Israel, thereby, tortiously interfering with defendants business
arrangement with the Government of Israel. The Company believes that Hertz
Computer has meritorious defenses to the counterclaim and that notwithstanding
defendants large claim for damages, the maximum amount it could reasonably
expect to recover if it were successful in this suit would be the amount of the
profits it was deprived of by reason of Plaintiff's allegedly tortious conduct.
While the ultimate results of the matters described above cannot be
determined, management does not expect that they will have a material adverse
effect on the Company's results of operations or financial position.
7. PROFIT SHARING PLAN
Hertz Computer has a profit sharing plan covering all eligible employees.
For the years ended August 31, 1995 and 1994, the Board of Directors approved
the contribution of approximately $60,000 and $83,000 to this plan and these
amounts are reflected as a component of selling, general and administrative
expense in the Company's Consolidated Statements of Operations.
8. INCOME TAXES
Effective September 1, 1993, Hertz Computer changed its method of
accounting for income taxes from the deferred method to the liability method as
required by Statement of Financial Accounting Standards No. 109--'Accounting
for Income Taxes' ('SFAS No. 109'). As permitted under SFAS No. 109, Hertz
Computer adopted this method of accounting via a cumulative effect of a change
in accounting principle. This adoption resulted in a benefit of $28,424.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The most significant
components relate to the allowances for doubtful accounts and obsolescence,
different methods of depreciation for book and tax, and capitalization of
certain inventory costs for tax purposes. Included in other current assets at
August 31, 1995 is a deferred tax asset of $14,291.
A reconciliation between the federal tax rate (34%) and the effective tax
rate for the years ended 8/31/95 and 8/31/94 is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Federal tax rate................................................................ 34% 34 %
State and local income taxes, net of federal benefit............................ 12% 12 %
Other........................................................................... 13% (16 %)
---- ----
Effective tax rate.............................................................. 59% 30 %
</TABLE>
F-11
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1995 AND AUGUST 31, 1994
8. INCOME TAXES--(CONTINUED)
The effective tax rate per the financial statements exceeds the statutory
rate for the year ended 8/31/95. This difference (reflected in the 'Other'
category) arises because the Company files three separate tax returns for Hertz
Computer, Hertz-Israel, and Hergo and, as such, taxable losses can not be netted
against taxable income on a consolidated basis.
The effective tax rate per the financial statements is less than the
applicable statutory rate for the year ended 8/31/94. This difference results
because Hertz Computer is taxed at the federal statutory rate of 34% as it is a
C Corporation and, as a New York S Corporation, Hergo does not remit federal
taxes. In fiscal 1994, Hergo generated the majority of the consolidated taxable
income which was not subject to federal income taxes and, as a result the
effective tax rate is lower than the statutory rates.
9. SEGMENT OPERATIONS
The operating results of significant segments of the consolidated company
at 8/31/95 are as follows:
<TABLE>
<CAPTION>
HERTZ COMPUTER HERTZ-ISRAEL HERGO CONSOLIDATED
-------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Sales (Unaffiliated)...................... $7,055,231 $ 1,936,080 $2,228,872 $ 11,220,183
Inventory Transfers from/(to)............. 1,015,634 (1,015,634) -- --
Gross Profit.............................. 1,443,088 369,224 1,304,894 3,117,206
Operating Income.......................... 195,859 21,926 30,756 248,541
Assets.................................... 1,848,574 780,873 736,756 3,366,203
</TABLE>
The operating results of significant segments of the consolidated company
at 8/31/94 are as follows:
<TABLE>
<CAPTION>
HERTZ COMPUTER HERTZ-ISRAEL HERGO CONSOLIDATED
-------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Sales (Unaffiliated)........................ $8,710,218 $ 949,997 $1,269,093 $ 10,929,308
Inventory Transfers from/(to)............... 322,416 (322,416) -- --
Gross Profit................................ 1,511,203 269,216 762,524 2,542,943
Operating Income (Loss)..................... 149,134 (17,675) 123,096 254,555
</TABLE>
10. GEOGRAPHIC AND CUSTOMER CONCENTRATION
The Company has a concentration of its sales in the New York metropolitan
area of approximately 61% and 60% for the years ended August 31, 1995 and 1994,
respectively. Approximately 36% and 33% of its total sales in the years ended
August 31, 1995 and 1994, respectively, were to federal, state and city agencies
or government affiliated organizations, including hospitals and schools. The
Company had significant sales with two operating units of a customer, each which
comprised 14% and 11% of total sales for the year ended August 31, 1994. This
customer was not a significant part of total sales for the year ended August 31,
1995 and there were no significant sales to other customers during the year
ended August 31, 1995.
11. INITIAL PUBLIC OFFERING
On November 12, 1996, the Company's SB-2 registration statement went
effective with the Securities and Exchange Commission. The Company registered
approximately 1,100,000 units each unit consisting of one share of common stock,
$.001 par value per share and two Class A warrants at an expected IPO price of
$5.50 per unit. The warrants are exercisable one year from the effective date of
the IPO at a price of $5.50. The Company's management expects to realize
proceeds from the sale of common stock and warrants of $4,868,500 net of
commissions and offering expenses of $1,181,500.
F-12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the shareholders of
Hertz Computers Information System (1985) Ltd.
We have audited the balance sheet of Hertz Computers Information System (1985)
Ltd. as at August 31, 1995, the related statements of income and shareholders'
equity and cash flows for each of the two years in the period ended August 31,
1995 and 1994, expressed in U.S. Dollars. These financial statements are the
responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits in accordance with generally accepted
auditing standards, including those prescribed under the Auditors Regulations
(Auditor's Mode of Performance), 1973 and, accordingly we have performed such
audinting procedures as we considered necessary in the circumstances. For
purposes of these financial statements there is no material difference between
generally accepted Israeli auditing standards and auditing standards generally
accepted in the U.S. These standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management as
well as evaluating the overall financial statement presentations. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audit, the above mentioned financial statements
present fairly the financial position of the Company as at August 31, 1995 and
the results of its operations, the changes in the shareholders' equity and cash
flows for each of the two years ended August 31, 1995 and 1994 in conformity
with accounting principles generally accepted in Israel, consistently applied.
Accounting principles generally accepted in Israel differ in certain respects
from accounting principles generally accepted in the United States. The
application of the latter would have not significantly affected the
determination of net income (loss) and shareholders' equity.
SHLOMO ZIV & CO.
Certified Public Accountants (Isr.)
November 30, 1995
F-13
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEET
MAY 31, 1996
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.............................................................................................. $ 284,243
Accounts receivable, less allowance for doubtful accounts of $68,246.............................. 1,605,538
Inventories....................................................................................... 1,005,531
Prepaid expenses and other current assets......................................................... 116,430
----------
Total current assets................................................................................ 3,011,742
----------
Property and equipment, net......................................................................... 262,920
----------
Goodwill, net of accumulated amortization of $37,625................................................ 41,584
----------
Other assets........................................................................................ 71,966
----------
Total assets........................................................................................ $3,388,212
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks and others................................................................. $1,117,093
Accounts payable and accrued expenses............................................................. 595,568
Current maturities of capital lease obligation.................................................... 5,388
Income taxes payable.............................................................................. 195,905
Distribution payable to stockholders.............................................................. 224,567
Notes payable to stockholder...................................................................... 326,471
----------
Total current liabilities........................................................................... 2,464,992
----------
Capital lease obligation............................................................................ 19,309
----------
----------
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock, $.001 par value: 25,000,000 authorized, issued and outstanding
1,900,000 shares............................................................................... 1,900
Additional paid-in capital.......................................................................... 124,100
Retained earnings................................................................................... 777,911
----------
Total stockholders' equity.......................................................................... 903,911
----------
Total liabilities and stockholders' equity.......................................................... $3,388,212
----------
----------
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-14
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MAY 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
------------------------------------------------------
1996 1995
------------------------- -------------------------
<S> <C> <C>
Net sales............................... $ 9,375,857 $ 8,224,492
Cost of goods sold...................... 6,532,666 6,117,860
------------- -------------
Gross profit.......................... 2,843,191 2,106,632
Selling, general and administrative
expenses.............................. 2,072,389 1,942,355
------------- -------------
Operating income...................... 770,802 164,277
Other income (expense):
Other income.......................... 9,323 278
Interest, net of interest income of
$4,114 and $1,970.................. (148,113) (96,650)
------------- -------------
Income before provision for income
taxes.............................. 632,012 67,905
Provision for income taxes.............. 244,500 3,900
------------- -------------
Net income............................ $ 387,512 $ 64,005
------------- -------------
------------- -------------
Historical income before provision for
income taxes.......................... $ 632,012 $ 67,905
Pro forma provision for income taxes.... 366,233 --
------------- -------------
Pro forma net income.................... $ 265,779 $ 67,905
------------- -------------
------------- -------------
Pro forma net income per share.......... $ 0.14 $ 0.04
------------- -------------
------------- -------------
Weighted average number of common shares
outstanding........................... 1,900,000 1,900,000
------------- -------------
------------- -------------
Supplementary net income per share...... 0.16
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-15
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MAY 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income............................................................................ $ 387,512 $ 64,005
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization...................................................... 39,741 28,998
Bad debt expense (recovery)........................................................ 46,246 (60,246)
Changes in operating assets and liabilities:
Accounts receivable.............................................................. 280,064 (154,077)
Inventories...................................................................... (47,322) (119,294)
Due from related parties......................................................... 17,276 (6,842)
Prepaid expenses and other current assets........................................ (69,789) (52,499)
Other assets..................................................................... (43,288) (17,622)
Accounts payable and accrued expenses............................................ (442,932) (55,516)
Income taxes payable............................................................. 184,528 (56,822)
Other liabilities................................................................ (15,617) 20,730
--------- ---------
Net cash provided by (used in) operating activities..................................... 336,419 (409,185)
--------- ---------
Cash Flows From Investing Activities:
Expenditures for property and equipment............................................... (82,623) (38,396)
--------- ---------
Cash Flows From Financing Activities:
Net borrowings under notes payable to banks........................................... 103,645 224,019
Net (repayments) borrowings under notes payable to stockholder........................ (195,127) 200,689
Repayment of note receivable from related party....................................... -- 8,902
--------- ---------
Net cash (used in) provided by financing activities..................................... (91,482) 433,610
--------- ---------
Net increase (decrease) in cash......................................................... 162,314 (13,971)
Cash, beginning of period............................................................... 121,929 65,384
--------- ---------
Cash, end of period..................................................................... $ 284,243 $ 51,413
--------- ---------
--------- ---------
Supplemental Cash Flow Information:
Interest paid......................................................................... $ 117,275 $ 58,767
Income taxes paid..................................................................... 79,972 98,331
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-16
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995
(UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
A. Unaudited Period
The unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States relating to the
provision of interim financial information. Accordingly, they do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine month
period ending May 31, 1996 are not necessarily indicative of the results that
may be expected for the year ending August 31, 1996.
B. Accounting for Impairments in Long-lived Assets
The Financial Accounting Standards Board has issued SFAS No. 121,
'Accounting for Impairments in Long-lived Assets and Long-lived Assets Being
Disposed Of,' which the Company adopted on September 1, 1995. This statement
requires that long-lived assets and identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amounts of the assets not to be recoverable. In evaluating recoverability, Hertz
Technology Group's (the 'Company') management estimates the future cash flows
expected to result from the assets and its eventual disposition. If the sum of
future undiscounted cash flows is less than the carrying amount of the asset, an
impairment loss is recognized. No such loss was recognized in the May 31, 1996
consolidated financial statements.
C. Accounting for Stock-based Compensation
The Financial Accounting Standards Board has issued Statement of Accounting
Standards No. 123, 'Accounting for Stock-based Compensation ('SFAS 123').' This
statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. The requirements of SFAS 123 are
effective for transactions entered into in fiscal years that begin after
December 15, 1995, though they may be adopted upon issuance. The disclosure
requirements of SFAS 123 are effective for financial statements for fiscal years
beginning after December 15, 1995. The adoption of this statement has no effect
on the May 31, 1996 consolidated financial statements.
D. Pro Forma Net Income
Pro forma net income is calculated as if Hergo Ergonomic Systems, Inc.
('Hergo') was a C corporation for tax filing purposes during the nine months
ended May 31, 1996 and May 31, 1995. As such, an effective tax rate of
approximately 46% was used in calculating both Hergo's and Hertz Computer
Corporation's ('Hertz Computer') pro forma net income.
E. Supplementary Net Income Per Share
Supplementary net income per share is calculated for the nine month period
ended Ma y 31, 1996. Supplementary net income per share is computed as if
$1,443,564 of interest bearing debt obligations was repaid from the net proceeds
of the IPO as of September 1, 1995 and assuming that (i) 288,713 of common
shares were issued as of September 1, 1995 to repay the interest bearing debt
obligations; (ii) $82,200 of interest expense, net of income tax expense, was
eliminated as a result of such payment for the nine months ended May 31, 1996;
(iii) pro forma income of $265,779 (as if Hergo was a C corporation for the nine
months ended May 31, 1996) is the base utilized in the calculation of net
income.
F-17
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995
(UNAUDITED)
NOTE 2. NOTES PAYABLE
In June 1995, Hertz Comuter entered into a Revolving Line of Credit
('Agreement') with a bank ('Bank') under which the Company could borrow up to
$1,000,000 with interest accruing on any outstanding balance at the base rate of
the Bank, plus 1% (effective rate at May 31, 1996 was 9.25%). Repayment of the
borrowings is secured by a general security interest in substantially all
personal property of the Company and is personally guaranteed by the
stockholders. The Agreement was renewed on June 30, 1996 with substantially
similar terms and is effective through June 30, 1997. As of May 31, 1996, the
balance outstanding under this Agreement was $895,000.
In February 1996, Hertz Computers Information System (1985) Ltd.
(Hertz-Israel) entered into a line of credit agreement with a bank for $300,000
and an interest rate of the six month Libor rate plus 1.25% (6.91% at May 31,
1996) which is effective through March 9, 1997. Presently, two short term loans
totaling $205,240 at May 31, 1996 are outstanding against this line of credit.
These loans were originally due on September 9, 1996, but were extended six
months and are presently due on March 9, 1997. The interest rate for the
extension period is the six month Libor rate plus 1.0%. An additional $6,135 is
outstanding at May 31, 1996 against this line of credit.
The Company is expected to utilize the proceeds from the IPO to pay the
entire balance of notes payable to the current stockholders and the current
revolving credit line with the Bank. In addition, the Company will utilize the
proceeds from the IPO to pay the distribution payable of $224,567 to the current
stockholders. This distribution payable represents the May 31, 1996 retained
earnings balance of Hergo and has been reflected as a current liability in the
May 31, 1996 consolidated balance sheet.
NOTE 3. STOCK OPTION PLAN
On August 7,1996, in order to attract and retain persons necessary for the
success of the Company, the Company adopted its 1996 Stock Option Plan ('Option
Plan') covering up to 750,000 of its shares of its common stock ('Shares'),
pursuant to which officers, directors and key employees of the Company and
consultants to the Company are eligible to receive incentive and/or
non-incentive stock options. The Option Plan, which expires on August 6, 2006,
will be administered by the Company's Board of Directors or a committee
designated by such group. The selection of participants, allotment of shares,
determination of price and other conditions relating to the purchase of options
will be determined by the Board of Directors, or a committee thereof, in its
sole discretion. Incentive stock options granted under the Option Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Shares on the date of
the grant, except that the term of an incentive stock option granted under the
Option Plan to a shareholder owning more than 10% of the outstanding Shares may
not exceed five years and its exercise price may not be less than 110% of the
Fair market value of the Shares on the date of the grant. As of September 12,
1996, no options have been granted under the Option Plan.
NOTE 4. GEOGRAPHIC AND CUSTOMER CONCENTRATION
The Company has a concentration of its sales in the New York metropolitan
area of approximately 66% and 60% for the periods ended May 31, 1996 and 1995,
respectively. Approximately 41% and 36% of its total computer's sales in the
nine month periods ended May 31, 1996 and 1995 were to federal, state and city
agencies or government affiliated organizations, including hospitals and
schools. The Company has significant sales with one customer, which comprises
18% of total sales for the May 31, 1996 nine month period. No customers exceeded
10% of sales in the nine month period ended May 31, 1995.
F-18
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NINE MONTHS ENDED MAY 31, 1996 AND MAY 31, 1995
(UNAUDITED)
NOTE 5. COMMITMENTS AND CONTINGENCIES
Hertz Computer entered into an operating lease agreement effective
September 1, 1996 for a rental property located in New York City as it is
vacating the premises it occupies currently on August 31, 1996. The minimum
lease commitments for the new premises are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDING MAY 31,
- ---------------------------------------------------------
<S> <C>
1997..................................................... $ 66,703
1998..................................................... 115,508
1999..................................................... 115,508
2000..................................................... 115,508
2001..................................................... 115,508
Thereafter............................................... 192,513
--------------
Total.................................................... $721,248
</TABLE>
F-19
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
------------------------------------------------------
------------------------------------------------------
NO UNDERWRITER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURERS OTHER THAN
THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH AN OFFER WOULD BE UNLAWFUL. ANY MATERIAL MODIFICATION OF THE
OFFERING WILL BE ACCOMPLISHED BY MEANS OF AN AMENDMENT TO THE REGISTRATION
STATEMENT. IN ADDITION, THE RIGHT IS RESERVED BY THE COMPANY TO CANCEL ANY
CONFIRMATION OF SALE PRIOR TO THE RELEASE OF FUND, IF, IN THE OPINION OF THE
COMPANY, COMPLETION OF SUCH SALE WOULD VIOLATE FEDERAL OR STATE SECURITIES LAWS
OR A RULE OR POLICY OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.,
WASHINGTON, D.C. 20006.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.......................... 3
Prospectus Summary............................. 4
Risk Factors................................... 8
S Corporation Distribution..................... 17
Use of Proceeds................................ 18
Dilution....................................... 19
Capitalization................................. 20
Dividend Policy................................ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 21
Business....................................... 25
Management..................................... 30
Principal Shareholders......................... 33
Certain Transactions........................... 34
Description of Securities...................... 35
Selling Shareholders........................... 38
Underwriting................................... 39
Legal Proceedings.............................. 42
Legal Matters.................................. 42
Experts........................................ 42
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL DECEMBER 7, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
BROKER-DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A
PROSPECTUS WHICH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
1,100,000 UNITS,
EACH UNIT CONSISTING OF ONE
SHARE OF COMMON STOCK AND
TWO CLASS A WARRANTS
HERTZ TECHNOLOGY GROUP, INC.
------------------------
PROSPECTUS
------------------------
BILTMORE SECURITIES, INC.
NOVEMBER 12, 1996
------------------------------------------------------
------------------------------------------------------
