U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended May 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1939
For the transition period from ___________ to ___________
Commission File Number: 0-21679
HERTZ TECHNOLOGY GROUP, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3896069
- ------------------------------------- ----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) identification number)
75 Varick Street 10013
- ----------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
212-634-4000
---------------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days.
Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of Common
equity, as of the latest practicable date.
July 7, 1997
Common Stock, par value
$.001 per share 3,165,000
- -------------------------------- -------------------------
Class Shares Outstanding
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES
MAY 31, 1997
INDEX
Page
PART I. Financial Information
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
May 31, 1997 and August 31, 1996 3
Condensed Consolidated Statements of
Operations for the three months and nine months
ended May 31, 1997 and May 31, 1996 4
Condensed Consolidated Statements of Cash
Flows for the nine months ended
May 31, 1997 and May 31, 1996 5
Notes to Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE MONTHS AND
NINE MONTHS ENDED MAY 31, 1997 8
PART II. Other Information
Item 6. Exhibit Index 12
SIGNATURES 13
<PAGE>
HERTZ TECHNOLOGY GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MAY 31, AUGUST 31,
1997 1996
---- ----
Unaudited
---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 363,041 275,529
Marketable securities 3,518,738 -
Accounts receivable, less allowance for
doubtful accounts of $153,869 and $123,869 respectively 1,363,948 1,756,454
Inventories 875,133 999,273
Prepaid expenses and other current assets 305,412 482,440
--------------------------
Total current assets 6,426,272 3,513,696
--------------------------
PROPERTY AND EQUIPMENT, net 618,695 231,422
--------------------------
GOODWILL, net - 39,604
--------------------------
OTHER ASSETS 50,538 28,612
--------------------------
Total assets $ 7,095,505 3,813,334
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
MAY 31, AUGUST 31,
1997 1996
---- ----
CURRENT LIABILITIES
Notes payable $ - 1,126,372
Accounts payable and accrued expenses 479,599 893,571
Income taxes payable - 247,327
Distribution payable to stockholders - 390,648
Notes payable to stockholder - 246,686
--------------------------
Total current liabilities 479,599 2,904,604
--------------------------
OTHER 19,286 17,962
--------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value: 25,000,000 shares authorized,
3,165,000 shares and 1,900,000 issued and outstanding, respectively 3,165 1,900
Additional paid-in capital 5,606,556 124,100
Retained earnings 986,899 764,768
--------------------------
Total stockholders' equity 6,596,620 890,768
--------------------------
Total liabilities and stockholders' equity $ 7,095,505 3,813,334
==========================
</TABLE>
The accompanying notes are an integral part of these condensed balance sheets
-3-
<PAGE>
HERTZ TECHNOLOGY GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED MAY 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
------- -------
1997 1996 1997 1996
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 2,762,625 $ 3,108,985 $ 8,684,456 $ 9,375,857
COST OF GOODS SOLD 1,852,118 2,156,431 5,568,413 6,532,666
------------ ----------- ----------- -------------
Gross Profit 910,507 952,554 3,116,043 2,843,191
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 619,201 688,855 2,197,557 2,072,388
PROVISION FOR CLOSING COSTS OF HERTZ ISRAEL - - 158,749 -
------------ ----------- ----------- -------------
619,201 688,855 2,356,306 2,072,388
------------ ----------- ----------- -------------
Operating income 291,306 263,699 759,737 770,803
OTHER INCOME (EXPENSE):
Other (102,359) 9,323 (98,316) 9,323
Interest, net 78,621 (60,747) 104,328 (148,113)
------------ ----------- ----------- -------------
Income before provision for income taxes 267,568 212,275 765,749 632,013
PROVISION FOR INCOME TAXES 55,520 102,896 204,985 244,500
------------ ----------- ----------- -------------
Net income $ 212,048 $ 109,379 $ 560,764 $ 387,513
============ =========== =========== =============
NET INCOME PER SHARE $ 0.06 - 0.17 -
============ =========== =========== =============
HISTORICAL INCOME BEFORE PROVISION FOR INCOME
TAXES $ 212,275 $ 765,749 $ 632,013
UNAUDITED PROFORMA PROVISION FOR INCOME TAXES 131,642 307,062 366,233
----------- ----------- -------------
PRO FORMA NET INCOME $ 80,633 $ 458,687 $ 265,780
=========== =========== =============
PRO FORMA NET INCOME PER SHARE $ 0.04 $ 0.14 $ 0.14
=========== =========== =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 3,665,652 1,900,000 3,223,782 1,900,000
============ =========== =========== =============
</TABLE>
The accompanying notes are an integral part of these condensed statements.
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<PAGE>
HERTZ TECHNOLOGY GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
NINE MONTHS ENDED MAY 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31,
-------
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 560,763 $ 387,510
Adjustments to reconcile net income to net cash
used in operating activities-
Depreciation and amortization 92,746 39,741
Bad debt expense 30,000 46,246
Changes in operating assets and liabilities-
Accounts receivable 360,867 280,064
Inventories 124,141 (47,321)
Due from related parties - 17,276
Prepaid expenses and other current assets 177,028 (69,790)
Other assets (21,928) (43,288)
Accounts payable and accrued expenses (413,979) (442,930)
Income taxes payable (247,323) 184,529
Other liabilities 1,324 (15,617)
-------------- ------------
Net cash provided by (used in) operating activities 663,639 336,420
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (480,018) (82,623)
Purchase of marketable securities (3,518,738) -
-------------- ------------
Net cash used in investment activities (3,998,756) (82,623)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under notes payable
to other banks - 103,644
Repayment of credit line to a bank (1,126,372) -
Proceeds from issuance of common stock and
warrants, net of underwriting expense 6,053,025 -
Payments of registration costs of common stocks and warrants (569,304) -
Net (repayments) under note payable to stockholder (246,686) (195,127)
Sub S distribution to stockholder (688,034) -
-------------- ------------
Net cash provided by financing activities 3,422,629 (91,483)
-------------- ------------
Net increase in cash and cash equivalents 87,512 162,314
CASH and cash equivalents, beginning of period 275,529 121,929
-------------- ------------
CASH and cash equivalents, end of period $ 363,041 $ 284,243
============= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 21,683 $ 117,275
Income taxes paid $ 341,873 $ 79,972
</TABLE>
The accompanying notes are an integral part of these condensed statements.
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<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
May 31, 1997
1. BASIS OF PRESENTATION AND OPERATIONS
The accompanying consolidated financial statements are unaudited and in
the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation in
accordance with generally accepted accounting principles and with the
instructions to Form 10QSB. Operating results for the three month and nine month
periods ended May 31, 1997 are not necessarily indicative of the results that
may be expected for the year ended August 31, 1997. For further information,
refer to the financial statements and footnotes thereto included in the Hertz
Technology Group, Inc. ("Hertz" or the "Company") audited financial statements
for the year ended at August 31, 1996.
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.
Effective November 12, 1996, the date of the Company's IPO, Hergo's S
Corporation status was terminated and effective November 13, 1996 Hergo is a C
Corporation. As such, Hergo did not incur federal income tax expense, although
it did incur state and local tax expense for the September 1, 1996 through
November 12, 1996 period. Immediately subsequent to this date, Hergo incurred
federal income 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 were a C corporation for
tax filing purposes during the nine month period ended May 31, 1997 and for the
three and nine month periods ended May 31, 1996. As such, an effective tax rate
of approximately 46% was used in calculating Hergo's pro forma income tax
provision for these periods. The Company has included the effect of the warrants
as if they were exercised in the calculation for pro forma net income per share.
Net Income Per Share
Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of shares of common stock outstanding
during the periods as if the Company was recapitalized on September 1, 1995. The
Company has included the effect of the warrants as if they were exercised in the
calculation for net income per share.
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<PAGE>
2. RECAPITALIZATION
Effective November 12, 1996, the date of the initial public offering,
Hertz Computer Corporation ("Hertz Computer") and Hergo Ergonomic Support
Systems, Inc. ("Hergo"), two entities under common control, were acquired by the
Company (which was owned by the same shareholders) and became wholly owned
subsidiaries. Accordingly, the financial statements are presented as
consolidated for all periods presented. Hertz Computer owns 100% of Hertz
Computer Information System (1985) Ltd. ("Hertz-Israel").
On November 12, 1996, the Company registered 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 IPO price of $5.50 per unit. The warrants are exercisable for a
four year period commencing one year from the effective date of the IPO at a
price of $5.50. On November 18, 1996, the underwriter of the IPO exercised its
over-allotment option to purchase 165,000 units from the Company (165,000 shares
and 330,000 warrants) at $5.50 per unit. The Company realized proceeds from the
sale of the units of $5,483,721 net of commissions and offering expenses of
$1,473,778. Upon realizing these proceeds, the Company repaid $1,126,000,
$246,686 and $688,000, respectively, relating to its credit line to a bank, note
payables to shareholders and its distribution payable to shareholders related to
the retained S Corporation earnings in Hergo.
3. PROVISION FOR CLOSING COSTS OF HERTZ -ISRAEL
During the three month period ended February 28, 1997, the Company
recorded a provision of $158,749 for the closing costs of Hertz-Israel. This
represents a provision for write downs of property and equipment, goodwill and
other closure related costs. The Company expects to close Hertz-Israel and
liquidate its assets by the end of the fiscal year.
4. EARNINGS PER SHARE
The Company will adopt SFAS No. 128, "Earning Per Share" during fiscal
1998. This statement establishes standards for computing and presenting earnings
per share (EPS), replacing the presentation of currently required primary EPS
with a presentation of basic EPS. The pro forma effect of this statement for the
nine-month period ended May 31, 1997 is immaterial. When adopted, the Company
will be required to restate its EPS data for all prior periods presented. The
Company does not expect the impact of the adoption of this statement to be
material to previously reported EPS amounts.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
General
The Company custom designs and assembles PC's and related products and
provides technical services and support under the "Hertz" name through its Hertz
Computer subsidiary. It also designs, manufactures and sells ergonomically
engineered modular support structures and technical furniture for micro
computers and electronic devices under the "Hergo" name through its Hergo
subsidiary.
Three Months and Nine Months Ended May 31, 1997 compared to Three Months and
Nine Months Ended May 31, 1996
Net Income
Net income for the three months ended May 31, 1997 was $212,000 compared to
$109,000 for the three months ended May 31, 1996, a 94% increase. Net income for
the nine months ended May 31, 1997 was $561,000 compared to $388,000 for the
nine months ended May 31, 1996, a 45% increase. Increases in the three months
and nine months net income were due to several factors: increased gross profit
percentages attributable to increased Hergo sales, elimination of interest
expense due to the repayment of Company loan and lines of credit from the
proceeds of the initial public offering and increased interest income generated
from the proceeds of the initial public offering. Increased expenses for both
the three month and nine month periods were related to the new public corporate
structure as well as a non-recurring charge for a loss on marketable securities.
Net Sales
The Company's net sales for the three months-ended May 31, 1997 were $2.76
million, compared to $3.11 million for the three months-ended May 31, 1996, an
11% decrease. Net sales for the nine months ended May 31, 1997 were $8.68
million compared to $9.38 million, a 7% decrease. Hertz computer net sales
declined for the quarter and the nine months due to the completion of some
volume purchases by Government agencies in the prior period as well as the
closing of Hertz Israel in the prior period. Effective March 1, 1997 the Company
has granted the distribution rights to its Hertz PC's to an established, full
service computer company in Israel. Hergo net sales increased 64% for the
quarter and 57% for the nine months ended May 31, 1997 over the respective prior
periods.
-8-
<PAGE>
Gross Profit
Gross profit was $911,000 (33% of net sales) and $953,000 (31% of net sales) for
the three months ended May 31, 1997 and May 31, 1996, respectively, a decrease
of $42,000. Gross profit was $3,116,000 (36% of net sales) and $2,843,000 (30%
of net sales) for the nine months ended May 31, 1997 and May 31, 1996,
respectively, an increase of $273,000. Increased gross profit percentages were
due to the relative sales mix between Hertz and Hergo which offset the reduction
in sales for the three month and nine month periods ended May 31, 1997. Also
impacting favorably on the gross profit percentages was the closing of the Hertz
Israel division, which historically operated at a lower gross margin.
Selling General and Administrative Expenses
Selling, general and administrative expenses decreased for the quarter ended May
31, 1997 by $70,000, and increased for the nine months ended May 31, 1997 by
$125,000, as compared to the preceding respective periods. The primary reason
for the decrease in selling, general and administrative expenses for the three
months ended May 31, 1997 was the elimination of expenses generated by the Hertz
Israel division, which was discontinued on February 28, 1997. For the nine
months ended May 31, 1997 there were increased expenses related to the public
corporate structure, increases in legal and accounting fees and increased
advertising expenses. In addition, expenses were incurred in connection with the
relocation of the corporate offices and the computer production facility. Some
of these expenses were also offset by the reduction of operational expenditures
in Hertz Israel.
Other Income and Expenses
Interest income increased by $67,000 for the three months and by $104,000 for
the nine months ended May 31, 1997 respectively as compared to the proceeding
respective periods. This increase is the result of interest income generated by
funds from the public offering. Interest Expense decreased by $72,000 and
$148,000 for the quarter and nine months ended May 31, 1997 respectively, as
compared to the preceding respective periods, due to the repayments of the
Company's outstanding loans and lines of credits using the proceeds from the
IPO. The increase in interest income was partially offset by a $102,000 loss
incurred in the sale of marketable securities.
Provision for Closing Costs of Hertz-Israel
During the three month period ended February 28, 1997, the Company recorded a
provision of $158,749 for the closing costs of Hertz-Israel. This represents a
provision for write downs of property and equipment, goodwill and other closure
related costs. The Company expects to close Hertz-Israel and liquidate its
assets by the end of the fiscal year 1997.
-9-
<PAGE>
Provision for Income Taxes
From September 1, 1996 through November 12, 1996 Hergo was classified as a
subchapter "S" corporation and incurred no federal corporation tax. The tax
provision from November 13, 1996 through May 31, 1997 was calculated at a
blended rate between Hertz Computer as a "C" corporation for the full period and
Hergo as a "C" corporation from November 13, 1996 through May 31, 1997. The tax
provision for the three months ended and the nine months ended May 31, 1997 was
$56,000 and $205,000, respectively. The tax provision for the three months and
nine months ended May 31, 1996 ($103,000 and $245,000, respectively) was
calculated with Hertz Computer as a "C" corporation and Hergo as a subchapter
"S" corporation. As a result of management's decision to discontinue Hertz
Israel's operations during the quarter ended February 28, 1997 the accumulated
losses recorded for financial statement purposes will be recognized in the
current year for tax purposes.
Liquidity and Capital Resources
During the nine-month period ended May 31, 1997 the Company completed an IPO of
common stock and warrants, which became effective November 12, 1996. The
proceeds from the IPO net of underwriting commissions and expenses totaled
$6,053,000. In completing its IPO, the Company incurred additional expenses of
$569,000 in connection with the registration of its common stock and warrants.
As previously planned, the Company used $1,126,000 of the IPO proceeds to repay
its loans and line of credit.
As of May 31, 1997 the Company has $3,882,000 in cash and marketable securities
as compared to $276,000 in the prior year. The Company has no long term debt.
For the nine-months period ended May 31, 1997, the Company generated a positive
cash flow from operation of $664,000 as compared to $336,000 for the nine-month
period ended May 31, 1996.A positive cash flow was due to the reductions in
inventory, accounts receivable and prepaid expenses offset in part by reductions
in accounts payable and income taxes payable.
Net purchases of fixed assets in the nine months ended May 31, 1997 were
$480,000 as compared to $83,000 in the same period last year. The increase was
largely due to expenditures related to the relocation of the corporate offices
and computer production facility.
Concurrent with the effective date of the IPO, as described above, Hergo's
status has been changed from a subchapter "S" corporation for federal income tax
purposes, to a "C" corporation. In connection with this change Hergo has made a
subchapter "S" distribution of $688,000.
-10-
<PAGE>
New Accounting Standards
The Financial Accounting Standards Board has issued Statement # 128, "Earnings
Per Share", which is effective on December 31, 1997. Had the Company presented
it's Earnings Per Share under this standard, the difference would not be
material.
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
EXHIBIT INDEX
ITEM 6. Exhibit
Exhibit 27. Financial Data Schedule
-12-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant,
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Hertz Technology Group, Inc
Dated: 07/10/97 /s/ Eli E. Hertz
------------------------------------
Eli E. Hertz, Chairman, President
And Chief Executive Officer
Dated: 07/10/97 /s/ Robert Cohen
------------------------------------
Robert Cohen, Chief Financial
Officer
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule Worksheet
Commercial and Industrial Companies - Article 5 of Regulation S-X
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 363,041
<SECURITIES> 3,518,738
<RECEIVABLES> 1,517,817
<ALLOWANCES> 153,869
<INVENTORY> 875,133
<CURRENT-ASSETS> 6,426,272
<PP&E> 820,534
<DEPRECIATION> 201,838
<TOTAL-ASSETS> 7,095,505
<CURRENT-LIABILITIES> 479,599
<BONDS> 0
0
0
<COMMON> 3,165
<OTHER-SE> 6,593,455
<TOTAL-LIABILITY-AND-EQUITY> 7,095,505
<SALES> 8,684,456
<TOTAL-REVENUES> 8,684,456
<CGS> 5,568,413
<TOTAL-COSTS> 5,568,413
<OTHER-EXPENSES> 158,749
<LOSS-PROVISION> 30,000
<INTEREST-EXPENSE> 116,217
<INCOME-PRETAX> 765,749
<INCOME-TAX> 204,985
<INCOME-CONTINUING> 560,764
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 560,764
<EPS-PRIMARY> .17
<EPS-DILUTED> 0
</TABLE>
