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 November 30, 1996
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.
January 13, 1996
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
NOVEMBER 30, 1996
INDEX
Page
----
PART I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of November 30, 1996
and August 31, 1996 3
Condensed Consolidated Statements of Operations for the
three months ended November 30, 1996 and November 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the
three months ended November 30, 1996 and November 30, 1995 5
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
NOVEMBER 30, 1996 8
PART II. Other Information
ITEM 1. Legal Proceedings 10
ITEM 6. Exhibit Index 11
Signatures 12
2
<PAGE>
PART 1. Financial Information
ITEM 1. Financial Statements
HERTZ TECHNOLOGY GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
NOVEMBER 30, AUGUST 31,
------------ ----------
1996 1996
---- ----
CURRENT ASSETS:
Cash and cash equivalents $4,571,424 275,529
Accounts receivable, less allowance for
doubtful accounts of $ 123,869 1,841,944 1,756,454
Inventories 1,116,954 999,273
Prepaid expenses and other current assets 178,362 482,440
-----------------------
Total current assets 7,708,684 3,513,696
-----------------------
PROPERTY AND EQUIPMENT, net 513,276 231,422
-----------------------
GOODWILL, net 37,624 39,604
-----------------------
OTHER ASSETS 50,524 28,612
-----------------------
Total assets $8,310,108 3,813,334
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
NOVEMBER 30, AUGUST 31,
------------ ----------
1996 1996
---- ----
CURRENT LIABILITIES
Notes payable $ 209,016 1,126,372
Accounts payable and accrued expenses 949,161 893,571
Income taxes payable 87,788 247,327
Distribution payable to stockholders 643,370 390,648
Notes payable to stockholder 3,745 246,686
-----------------------
Total current liabilities 1,893,081 2,904,604
-----------------------
OTHER 16,615 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 5,622,056 124,100
Retained earnings 775,192 764,768
-----------------------
Total stockholders' equity 6,400,413 890,768
-----------------------
Total liabilities and stockholders' equity $8,310,108 3,813,334
=======================
The accompanying notes are an integral part of these condensed statements
3
<PAGE>
HERTZ TECHNOLOGY GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1995
(UNAUDITED)
THREE MONTHS ENDED
------------------
NOVEMBER 30,
------------
1996 1995
---------- ---------
NET SALES $2,947,342 $3,295,214
COST OF GOODS SOLD 1,912,575 2,278,395
---------- ---------
Gross Profit 1,034,767 1,016,819
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 670,386 701,042
---------- ---------
Operating income 364,381 315,777
OTHER INCOME (EXPENSE):
Other income -- 8,539
Interest, net of interest income of
$4,114 and $1,970 (38,767) (47,444)
---------- ---------
Income before provision for income taxes 325,614 276,872
PROVISION FOR INCOME TAXES 62,465 72,357
---------- ---------
Net income $ 263,149 $ 204,515
========== =========
HISTORICAL INCOME BEFORE PROVISION FOR INCOME TAXES $ 325,614 $ 276,872
UNAUDITED PROFORMA PROVISION FOR INCOME TAXES 164,542 145,991
========== =========
PRO FORMA NET INCOME $ 161,072 $ 130,881
---------- ---------
PRO FORMA NET INCOME PER SHARE $ 0.07 $ 0.07
========== =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 2,150,220 1,900,000
========== =========
SUPPLEMENTARY NET INCOME PER SHARE $ 0.07
==========
The accompanying notes are an integral part of these condensed statements
4
<PAGE>
HERTZ TECHNOLOGY GROUP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED NOVEMBER 30, 1996 AND 1995
(UNAUDITED)
THREE MONTHS ENDED
------------------
NOVEMBER 30,
------------
1996 1995
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 263,149 $ 204,515
Adjustments to reconcile net income to net cash
used in operating activities-
Depreciation and amortization 17,877 18,731
Bad debt expense (recovery) 0 20,000
Changes in operating assets and liabilities-
Accounts receivable (85,490) (626,735)
Inventories (117,681) (112,491)
Due from related parties -- 17,276
Prepaid expenses and other current assets 304,079 (4,604)
Other assets (21,913) (13,685)
Accounts payable and accrued expenses 55,582 223,145
Income taxes payable (159,535) 64,894
Other liabilities 0 (15,617)
---------- ---------
Net cash provided by (used in) operating
activities 256,068 (224,571)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (297,750) (5,540)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under notes payable
to other banks (23,703) 91,078
Repayment of credit line to United Mizrahi Bank
and Trust Company (895,000) --
Proceeds from issuance of common stock and
warrants, net of underwriting 6,053,025 --
commission and expenses
Payments of registration costs of common stocks
and warrants (553,804) --
Repayments of note payable to stockholder (242,941) --
---------- ---------
Net cash provided by financing activities 4,337,577 91,078
---------- ---------
Net increase (decrease) in cash and cash
equivalents 4,295,895 (139,034)
CASH and cash equivalents, beginning of period 275,529 121,929
---------- ---------
CASH and cash equivalents, end of period $4,571,424 $ (17,105)
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 28,812 $ 37,115
Income taxes paid 222,000 16,375
The accompanying notes are an integral part of these condensed statements
5
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
November 30, 1996
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 period ended November 30, 1996 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. For the November 13, 1996 through November 30, 1996
period, 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 was a C corporation for tax
filing purposes during the period ended November 30, 1996 and November 30, 1995.
As such, an effective tax rate of approximately 46% was used in calculating
Hergo's pro forma income tax provision.
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 period as if the company were 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.
6
<PAGE>
Supplementary net income per share is calculated for the period ended
November 30, 1996. Supplementary net income per share is computed as if
$1,126,372 and $246,686 of interest bearing debt obligations were repaid from
the net proceeds of the IPO as of September 1, 1995 and assuming that (I)
2,174,612 of common shares were issued as of September 1, 1995 to repay the
interest bearing debt obligations; (ii) 23,156 of interest expense, net of
income tax expense, was eliminated as a result of such payment for the period
ended November 30, 1996.
2. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
Effective November 12, 1996, the date of the initial public offering
("IPO"), Hertz Computer Corporation ("Hertz Computer") and Hergo Ergonomic
Support Systems, Inc. ("Hergo"), two entities under common control, were
acquired by the Company (which is owned by the same shareholders) and became
wholly owned subsidiaries. Accordingly, the financial statements are presented
as consolidated. 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 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 $5,499,221
net of commissions and offering expenses of $1,458,278.
7
<PAGE>
ITEM. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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 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 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.
Three Months Ended November 30, 1996 Compared to Three Months Ended
November 30, 1995
Revenues
Company sales for the three months ended November 30, 1996, were $2.95 million,
compared to $3.30 million for the period ended November 30, 1995, an 11%
decrease. The construction of, and relocation to the new corporate offices and
the new Hertz Computer production facility begun in the month of September 1996
contributed to a downturn in Hertz Computer sales with less production and
shipping occurring during that period when compared to the same period last
year. The new Hertz Computer production facility was substantially completed by
December 31, 1996. Hergo sales, on the other hand, experienced continued growth
with an increase in sales from $721,000 to $1,002,000, a 39% increase over the
same period last year. Hertz Israel, as reported previously, continues to
experience competitive pressures resulting in a sales decrease from $530,000 in
the first quarter of last year to $355,000 in the same period this year. The
company is currently reviewing alternatives to the Israel market as it is
currently structured.
Gross Profit
Combined gross profit for the three months ended November 30, 1996 was
$1,034,767, representing 35% of sales, compared to $1,016,819, representing 30%
of sales, for the three months ended November 30, 1995. Despite lower combined
sales volume, Hertz USA maintained its gross profit margin and Hertz Israel
experienced a slight improvement in its gross profit margin. Hergo not only
increased their sales volume but Hergo sales constituted a larger portion of
combined sales, increasing from 22% in the first quarter last year to 34% in the
first quarter ended November 30, 1996. Since the gross profit margin is higher
in the Hergo product line, the combined effect increased the gross profit margin
and resulted in a slight increase in total gross profit dollars for the current
period.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Selling, General and Administrative
For the three months ended November 30, 1996, selling, general and
administrative expenses, of the company were $670,000 as compared to $701,000
for the three months ended November 30, 1995. The net decrease of $31,000 is
attributable primarily to a decrease in operating expenses in Hertz Israel of
$52,100, undertaken in order to bring expenses more in line with the reduced
sales from the division. Hertz Israel expenses were reduced from $140,200 in the
first quarter of last year to $88,100 in the first quarter of this year. The
other significant expense decrease was in Hertz USA, where officer compensation
was reduced by $35,800. Increases in advertising and trade show expenses in
Hergo accounted for most of the offsetting expense increase of $56,900.
Interest Expense
The decrease in interest expense of $8,677 between the three month period ended
November 30, 1995, and the three month period ended November 30, 1996, results
primarily from a decrease in interest payments due to the repayment of loans to
the principal shareholders and repayment of its line of credit with the United
Mizrahi Bank offset by an increase in interest expense related to Hertz Israel
due to an unfavorable change in currency exchange rates.
Provision for Income Taxes
From September 1, 1996 through November 12, 1996, Hergo was classified as a
subchapter "S" corporation and incurred no federal corporate taxes. The tax
provision for the three months ended November 30, 1996, was calculated as 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 November 30, 1996.
The tax provision for the three months ended November 30, 1995, was calculated
with Hertz Computer as a "C" corporation and Hergo as a subchapter "S"
corporation for the entire period. The proforma tax provision for income taxes
accounts for Hergo as a "C" corporation for each of the three months ended
November 30, 1996 and 1995.
Net Income
Net Income for the three months ended November 30, 1996, was $263,149 as
compared to $204,515 for the same period last year. The increase in net income
over the same period last year is due primarily to increased Hergo sales. Hergo
enjoys a substantially higher gross margin, and sales increases have a
disproportionately favorable impact on net income.
Liquidity and Capital Resources
During the three month period ended November 30, 1996, the Company completed an
initial public offering (IPO) of common stock and warrants which became
effective November 12, 1996. The proceeds from the IPO net of underwriting
commissions and expenses totaled $6,053,025. In
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
completing its IPO, the Company incurred additional expenses to register its
common stock and warrants of $553,804. As previously planned, the Company used a
portion of the IPO proceeds to repay its line of credit with United Mizrahi Bank
and to repay a loan to a principal shareholder. In the three month period ended
November 30, 1995, the only financing activity was an increase in borrowing from
banks of $91,078.
For the three month period ended November 30, 1996, the Company generated a
positive cash flow from operations of $256,068, as compared to a negative cash
flow from operations of $224,571, for the three month period ended November 30,
1995. Increased net income in spite of the drop in sales, and essentially flat
accounts receivable when compared to the very large increase in accounts
receivable in the same period last year are the principal reasons for the
difference.
Net purchases of fixed assets in the three months ended November 30, 1996, were
$297,751 as compared to $5,540 in the same period last year.
Concurrent with the effective date of the IPO, as described above, Hergo's
status was changed from a subchapter "S" corporation for federal income tax
purposes to a "C" corporation and it became a wholly owned subsidiary of the
Company. The Company intends to make a final subchapter "S" distribution of
$643,370 to the shareholders of Hergo for their share of subchapter "S" retained
earnings.
PART II. Other Information
ITEM 1. Legal Proceedings
In December 1996, the Company settled the suit by Ergotron, Inc. regarding
tradedress and copyright infringment for an amount not material to the results
of operations for the year ended August 31, 1996. This suit was reported in the
Registrant's Registration Statement on Form SB-2, registration number 333-9783
filed on November 12, 1996.
10
<PAGE>
EXHIBIT INDEX
ITEM 6. Exhibits.
Exhibit 27. Financial Data Schedule
11
<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.
Date January 16, 1997 /s/ Eli E. Hertz
------------------------- ---------------------------------
Eli E. Hertz, Chairman,
President and Chief Executive
Officer
Date January 16, 1997 /s/ John C. Rudy
------------------------- ---------------------------------
John C. Rudy, Vice President,
Principal Financial Officer and
Chief Accounting Officer
12
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> NOV-30-1996
<CASH> 4,571,424
<SECURITIES> 0
<RECEIVABLES> 1,965,813
<ALLOWANCES> 123,869
<INVENTORY> 1,116,954
<CURRENT-ASSETS> 7,708,684
<PP&E> 729,764
<DEPRECIATION> 216,488
<TOTAL-ASSETS> 8,310,108
<CURRENT-LIABILITIES> 1,893,081
<BONDS> 0
0
0
<COMMON> 3,165
<OTHER-SE> 6,397,248
<TOTAL-LIABILITY-AND-EQUITY> 8,310,108
<SALES> 2,947,342
<TOTAL-REVENUES> 2,947,342
<CGS> 1,912,575
<TOTAL-COSTS> 1,912,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,881
<INCOME-PRETAX> 325,614
<INCOME-TAX> 62,465
<INCOME-CONTINUING> 263,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 263,149
<EPS-PRIMARY> .07
<EPS-DILUTED> 0
</TABLE>
