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 February 28, 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.
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(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
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(Address of principal executive offices) (Zip Code)
212-634-4000
---------------------------------
(Issuer's telephone number)
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(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
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Class Shares Outstanding
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL SCHEDULES
FEBRUARY 28, 1997
INDEX
Page
----
PART I. Financial Information
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
February 28, 1997 and August 31, 1996 3
Condensed Consolidated Statements of
Operations for the three months and six months
ended February 28, 1997 and February 29, 1996 4
Condensed Consolidated Statements of Cash
Flows for the three months ended
February 28, 1997 and February 29, 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
SIX MONTHS ENDED FEBRUARY 28, 1997 8
PART II. Other Information
Item 1. Legal Proceedings 10
Item 6. Exhibit Index 11
SIGNATURES 12
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<PAGE>
HERTZ TECHNOLOGY GROUP
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
FEBRUARY 28, AUGUST 31,
1997 1996
------------ ----------
Unaudited
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 372,479 275,529
Marketable securities 3,557,541 --
Accounts receivable, less allowance
for doubtful accounts of $ 138,869 and $ 123,869 respectively 1,981,947 1,756,454
Inventories 1,059,674 999,273
Prepaid expenses and other current assets 172,537 482,440
-----------------------
Total current assets 7,144,178 3,513,696
-----------------------
PROPERTY AND EQUIPMENT, net 611,863 231,422
-----------------------
GOODWILL, net -- 39,604
-----------------------
OTHER ASSETS 50,445 28,612
-----------------------
Total assets $7,806,486 3,813,334
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
FEBRUARY 28, AUGUST 31,
1997 1996
------------ ----------
CURRENT LIABILITIES
Notes payable $ 206,289 1,126,372
Accounts payable and accrued 950,277 893,571
expenses
Income taxes payable 113,288 247,327
Distribution payable to stockholders 49,115 390,648
Notes payable to stockholder -- 246,686
-----------------------
Total current liabilities 1,318,969 2,904,604
-----------------------
OTHER 20,656 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 841,640 764,768
-----------------------
Total stockholders' equity 6,466,861 890,768
-----------------------
Total liabilities and stockholders' equity $7,806,486 3,813,334
=======================
</TABLE>
The accompanying notes are an integral part of these condensed balance sheets
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<PAGE>
HERTZ TECHNOLOGY GROUP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 2,974,489 $ 2,971,658 $ 5,921,831 $ 6,266,872
COST OF GOODS SOLD 1,803,720 2,097,840 3,716,295 4,376,235
----------- ----------- ----------- -----------
Gross Profit 1,170,769 873,818 2,205,536 1,890,637
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 907,970 682,491 1,578,356 1,383,533
PROVISION FOR CLOSING COSTS OF HERTZ ISRAEL 158,749 -- 158,749 --
----------- ----------- ----------- -----------
1,066,719 682,491 1,737,105 1,383,533
----------- ----------- ----------- -----------
Operating income 104,050 191,327 468,431 507,104
OTHER INCOME (EXPENSE):
Other 4,043 (8,539) 4,043 --
Interest, net 64,474 (39,922) 25,707 (87,366)
----------- ----------- ----------- -----------
Income before provision for income taxes 172,568 142,866 498,181 419,738
PROVISION FOR INCOME TAXES 87,000 69,247 149,465 141,604
----------- ----------- ----------- -----------
Net income $ 85,567 $ 73,619 $ 348,716 $ 278,134
=========== =========== =========== ===========
NET INCOME PER SHARE $ 0.03 -- 0.12 --
=========== =========== =========== ===========
HISTORICAL INCOME BEFORE PROVISION FOR INCOME TAXES $ 142,866 $ 498,181 $ 419,738
UNAUDITED PROFORMA PROVISION FOR INCOME TAXES 88,600 251,542 234,591
----------- ----------- -----------
PRO FORMA NET INCOME $ 54,266 $ 246,639 $ 185,147
=========== =========== ===========
PRO FORMA NET INCOME PER SHARE $ 0.03 $ 0.09 $ 0.10
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 3,227,801 1,900,000 2,883,166 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
SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28,
--------------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 348,716 $ 278,134
Adjustments to reconcile net income to net cash used in operating activities-
Depreciation and amortization 48,577 20,899
Bad debt expense 15,000 --
Changes in operating assets and
liabilities-
Accounts receivable (242,131) (213,914)
Inventories (60,401) (138,892)
Due from related parties -- 17,276
Prepaid expenses and other current assets 309,903 (78,545)
Other assets 13,810 (11,123)
Accounts payable and accrued expenses 56,699 19,345
Income taxes payable (134,035) 86,779
Other liabilities 2,694 10,426
----------- -----------
Net cash provided by (used in) operating activities 358,832 (9,615)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (427,038) (69,274)
Purchase of marketable securities (3,557,541) --
----------- -----------
Net cash used in investment activities (3,984,579) (69,274)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under notes payable
to other banks (25,083) 196,680
Repayment of credit line to a bank (895,000) --
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) 51,736
Sub S distribution to stockholder (594,255) --
----------- -----------
Net cash provided by financing activities 3,722,697 248,416
----------- -----------
Net increase in cash and cash equivalents 96,950 169,525
CASH and cash equivalents, beginning of period 275,529 121,929
----------- -----------
CASH and cash equivalents, end of period $ 372,479 $ 291,454
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 21,683 $ 48,150
Income taxes paid $ 221,035 $ 54,825
</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)
February 28, 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 six month periods ended
February 28, 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 was a C corporation for tax
filing purposes during the six month period ended February 28, 1997 and for the
three and six month periods ended February 29, 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 is 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 $895,000, $246,686
and $594,255, respectively, related 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 fully
liquidate its assets by the end of the fiscal year.
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<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 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.
Three Months and Six Months Ended February 28, 1997 compared to Three Months and
Six Months Ended February 29, 1996
Net Income
Net income for the three months ended February 28, 1997 was $85,000 compared to
$73,000 for the three months ended February 29, 1996, a 16% increase. Net income
for the six months ended February 28,1997 was $349,000 compared to $278,000 for
the six months ended February 29,1996, a 25% increase. Increases in the three
months and six months net income was due primarily to increased gross profit
attributable to the increased percentage of Hergo net sales, as well as the
elimination of interest expense related to the loan and line of credit repaid
from the proceeds received from the initial public offering. Offsetting such
benefits for both the three month and six month periods were increases in
expenses related to the new public corporate structure as well as a
non-recurring charge of $158,750, which relates to the closing of the Hertz
Israel operation, which impacted on net earnings for the three months ended
February 28, 1997.
Net Sales
The Company's net sales for the three months-ended February 28,1997 were $2.97
million, unchanged from the prior year. Net sales for the six months ended
February 28,1997 were $5.92 million compared to $6.27 million, a 5.4% decrease.
Hertz computer net sales declined for the quarter and the six months due to the
completion of some volume purchases by NYS Government agencies in the prior
period and the decline in net sales of Hertz Israel in the current period. The
Company has discontinued the operation of Hertz Israel. Effective March 1, 1997
the Company has granted the distribution rights to its Hertz PC's to a
well-established, full service computer company in Israel. Hergo net sales
increased 78% for the quarter and 54% for the six months ended February 28,1997
over the respective prior periods.
-8-
<PAGE>
Gross Profit
Gross profit was $1,171,000 (39% of net sales) and $874,000 (29% of net sales)
for the three months ended February 28, 1997 and February 29, 1996,
respectively, an increase of $297,000. Gross profit was $2,206,000 (37% of net
sales) and $1,891,000 (30% of net sales) for the six months ended February 28,
1997 and February 29, 1996, respectively, an increase of $315,000. The favorable
impact on gross profit was primarily attributable to Hergo's higher sales and
higher gross profit margins for both the quarter and the six months ended
February 28,1997 as compared to the respective prior periods.
Selling General and Administrative Expenses
Selling, general and administrative expenses increased for the quarter and six
months ended February 28, 1997 respectively, as compared to the preceding
respective periods, by $225,000 and $195,000 respectively. The primary increases
were in selling expenses related to advertising and trade shows, as well as,
expenses related to the public corporate structure and increases in legal and
accounting fees. In addition, expenses were incurred on account of the
relocation of the corporate offices and the computer production facility. Since
the IPO and the relocation of new offices occurred at the end of the first
quarter 1997 the increased expenses in selling, general and administrative were
in the second quarter 1997. Some of these expenses were offset by the reduction
of operational expenditures in Hertz Israel.
Interest Income, Net
Interest income increased by $56,000 for both the quarter and six months ended
February 28, 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 $49,000 and $57,000 for the
quarter and six months ended February 28, 1997 respectively, as compared to the
preceding respective periods, due to the repayments of the Company's outstanding
loans and lines of credit with the proceeds from the IPO.
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 fully 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 February 28, 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 February 28, 1997. The
tax provision for the three months ended and the six months ended February 28,
1997 was $87,000 and $149,000, respectively. The tax provision for the three
months and six months ended February 29,1996 ($69,000 and $142,000,
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 six-month period ended February 28, 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 $1,142,000 of the IPO proceeds to repay
its loans and line of credit.
For the six-months period ended February 28, 1997, the Company generated a
positive cash flow from operation of $359,000 as compared to a negative cash
flow from operation of $10,000 for the six-month period ended February 29, 1996.
Increased net income, in-spite of the decline in sales, and a large decrease in
prepaid expenses were the principal reasons for the difference.
Net purchases of fixed assets in the six months ended February 28, 1997 were
$427,000 as compared to $69,000 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 an
initial estimated subchapter "S" distribution of $594,000. The Company intends
to make a final subchapter "S" distribution of approximately $49,000 in fiscal
year 1997.
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.
-10-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
EXHIBIT INDEX
ITEM 6. Exhibit
Exhibit 27. Financial Data Schedule
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<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
/s/ Eli E. Hertz
------------------------------------
Dated: 04/10/97 Eli E. Hertz, Chairman, President
And Chief Executive Officer
/s/ Robert Cohen
------------------------------------
Dated: 04/10/97 Robert Cohen, Chief Financial
Officer
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> FEB-28-1997
<CASH> 372,479
<SECURITIES> 3,557,541
<RECEIVABLES> 2,120,816
<ALLOWANCES> 138,869
<INVENTORY> 1,059,674
<CURRENT-ASSETS> 7,144,178
<PP&E> 779,783
<DEPRECIATION> 167,919
<TOTAL-ASSETS> 7,806,486
<CURRENT-LIABILITIES> 1,318,969
<BONDS> 0
0
0
<COMMON> 3,165
<OTHER-SE> 6,463,696
<TOTAL-LIABILITY-AND-EQUITY> 7,806,486
<SALES> 5,921,831
<TOTAL-REVENUES> 5,921,831
<CGS> 3,716,295
<TOTAL-COSTS> 3,716,295
<OTHER-EXPENSES> 158,749
<LOSS-PROVISION> 15,000
<INTEREST-EXPENSE> 46,276
<INCOME-PRETAX> 498,181
<INCOME-TAX> 149,465
<INCOME-CONTINUING> 348,716
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 348,716
<EPS-PRIMARY> .12
<EPS-DILUTED> 0
</TABLE>
