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, 1998
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
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
212-634-4000
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(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.
July 15, 1998
Common Stock, par value
$.001 per share 3,208,600
- ------------------------ ------------------
Class Shares Outstanding
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
MAY 31, 1998
INDEX
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of
May 31, 1998 and August 31, 1997 3
Consolidated Statements of Operations
for the three months and nine months ended
May 31, 1998 and May 31, 1997 4
Consolidated Statements of Cash
Flows for the nine months ended
May 31, 1998 and May 31, 1997 5
Consolidated Statements of Stockholders
Equity for year ended August 31, 1997 and
nine months ended May 31, 1998 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of financial condition and results of
operations for the three months and
nine months ended May 31, 1998 11
PART II. Other Information
Item 2. Changes in securities and use of proceeds 17
SIGNATURES 18
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<PAGE>
PART I
FINANCIAL INFORMATION
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
MAY 31, AUGUST 31,
1998 1997
Unaudited Audited
--------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 112,722 326,121
Marketable securities 2,658,363 3,570,799
Accounts receivable, less allowance for
doubtful accounts of $50,829 and $151,818 respectively 1,587,373 1,185,258
Inventories, net 551,709 997,766
Prepaid expenses and other current assets 689,513 192,219
-----------------------
Total current assets 5,599,680 6,272,163
-----------------------
PROPERTY AND EQUIPMENT, net 1,305,994 617,501
-----------------------
GOODWILL, net of accumulated amortization 155,667 --
-----------------------
OTHER ASSETS 149,453 100,387
-----------------------
Total assets $7,210,794 6,990,051
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
MAY 31, AUGUST 31,
1998 1997
---- ----
CURRENT LIABILITIES:
Accounts payable $ 289,554 179,289
Notes payable 126,667 --
Accrued expenses - other current payables 299,329 163,389
-----------------------
Total current liabilities 715,550 342,678
-----------------------
NONCURRENT LIABILITIES:
Notes payable to banks and others 261,841 12,573
-----------------------
Total noncurrent liabilities 261,841 12,573
-----------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value: 25,000,000 shares
authorized 3,240,000 shares issued and 3,208,600
shares outstanding as of May 31, 1998 3,240 3,165
Additional paid-in capital 5,671,206 5,591,556
Treasury Stock, 31,400 shares at cost (47,459) --
Retained earnings 606,416 1,040,079
-----------------------
Total stockholders' equity 6,233,403 6,634,800
-----------------------
Total liabilities and stockholders' equity $7,210,794 6,990,051
=======================
</TABLE>
The accompanying notes are an integral part of these consolidated statements
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<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED MAY 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 2,466,999 $ 2,762,625 $ 6,237,325 $ 8,684,456
COST OF GOODS SOLD 1,815,036 1,852,118 4,255,462 5,568,413
----------- ----------- ----------- -----------
Gross Profit 651,963 910,507 1,981,863 3,116,043
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 969,105 619,201 2,897,543 2,197,557
PROVISION FOR CLOSING COSTS OF HERTZ ISRAEL -- 158,749
----------- ----------- ----------- -----------
969,105 619,201 2,897,543 2,356,306
----------- ----------- ----------- -----------
Operating income (loss) (317,142) 291,306 (915,680) 759,737
OTHER INCOME (EXPENSE)
Other 40,943 (102,359) 23,984 (98,316)
Interest, net 13,845 78,621 124,735 104,328
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes (262,354) 267,568 (766,960) 765,749
PROVISION FOR INCOME TAXES (97,018) 55,520 (333,298) 204,985
----------- ----------- ----------- -----------
Net income (loss) $ (165,336) $ 212,048 $ (433,662) $ 560,764
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE - BASIC $ (0.05) 0.07 (0.14) 0.18
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.05) 0.06 (0.14) 0.16
=========== =========== =========== ===========
HISTORICAL INCOME BEFORE PROVISION FOR INCOME TAXES (766,961) $ 765,749
UNAUDITED PROFORMA PROVISION FOR INCOME TAXES 307,062
-----------
PRO FORMA NET INCOME $ 458,687
===========
PRO FORMA NET INCOME PER SHARE $ 0.14
===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic 3,208,600 3,165,000 3,177,028 3,165,000
=========== =========== =========== ===========
Diluted 3,208,600 3,664,970 3,177,028 3,561,554
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
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<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED MAY 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (433,663) $ 560,763
Adjustments to reconcile net income to net cash provided
by activities-
Depreciation and amortization 215,906 92,746
Allowance for doubtful accounts (100,989) 30,000
Issuance of stock to Employees 79,725 --
Issuance of stock options -- --
Changes in operating assets and liabilities- -- --
Accounts receivable (37,369) 360,867
Inventories 557,083 124,141
Due from related parties -- --
Prepaid expenses and other current assets (503,543) 177,028
Other assets (49,065) (21,928)
Accounts payable and accrued expenses 230,957 (413,979)
Income taxes payable -- (247,323)
Other liabilities -- 1,324
Capital lease 6,839 --
----------- -----------
Net cash provided by operating activities (34,119) 663,639
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (420,067) (480,018)
Sale of Marketable Securities 912,436 (3,518,738)
Acquisition of Business Acquired, net (624,190) --
----------- -----------
Net cash used in investment activities (131,821) (3,998,756)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under notes payable to banks -- --
Purchase of treasury stock (47,459) --
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)
Sub S distribution to stockholder -- (688,034)
----------- -----------
Net cash provided by financing activities (47,459) 3,422,629
----------- -----------
Net increase in cash and cash equivalents (213,399) 87,512
CASH and cash equivalents, beginning of period 326,121 275,529
----------- -----------
CASH and cash equivalents, end of period $ 112,722 $ 363,041
=========== ===========
<CAPTION>
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Business Acquired
Assets Acquired 850,925 --
Goodwill 163,860 --
less:
Liabilities Assumed 390,595 624,190 --
Issuance of stock to Employees $ 79,725 --
Interest paid $ 27,585 $ 21,683
Income taxes paid $ 94,370 $ 341,873
</TABLE>
The accompanying notes are an integral part of these consolidated statements
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<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR YEARS ENDED 8/31/96 AND 8/31/97, AND NINE MONTHS ENDED 5/31/98
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Common Paid- in Treasury Retained
Stock Capital Stock Earnings Total
----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, August 31,1996 $ 1,900 $ 124,100 $ -- $ 764,768 $ 890,768
Net income -- -- -- 572,699 572,699
Issuance of common stock
and warrants in connection
with initial public
offering, net of expenses
of $1,488,778 1,265 5,467,456 -- -- 5,468,721
S corporation Distributions to
stockholders -- -- -- (297,388) (297,388)
------------ ------------ ------------ ------------ ------------
BALANCE, August 31,1997 3,165 5,591,556 -- 1,040,079 6,634,800
Net income -- -- -- (433,663) (433,663)
Issuance of stock to Employees 75 79,650 -- -- 79,725
Treasury stock -- -- (47,459) -- (47,459)
------------ ------------ ------------ ------------ ------------
BALANCE, MAY 31,1998 $ 3,240 $ 5,671,206 $ (47,459) $ 606,416 $ 6,233,403
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements
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<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
May 31, 1998
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 10-QSB. Operating results for the nine-month period ended
May 31 , 1998 are not necessarily indicative of the results that may be expected
for the year ended August 31, 1998. 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, 1997.
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 became a
C Corporation. As such, Hergo did not incur federal income tax expense prior to
November 13, 1996, 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 three-month period ended November 30, 1996. As
such, an effective tax rate of approximately 46% was used in calculating Hergo's
pro forma income tax provision for this period. The Company has included the
effect of the warrants as if they were exercised in the calculation for pro
forma net income per share.
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<PAGE>
2. EARNINGS PER SHARE
For the periods ended May 31 , 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". In Accordance with
the requirements of SFAS No. 128, net earnings per common share Amounts ("basic
EPS") were computed by dividing net earnings by the weighted average number of
common shares outstanding and contingently issueable shares (which satisfy
certain conditions) and excluding any potential dilution. Net earnings per
common share amounts - assuming dilution ("diluted EPS") were computed by
reflecting potential dilution from the exercise of stock options. SFAS No. 128
requires the presentation of both basic EPS and diluted EPS on the face of the
income statement. Earnings per share amounts for the same prior-year periods
have been restated to conform with the provisions of SFAS No. 128.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net earnings is as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
May 31, 1998 May 31, 1997
------------ ------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) (165,337) 212,048
BASIC EPS
Net earnings (loss)
attributed to common
stock $(165,337) 3,208,600 $ (.05) $ 212,048 3,165,000 $ .07
--------- --------- --------- --------- --------- ---------
EFFECT OF DILUTED
SECURITIES
Stock Option
Stock Warrents 499,970
DILUTED EPS
Net earnings (loss)
attributable to common
stock and option
exercises $(165,337) 3,208,600 $ (.05) $ 212,048 3,664,970 $ .06
--------- --------- --------- --------- --------- ---------
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Nine months ended Nine months ended
May 31 , 1998 May 31 , 1997
------------- -------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) (433,662) 560,764
BASIC EPS
Net earnings (loss)
attributed to common
stock $(433,662) 3,177,028 $ (.14) $ 560,764 3,165,000 $ .18
--------- --------- --------- --------- --------- ---------
EFFECT OF DILUTED
SECURITIES
Stock Option
Stock Warrants 396,554
DILUTED EPS
Net earnings (loss)
attributable to common
stock and option
exercises $(433,662) 3,177,028 $ (.14) $ 560,764 3,561,554 $ .16
--------- --------- --------- --------- --------- ---------
</TABLE>
No diluted EPS is presented, for the three month and nine months periods ending
on May 31 1998 as the effect of dilutive securities would be anti-dilutive on
loss per common share.
Options to purchase the following shares of common stock were not included in
the computation of diluted EPS because the exercise price of those options were
greater than the average market price of the common shares. The options were
still outstanding at the end of the period.
Three months ended Nine months ended
5/31/98 4,152,779 5/31/98 4,152,779
Three months ended Nine months ended
5/31/97 - 5/31/97 -
3. PURCHASE OF BUSINESS ASSETS LANDAU METAL PRODUCTS CORP
On December 5, 1997, a wholly owned subsidiary of Hertz Technology Group,
Inc. (Lan Metal Products Corp) acquired substantially all of the assets and
business of Landau Metal Products Corp., a company engaged in the of sheet metal
fabrication in Long Island City, New York ("Landau"). The aggregate
consideration paid to Landau was $660,000 in cash and a promissory note in the
principal amount of $380,000, payable over a three-year period. The principal
officer and sole stockholder of Landau was employed effective as of the closing
by the Buyer for five years at a fixed annual salary with additional incentive
compensation if sales of the new company exceed certain prescribed targets.
-9-
<PAGE>
Pro-forma Income Statement stand alone for Landau
Nine months ended Nine months ended
5/31/98 5/31/97
------- -------
Sales 854,018 1,091,990
NI 76,768 39,337
EPS -- --
4. DISCRETIONARY 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. On February 12,
1998 the company awarded 75,000 shares to an employee. The value of the stock
issued is compensation and charged against earnings
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<PAGE>
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 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, 1998 compared to Three Months and
Nine Months Ended May 31, 1997.
Revenues
Company sales for the three months ended May 31, 1998, were $2.47 million,
compared to $2.76 million for the period ended May 31, 1997, a 11% decrease. Net
sales for the nine months ended May 31, 1998 were $6.24 million compared to
$8.68 million in the previous year, a 28% decrease. A substantial portion of the
decline in sales was attributed to the decline in computer sales. Computer sales
for the quarter ended May 31, 1998 were $1,012,000 compared to $1,874,000 for
the comparable period in the previous year. For the nine months ended May 31,
1998 computer sales were $2,531,000 compared to $5,813,000 for the nine months
ended May 31,1997.
Hertz Computer Sales were impacted by several factors including the closing of
Hertz's Israel division in February 1997, the reduction in sales to several
customers who had made substantial purchases for the comparable quarter and nine
months ended May 31, 1998, and by increasingly intense competition in the PC
market, which is continuing. Offsetting some of the decline in sales were
increased computer sales activity in the governmental area, generated in part,
by a Company office that was established in Albany in November 1997 to better
promote and service Hertz Computer clients. During the three months ended May
31, 1998, computer sales to governmental agencies increased by $471,000 over the
same period in the previous year.
Hergo sales, on the other hand, increased by $41,000 for the quarter ended May
31, 1998 a 5% increase over the same period last year. During this period Hergo
concentrated on expanding its manufacturing and warehousing capacity, increasing
efficiency and product diversity. Towards this end on December 5, 1997 Hertz
Technology Group purchased substantially all the assets of a machine shop known
as Landau Metal Products Corp. for $1,040,000 and established a new division
called LAN Metal Products Corp. The purchase resulted in the acquisition of
additional machinery needed for expansion, additional manufacturing space, and
the potential for increased sales from the new division market segment which
consist principally of custom fabrication and contract manufacturing.
Additionally, management from the previous company was retained, adding
additional depth in engineering, production and sales. Sales of the LAN division
for the three months ended May 31, 1998 and the nine months were $526,000 and
$854,000, respectively.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Gross Profit
Gross profit was $652,000 (26% of net sales) and $911,000 (33% of net sales) for
the three months ended May 31, 1998 and May 31,1997, respectively, a decrease of
$259,000. Gross profit was $1,982,000 (32% of net sales) and $3,116,000 (36% of
net sales) for the nine months ended May 31, 1998 and May 31,1997, respectively,
a decrease of $1,134,000.
The computer industry experienced an extremely volatile shift in technology and
in the cost of technology related products made in the Far East. This extreme
shift caused computer inventories to either became obsolete or depreciate in
value. To reflect current values of its inventory, Hertz Computer lowered its
inventory cost for the three month ended May 31, 1998. The total reduction in
inventory value for the period was $251,000. Because of this, gross profit, as a
total for nine months ended May 31, 1998 was reduced to $63,000.
Computer division's gross profit for the three months ended May 31, 1998 and May
31, 1997 as calculated prior to the inventory write down, was $116,000 (12% of
net computer sales) and $356,000 (19% of net computer sales). Computer Gross
profit for the nine months ended May 31, 1998 and May 31, 1997, as calculated
prior to the inventory write down was $314,000 (12% of net computer sales) and
$1,373,000 (24% of net computer sales)
Hergo experienced growth in both sales and efficiency during the three months
ended May 31, 1998. After incurring costs in the second quarter to ramp-up the
LAN Metal Products division and merge production of both LAN and Hergo, synergy
and efficiency increased. For the nine months ended May 31, 1998 and May 31,
1997, gross profit was $1,609,000 (56% of Hergo sales) and $1,743,000 (61% of
Hergo sales). Most of the year-to-date reduction of gross profit of $134,000 was
due to the start up cost of the LAN operation, the merging of the production
facilities, and increased depreciation expense. Hergo's Gross profit however,
for the three months ended May 31,1998 and May 31, 1997 was $594,000 (64% of
Hergo sales) and $554,000 (62% of Hergo sales), an increase of $40,000. The
increased efficiencies in utilizing of labor and equipment was the primarily
reason for the upward swing in GP.
Gross profit from LAN sales for the three months and the nine months ended May
31, 1998 was $200,000 (38% of sales) and $253,000 (37% of sales).
Selling, General and Administrative
Selling, general, and administrative expenses increased for the quarter and nine
months ended May 31, 1998 as compared to the preceding periods, by $350,000 and
$700,000 respectively. Selling general and administrative expenses were impacted
by the establishment of a warehousing facility for the Hergo line as well as
increases in selling expenses both in Hergo and in Hertz Computer. Selling
Expense increases included increased expenses in operating the new Albany Sales
office, increased advertising, and sales salaries as well as increased marketing
costs. Administrative expense increases included increased costs associated with
being a public entity including the year-end annual report and issuance of stock
to an employee. During the period, additional reserves were established for
resolution of an IRS audit, payment of final income taxes in reference to the
Hertz Israel entity, and reserve for bad debts. A partial offset to
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
these expenses was the benefit derived in the comparative decline in expenses
due to the closing of Hertz Israel
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 reflects a
reduction of SG&A expenses for the nine months.
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Other Income (Expense):
Other Income (net)
Other Income consisting of investment income increased by $143,000 and $122,000
for the quarter and nine-month period ended May 31, 1998. The comparative
increase in Income is due primarily to an investment loss taken last year, in
the quarter ended May 31, 1997.
Interest, net
Interest, income for the quarter and nine months ended May 31, 1998 decreased by
$65,000 and increased by $20,000 from the preceding respective periods. The
decrease in interest income for the quarter was due, primarily to the reduction
in funds available, due to the use of cash in the purchase of the assets from
Landau Metal Corp on December 5,1997, interest paid on the completion of an IRS
audit, and interest paid on the note issued for the LAN purchase.
Provision for Income Taxes
The tax benefit for the three months and the nine months ended May 31, 1998 was
$97,000 and $333,000, respectively. The tax provision for the three months and
nine months ended May 31,1997 ($56,000 and $205,000, respectively) was
calculated with Hertz Computer as a "C" corporation and Hergo as a subchapter
"S" corporation, For the period of 9/1/96 to 11/12/96. 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.
Net Income and Earnings Per Share
Operations for the three months ended May 31, 1998 resulted in a loss of
$165,000 or ($.05) per share compared to a net income of $212,000 or $.07 per
share for the three months ended May 31, 1997. Operations for the nine months
ended May 31,1998 resulted in a loss of $434,000 or ($.14) per share compared to
net income of $561,000 or $.18 per share for the nine months ended May 31, 1997.
A significant decline in corporate computer sales due to decreased orders from a
few large customers offset the benefits obtained from increased government sales
and the beginning of sales by the newly acquired LAN Metal Products Corp.
subsidiary. Gross Profit declined due to reduction in Inventory value due to
dynamic changes in the computer industry, the costs incurred by the start up of
LAN, the moving of much of the Hergo production facilities to the LAN facility
and the increase in depreciation expense as a result of the acquisition of
additional equipment.
-14-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity and Capital Resources
For the nine-month period ended May 31, 1998, the Company had a deficit cash
flow from operations of $34,000, as compared to the generation of a positive
cash flow of $664,000, for the nine-month period ended May 31, 1997. The
operating loss accounts for the principal reason for the decrease. Non cash
transactions including depreciation and issued shares comprised a substantial
portion of the loss and thus did not impact on cash.
Net purchases of fixed assets in the nine months ended May 31, 1998, were
$420,000 as compared to $480,000 in the same period last year. Included in the
purchases in the recent nine month period were equipment for Hergo production in
the amount of $168,000 and improvements to the new LAN facility of $91,000. On
December 5, 1997 the company purchased substantially all of the assets of Landau
Metal Products Corp and established LAN Metal Products Corp. Additional
equipment purchases that were included in the initial LAN purchase ($476,000)
are included in the cash paid for the assets of ($624,000).
Sale of marketable securities generated $912,000 for the current 9 months
period. Funds were used predominantly for the purchase of new machinery and
financing the new LAN acquisition. During the nine months ended May 31, 1998,
the Company purchased on the open market a total of 31,400 shares of it's stock
for a total of $47,000.
Working capital for the nine months ended May 31, 1998 was $4,884,000 compared
to $5,929,000 for the period ended May 31, 1997, a $1,045,000 decline. The
purchase of the Landau Metal Products assets, the loss for the period, as well
as the purchases of additional production equipment accounted for the majority
of the decline.
The Company as of May 31, 1998 had $2,771,000 in cash and marketable securities
which are available to fund Company operations and expansion plan.
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-QSB including
statements contained in the foregoing "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" are "forward-looking statements"
(within the meaning of the Private Securities Litigation Reform Act of 1995)
regarding the plans and objectives of management for future operations and
projections of revenues, earnings and capital expenditures. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. The forward-looking statements
included herein are based on current expectations that involve numerous risks
and uncertainties. The Company's plans objectives and expectations are based, in
part, on assumptions involving the growth of the Company's business. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Company
believes that its assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, there
can be no assurance that the forward-looking statements included in this Report
will prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives, plans or expectations of the Company will be
achieved
-16-
<PAGE>
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds
The Company registered Common Stock and Warrants in an initial public
offering on Form SB-2 which become effective on November 12, 1996. After
deducting $1,488,778 in expenses incurred in connection with the offering,
an aggregate of $5,468,721 of net proceeds was realized by the Company.
The use of these net proceeds was reported on Forms SR filed with the
Securities and Exchange Commission on February 11, 1997 and August 18,
1997, and in the Company's annual report on Form 10-KSB for the year ended
August 31, 1997, and in its quarterly report on Form 10-QSB for the
quarter ended February 28, 1998. Updating these reports, as of May 31,
1998 the disposition of the proceeds was as follows:
<TABLE>
<CAPTION>
Changes Balance
2/28/98 3/1/98-5/31/98 5/31/98
<S> <C> <C> <C>
Construction of plant building and
facilities 360,140 360,140
Purchases and installation of machinery and
equipment 538,933 538,933
a) Acquisition of Landau Metal Products 624,190 624,190
b) Improvement to physical facilities 52,199 52,199
c) Equipment purchases 60,281 60,281
Repayment of Indebtedness 1,315,058 1,315,058
S Corporation Distribution 688,034 688,034
Marketing Plan 186,920 186,920
To be used to fund marketing plan, acquire
equipment, 1,755,446 (112,480) 1,642,966
Grand Total: $ 5,468,721 $ 0 $ 5,468,721
</TABLE>
-17-
<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: 07/15/98 Eli E. Hertz, Chairman, President
And Chief Executive Officer
/s/ Barry J. Goldsammler
-------------------------------------
Dated: 07/15/98 Barry J. Goldsammler, Chief Financial
and Accounting Officer
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 112,722
<SECURITIES> 2,658,363
<RECEIVABLES> 1,638,202
<ALLOWANCES> 50,829
<INVENTORY> 551,709
<CURRENT-ASSETS> 5,599,680
<PP&E> 1,746,544
<DEPRECIATION> (440,550)
<TOTAL-ASSETS> 7,210,794
<CURRENT-LIABILITIES> 715,550
<BONDS> 0
0
0
<COMMON> 3,240,000
<OTHER-SE> 6,230,163
<TOTAL-LIABILITY-AND-EQUITY> 7,210,794
<SALES> 6,237,325
<TOTAL-REVENUES> 6,237,325
<CGS> 4,255,462
<TOTAL-COSTS> 4,255,462
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (100,989)
<INTEREST-EXPENSE> 35,023
<INCOME-PRETAX> (766,960)
<INCOME-TAX> (333,298)
<INCOME-CONTINUING> (433,662)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (433,662)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
