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, 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
- --------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
212-634-4000
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(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, 1998
Common Stock, par value
$.001 per share 3,154,500
- ------------------------- ----------------------
Class Shares Outstanding
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
NOVEMBER 30, 1997
INDEX
Page
----
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
November 30, 1997 and August 31, 1997 3
Condensed Consolidated Statements of
Operations for the three months ended
November 30, 1997 and November 30, 1996 4
Condensed Consolidated Statements of Cash
Flows for the three months ended
November 30, 1997 and November 30, 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
ended November 30, 1997 8
PART II. Other Information
Item 5. Other Information 11
Item 6. a - Exhibit Index 11
b - Reports on FORM 8-K
SIGNATURES 12
2
<PAGE>
PART I
FINANCIAL INFORMATION
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
NOVEMBER 30, AUGUST 31,
------------ ----------
1997 1997
---- ----
Unaudited Audited
--------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 786,956 326,121
Marketable securities 2,980,445 3,570,799
Accounts receivable, less allowance for
doubtful accounts of $161,818 and $151,818 respectively 1,314,213 1,185,258
Inventories, net 863,741 997,766
Prepaid expenses and other current assets 297,484 192,219
-----------------------
Total current assets 6,242,838 6,272,163
-----------------------
PROPERTY AND EQUIPMENT, net 770,164 617,501
-----------------------
OTHER ASSETS 108,552 100,387
-----------------------
Total assets $ 7,121,554 6,990,051
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
NOVEMBER 30, AUGUST 31,
------------ ----------
1997 1997
---- ----
CURRENT LIABILITIES:
Accounts payable $ 432,300 179,289
Accrued expenses - other current payables 5,366 163,389
-----------------------
Total current liabilities 437,666 342,678
-----------------------
NONCURRENT LIABILITIES:
Notes payable to banks and others 11,226 12,573
-----------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value: 25,000,000 shares authorized
3,165,000 shares issued and 3,154,500 shares outstanding
as of November 30, 1997 3,154 3,165
Additional paid-in capital 5,591,567 5,591,556
Treasury Stock, 10,500 shares at cost (18,047)
Retained earnings 1,095,988 1,040,079
-----------------------
Total stockholders' equity 6,672,662 6,634,800
-----------------------
Total liabilities and stockholders' equity $ 7,121,554 6,990,051
=======================
</TABLE>
The accompanying notes are an integral part of these condensed balance sheets
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<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND TWELVE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
THREE MONTHS ENDED
------------------
NOVEMBER 30,
------------
1997 1996
---------- -----------
NET SALES $1,799,712 $ 2,947,342
COST OF GOODS SOLD 1,099,576 1,912,575
---------- -----------
Gross Profit 700,136 1,034,767
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 654,936 670,386
---------- -----------
Operating income 45,200 364,381
OTHER INCOME (EXPENSE):
Other income (expense), net 1,155
Interest, net for interest expense of $263
for 1997 and interest income of $497 for 1996 57,648 (38,767)
---------- -----------
Income before provision for income taxes 104,003 325,614
PROVISION FOR INCOME TAXES 48,093 62,465
---------- -----------
Net income $ 55,910 $ 263,149
========== ===========
NET INCOME PER SHARE $ 0.02 $ 0.20
========== ===========
HISTORICAL INCOME BEFORE PROVISION FOR INCOME TAXES $ 325,614
UNAUDITED PROFORMA PROVISION FOR INCOME TAXES 164,542
-----------
PRO FORMA NET INCOME $ 161,072
===========
PRO FORMA NET INCOME PER SHARE $ 0.07
===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 3,163,440 2,150,220
========== ===========
The accompanying notes are an integral part of these condensed statements.
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<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
THREE MONTHS ENDED NOVEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
NOVEMBER 30,
------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,910 $ 263,149
Adjustments to reconcile net income to net cash
provided by activities-
Depreciation and amortization 21,661 17,877
Bad debt expense 10,000
Changes in operating assets and liabilities-
Accounts receivable (138,955) (85,490)
Inventories 134,025 (117,681)
Due from related parties
Prepaid expenses and other current assets (111,514) 304,079
Other assets (8,165) (21,913)
Accounts payable and accrued expenses 101,237 55,582
Income taxes payable (159,535)
Capital lease (1,347)
Other liabilities
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Net cash provided by operating activities 62,852 256,068
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (174,324) (297,750)
Sale of Marketable Securities 590,354
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Net cash used in investment activities 416,031 (297,750)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under notes payable to banks (23,703)
Purchase of treasury stock, 10,500 at $1.71875 (18,047)
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 (553,804)
Net (repayments) under note payable to stockholder (242,941)
--------- -----------
Net cash provided by financing activities (18,047) 4,337,577
--------- -----------
Net increase in cash and cash equivalents 460,835 4,295,895
CASH and cash equivalents, beginning of period 326,121 275,529
--------- -----------
CASH and cash equivalents, end of period $ 786,956 $ 4,571,424
========= ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ $ 28,812
Income taxes paid $ 59,370 $ 222,000
</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)
November 30, 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
10-QSB. Operating results for the three-month period ended November 30, 1997 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.
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. 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
three-month period ended November 30, 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.
4. SUBSEQUENT EVENTS
On December 5, 1997, a wholly-owned subsidiary of Hertz Technology Group,
Inc. (The "Buyer") 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 amounts.
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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 Ended November 30, 1997 Compared to Three Months Ended
November 30, 1996
Revenues
Company sales for the three months ended November 30, 1997, were $1.80 million,
compared to $2.95 million for the period ended November 30, 1996, a 39%
decrease. Sales were impacted by several factors including the elimination of
the Hertz Israel division in February 1997, the reduction in sales from a
customer who had made substantial purchases for the comparable quarter ended
November 30, 1996 and intense price competition in the PC market, which is
continuing. During the three months ended November 30, 1997, an office was
established in Albany to better promote and service Hertz Computer clients in
both the Government and corporate areas. Additionally, the State of New York has
recently approved the addition of most Hergo products to be included in the
Hertz Computer state contract.
Hergo maintained it's sales from the previous year and concentrated on efforts
during the quarter to increase capacity, efficiency , product diversity and
market share. Towards this end Hertz Technology Group purchased on December 5,
1997, substantially all the assets of a machine shop known as Landau Metal
Products and established a new division called Lan Metal Products. The purchase
resulted in increased machinery needed for expansion, increased manufacturing
space, and a potential for increased sales from the new division. Additionally,
management from the previous company was retained, thereby adding additional
depth in production and sales.
Gross Profit
Combined gross profit for the three months ended November 30, 1997 was $700,000
representing 39% of sales, compared to $1,035,000, representing 35% of sales,
for the three months ended November 30, 1996. Hergo sales constituted a larger
portion of combined sales, increasing from 34% in the first quarter last year to
54% in the first quarter ended November 30, 1997. Since the gross profit margin
is higher in the Hergo product line, the combined effect increased the gross
profit margin percentage.
-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, 1997, selling, general and
administrative expenses, of the company were $655,000 as compared to $670,000
for the three months ended November 30, 1996. The net decrease of $15,000 is
attributable primarily to a decrease in operating expenses due to the
elimination of Hertz Israel of $88,000. Increases in salaries paid to
salespeople, advertising, and trade show expenses in Hergo, as well as the
establishment of the Albany location accounted for most of the offsetting
expense increase of $73,000.
Interest Expense
The decrease in interest expense of $39,000 between the three month period ended
November 30, 1997, and the three month period ended November 30, 1996, resulted
primarily from the decrease in interest payments. This was due to the repayment
of loans to the principal shareholders and repayment of its line of credit with
the United Mizrahi Bank. An increase of Interest Income of $57,000 for the same
period resulted through investment of the funds generated by the Initial Public
Offering.
Provision for Income Taxes
The tax provision for the three months ended November 30, 1997, was calculated
with Hertz Technology Group as a "C" corporation for the entire period. 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 proforma tax provision for income taxes accounts for Hergo as a "C"
corporation for each of the three months ended November 30, 1996.
Net Income
Net Income for the three months ended November 30, 1997, was $56,000 as compared
to $263,000 for the same period last year. Interest Income generated by the
proceeds of the Initial Public Offering, as well as reduced Selling, General and
Administrative Expenses offset, in part the effect of the lower sales volume for
the period ended November 30, 1997 when compared to the same period last year.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
For the three-month period ended November 30, 1997, the Company generated a cash
flow from operations of $63,000, as compared to $256,000, for the three-month
period ended November 30, 1996. Decreased net income accounts for the principal
reason for the decrease.
Net purchases of fixed assets in the three months ended November 30, 1997, were
$174,000 as compared to $298,000 in the same period last year.
Sale of marketable securities increased by $590,000 for the current year. The
Company, in preparation of the closing of the acquisition of substantially all
the assets of Landau Metal Products Corp., sold $590,000 of marketable
securities. This amount is evident in the unusually large cash amount at
November 30, 1997.
During the month of November 1997, the Company purchased on the open market a
total of 10,500 shares of it's stock for a total of $18,000.
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 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.
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.
-10-
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company announced effective November 6,1997 that its Board of Directors has
authorized the Company to make open market purchases of up to 250,000 shares of
Hertz Technology Group, Inc. issued and outstanding common stock over the next
three months and as of November 30, 1997 acquired 10,500 shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
A Form 8-K was filed on December 17, 1997 with respect to the Company's
acquisition of substantially all the assets of Landau Metal Products Corp, a
contract metal fabricator with a large client base in the display business.
-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
/s/ Eli E. Hertz
Dated: 01/13/98 ---------------------------------
Eli E. Hertz, Chairman, President
And Chief Executive Officer
/s/ Barry J. Goldsammler
Dated: 01/13/98 ---------------------------------
Barry J. Goldsammler, Chief
Financial and Accounting
Officer
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> NOV-30-1997
<CASH> 786,956
<SECURITIES> 2,980,445
<RECEIVABLES> 1,476,031
<ALLOWANCES> 161,818
<INVENTORY> 863,741
<CURRENT-ASSETS> 6,242,838
<PP&E> 1,024,661
<DEPRECIATION> 254,497
<TOTAL-ASSETS> 7,121,554
<CURRENT-LIABILITIES> 437,666
<BONDS> 0
0
0
<COMMON> 3,154
<OTHER-SE> 6,669,508
<TOTAL-LIABILITY-AND-EQUITY> 7,121,554
<SALES> 1,799,712
<TOTAL-REVENUES> 1,799,712
<CGS> 1,099,576
<TOTAL-COSTS> 1,099,576
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 263
<INCOME-PRETAX> 104,003
<INCOME-TAX> 48,093
<INCOME-CONTINUING> 55,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,910
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
