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, 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
---------------------------
(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.
April 13, 1998
Common Stock, par value
$.001 per share 3,208,600
- ----------------------- ------------------
Class Shares Outstanding
<PAGE>
HERTZ TECHNOLOGY GROUP, INC.
FEBRUARY 28, 1998
INDEX
Page
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of
February 28, 1998 and August 31, 1997 3
Consolidated Statements of Operations
for the three months and six months ended
February 28, 1998 and February 28, 1997 4
Consolidated Statements of Cash
Flows for the six months ended
February 28, 1998 and February 28, 1997 5
Consolidated Statements of Stockholders
Equity for years ended August 31, 1996 and
August 31, 1997 and six months ended
February 28, 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
six months ended February 28, 1998 11
PART II. Other Information
Item 2. Changes in securities and use of proceeds 16
SIGNATURES 17
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<PAGE>
PART I
FINANCIAL INFORMATION
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
FEBRUARY 28, AUGUST 31,
1998 1997
Unaudited Audited
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 145,180 326,121
Marketable securities 2,788,430 3,570,799
Accounts receivable, less allowance for
doubtful accounts of $221,818 and $151,818 respectively 1,455,372 1,185,258
Inventories, net 899,638 997,766
Prepaid expenses and other current assets 517,058 192,219
----------- -----------
Total current assets 5,805,678 6,272,163
----------- -----------
PROPERTY AND EQUIPMENT, net 1,277,812 617,501
----------- -----------
GOODWILL, net of accumulated amortization 163,860 --
----------- -----------
OTHER ASSETS 133,910 100,387
----------- -----------
Total assets $ 7,381,260 6,990,051
=========== =========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FEBRUARY 28, AUGUST 31,
1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 358,005 179,289
Notes payable 126,667 --
Accrued expenses - other current payables 226,338 163,389
----------- -----------
Total current liabilities 711,010 342,678
----------- -----------
NONCURRENT LIABILITIES:
Notes payable to banks and others 252,759 12,573
----------- -----------
Total noncurrent liabilities 252,759 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 February, 28 1998 3,240 3,165
Additional paid-in capital 5,689,956 5,591,556
Treasury Stock, 31,400 shares at cost (47,459) --
Retained earnings 771,754 1,040,079
----------- -----------
Total stockholders' equity 6,417,491 6,634,800
----------- -----------
Total liabilities and stockholders' equity $ 7,381,260 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 FEBRUARY 28, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------ ----------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 1,970,614 $ 2,974,489 $ 3,770,326 $ 5,921,831
COST OF GOODS SOLD 1,340,850 1,803,720 2,440,426 3,716,295
----------- ----------- ----------- -----------
Gross Profit 629,764 1,170,769 1,329,900 2,205,536
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,273,502 907,970 1,928,438 1,578,356
PROVISION FOR CLOSING COSTS OF HERTZ ISRAEL -- 158,749 -- 158,749
----------- ----------- ----------- -----------
1,273,502 1,066,719 1,928,438 1,737,105
----------- ----------- ----------- -----------
Operating income (loss) (643,737) 104,050 (598,537) 468,431
OTHER INCOME (EXPENSE)
Other (18,112) 4,043 (16,957) 4,043
Interest, net 53,242 64,474 110,890 25,707
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes (608,607) 172,567 (504,605) 498,181
PROVISION FOR INCOME TAXES (284,373) 87,000 (236,280) 149,465
----------- ----------- ----------- -----------
Net income (loss) $ (324,234) $ 85,567 $ (268,325) $ 348,716
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE - BASIC $ (0.10) 0.03 (0.09) 0.13
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.10) 0.03 (0.09) 0.12
=========== =========== =========== ===========
HISTORICAL INCOME BEFORE PROVISION FOR INCOME TAXES $ 498,181
UNAUDITED PROFORMA PROVISION FOR INCOME TAXES 251,542
-----------
PRO FORMA NET INCOME $ 246,639
===========
PRO FORMA NET INCOME PER SHARE $ 0.09
===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic 3,155,946 3,165,000 3,142,227 2,657,610
=========== =========== =========== ===========
Diluted 3,155,946 3,250,142 3,142,227 2,964,266
=========== =========== =========== ===========
</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 FEBRUARY 28, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28,
----------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (268,325) $ 348,716
Adjustments to reconcile net income to net cash provided by activities-
Depreciation and amortization 123,416 48,577
Allowance for doubtful accounts 70,000 15,000
Issuance of stock to Employees 79,725 --
Issuance of stock options 18,750 --
Changes in operating assets and liabilities-
Accounts receivable (76,357) (242,131)
Inventories 209,154 (60,401)
Due from related parties -- --
Prepaid expenses and other current assets (331,088) 309,903
Other assets (33,523) 13,810
Accounts payable and accrued expenses 226,417 56,699
Income taxes payable -- (134,035)
Other liabilities (2,245) 2,694
----------- -----------
Net cash provided by operating activities 15,925 358,832
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (307,587) (427,038)
Sale of Marketable Securities 782,369 (3,557,541)
Acquisition of Business Acquired, net (624,190) --
----------- -----------
Net cash used in investment activities (149,407) (3,984,579)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under notes payable to banks -- (25,083)
Purchase of treasury stock (47,459) --
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)
Sub S distribution to stockholder -- (594,255)
----------- -----------
Net cash provided by financing activities (47,459) 3,722,697
----------- -----------
Net increase in cash and cash equivalents (180,942) 96,950
CASH and cash equivalents, beginning of period 326,121 275,529
----------- -----------
CASH and cash equivalents, end of period $ 145,180 $ 372,479
=========== ===========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<S> <C> <C> <C>
Business Acquired
Assets Acquired 850,925 -
Goodwill 163,860 -
less:
Liabilities Assumed 390,595 624,190 -
-
Issuance of stock to Employees $ 79,725 -
Issuance of stock options $ 18,750 -
Interest paid $ 1,895 $ 21,683
Income taxes paid $ 94,370 $ 221,035
</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 SIX MONTHS ENDED 2/28/98
(UNAUDITED)
<TABLE>
<CAPTION>
Additional
Common Paid- in Treasury Retained
Stock Capital Stock Earnings Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, August 31, 1995 $ 1,900 $ 124,100 $ -- $ 614,966 $ 740,966
Net income -- -- -- 540,450 540,450
S corporation Distributions to
stockholders -- -- -- (390,648) (390,648)
----------- ----------- ----------- ----------- -----------
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 -- -- -- (268,325) (268,325)
Issuance of stock to Employees 75 79,650 -- -- 79,725
Issuance of stock options -- 18,750 -- -- 18,750
Treasury stock -- -- (47,459) -- (47,459)
----------- ----------- ----------- ----------- -----------
BALANCE, February 28, 1998 $ 3,240 $ 5,689,956 $ (47,459) $ 771,754 $ 6,417,491
=========== =========== =========== =========== ===========
</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)
February 28, 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 six-month period ended
February 28, 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 February 28, 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 issue-able 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
February 28, 1998 February 28, 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) (324,234) 85,567
BASIC EPS
Net earnings (loss)
attributed to common
stock $ (324,234) 3,155,946 $ (.10) $ 85,567 3,165,000 $ .03
----------- --------- ------- -------- --------- -----
EFFECT OF DILUTED
SECURITIES
Stock Option
Stock Warrents 85,142
DILUTED EPS
Net earnings (loss)
attributable to common
stock and option
exercises $ (324,234) 3,155,946 $ (.10) $ 85,567 3,250,142 $ .03
----------- --------- ------- -------- --------- -----
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Six months ended Six months ended
February 28, 1998 February 28, 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) (268,325) 348,716
BASIC EPS
Net earnings (loss)
attributed to common
stock $ (268,325) 3,142,227 $ (.09) $ 348,716 2,657,610 $ .13
----------- --------- ------- --------- --------- -----
EFFECT OF DILUTED
SECURITIES
Stock Option
Stock Warrants 306,656
DILUTED EPS
Net earnings (loss)
attributable to common
stock and option
exercises $ (268,325) 3,142,227 $ (.09) $ 348,716 2,964,266 $ .12
----------- --------- ------- --------- --------- -----
</TABLE>
No diluted EPS is presented, for the three month and six month periods ending on
February 28, 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 Six months ended
2/28/98 4,152,779 2/28/98 4,152,779
Three months ended Six months ended
2/28/97 330,000 2/28/97 330,000
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
Six months ended Six months ended
2/28/98 2/28/97
Sales 795,000 728,000
NI 55,650 26,225
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
5. STOCK OPTIONS
On February 28, 1998, the company entered into an agreement with an
investment-banking firm, to promote the Company, products, and services and
implement a strategy of growth through acquisition. The agreement under which
the company, on February 28, 1998 issued 15,000 stock options in payment of
investment advisory services is an expense for the current period.
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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 Six Months Ended February 28, 1998 compared to Three
Months and Six Months Ended February 28, 1997
Revenues
Company sales for the three months ended February 28, 1998, were $1.97 million,
compared to $2.97 million for the period ended February 28, 1997, a 34%
decrease. Net sales for the six months ended February 28, 1998 were $3.77
million compared to $5.92 million in the previous year, a 36% decrease. A
substantial portion of the reduction in sales was attributed to the decline in
computer sales. Computer sales for the quarter ended February 1998 were $689,000
compared to $1,994,000 for the comparable period in the previous year. For the
six months ended February 28, 1998 computer sales were $1,520,000 compared to
$3,939,000 for the six months ended February 28, 1997.
Sales were impacted by several factors including the elimination of the Hertz
Israel division in February 1997, the reduction in sales from several customers
who had made substantial purchases for the comparable quarter and six months
ended February 28, 1998, and intense price competition in the PC market, which
is continuing. Partially offsetting this decline in sales was increased computer
sales activity in the governmental sales area generated, in part, by an office
that was established in Albany in November 1997 to better promote and service
Hertz Computer clients. During the three months ended February 28, 1998, sales
generated from computer sales to the government increased by $317,000 over the
same period in the previous year.
Hergo sales slightly decreased by $60,000 for the two quarters ended February
28,1998. During this period Hergo concentrated on efforts 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 Corp. for $1,040,000 and
established a new division called Lan Metal Products Corp. 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. Sales for the Lan division for the three months ended
February 28, 1998 were $328,000.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Gross Profit
Gross profit was $630,000 (32% of net sales) and $1,171,000 (39% of net sales)
for the three months ended February 28, 1998 and February 28,1997, respectively,
a decrease of $541,000. Gross profit was $1,330,000 (35% of net sales) and
$2,206,000 (37% of net sales) for the six months ended February 28, 1998 and
February 28,1997, respectively, a decrease of $876,000. The costs incurred in
ramping up of the new entity of Lan Metal Products, the transferring and merging
of Hergo production to the new facility, and the conversion of Hergo's Woodside
location to a new warehousing and distribution facility reduced gross profit.
Because of this, Hergo gross profit was 53% of sales for the period ended
February 28, 1998 as compared to 60% for the same period last year. The Hertz
Computer division, likewise, experienced inefficiencies. Gross profit from Hertz
Computer for the six months ended February 28, 1998 was 13% of computer sales
compared to 25% of sales for the same period last year. Although Hertz
experienced a significant reduction in sales, it has kept it's skilled and
trained integration personnel in place. Hertz intends to put these resources to
work as it's new sales and marketing program will bear fruit. Other factors that
contributed to the decline in Gross profit included an increase in depreciation
due to the purchase of the Lan equipment, as well as other capital expenditures.
Gross profit generated by the newly acquired Lan division for the three months
ended February 28, 1998 was 36% of sales.
Selling, General and Administrative
Selling, general, and administrative expenses increased for the quarter and six
months ended February 28, 1998 as compared to the preceding periods, by $366,000
and $350,000 respectively. Most of the increases occurred primarily in the
second quarter. 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 being a public entity
including the year-end annual report, issuance of stock to an employee, and some
additional legal and accounting costs. Finally, 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 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 current period.
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Income (Expense):
Other Expenses
Other expenses increased by $22,000 and $21,000 for the quarter and six-month
period ended February 28, 1998. The increase is primarily due to options that
were issued in connection with the retention of a Financial Consultant.
Interest, net
Interest Income for the quarter and six months ended February 28, 1998 decreased
by $11,000 and increased by $46,000 respectively, as compared to the proceeding
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 Expense stayed approximately the same for the quarter but decreased by
$39,000 for the six months as compared to the same period last year. The
decrease in Interest expense was due to the fact that the first quarter ended
November 30, 1996 was included in the six months of the prior year and prior to
the company's Initial Public Offering.. The interest paid at that time was due
to the repayment of its line of credit with the United Mizrahi Bank, interest
paid to an Israeli bank, and the repayment of loans to the principal
shareholders.
Provision for Income Taxes
The tax benefit for the three months and the six months ended February 28, 1998
was $285,000 and $236,000, respectively. The tax provision for the three months
and six months ended February 28,1997 ($87,000 and $149,000, 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 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.
Net Income and Earnings Per Share
Net income for the three months ended February 28, 1998 resulted in a loss of
$324,000 or ($.10) per share compared to a net income of $86,000 or $.03 per
share for the three months ended February 28, 1997. Net income for the six
months ended February 28,1998 was a loss of $268,000 or ($.09) per share
compared to net income of $349,000 or $.13 per share for the six months ended
February 28,1997.
A significant decline in Computer sales due to decreased purchasing from a few
large customers offset the benefits obtained from increased government sales to
the State of New York and the beginning of sales from the newly acquired Lan
Metal Products Corp. subsidiary. Gross Profit declined due to the costs incurred
by the start up of Lan, the moving of the Hergo production
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
facilities and increased depreciation expense. Additionally, gross profit on the
Hertz side was adversely effected by the decrease in revenues without a
proportionate decrease in direct labor and other expenses. Management feels that
the maintenance of a highly skilled strong manufacturing and support staff is
necessary to meet expectations of future business.
Liquidity and Capital Resources
For the six-month period ended February 28, 1998, the Company generated a cash
flow from operations of $16,000, as compared to $359,000, for the six-month
period ended February 28, 1997. The operating loss accounts for the principal
reason for the decrease. Non cash transactions including depreciation, granted
options and issued shares comprised a substantial portion of the loss and thus
did not impact on cash.
Net purchases of fixed assets in the six months ended February 28, 1998, were
$308,000 as compared to $427,000 in the same period last year. Included in the
purchases in the recent six month period was 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 increased by $782,000 for the current year. Funds
were used predominantly for the purpose of financing the new Lan acquisition.
During the six months ended February 28, 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 six months ended February 28, 1998 was $5,095,000
compared to $5,825,000 for the period ended February 28, 1997, a 730,000
decline. The purchase of the Landau Metal Products assets as well as the
purchases of additional production equipment accounted for the majority of the
decline.
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<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
-15-
<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 because 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 10KSB for the year ended
August 31, 1997. Updating these reports, as of February 28, 1998 the
disposition of the proceeds was as follows:
<TABLE>
<CAPTION>
Changes Balance
11/1/97 11/1/97-2/28/98 2/28/98
<S> <C> <C> <C>
Construction of plant building and
facilities. 360,140 360,140
Purchases and installation of machinery and
equipment. 152,587 538,933
a) Acquisition of Landau Metal Products 386,346 624,190 624,190
Repayment of Indebtedness. 1,315,058 1,315,058
S Corporation Distribution. 688,034 688,034
Marketing Plan. 170,070 16,850 186,920
To be used to fund marketing plan, acquire
equipment, 2,549,073 (793,627) 1,755,446
Grand Total: $ 5,468,721 $ 1,587,254 $ 5,468,721
</TABLE>
-16-
<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: 04/13/98 ---------------------------------
Eli E. Hertz, Chairman, President
And Chief Executive Officer
/s/ Barry J. Goldsammler
Dated: 04/13/98 ---------------------------------
Barry J. Goldsammler, Chief
Financial and Accounting
Officer
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> FEB-28-1998
<CASH> 145,180
<SECURITIES> 2,788,430
<RECEIVABLES> 1,677,190
<ALLOWANCES> 221,818
<INVENTORY> 899,638
<CURRENT-ASSETS> 5,805,678
<PP&E> 1,634,064
<DEPRECIATION> 356,252
<TOTAL-ASSETS> 7,381,260
<CURRENT-LIABILITIES> 711,010
<BONDS> 0
0
0
<COMMON> 3,240,000
<OTHER-SE> 6,414,251
<TOTAL-LIABILITY-AND-EQUITY> 7,381,260
<SALES> 3,770,326
<TOTAL-REVENUES> 3,770,326
<CGS> 2,440,426
<TOTAL-COSTS> 2,440,426
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 70,000
<INTEREST-EXPENSE> 6,720
<INCOME-PRETAX> (504,605)
<INCOME-TAX> (236,280)
<INCOME-CONTINUING> (268,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (268,325)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
