SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ____________ to ______________
Commission file number: 0-21679
HERTZ TECHNOLOGY GROUP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Delaware 13-3896069
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
75 Varick Street. 11th Floor. New York, NY 10013
- - ----------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Issuer's telephone number, including area code: (212) 634-4000
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of Class)
Warrants
(Title of Class)
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 |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. | |
The Registrant's revenues for the fiscal year ended August 31, 1999
were $ 6,881,838.
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant, based on the average of the high and
low prices as quoted on NASDAQ Small Cap on November 29, 1999 was $2,568,679.
As of November 29, 1999 the registrant had a total of 2,129,083 shares of
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Proxy Statement for the year ended August 31, 1999 are
incorporated by reference in Part III.
Transitional Small Business Disclosure Format: ____ Yes X No
<PAGE>
PART I
Certain statements in the Letter of the Chairman President and Chief
Executive Officer included in the annual report to stockholders, in the
"Management's Discussion and Analysis" and elsewhere in this Form 10-KSB
constitute "forward-looking statements' within the meaning of Section
21E of the Securities and Exchange Act of 1934 See "Forward Looking
Statements".
ITEM 1. DESCRIPTION OF BUSINESS
General
Hertz Technology Group, Inc. (the "Company") was incorporated in the
state of Delaware on June 18, 1996 for the purpose of acquiring all the
outstanding stock of Hertz Computer Corporation ("Hertz Computer") and
Hergo Ergonomic Support System, Inc. ("Hergo"), two New York
corporations formed in 1982 and 1992 respectively, which are now wholly
owned subsdiaries of the Company. The Company's Hertz Computer division
custom designs, assembles and sells PCs and related technology and
provides services under the "Hertz" name. The Company's Hergo division
designs, manufactures and sells ergonomically engineered modular
mounting and support structures, technical furniture and workstations
("Modular Systems") for PCs and related peripherals under the "Hergo" name.
Products and Services
- - ---------------------
The Technology Group
- - --------------------
RemoteIT.com(R) (www.remoteit.com)
This subsidiary was acquired in March 1999 as a division of the
Hertz Technology Group to offer full-service networking, Internet,
and communications services. Among the wide array of products and
services RemoteIT.com offers are:
* Design, installation and maintenance of local (LAN) and wide (WAN)
area networks. Services and products include data back-up, anti-virus
protection, Y2K testing and recovery, operating system and application
maintenance and upgrades, remote site management, and hardware and
software training through Edutec(R) (www.edutec.com), the Company's
state-of-the-art training facility located in New York City.
* Internet Service Provider (ISP). The Company offers communications
services such as Internet access and point-to-point connectivity
through dial-up, T1 and DSL technologies. Other services being
offered are co-location services for Web site application, as well
as Web-related hardware and software.
* Web services such as Web site design, implementation and hosting,
including corporate Intranet sites and eCommerce development.
* Application Services Provider (ASP). The Company is planning to offer
on-site installation and support for accounting and other
management and productivity software. For organizations concerned
with the lowest Total Cost of Ownership (TCO), RemoteIT.com is
planning to offer the benefits of centralized management with the
power of distributed computing through Microsoft's (NASDAQ: MSFT)
(www.microsoft.com) Thin Client product.
* Integration Services. This includes integration, configuration and
sales of Hertz Computer(R) workstations, servers and other
peripherals, operating systems and software. The Company also sells
computer systems made by first tier manufacturers.
The Company's goal is to enable customers to achieve a competitive
edge through maximizing efficiency and productivity by using
consulting services and technology provided and maintained by
RemoteIT.com.
To this end, the Company secured the availability of reliable high-speed
symmetrical Digital Subscriber Line (DSL) from NorthPoint
(NASDAQ: NPNT) (www.northpoint.net) offered primarily to businesses
which require high-speed symmetrical communication.
To expand and complement the Company's communications offerings,
RemoteIT.com also has an agreement with Bell Atlantic (NYSE: BEL) to
deliver Infospeed(TM)DSL services (www.bellatlantic.net/home/dsl/).
This Asymmetric Digital Subscriber Line (ADSL) service will be offered
to home-based businesses, telecommuters and residential customers in
the New York metropolitan area for high-speed Internet access and
Home-to-Work access of: email, file exchange and LAN-based
applications. The ADSL services are expected to be offered as soon as
Bell Atlantic's installation of its line into the RemoteIT.com
facility is completed. This is expected to be fully functional
sometime after January 2000.
To manage subscribers and provisioning of accounts for use with the
above services, the Company invested and deployed state-of-the-art
hardware and software from Redback Networks Inc. (NASDAQ: RBAK)
(www.redback.com). The product, Redback's Subscriber Management
System(TM)(SMS) 1000, is a powerful, highly intelligent networking
device that bridges the gap between high-speed access equipment in the
telco (telephone company) central office or cable/wireless head-end,
and service provider backbone routers.
In addition, RemoteIT.com secured facilities for a new state-of-the-art
Internet and Network Operations Center, located in New York City
and operated by Level 3. Level 3 Communications, Inc. (NASDAQ: LVLT)
(www.Level3.com) is a major communications and information services
company which built the first international network optimized for
Internet Protocol technology. The new operations center will provide
24/7 network monitoring and security, uninterrupted power source, and
multiple diversely routed connections for highly redundant
connectivity. Also, by residing on a major national and international
backbone, RemoteIT.com should be able to respond quickly to the
expanding communications needs of its client base.
Hertz Computers(R)and Related Services (www.hertztec.com)
The Company's computer division configures and sells customized PCs
and peripherals, and provides a range of related computer integration
services. PCs are assembled, according to customer specifications, in
a number of different configurations, using tested qualified standard
component parts. Customization enables the Company to accommodate
specific customer requirements with respect to cost, storage capacity,
speed, applications, size, and a range of other considerations.
Most of the PCs sold by the Company are for use in a network
configuration or special applications. The fierce price competition in
this market caused Hertz Computer to drastically cut back on sales and
marketing of PCs to market segments where price is the primary
consideration for purchase. The Company expects to have the greatest
amount of orders for customized computer systems to be placed by its
affiliate company RemoteIT.com for resale to their customer base. The
Company also plans to have RemoteIT.com provide the ongoing support
and maintenance for these computer systems.
In addition to the fully customized PCs sold directly to corporations,
the Company is planning a trial period of selling its computer systems
and peripherals over the Internet. Computers sold via the Internet
will offer a reasonable amount of integration options and will have
limited support and warranty policies. The Web-based sales will be
transacted using eCommerce software which has been developed by the
Company and is in its final testing stages. Customers will be able to
use the Company's built-in "Configurator" to assist them in "building"
their desired workstations and mid-range servers.
Edutec(R) Training Facilities (www.edutec.com)
The Company, through Edutec, provides customers with access to
spacious, comfortable training facilities equipped with the latest PC
workstations and related audio-visual technology for an optimum
learning environment. The rooms, located at the Company's offices in
New York City, each accommodate up to 25 trainees, with a PC and
Internet access through a T-1 connection for every individual. They
are available for rental by the day, week, and month or by other
special long-term arrangement, for use in software, sales, education
or management training. Customers often find that training is much
more effective when conducted off-site, away from the routine
distractions of their own office. Sales and maintenance of these
facilities will be the responsibility of RemoteIT.com, which will
market the facility to its customer base.
Products and Services
- - ---------------------
The Hergo(R)Group
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Since its inception in 1982, the Company has been in the PC business
and understands the technology needs of its customers. This enables
Hergo to better design and manufacture some of the most functional,
efficient and ergonomic technical computer furniture, racking
products, and enclosures in the market today.
Hergo(R)Modular Systems (www.hergo.com)
The Company's Hergo division designs, manufactures and sells a line of
functional, ergonomic, modular products, which are instrumental in
achieving efficient workplace environments. The product line includes
technical computer furniture, racking systems, data and communications
enclosures and cabinets, personal workstations, training desks and
other ergonomic, space-saving products. The market for these modular
systems and products is expanding due mainly to the upsurge of the
number of PCs shipped to the marketplace, and the urgent need for
corporations to network and maintain control of their vast computing
assets, therefore requiring data and communications enclosure cabinets
and racking systems in their server rooms and communications centers.
Other areas where use of such products has become more popular are
trading floors, manufacturing plants, testing laboratories, training
rooms, and broadcast centers, as well as other technical environments.
The Company was one of the first to provide a cohesive, functional and
architecturally attractive racking system that mounts vertically and
supports multiple computers, servers and related peripherals, such as
monitors, printers, hubs, routers, switches and other communications
and network control hardware.
The Company offers basic modular components, in a variety of standard
and custom colors, made primarily of strong, heavy gauge steel. The
interchangeable components can be used individually, or integrated to
create limitless configurations of mounting and support structures.
Hergo Cabinets and Enclosures
Due to what appears to be an increased demand for data and
communication enclosures and cabinets used by ISPs, in corporations
upgrading their networking and communications infrastructure, and in
other technical environments, the Company introduced during the past
year a line of high quality, functional enclosures and cabinets. These
products solve security, organization, mounting, cable management, and
ergonomic storage needs across a wide variety of industries. They are
fully-welded, made of rugged 16-gauge, 5-bend frame and 11-gauge gold
zinc-plated adjustable mounting rails, and are available with many
standard and optional features, all meeting NEMA and E.I.A.
specifications.
Standard products which the Company is currently shipping include: the
Dual Discovery(TM)Enclosure Cabinet; the Discovery(TM)Enclosure
Cabinet (single); Hergo's Discovery(TM)Deskmate Cabinet; and the
Discovery(TM)Wall Mount Swing Cabinet, all described below.
New Hergo Products
In the past year, Hergo has developed prototypes or introduced to the
market the following new or improved products, as well as custom OEM
products:
* A new line of welded-steel data and communications "dual enclosure
cabinets." The 48-inch wide Dual Discovery(TM)Enclosure Cabinet
features the CabiCom(TM)Kit (patent pending) which enables the user
to reconfigure the cabinet easily between a specific E.I.A.-310-D
standard 19-inch rack that mounts switches, hubs, routers, PCs and
servers, and more standard, flexible shelving space.
* The new Discovery(TM)Deskmate(TM)Cabinet, designed to fit beneath any
standard desk.
* The new Discovery(TM)Wall Mount Swing Cabinet, which can be mounted at
any height level, and used when space is limited or cable
accessibility requires a wallmount cable management solution.
The Company is currently developing, what it believes to be, a unique
and relatively low cost solution for mounting and managing Liquid
Crystal Displays (LCD). The market is experiencing a growing demand
for this type of monitor/display due to greater adaptability of the
LCD as a display solution in areas of limited space.
Manufacturing and Assembly
In keeping with the latest manufacturing technology, Hergo has
acquired new and advanced CNC computerized machinery. A new production
laser-cutting machine from AMADA America (www.amada.com) has been
installed. This provides enhanced features that can increase
productivity to new levels. It can process large sheets with a single
repositioning cycle and a high-speed piercing technology delivers
turret-like throughput. Another new machine Hergo acquired is a CNC
long folding machine for use in the manufacture of enclosures and
cabinets. The new manufacturing technology should greatly increase
production, increase the range of products manufactured, as well as
ensure precision and quality of workmanship. Additionally, the LAN
Metal Products division is acquiring the necessary tooling and
machinery to increase their ability to produce high-volume, precision-made,
small enclosures used primarily in the security business (such
as alarm companies) and other small to medium size custom
instrumentation enclosures.
Computers are manufactured at the Company's manufacturing facilities
in New York City. The Hergo modular systems, cabinets and enclosures
and the LAN Metal custom products are manufactured at the Company's
Long Island City facility. The Company's Woodside, Queens, facility
handles warehousing and shipping operations for the Hergo line.
Management is currently investigating the possibility of integrating
the Hergo manufacturing in Long Island City and the Woodside warehouse
into a single, more efficient production, paint and distribution
facility.
The Company offers limited warranty coverage for its products for
varying time periods depending on a variety of factors.
Suppliers
The Company stocks most of the component parts used both in the
manufacture of its computers and in the manufacture of its Hergo
products. The cost of some components used in the manufacturing of
computers, such as central processing units ("CPUs"), hard disks, and
memory, can fluctuate from day-to-day, and for this reason, the
Company stocks these items in limited quantities. To-date, the Company
has not experienced any difficulty in obtaining the required items in
a short timeframe. Most of the component parts purchased by the
Company for its computers are obtained from a number of different
vendors with whom the Company maintains ongoing relationships. The
Company believes that it is not dependent on any single source, as
these alternative sources are always available. Hergo makes most of
the steel components used in its product line. The Company acquires
its raw materials for these components from a number of different
vendors and believes that adequate alternative raw material sources
are available if required.
Marketing and Sales
RemoteIT.com(R)
A start-up business acquired in March 1999 as a division of the
Hertz Technology Group to offer full-service networking, Internet, and
communications services. The Company offers a wide array technology
related of products and services and intends to stay in the forefront
of the marketplace by adding to and expanding products and services in
additional relevant areas related to the Company's core business.
The Company offers the following products and services:
* Design, installation and maintenance of local (LAN) and wide (WAN)
area networks.
* ISP services such as Internet access and point-to-point connectivity
through dial-up, T1 and DSL technologies, co-location services for
Web site applications as well as Web-related hardware and software.
* Web site design, implementation and hosting, including corporate
Intranet sites and eCommerce development.
* Application Services Provider (ASP) services such as on- and off-site
installation and support for management and productivity software
and utilities.
* Integration Services that include configuration and sales of Hertz
Computer(R)products as well as other first tier computer
manufacturers.
The Company will initially promote and market most of the support
services in the New York metropolitan area, with the possibility of
expanding to other parts of the country if and when they prove a
successful model of operation. The Company plans to deliver dial-up
Internet and DSL offerings on a national level within the near future.
The Company revenues for its first 6 months of operation were
$558,000.
Hertz Computers and Related Services
Sales to commercial customers has been dramatically reduced to include
only those sales that provide an acceptable gross profit margin. The
Company has begun to direct its sales and marketing efforts to clients
of its affiliate company RemoteIT.com and will soon begin an
experimental eCommerce effort.
The Company is an approved provider to OGS and to GSA, which monitors
all U.S. government procurement of computers and equipment.
Computer sales and servicing revenues in the 1999 fiscal year were
$877,000, down from $4,445,000 in the prior year. As predicted by
management last year, competition continued to be fierce and was
exacerbated by the Asian economic problems. The company realized that
quantity selling against tier one manufacturers, along with the long-term
warranty and repair programs offered by Hertz would result in
slim gross profit margin, if any. Management's decision to reduce its
reliance on direct computer sales was apparently justified by the
resulting overall gross margin of the Hertz Technology Group that
significantly increased to 49 percent, from a 31 percent gross profit
margin in the previous year.
The Company has exhibited its computers at trade shows and has, from
time to time, distributed brochures and articles containing excerpts
from favorable media reviews of the computers. Much of its computer
business is repeat business, and the source of new customers has been
largely word-of-mouth referrals and inquiries from favorable media
product reviews. The Company's small sales staff is primarily occupied
with taking and filling orders by telephone. The Company expects its
traditional PC sales in Fiscal 2000 to be even lower, unless the
expected sales of its computers and peripherals on the Internet
increases substantially.
Edutec Training Facilities
In order to capitalize on the rapidly growing business of computerized
training, Edutec, with expanded capabilities at its state-of-the-art
training center, is now available for rent on a daily, weekly or
monthly basis or by special long-term arrangement. The facility offers
modern classrooms, which can be individually networked and configured
with the latest Hertz PCs and Hergo Training Desks to optimize student
productivity. A student lounge and other amenities are available and
can be tailored to each users specific requirements. Additional types
of training, including sales and education seminars, and management
training sessions, present additional new business opportunities.
Edutec targets New York metropolitan area customers primarily through
focused niche-market advertising, direct mail, fax broadcasting, and
Internet marketing.
Hergo Products
The Company manufactured and sold Hergo modular systems, enclosures
and cabinets to approximately 600 customers in the 1999 fiscal year.
These customers included some of the largest and best-known
corporations in the U.S. Companies of the size and stature of AT&T,
Bloomberg Financial, Boeing, Citibank N.A., Chrysler Financial, CVS,
General Electric, EDS, Hewlett Packard, IBM, Kodak, MTA New York and
the U.S. Postal Service all purchased Hergo structural support units
in 1999. No single customer accounted for more than 10 percent of
total Hergo sales in 1999. Sales are generated in large part through
national advertising, regional telemarketing efforts and exhibits at
trade shows targeted to a variety of industries.
Hergo products are listed on the Federal Government's General Services
Administration ("GSA") and New York State Offices of General Services
("OGS") schedules, and sold to Federal government and various local
and State government agencies. Hergo sales in 1999 increased by
$372,000, or 7.5 percent over Hergo 1998 sales. Hergo's profit margins
at 56 percent are considerably higher than those of the other
Company's divisions.
In its first year the line of enclosures and cabinets was offered, the
Company has sold more than 120 units totaling $265,000.
The Company maintains a marketing and advertising budget for its
"Hergo" Modular Systems, cabinets and enclosures, which is used
primarily for an advertising program in trade and business
publications, for public relations and marketing communications
efforts, and in the development and distribution of promotional
materials. The Company currently maintains a staff of 8 Hergo sales
and marketing personnel.
A program to increase the number of resellers and OEM clients is
currently being implemented by the Company. Toward this end, the
Company has appointed Donald H. Cutlip to the newly created position
of Sales Director for Northeast Reseller, OEM & Government Sales. Mr.
Cutlip comes to Hergo with more than 25 years of related experience in
technical furniture sales and marketing, as well as a proven track
record in developing and managing reseller networks, integrator
relationships and Federal direct sales operations for both The Marvel
Group(R)and Wright Line, Inc(R).
The Reseller affiliate expansion began with increased visibility and
activity in the NRI Data and Business Products sales organization
(www.nridata.com). NRI, headquartered in Morrisville, Pennsylvania,
has salespeople in Pennsylvania, New Jersey, Delaware, Massachusetts,
Connecticut, Rhode Island and New Hampshire.
Other Resellers recently signed include: GenTek, Inc. of Tampa,
Florida, which serves Florida, Alabama, Tennessee, Georgia, South
Carolina, & North Carolina (www.gentekrep.com); Pennsylvania Office
Service Group, Inc. of Lemoyne, Pennsylvania, which covers the central
Pennsylvania region; Sel-Tronics, Inc., located in Landover, Maryland,
serving the Mid-Atlantic region including Virginia, Maryland,
Washington, D.C., and Delaware (www.seltronics.com); H.G. Associates
of Stowe, Massachusetts, in the New England region (www.hgane.com);
National Office Systems, Inc., located in Gaithersburg, Maryland and
Baltimore, Maryland and Shelf-Rack Wholesale Products, Inc., located
in San Jose, California, which serves the Silicon Valley.
Competition
Networking and communications products and services are being offered
by countless companies. More specifically, communications services
such as Internet dial-up, DSL and T1 are considered commodities. Users
have many choices when selecting their Internet Service Provider or
when choosing the connection means to the Internet or to any point
around the globe. Competing head-on with other ISPs, DSL and dial-up
providers will most likely result in sales with very limited profits,
unless these products are being offered in combination with other more
sophisticated technical services.
There are many companies that sell computers and may be regarded as
competitors of the Hertz Computer Division. Computers are sold
directly to commercial and government entities by manufacturers such
as Dell(R), IBM(R), Hewlett Packard(R)and Compaq(R), by large retail
outlets such as Staples(R)and Office Depot(R), by mail-order houses,
electronic equipment catalogues and by assemblers and entities like
the Company selling computers under their own names. Many of these
companies have substantially greater financial, sales, marketing,
technical and other competitive resources then those of the Company.
As an indication of the price competition that exists in the retail
market, first-tier companies have begun selling computers for below
$300 when combined with Internet offerings. The Company believes that
many advantages the Company and its products offer are being
diminished by the fierce competition that emphasizes low cost above
all.
The business of providing functional, architecturally attractive
modular systems specifically designed to mount, support and allow easy
access to microcomputers and related equipment is becoming a
relatively mature business. There are a number of companies in the
business, which are considerably larger and better established than
the Company. Moreover, because of the attractive profit margins in the
business and the absence of any serious barriers to entry, it is
likely that additional companies may soon enter the field.
Strategic Growth Plan
A number of strategic business plans are underway to further
strengthen the Company. RemoteIT.com, a start-up Internet and
networking company began operating in March 1999. The Company
assembled a core of technical staff with the knowledge base and
experience to offer and deliver technology-based solutions to the mid-
to large-sized business markets. The Company's goals for strategic
growth are based on the evaluation of today's business computing and
communications needs. The Company believes that the strength of their
product offering will lie in their ability to deliver a bundle
containing a variety of products and services vital to the success of
most businesses today. The Company is planning to take the necessary
steps to secure the marketing, sales and operational management talent
in order to grow and expand RemoteIT.com services and client base.
A campaign to expand Hergo's direct selling efforts in the New York
metro area through high level telemarketing that results in face-to-face
appointments just began. Also a Sales Director for Northeast
Reseller, OEM & Government Sales has been hired. His high-level
activities have already secured a number of resellers and reps who
will carry Hergo's products for the first time. The Company will
continue advertising in national computer and technology publications
to maintain the brand and attract new opportunities that can either be
handled directly or passed along to resellers. Hergo is contemplating
selling a limited number of products via a Web-store, using custom
eCommerce software that is being developed by the Company.
Hertz Computer(R)products and services will be offered primarily
through RemoteIT.com. The Company is planning to begin a trial period
selling its computer systems and peripherals over the Web as well.
Computers sold via the Internet will offer a reasonable amount of
integration options and will be offered with limited support and
warranty policies. Synergy between RemoteIT.com and Hergo customers
should provide for sales opportunities at higher margins.
The Company will continue to implement cutting-edge technologies as
part of its growth plan, investing in new marketing and management
tools to improve sales results and overall productivity. The Company
will be stepping-up corporate efforts to promote actively the synergy
which exists between the Technology Group and the Hergo Group. Toward
this end, the Company has expanded a market specific advertising, PR
and promotional plan to promote the Hertz Technology Group and its
divisions with the goal of heightened awareness, increased brand
recognition and increased sales in the principal markets in which the
Company operates.
Intellectual Property Rights
The Company seeks to protect its proprietary rights by obtaining
non-disclosure and confidentiality agreements from its employees and
consultants. The Company has trademark registrations for "Hergo,"
"Hergonized," "Edutec" and "Hertz Computer Corporation." The Company
is in the process of filing a patent in regard to its recently
developed CabiCom(TM)Kit which enables users to easily reconfigure the
Dual Enclosure space between a specific E.I.A.-310-D standard 19-inch
rack width and the more standard, flexible free shelving space.
Employees
The Company employs a total of 64 persons: 5 executives, 13 persons in
administration, 7 in sales, 6 technicians, and 33 workers in
manufacturing and warehousing.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently occupies loft space on 75 Varick Street,
consisting of 21,000 square feet, for a six year period which began on
September 1, 1996, at an annual rental of $178,513 a year. These
facilities are used by the Company for its executive, administrative and
sales offices, Edutec classrooms and for computer manufacturing. The
Company leases 34,000 square feet in Long Island City for its Hergo
facility. The lease runs through July 31, 2002 with an annual rent of
approximately $105,000. The Company leases an additional 16,000 square feet in
Woodside, Queens, New York for Hergo's warehouse and distribution. The
lease for this space, which ends on August 31, 2000 provides for an
annual rent of approximately $105,000.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters put to a vote of security holders during the
fourth quarter. However, the Company's Annual Meeting of Stockholders
was held on January 18, 1999 at which time three matters were submitted
to the Company's stockholders for a vote. The majority of the
stockholders voted for the appointment of the following Directors: Eli
E. Hertz, I. Marilyn Hertz, Barry J. Goldsammler, Beryl Ackerman and
Bruce Borner. The proposal to reduce the number of authorized shares of
common stock of the Company from 25,000,000 to 3,000,000 shares was
ratified by a majority of the stockholders. Goldstein Golub Kessler LLP
was appointed its new auditors in the spring of 1999 to audit its
financial statements for the fiscal year ending on August 31, 1999. The
proxy tabulations as tabulated by the Inspector of Elections was as
follows: 1,021,024 in favor; 12,927 opposed; and 650 abstaining.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a) Market Information
The Company's Common Stock is listed and trades on the Nasdaq Small Cap
Market (Symbol: HERZ). The following table set forth, on a per share
basis, the high and low prices for the Company's Common Stock for the
first quarter of the Company's fiscal year after the initial public
offering of the Company's Common Stock on November 12, 1996, and for
each succeeding quarter through and including the quarter ending on
August 31, 1999. The prices set forth below have been adjusted to
reflect the one for three reverse stock split effective November 2,
1998. In addition, on May 18, 1999, the Company approved a 100% stock
dividend on its common stock. After the record date of the stock
dividend, each outstanding Class A warrant became exercisable to
purchase two shares of common stock. All share and per share data
included in this report have been retroactively adjusted to give effect
to the reverse split and stock dividend as of the first date presented.
Common Stock
------------
High Low
---- ---
November 12, 1996 to November 30, 1996 $13.13 $11.00
December 1, 1996 to February 28, 1997 $ 9.57 $ 6.38
March 1, 1997 to May 31, 1997 $12.58 $ 6.38
June 1, 1997 to August 31, 1997 $ 7.88 $ 3.93
September 1, 1997 to November 30, 1997 $ 3.66 $ 2.94
December 1, 1997 to February 28, 1997 $ 2.49 $ 3.19
March 1, 1998 to May 31, 1998 $ 2.11 $ 3.28
June 1, 1998 to August 31, 1998 $ 1.92 $ 1.78
September 1, 1998 to November 30, 1998 $ 1.66 $ .75
December 1, 1998 to February 28, 1999 $ 2.02 $ .75
March 1, 1999 to May 31, 1999 $ 9.75 $ 1.97
June 1, 1999 to August 31, 1999 $ 8.03 $ 3.13
On November 29, 1999 the closing sale price for the Common Stock on
NASDAQ was $2.63.
Effective July 27, 1998 the Company's Board of Directors authorized the
Company to make open market purchases of its Common Stock of up to
166,666 shares during the following nine months. 156,934 shares were
repurchased. No shares were repurchased after fiscal 1999 to the date of
this Annual Report on Form 10-KSB.
b) Holders
The approximate number of record holders of the Company's Common Stock,
as of November 29, 1999 was 20. The Company believes that there are
beneficial shareholders in excess of 300 in street name in various
brokerage accounts.
c) Dividends
The holders of Common Stock are entitled to receive such dividends as
may be declared by the Company's Board of Directors. The Company has not
paid and does not expect to declare or pay any cash dividends in the
foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
The Company offers full service for Novell(R)and
Microsoft(R)networking solutions, Internet and Web related services
including high-speed communications services such as T1 and DSL from
companies such as NorthPoint(R)and BellAtlantic(R)under the
"RemoteIT.com" name, through its RemoteIT.com subsidiary. The Company
custom designs and assembles personal workstations and servers under
the "Hertz Computer(R)" name through its Hertz Computer subsidiary.
Through its Edutec(R)subsidiary, the Company offers customizable
state-of-the-art training rooms at its New York City headquarters. The
rooms are equipped with the latest PC workstations and A/V
presentation technology. RemoteIT.com, Hertz Computer and Edutec
comprise the "Technology Group."
The Company also designs, manufactures and sells ergonomically
engineered modular technical computer furniture, open racking systems,
data and communications cabinets and enclosures, personal
workstations, training desks, assembly workbenches, KVM switches and
other technical workspace solutions under the "Hergo(R)" name through
its Hergo subsidiary. Hergo, through its LAN Metal division provides
custom specialty metal manufacturing and fabrication products to the
trade. Together, Hergo and LAN comprise the "Hergo Group."
Year Ended August 31, 1999 compared to Year ended August 31, 1998
Revenues
Company sales for the year ended August 31, 1999, were $6.88 million,
compared to $9.40 million for the year ended August 31, 1998, a 27%
decrease. A substantial portion of the reduction in sales was
attributed to the decline in computer sales. For the year ended August
31, 1999 the Hergo Group sales were $5,305,000 compared to sales of
$4,933,000 for the year ended August 31, 1998, an increase of $372,000
(7.5%). Sales of the Technology Group were $1,576,000 for the year
ended August 31, 1999 compared to $4,470,000 for the year ended August
31, 1998 a decrease of $2,894,000 or 65%. RemoteIT.com was acquired on
March 1, 1999 and contributed $558,000 in sales.
The Company believes that the newly formed subsidiary RemoteIT.com,
together with the Hergo Group, currently offers the best opportunities
for future growth. RemoteIT.com is providing networking and
communications products and services, Internet connectivity, Web
development, and other value-added services. The recent partnering
with NorthPoint Communications and Bell Atlantic are steps that have
been taken to provide the latest available technologies in
communications and networking services. The PC hardware market has
become increasingly competitive and over-saturated and the Company is
directing its efforts in computer hardware manufacturing primarily to
support the integration and networking business generated by
RemoteIT.com. The Company is also directing its resources to expanding
Hergo's national presence through better distribution channels within
the reseller and dealer marketplace and expanding the product line to
include products currently in high demand such as data and
communications cabinets and enclosures. To this end the Company has
invested considerable resources in its acquisition of precision CNC
laser and other advanced fabricating machinery.
Gross Profit
Overall Gross profit in dollars and as a percentage of sales increased
substantially during the year ended August 31, 1999 as compared to the
year ended August 31, 1998 despite the large reduction in sales. Gross
profit was $3,339,000 (49% of net sales) for the year ended August 31,
1999 as compared with $2,943,000 (31% of net sales) for the year ended
August 31, 1998, an increase of $396,000 (13%).
Improved profit margins from the Hergo Group for the year ended August
31, 1999 were a result of efficiencies gained with new machinery and
the reduction of the costs needed to start the LAN production
operation when the division was acquired in the quarter ended February
28, 1998. Gross profit generated from the Hergo Group for the year
ended August 31, 1999 was $2,991,000 (56% of net sales) compared to
$2,567,000 (52% of net sales) for the year ended August 31, 1998.
Gross profit generated from the Technology Group for the year ended
August 31, 1999 was $348,000 (22% of sales) compared to $376,000 (8%
of sales) for the same period last year.
Gross Profit increased despite the fact that sales decreased for the
current year as compared to sales for the year ended August 31, 1998.
The addition of the RemoteIT.com division contributed to the increase
in the profit margin. This is consistent with the Company's intent on
reducing the hardware portion of its technology business in favor of a
greater emphasis on service-related business. Also contributing to the
Company's increase in Gross Profit was a full year of Edutec sales and
its higher profit margins.
<PAGE>
Selling, General and Administrative
Selling, general, and administrative expenses decreased for the year
ended August 31, 1999 compared to the year ended August 31, 1998 by
$125,000 (3%). The improvement, in light of the addition of
RemoteIT.com and its associated expenses, makes the decrease that much
more positive.
Administrative expenses were impacted by the reduction of bad debt
reserve, legal expenses, consulting fees and the payment in the prior
fiscal year of final income taxes (with associated increases in
accounting fees) in reference to the closing of the Hertz Israel
entity. Also, in the previous year, Company stock was issued to an
employee, which resulted in compensation expense, and was not repeated
in the current fiscal year's expenses. Selling expenses were trimmed
in various areas. The number of trade shows was reduced to include
only those that, according to the Company's belief, have the greatest
direct impact on sales. Actual exhibit expenses and all associated
logistics costs, including certain marketing and administrative costs,
were thereby eliminated.
Increased expenses included sales and administrative salaries related
to the RemoteIT.com acquisition as well as advertising (including Web
site design of RemoteIT) and various types of general and
administrative expenses. General and administrative expense increases
included additional costs associated with investigating possible
business ventures as well as improvement of employee benefits plans.
Other Income (Expense):
Other expense for the year ended August 31, 1999 was $7,000 compared
to Other Income of $32,000 for the year ended August 31, 1998. The
income that was recorded in the previous year was primarily due to an
insurance claim and the return of options by an outside consultant.
Net Interest Income for the year ended August 31, 1999 decreased by
$81,000 as compared to the comparable year ended August 31, 1998. The
decrease in interest income for the year just ended was primarily due
to the reduction of marketable securities. These securities were sold
for cash flow needs that included purchase of equipment, software
development costs, purchase of treasury stock and repayment of notes
payable.
Provision for Income Taxes
The Company recorded a provision for taxes of $110,000 for the year
ended August 31, 1999 as compared to a tax benefit of $176,000 for the
year ended August 31, 1998. The Company felt that it should reduce the
deferred tax asset by $110,000 in the interest of conservatism. The
Company's net operating loss carry forward will reduce the Company's
taxes on future profits.
Net Income and Earnings Per Share
Operation results improved favorably when comparing operations to last
year. Operations before Interest, Taxes, Depreciation, and
Amortization (IBITDA), showed a $748,000 increase in profitability
when compared to the year ended August 31, 1998. For the year ended
August 31, 1999, IBITDA showed a loss of $177,000 or $.08 per share
compared to a loss of $925,000 or $.43 a share for the year ended
August 31, 1998.
The net loss for the year ended August 31, 1999 was substantially
reduced with a loss of 695,000 or $.33 per share compared to a loss
of $810,000 or $.38 per share for the year ended August 31, 1998.
Liquidity and Capital Resources
The Company, as of August 31, 1999 had working capital of $2,938,000
of which $1,625,000 was in cash and marketable securities, which are
available to fund the Company's operations and expansion plan.
For the twelve months ended August 31,1999, the Company had cash
provided by operations of $816,000, as compared to $1,203,000, for the
comparable period last year. The collection of the relatively high
August 1998 accounts receivable net of the accounts payable was the
principal reason for the cash provided by operations during the fiscal
year 1999. Additionally, during the year ended
August 31, 1998 the Company sold marketable securities in the amount
of $1,811,000. At the time, additional funds had been necessary to
purchase fixed assets, acquire LAN Metal Products and support a
temporary cash flow shortfall due to the unusually high level of
accounts receivable at the end of the year. Sales of marketable
securities for the year ended August 31, 1999 were $168,000.
Cash used in investing activities for the twelve months ended August
31, 1999 was $609,000. The primary uses were purchasing of machinery
for the Hergo product line, as well as equipment purchased for use in
the new RemoteIT.com subsidiary. Additionally, the Company capitalized
expenses incurred in creation of eCommerce software in the amount of
$172,000.
Cash used in financing activities for the year ended August 31, 1999
totaled $315,000 compared to $108,000 for the year ended August 31,
1998. During the current year ended, the Company bought 107,000 shares
of Treasury Stock for a total of $178,000. It also paid down the first
of three installment payments on a note obtained in connection with the
financing of the purchase of LAN Metal Products.
Special Note Regarding Forward-Looking Statements
Certain statements under the caption "Management's Discussion and
Analysis" and elsewhere in this Form 10-QSB constitute "forward-looking
statements" within the meaning of Section 21E of the Securities and
Exchange Act of 1934. Words "believe," "expect," "future," "intend,"
"plan," and similar expressions as they relate to the Company or the
Company's management identify forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
which may cause the 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.
Such factors include, among others, the following: general economic and
business conditions, competition, success of new product development,
effect of advertising and promotional efforts, brand awareness, the
existence of or adherence to development schedules, continued patronage by
existing customers, the ability to attract qualified managerial personnel,
the existence or absence of adverse publicity, changes in business strategy
or development plans, quality of management and terms and deployment of
capital, business abilities and judgment of personnel and success in
acquiring businesses.
Year 2000 Compliance
The Company is on schedule with a project that addresses the Year 2000
(Y2K) issue of computer systems and other equipment with embedded
chips or processors not being able to properly recognize and process
date-sensitive information after December 31, 1999. Many systems use
only two digits rather than four to define the year and these systems
will not be able to distinguish between the year 1900 and the year
2000. This may lead to disruptions in the operations of business and
governmental entities resulting from miscalculations or system
failures. The project is designed to ensure the compliance of all of
the Company's applications, operating systems and hardware platforms,
and to address the compliance of key business partners. Key business
partners are those customers and vendors that have a material impact
on the Company's operations. All phases of the project should be
completed by the end of 1999 thus minimizing the impact of the Y2K
problem on the Company's operations.
The total estimated cost of the required modifications to become Y2K
compliant should not be material to the Company's financial position.
Failure to make all internal business systems Y2K compliant could
result in an interruption in, or a failure of, some of the Company's
business activities or operations. Y2K disruptions in the operations
of key vendors could impact the Company's ability to obtain
components necessary for the manufacture of products and fulfillment
of contractual obligations. If one or more of these situations occur,
the Company's results of operations, liquidity and financial
condition could be materially and adversely affected. The Company has
almost completed verification of the readiness of its key business
partners but cannot control the accuracy of their reporting, and
cannot predict consequences of any business partner Y2K failures that
may have a material impact on the Company's results of operations,
liquidity or financial condition. The Y2K project, however, is
expected to significantly reduce the Company's level of uncertainty
about the Y2K problem and reduce the possibility of significant
interruptions of normal business operations.
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------------------------------
Independent Auditor's Report F-2
Report of Independent Public Accountants F-3
Consolidated Financial Statements:
Balance Sheet F-4
Statement of Operations F-5
Statement of Shareholders' Equity F-6
Statement of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-17
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Hertz Technology Group, Inc.
We have audited the accompanying consolidated balance sheet of Hertz
Technology Group, Inc. and Subsidiaries as of August 31, 1999, and the
related consolidated statements of operations, shareholders' equity,
and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Hertz Technology Group, Inc. and Subsidiaries as of August 31, 1999
and the results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting
principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
October 21, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Hertz Technology Group, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Hertz
Technology Group, Inc. and Subsidiaries as of August 31, 1998, and the
related consolidated statement of operations, shareholders' equity,
and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hertz
Technology Group, Inc. and Subsidiaries as of August 31, 1998, and the
results of its operations and its cash flows for the year then ended
in conformity with generally accepted accounting principles.
New York, New York ARTHUR ANDERSEN LLP
November 2, 1998
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- - ----------------------------------------------------------------------------
August 31, 1999 1998
- - ----------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 32,456 $ 140,254
Marketable securities 1,592,158 1,759,994
Accounts receivable net of allowance for
doubtful accounts of
$96,133 and $130,829, respectively 1,033,726 2,362,030
Inventories 669,601 709,228
Prepaid expenses and other current assets 282,790 205,229
- - ----------------------------------------------------------------------------
Total Current Assets 3,610,731 5,176,735
Property and Equipment, net 1,783,728 1,543,277
Goodwill, net of accumulated amortization of
$86,349 and $27,002, respectively 244,284 237,881
Deferred Income Taxes 136,173 209,963
Other Assets 308,075 148,490
- - ----------------------------------------------------------------------------
Total Assets $6,082,991 $7,316,346
============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 261,688 $ 616,035
Accrued expenses and other current liabilities 237,570 416,954
Current portion of capital lease obligation 46,974 -
Current portion of notes payable 126,666 126,667
- - ----------------------------------------------------------------------------
Total current liabilities 672,898 1,159,656
Capital Lease Obligation, net of current portion 194,318 -
Notes Payable 126,667 260,473
- - ----------------------------------------------------------------------------
Total liabilities 993,883 1,420,129
- - ----------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
Shareholders' Equity:
Common stock - $.001 par value; authorized
3,000,000 shares, issued 2,306,950 and 2,256,950
shares, respectively 2,307 2,257
Additional paid-in capital 5,837,889 5,772,189
Retained earnings (accumulated deficit) (465,072) 229,799
Less treasury stock, 177,868 and 70,868 shares,
respectively, at cost (286,016) (108,028)
- - ----------------------------------------------------------------------------
Shareholders' equity 5,089,108 5,896,217
- - ----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $6,082,991 $7,316,346
============================================================================
See Notes to Consolidated Financial Statements
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- - ----------------------------------------------------------------------------
Year ended August 31, 1999 1998
- - ----------------------------------------------------------------------------
Net Sales $6,881,838 $9,403,053
Cost of Sales 3,542,941 6,460,027
- - ----------------------------------------------------------------------------
Gross profit 3,338,897 2,943,026
Selling, general and administrative expenses 4,001,717 4,127,160
- - ----------------------------------------------------------------------------
Operating loss (662,820) (1,184,134)
Other income (expense) (7,224) 31,799
Interest income, net of interest expense of $27,145
and $41,936, respectively 85,173 166,156
- - ----------------------------------------------------------------------------
Loss before provision (benefit) for income taxes (584,871) (986,179)
Provision (benefit) for income taxes 110,000 (175,899)
- - ----------------------------------------------------------------------------
Net loss $(694,871) $(810,280)
============================================================================
Loss per common share - basic and diluted $ (.33) $ (.38)
============================================================================
Weighted-average number of common shares outstanding
- basic and diluted 2,132,777 2,133,950
============================================================================
See Notes to Consolidated Financial Statements
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- - ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Retained
Additional Earnings Total
Common Stock Paid-in (Accumulated Treasury Stock Shareholders'
Shares Amount Capital Deficit) Shares Amount Equity
- - -----------------------------------------------------------------------------------------------------------------
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 1, 1997 2,110,050 $2,110 $5,592,611 $1,040,079 - - $6,634,800
Issuance of stock to employees 50,000 50 79,675 - - - 79,725
Issuance of shares to related
party in connection with
purchase of Edutec 96,900 97 99,903 - - - 100,000
Repurchase of treasury stock - - - - 70,868 $(108,028) (108,028)
Net loss - - - (810,280) - - (810,280)
- - -----------------------------------------------------------------------------------------------------------------
Balance at August 31, 1998 2,256,950 2,257 5,772,189 229,799 70,868 (108,028) 5,896,217
Issuance of shares in
connection with purchase
of RemoteIT 50,000 50 65,700 - - - 65,750
Repurchase of treasury stock - - - - 107,000 (177,988) (177,988)
Net loss - - - (694,871) - - (694,871)
- - -----------------------------------------------------------------------------------------------------------------
Balance at August 31, 1999 2,306,950 $ 2,307 $5,837,889 $(465,072) 177,868 $(286,016) $5,089,108
=================================================================================================================
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - ----------------------------------------------------------------------------
Year ended August 31, 1999 1998
- - ----------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (694,871) $ (810,280)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 426,241 231,836
Amortization of goodwill 59,347 27,002
Provision for doubtful accounts (34,696) (20,989)
Stock issued as compensation - 79,725
Changes in operating assets and liabilities:
Decrease in marketable securities 167,836 1,810,805
(Increase) decrease in accounts receivable 1,363,000 (880,689)
Decrease in inventories 39,627 399,564
Increase in prepaid expenses and other current
assets (98,771) (13,010)
Decrease (increase) in deferred income taxes 110,000 (209,963)
Decrease (increase) in other assets 11,974 (48,102)
(Decrease) increase in accounts payable, accrued
expenses and other current liabilities (533,731) 642,265
Decrease in other liabilities - (5,433)
- - -----------------------------------------------------------------------------
Net cash provided by operating activities 815,956 1,202,731
- - -----------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (437,278) (677,152)
Software development costs (171,559) -
Purchase of subsidiaries, net of cash acquired - (603,418)
- - -----------------------------------------------------------------------------
Cash used in investing activities (608,837) (1,280,570)
- - -----------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of notes payable (133,807) -
Repayment of capital lease obligations (3,122) -
Purchase of treasury stock (177,988) (108,028)
- - -----------------------------------------------------------------------------
Cash used in financing activities (314,917) (108,028)
- - -----------------------------------------------------------------------------
Net decrease in cash and cash equivalents (107,798) (185,867)
Cash and cash equivalents at beginning of year 140,254 326,121
- - -----------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 32,456 $ 140,254
=============================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 24,931 $ 34,235
=============================================================================
Income taxes $ - $ 116,857
=============================================================================
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock relating to purchase of
subsidiaries $ 65,750 $ 100,000
=============================================================================
Capital lease obligations incurred $244,414 $ -
=============================================================================
</TABLE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - ----------------------------------------------------------------------------
1. PRINCIPAL The consolidated financial statements include the accounts of
BUSINESS Hertz Technology Group, Inc. ("Hertz-Tech") and its wholly
ACTIVITY owned subsidiaries (hereinafter collectively referred to as
AND the "Company"). The Company's subsidiaries include Hertz
SUMMARY OF Computer Corporation ("Hertz Computer"), Hergo Ergonomic
SIGNIFICANT Support Systems, Inc. ("Hergo")and Edutec Computer Education
ACCOUNTING Institute, Inc. ("Edutec"). As further described in Note 6,
POLICIES: on March 1, 1999 the Company acquired all of the outstanding
stock of RemoteIT.com, Inc. ("RemoteIT"). The results of
operations of RemoteIT are included in the Company's
consolidated financial statements from the date of acquisition.
On August 27, 1999, another wholly owned subsidiary, LAN
Metal Products Corp. ("LAN"), was merged into Hergo.
All significant intercompany transactions and balances have
been eliminated in consolidation.
The "Technology Group" is comprised of RemoteIT, Hertz
Computer and Edutec. RemoteIT offers full service
networking solutions and internet and web-related
services, including high speed communications services.
Hertz Computer custom designs and assembles personal
workstations and networking, communication and web
servers. Edutec offers state-of-the-art computerized
training facilities that can be used for software,
sales, education or management training.
Hergo manufactures and sells space-saving modular racks
and technical furniture to help organize all types of
computer hardware and communication and electronic
equipment. In addition, Hergo provides custom,
contract manufacturing and fabrication of specialty
metal products for use in a variety of industries.
Substantially all revenue is from the sale of products.
Revenue from the sale of products is recognized at the
date of shipment to customers. Service revenue is
recognized when the services are performed.
Substantially all computers and components sold by
Hertz-Tech are covered under warranty by the
manufacturers.
All advertising costs are expensed as incurred.
The Company considers all highly liquid investments
with a maturity of three months or less to be cash
equivalents. Cash equivalents, which consist primarily
of money market accounts, are carried at cost, which
approximates market value.
The Company maintains cash in bank accounts which, at
times, may exceed federally insured limits. The
Company has not experienced any loss on these accounts.
Inventories are stated at the lower of cost, determined
by the first-in, first-out method, or market.
Depreciation of property and equipment is provided for
by the straight-line method over the estimated useful
lives of the related assets. Leasehold improvements
are amortized over the lesser of their economic useful
lives or the term of the related leases.
The costs of software developed for internal use
incurred during the preliminary project stage are
expensed as incurred. Direct costs incurred during the
application development stage are capitalized. Costs
incurred during the post implementation/operation stage
are expensed as incurred.
Capitalized software development costs are amortized on
a straight-line basis over the estimated useful lives
of the related assets. Approximately $172,000 of
internal-use software costs have been capitalized and
are included in other assets at August 31, 1999. No
internal-use software costs were capitalized at August
31, 1998. Amortization will begin when that internal-use
software is ready for its intended use.
Goodwill is amortized using the straight-line method
over five years. At each balance sheet date, the
Company evaluates the period of amortization of
goodwill. The factors used in evaluating the period of
amortization include: (i) current operating results,
(ii) projected future operating results, and (iii) any
other material factors that affect the continuity of
the business.
Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable.
The Company believes that no such impairment existed at
August 31, 1999.
Basic earnings per common share is computed using the
weighted-average number of common shares outstanding.
Diluted earnings per common share is computed using the
weighted-average number of common shares outstanding
adjusted for the incremental shares attributed to
outstanding options and warrants to purchase common
stock. No incremental shares were used in the 1999 and
1998 calculation of diluted earnings per common share
since they would have had an antidilutive effect.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
the use of estimates by management. Actual results
could differ from those estimates.
The Company elected to measure compensation cost using
Accounting Principles Board ("APB") Opinion No. 25 as
is permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, and has elected to comply with other
provisions and the disclosure-only requirements of SFAS
No. 123.
The Company does not believe that any recently issued
but not yet effective accounting standards will have a
material effect on the Company's consolidated financial
position, results of operations or cash flows.
2. MARKETABLE The Company's marketable securities are comprised of equity
SECURITIES: and debt securities and are classified as trading securities.
Trading securities are recorded at fair value, with the change
in fair value during the period included in net earnings.
Net unrealized holding losses on trading securities
amounted to $23,281 for the year ended August 31, 1999.
There were no material unrealized holding gains or
losses at August 31, 1998.
3. INVENTORIES: Inventories consist of the following:
August 31, 1999 1998
----------------------------------------------------------
Components $ 52,143 $176,053
Raw materials 104,271 75,780
Work-in-process 22,053 73,480
Finished goods 491,134 383,915
----------------------------------------------------------
$669,601 $709,228
==========================================================
4. PROPERTY Property and equipment, at cost, consists of:
AND
EQUIPMENT:
Depreciation/
Amortization
August 31, 1999 1998 Period
---------------------------------------------------------------
Furniture, fixtures
and office equipment $ 464,716 $ 353,199 7 years
Warehouse equipment 1,438,280 996,524 5 years
Leasehold improvements 705,434 612,169 Term of lease
Vehicles 94,391 74,237 3 years
---------------------------------------------------------------
2,702,821 2,036,129
Less accumulated depreciation
and amortization 919,093 492,852
---------------------------------------------------------------
$1,783,728 $1,543,277
===============================================================
Property and equipment includes amounts acquired under
capital leases of approximately $230,000 at August 31,
1999. Amortization of these assets is included in
depreciation and amortization expense. Accumulated
amortization of these assets amounted to approximately
$23,000 at August 31, 1999. The Company did not hold
any property and equipment acquired under capital
leases at August 31, 1998.
5. NOTES
PAYABLE: Notes payable consist of the following:
August 31, 1999 1998
-------------------------------------------------------------
Note payable to an officer of LAN, due in
three annual installments through December
2000. The note bears interest at a rate of
7% per annum. $253,333 $380,000
Other - 7,140
--------------------------------------------------------------
253,333 387,140
Less current portion 126,666 126,667
--------------------------------------------------------------
Long-term portion $126,667 $260,473
==============================================================
Based on the borrowing rates currently available to the
Company for loans with similar terms and average
maturities, the fair value of the long-term debt
approximates the carrying amount.
Interest expense on the notes amounted to $18,429 and
$21,845 for the years ended August 31, 1999 and 1998,
respectively.
6. ACQUISITIONS:
In February 1999, the Company acquired all of the outstanding
stock of RemoteIT.com in exchange for issuance of 50,000
shares of common stock of the Company (adjusted to reflect the
100% stock dividend of May 18, 1999, described in Note
13). This business combination was accounted for as a
purchase. The stock issued was valued at $65,750 and has
all been recorded as goodwill. Had the acquisition occurred
at September 1, 1998 and 1997, revenue, net loss and loss
per share would not have been significantly impacted.
In July 1998, the Company acquired all of the
outstanding shares of Edutec from a related party in
exchange for issuance of 96,900 shares of common stock
of the Company (adjusted to reflect the reverse stock-split
of November 2, 1998 and the 100% stock dividend
of May 18, 1999, as described in Note 13) valued at
$100,000. This business combination has been accounted
for as a purchase. The fair value of the assets
acquired, including goodwill of approximately $101,000,
amounted to approximately $137,000 and the liabilities
assumed amounted to approximately $37,000.
In December 1997, the Company acquired substantially
all of the net assets of Landau Metal Products Corp.
("Landau"). The aggregate consideration paid was
$660,000 in cash and a promissory note in the principal
amount of $380,000, payable over a three-year period.
This business combination has been accounted for as a
purchase. The fair value of the assets acquired,
including goodwill of approximately $164,000, amounted
to approximately $1,051,000 and the liabilities assumed
(including the above promissory note) amounted to
approximately $391,000.
7.CAPITAL The Company leases property and equipment under capital
LEASE leases which expire through June 2004. The leases require
OBLIGATIONS: monthly payments of principal and interest, imputed at interest
rates ranging from 8% to 11% per annum.
Approximate minimum future lease payments under capital
leases are as follows:
Year ending August 31,
2000 $ 66,000
2001 66,000
2002 64,000
2003 61,000
2004 37,000
--------------------------------------------
294,000
Less amount representing interest 53,000
--------------------------------------------
241,000
Less current maturities 47,000
--------------------------------------------
Long-term debt, less current
maturities $194,000
============================================
8. INCOME The provision (benefit) for income taxes for the
TAXES: years ended August 31, 1999 and 1998 consist of the following
components:
Year ended August 31, 1999 1998
---------------------------------------------------
Current:
Federal - -
State and local - $ 11,582
Deferred:
Federal $ 77,000 (185,299)
State and local 33,000 (2,182)
---------------------------------------------------
$ 110,000 $(175,899)
===================================================
The provision (benefit) for income taxes for the years
ended August 31, 1999 and 1998 differs from the amount
computed using the federal statutory rate of 34% as a
result of the following:
Year ended August 31, 1999 1998
---------------------------------------------------
Tax at federal statutory rate (34)% (34)%
State and local income tax provision
(benefit) net of federal tax effect (6) 1
Deferred tax asset valuation allowance 59 15
----------------------------------------------------
19% (18)%
====================================================
The approximate tax effects of temporary differences
that give rise to the net short-term deferred income
tax asset at August 31, 1999 and 1998 are presented
below:
August 31, 1999 1998
-------------------------------------------------------
Reserve for bad debts $ 38,000 $31,290
Sales tax accrual 20,000 -
Unrealized losses on marketable
securities 12,000 -
Capitalized inventory 8,000 -
Contributions carryforward 13,000 3,232
Other - 1,688
-------------------------------------------------------
Total short-term deferred income
tax asset $ 91,000 $ 36,210
Valuation allowance $(91,000) $ -
-------------------------------------------------------
Net short-term deferred income
tax asset $ -0- $ 36,210
=======================================================
These amounts are included in prepaid expenses and
other current assets in the accompanying balance
sheets.
The tax effects of available tax carryforwards and
other temporary differences that give rise to the net
long-term deferred income tax asset are presented
below:
August 31, 1999 1999 1998
-------------------------------------------------------
Federal net operating loss
carryforward $ 473,995 $ 359,963
State and local net operating loss
carryforwards 205,404 -
Deferred rent 11,120 -
Accelerated depreciation (4,570) -
Basis difference in amortization of
intangibles 21,224 -
-------------------------------------------------------
Total long-term deferred income tax
asset 707,173 359,963
Valuation allowance (571,000) (150,000)
-------------------------------------------------------
Net long-term deferred income
tax asset $136,173 $ 209,963
=======================================================
At August 31, 1999, the Company has a federal net
operating loss carryforward of approximately $1,700,000
available to offset taxable income through 2019. The
Company also has state operating loss carryforwards
aggregating $1,663,000 which expire through 2014. A
valuation allowance has been established for the
deferred tax assets that are not expected to be
realized.
The Company files consolidated federal, state and local
income tax returns.
9. COMMITMENTS
AND
CONTINGENCIES:
The Company is obligated under noncancelable operating
leases for warehouse and office space through December
2002. The aggregate approximate minimum future
payments under these leases are payable as follows:
Year ending August 31,
2000 $340,000
2001 291,000
2002 284,000
2003 60,000
-----------------------------------------------------
$975,000
=====================================================
These leases are subject to escalation for the
Company's proportionate share in real estate taxes and
other operating expenses. Total rent expense charged
to operations amounted to approximately $272,000 and
$347,000 for the years ended August 31, 1999 and 1998,
respectively.
The Company has two operating leases for automobiles
expiring through April 2000. The approximate minimum
future lease payment is $5,000 for the year ending
August 31, 2000.
As of August 31, 1999, the Company has employment
agreements with six key employees expiring through
October 2002. The aggregate approximate minimum
commitment for future salaries are as follows:
Year ending August 31,
2000 $ 632,000
2001 474,000
2002 160,000
2003 27,000
---------------------------------------------------
$ 1,293,000
===================================================
The agreements provide for base compensation and fringe
benefits. One of the agreements provides for additional
compensation based on certain levels of net sales, as
defined.
10. 401(k) In January 1999, the Company adopted an employee savings plan
PLAN: which qualifies under Section 401(k) of the Internal Revenue
Code (the "Code"). Under the plan, all employees who
are at least 21 years of age and have completed 1 year
of service are eligible to defer up to 22% of their
pre-tax compensation subject to the Code's limits. The
Company matches 3% of employee contributions. The
Company contributed approximately $24,000 for the year
ended August 31, 1999.
11. SEGMENT The Company operates primarily in two industry
INFORMA- segments: (i) Hertz-Tech and (ii) Hergo. The
TION: accounting policies of the segments and the products
and services provided by the operating segments are
described in Note 1. The tables below present
information about reported segments.
At August 31, 1999:
Technology
Group Hergo Other Consolidated
----------------------------------------------------------------
Sales (unaffiliated) $1,576,499 $5,305,339 $6,881,838
Gross profit 347,757 2,991,140 3,338,897
Operating income
(loss) (1,445,406) 1,001,388 $(218,802) (662,820)
Assets 1,646,565 2,813,214 1,623,212 6,082,991
Capital expenditures 247,669 419,023 666,692
Depreciation expense 153,136 273,105 426,241
At August 31, 1998:
Technology
Group Hergo Other Consolidated
----------------------------------------------------------------
Sales (unaffiliated) $ 4,470,108 $4,932,945 $9,403,053
Gross profit 375,744 2,567,282 2,943,026
Operating income
(loss) (1,641,979) 687,845 $(230,000)(1,184,134)
Assets 3,060,402 2,365,966 1,889,978 7,316,346
Capital expenditures 214,624 462,528 677,152
Depreciation expense 85,742 146,094 231,836
12. GEOGRAPHIC
AND CUSTOMER
CONCENTRATION:
The Company had sales to customers in the New York Tri-State
area of approximately 63% and 72% of net sales
for the years ended August 31, 1999 and 1998,
respectively. Approximately 16% and 43% of net sales
were to federal, state and city agencies and
government-affiliated organizations, including
hospitals and schools, for the years ended August 31,
1999 and 1998, respectively.
During the year ended August 31, 1998, sales to a
single customer by the Technology Group accounted for
approximately 15% of the Company's net sales.
13. CAPITAL
TRANSACTIONS:
On November 2, 1998, the Company approved a 1-for-3
reverse split of the Company's common stock and Class A
warrants. In addition, on May 18, 1999, the Company
approved a 100% stock dividend on its common stock.
After the record date of the stock dividend, each
outstanding Class A warrant became exercisable to
purchase two shares of common stock. All share and per
share data included in this report have been
retroactively adjusted to give effect to the reverse
split and stock dividend as of the first date
presented.
The Company amended the number of shares of common
stock authorized from 25,000,000 to 3,000,000 in
February 1999.
In connection with the Company's initial public
offering and with the underwriter's subsequent exercise
of its over-allotment option, the Company has
outstanding 843,333 Class A warrants. In addition, the
Company has outstanding an Underwriter's Purchase
Option (the "Underwriter's Option") to purchase up to
110,000 units, consisting of 73,333 shares of common
stock and 73,333 Class A warrants. The Underwriter's
Option is exercisable through November 2001. To date,
this option has not been exercised. Each warrant is
convertible into two shares of common stock at an
exercise price of $8.25 per share (adjusted to reflect
the reverse stock split of November 2, 1998 and the
100% stock dividend of May 18, 1999, as described
above). To date no warrants have been exercised.
The Company has a stock option plan (the "Plan")
covering up to 500,000 of its common shares, under
which incentive and/or nonqualified options to purchase
shares of common stock may be granted to directors,
employees and consultants to the Company. Options
granted under the plan are exercisable for a period of
up to 10 years from the date of the grant at an
exercise price which is not less than the fair market
value of such shares at the date of the grant. In the
case of options granted to a shareholder owning more
than 10% of the outstanding shares of the Company on
the date of the grant, the options are exercisable for
a period not to exceed five years from the date of the
grant at an exercise price which is not less than 110%
of the fair market value of such shares at the date of
the grant. Options to purchase 191,452 shares of
common stock (excluding canceled shares) have been
granted under the Plan as of August 31, 1999. In
addition, options to purchase 898,600 shares of common
stock (excluding canceled shares) have been granted
outside the Plan as of August 31, 1999.
A summary of the status of the Company's options as of
August 31, 1999 and 1998, and changes during the years
then ended is presented below:
1999 1998
----------------------------------------------------------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
----------------------------------------------------------------
Outstanding at beginning
of year 851,853 $6.55 600,000 $8.25
Granted 1,101,452 .93 261,853 2.50
Canceled (863,253) 6.43 (10,000) 2.50
Exercised - - - -
----------------------------------------------------------------
Outstanding at end
of year 1,090,052 $.93 851,853 $6.55
================================================================
The Company has elected to apply APB Opinion No. 25 and
related interpretations in accounting for its stock
options and has adopted the disclosure-only provisions
of SFAS No. 123. Had the Company elected to recognize
compensation cost based on the fair value of the
options granted at the grant date as prescribed by SFAS
No. 123, the Company's net loss and loss per share
would have been as follows:
Year ended August 31, 1999 1998
-------------------------------------------------------------
Net loss as reported $ (694,871) $(810,280)
Net loss - pro forma (2,297,416) (1,933,986)
-------------------------------------------------------------
Loss per share - as reported
(basic and diluted) (.33) (.38)
Loss per share - pro forma
(basic and diluted) (1.08) (.91)
-------------------------------------------------------------
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions
used for the years ended August 31, 1999 and 1998:
expected volatility of 209% and 207%, respectively;
risk-free interest rates of 5% and 4.45%, respectively;
expected lives varying from 3 to 4 years; and no
dividend yield.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING FINANCIAL DISCLOSURE
None.
PART III
Items 9-12 inclusive are omitted per General Instruction E. The information
required by Part III shall be incorporated by reference from the Registrant's
definitive proxy statement pursuant to Regulation 14A for the fiscal year
ended August 31, 1999.
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
Unless otherwise indicated, the following exhibits are incorporated by
reference from the Company's Registration Statement on Form SB-2 as well
as any amendments thereto (SEC File Number 333-9783 referencing the
exhibit number used in such Registration Statement) with exceptions as
follows: Exhibit 16 which is hereby incorporated by reference to Form 8-K filed
on February 11, 1999; and Exhibit 22 is hereby incorporated by
reference to the Definitive Proxy Statement filed on December 15, 1998.
3.1A Certificate of Incorporation of the Company
3.1B Certificate of Amendment of Certificate of Incorporation of
the Company
3.2 By-Laws of the Company
4.1 Specimen Stock Certificate
4.2 Form of Redeemable Warrant
4.4 Warrant Agreement
10.1 1996 Stock Option Plan
10.2 Form of Employment Agreement between the Company and Eli E. Hertz
10.3 Form of Employment Agreement between the Company and I. Marilyn Hertz
10.7 Agreement of Lease between Simon Trakinski and William Trakinski and
Hergo Ergonomic Support Systems, Inc. For 26-58 Borough Place,
Woodside, NY 11377.
10.8 Agreement of Lease between Simon Trakinski and William Trakinski and
Hergo Ergonomic Support Systems, Inc. For 60-01 27th Avenue,
Woodside, NY.
10.9 Agreement of Lease between The Rector, Church-Wardens and Vestrymen
of Trinity Church in the City of New York and Hertz Computer
Corporation for 75 Varick Street.
16 Letter from Arthur Andersen LLP regarding change in certifying
accountant. **
21 Subsidiaries of the Registrant.
22 Published Report regarding matters submitted to a vote of
Security Holders
27.1 Financial Data Schedule*
*Filed herewith
**Incorporated by reference to Form 8-K filed with the Securities and Exchange
Commission on February 11, 1999.
(b) No Reports on Form 8-K have been filed during the last quarter
covered by this Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the "Exchange Act" the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Hertz Technology Group Inc.
By: /s/ Eli E. Hertz
________________________
Eli E. Hertz
Chairman, President and Chief
Executive Officer
Date: December 10, 1999
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Date Title
/s/ Eli E. Hertz 12/10/99 Chairman, President and
________________________ Chief Executive Officer
Eli E. Hertz
/s/ I.Marilyn Hertz 12/10/99 Vice Chairperson and Director
________________________
I.Marilyn Hertz
/s/ Barry J. Goldsammler 12/10/99 Senior Vice President,
________________________ Chief Financial and Accounting
Barry J. Goldsammler Officer and Director
/s/ Beryl Ackerman 12/10/99 Director
________________________
Beryl Ackerman
/s/ Bruce Borner 12/10/99 Director
________________________
Bruce Borner
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> AUG-31-1999
<CASH> 32,456
<SECURITIES> 1,592,158
<RECEIVABLES> 1,129,859
<ALLOWANCES> 96,133
<INVENTORY> 669,601
<CURRENT-ASSETS> 3,610,731
<PP&E> 2,702,821
<DEPRECIATION> 919,093
<TOTAL-ASSETS> 6,082,991
<CURRENT-LIABILITIES> 672,898
<BONDS> 194,318
0
0
<COMMON> 2,307
<OTHER-SE> 5,086,801
<TOTAL-LIABILITY-AND-EQUITY> 6,082,991
<SALES> 6,881,838
<TOTAL-REVENUES> 6,881,838
<CGS> 3,542,941
<TOTAL-COSTS> 3,542,941
<OTHER-EXPENSES> 7,224
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,145
<INCOME-PRETAX> (584,871)
<INCOME-TAX> 110,000
<INCOME-CONTINUING> (694,871)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (694,871)
<EPS-BASIC> (.33)
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