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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended: August 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-21679
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Return Assured Incorporated
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(Exact name of small business issuer as
specified in its charter)
Delaware 13-3896069
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1901 Avenue of the Stars, Suite 1710, Los Angeles, California 90067
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number 888-884-8809
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Securities registered under Section 12(b) of the Act: Common Stock, par value
$0.001 per share;
Class A Warrants
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Securities registered under Section 12(g) of the Act: None
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Check whether the registrant (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
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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 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. [ ]
State registrant's revenues for its most recent fiscal year: $6,319,304
As of November 9, 2000, there were 7,133,604 shares of the registrant's
common stock, par value $0.001 issued and outstanding. Of these, 4,566,727
shares are held by non-affiliates of the registrant. The market value of
securities held by non-affiliates is $5,274,570 based on the average closing bid
and asked bid price of $1.155 of the registrant's common stock on November 29,
2000.
Transitional Small Business Disclosure Format (check one):
Yes ; No X
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DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933, as amended ("Securities Act")
-- N/A.
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TABLE OF CONTENTS
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Item Number and Caption Page
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Forward-Looking Statements....................................................................4
PART I
1. Description of Business......................................................................4
2. Description of Property......................................................................23
3. Legal Proceedings............................................................................23
4. Submission of Matters to a Vote of Security Holders..........................................23
PART II
5. Market for Common Equity and Related Stockholder Matters.....................................24
6. Management's Discussion and Analysis of Financial Condition and Results of Operations........30
7. Financial Statements.........................................................................36
8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........36
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...........................................37
10. Executive Compensation......................................................................40
11. Security Ownership of Certain Beneficial Owners and Management..............................46
12. Certain Relationships and Related Transactions..............................................47
13. Exhibits and Reports on Form 8-K............................................................49
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FORWARD-LOOKING STATEMENTS
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Except for historical information, this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements involve risks and uncertainties, including, among other things,
statements regarding our business strategy, future revenues and anticipated
costs and expenses. Such forward-looking statements include, among others, those
statements including the words "expects," "anticipates," "intends," "believes"
and similar language. Our actual results may differ significantly from those
projected in the forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in the section "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Risk Factors". You should carefully review
the risks described in other documents we file from time to time with the
Securities and Exchange Commission. You are cautioned not to place undue
reliance on the forward-looking statements, which speak only as of the date of
this report. We undertake no obligation to publicly release any revisions to the
forward-looking statements or reflect events or circumstances after the date of
this document.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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The Merger
We recently closed the business combination of our Return Assured business
and Hertz Technology Group business. On October 13, 2000 Asure Acquisition
Corp., a wholly-owned subsidiary of Hertz Technology Group, Inc., a Delaware
Corporation, was merged into Return Assured Incorporated, a Nevada Corporation.
At the same Hertz Technology Group changed its name to Return Assured
Incorporated.
References in this report to "we", "us", "our" and similar terms means
Return Assured Incorporated, a Delaware corporation, formerly Hertz Technology
Group, Inc.
Industry Overview
As the world familiarizes itself with the convenience of online shopping,
the wonders of the Internet have virtually placed almost anything one would want
to buy at our fingertips. The Internet has become a resource for information and
research as well as a retail mecca offering myriads of products and services
that were previously inaccessible. It is projected that, in 2000, 59 million
people will spend $61.1 billion on online shopping. Estimates show that the
business to business e-commerce market could grow from $109 billion in 1999 to
$1.8 trillion in 2003.
Reports also show that in 1998, retail e-commerce in the U.S. reached $7.8
billion, a figure that accounts for only 0.5% of all retail sales. Retail
e-commerce, however, is expected to reach $108 billion, accounting for 6% of
total projected sales. A strong web presence is mandatory for any retailer that
wants to compete in the 21st century. In order to become a market leader
retailers must measure and act upon their customers' needs, provide seamless
service between channels and develop new ways for customers to shop.
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However, with the rapid growth of the Internet a few negatives are
threatening the retail landscape. There are mounting consumer concerns about
credit card fraud, lack of trust in the vendor or product, security risks with
personal information disclosure and a lack of systems to provide the consumer
with a safety net or comfort zone when dealing with unknown merchants. Small and
medium sized retailers may be at a disadvantage because without recognized
brands or reputations consumers are wary of shopping on these sites. In fact,
80% of online shoppers agree that their purchasing decisions are strongly
influenced by the ability to buy from known, trusted retailers and to buy known,
trusted product brand names. In addition, it is estimated that 75% of shopping
carts are abandoned before the transaction process is complete. Even in the case
where the carts are not voluntarily abandoned, 28% of online purchases fail. Of
those purchases that failed, 28% of the customers stopped shopping online.
Furthermore, a survey shows that the inability to return goods and general lack
of trust in the vendor were two of the top ten reasons why Internet users did
not buy online. For those consumers that did buy apparel online in 1999, low
prices, free delivery, large merchandise selection and ease of return topped the
list of most important features when selecting an online merchant. However, not
all return policies were rated equally. One survey showed that the most
important factor for an optimal online return policy would be a 100% money back
guarantee.
Our Business
We have brought to market the world's first proprietary
business-to-business and business-to-consumer value added "web seal of approval"
which provides a service that guarantees customers who order products through
the web sites of merchant members that the merchants' stated return policy will
be honored.
Our web seal of approval is designed to meet the needs of small and medium
sized businesses by removing the risk and uncertainty that are responsible for
incomplete online transactions. We offer a risk-free shopping experience because
we guarantee to fulfill the terms of a participating merchant's return policy in
cases where the merchant will not.
According to a recent study, 75% of shopping carts are abandoned before
the transaction process is complete for two reasons:
o Online shoppers are wary of the security risk of sending their credit
card number over the public Internet; and
o Online shoppers are unsure, as in the mail order catalogue business,
that Internet retailers will accept return of a product if it is unacceptable to
the consumer.
We deal with the second of these issues by providing our "Return Assured
Seal of Approval" web seal to those e-commerce sites that meet our criteria. If
a customer orders from the site displaying this web seal, we provide assurance
that the merchant displaying the web seal will honor its stated return policies.
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When a merchant applies for the Return Assured web seal, we perform a
credit check through Dun & Bradstreet or other sources such as the Better
Business Bureau, to verify the financial and credit standing of the merchant.
Depending on the results of our initial credit investigation, the merchant may
be approved immediately, approved after a review by senior management or
questioned about the reasons for any adverse financial or credit standing. A
merchant that is ultimately approved is authorized to display the Return Assured
web seal on its e-commerce web site. The web seal itself remains on our
computers. The merchant displays our web seal by linking to the file from its
web site.
As a condition for approval, all merchants must provide us with a copy of
their current merchandise return policies and to ship their products on carriers
which we have approved. These carriers must provide for online tracking of
shipments made on them. We are notified each time a customer places an order
through the site on which our web seal is displayed and receive shipping
information from the merchant which allows us to track the merchandise through
the delivery process. We have software that allows the tracking to be done
automatically. A customer who has not received merchandise ordered can contact
us and quickly determine the status of the shipment. Any delivery problems are
followed up with the carrier. If the shipment has not yet been made, we contact
the merchant to determine why and to resolve any outstanding issues.
If the customer wants to return merchandise ordered, we initially direct
the customer to contact the merchant directly for a return merchandise
authorization number and to return the merchandise directly to the merchant. If
the customer has already contacted the merchant without success, our service
representative reviews the merchant's return policies to see whether the return
would be consistent with those policies.
If the return is not consistent with the merchant policy, we tell the
customer that the return is not covered. If the return is covered, we contact
the merchant to determine whether there was a valid reason for refusal to accept
the return. We tell the merchant that if the reason is not satisfactory, the
merchant risks losing the Return Assured web seal for its site. If we are unable
to persuade the merchant to honor a valid claim, we direct the customer to
return the merchandise to us with a claim form. On verifying that the return is
in order, we mail our own refund check to the customer. We then dispose of the
merchandise either by trying to sell it for its salvage value or by donating it
to a charity. We may then seek to recover from the merchant the amount we have
reimbursed the customer.
Since our web seal displayed on a merchant's site is controlled by our
computers rather than by the merchant, we are able to immediately remove our web
seal from the site of any merchant which we determine is not making prompt
delivery of goods that are ordered or is not complying with its stated return
policy.
We charge the merchant for our services based on the number of orders
placed through the merchant's site. The amount of the charge will depend upon a
variety of factors including
o the value of the item,
o the merchant's retail sector,
o the typical return rate for that item,
o the number of years the merchant has been in business, and
o whether the merchant has a physical location.
Generally we charge from $.25 to $1.00 per transaction.
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We believe that a high level of customer support for our retail customers
as well as consumers is necessary to achieve acceptance of our Internet-based
services. We provide a wide range of customer support services through a staff
of customer service personnel - call center, e-mail help desk and a web-based
self-help system. Since we first introduced our Internet-based service, we have
developed some knowledge base of customer support information based on our
customer interactions and we believe that this offers us a competitive
advantage. Our call center is staffed 24 hours a day. We also offer web-based
support services that are available 24-hour hours per day, 7 days per week and
that are frequently updated to improve existing information and to support new
services. We utilize a staff of trained customer support agents who typically
respond to customer inquiries within 24 hours.
We created this service because we saw that, with the rapid growth of the
Internet retail landscape, there were mounting consumer concerns such as credit
card fraud, security and personal disclosure risks and a lack of systems to
provide the consumer with a safety net or comfort zone when dealing with unknown
merchants. We saw a need in the marketplace for a third party to step in and
offer consumers a no-risk shopping experience which would encompass guaranteeing
merchant performance or their money back.
We set a higher standard of confidence and trust between consumers and
merchants for an improved online shopping experience. Our "Return Assured Seal
of Approval" appears on the websites of certified, participating merchants,
which represents a guarantee to the consumer that the merchant's return policy
will be honored. This innovation injects a comfort level for consumers that want
to buy online safely and provide a level playing field for large and small
merchants alike - many of which have no arrangements for merchandise returns or
refunds. The result provides consumers with a virtual risk-free environment to
shop online safely.
Our Strategies
We have brought to market our web seal of approval guarantee program. It
is available to all merchants operating in non-face-to-face transactions. We
initially made it available to a key group of Internet partners such as retail
organizations, online portals and retailers, and then expanded to include a wide
range of merchants worldwide. To reach critical mass, we have come up with novel
ways to offer our product through cross promotion and merchandising. For
example, our web seal is a value added product for Internet service providers to
offer new or existing web site merchant accounts. In addition, we have laid the
groundwork for opportunities to promote our product through syndicated content
sites with proprietary e-merchandising endorsed by celebrities. We also intend
to reach critical mass by partnering with large and trafficked sites that will
aggregate users into safe shopping portals. We are also pursuing opportunities
to sell our seal to merchants listed on specialized "yellow pages" type
publications. Our marketing model is an aggressive one that we believe will
enable us to reach critical mass without wasting marketing dollars on promotions
and television advertising.
We have highlighted below our business, marketing and growth strategies.
Our Business Strategy
o Generate revenue from web seal transactions. We have recently signed up
our first web seal merchant. Through our marketing strategy, we will
aggressively seek to attract new merchants to use our web seal. We
anticipate generating revenues from our web seal service shortly.
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o Establish automated web seal tracking and monitoring. As we increase the
number of merchants utilizing our web seal, we will be faced with the need
to automate our tracking and monitoring system. We anticipate engaging IBM
to complete this task, which we estimate will be completed by Spring 2001.
o Complete our executive and administrative management team. Our success
will depend in large part on the quality of our management team. As our
operations expand, we anticipate hiring new talent to meet our marketing
and technological needs in the future.
Our Marketing Strategy
o Attract new merchants through arrangements with web portals. We have
arrangements with several web portals and online shopping to promote and
endorse our web seal service to their participating merchants. We have
such agreements with:
o eBrick. eBrick is a shopping portal with over 1,500 approved
merchant sites. Consumers can search and shop for virtually
anything fast and effectively because every online merchant
has been approved by eBrick on a number of criteria. In
addition to its website, eBrick.com publishes The Brick, the
official e-commerce sourcebook. The Brick is published
tri-annually with over 3 million copies distributed. The Brick
mirrors the content of the site and is the most useful offline
shopping resource available. eBrick will sell our web seal as
a value added product to participating merchants and will
advertise our product on their site and sourcebook. They will
endorse our product as the standard of choice for e-retailers.
eBrick will receive 7.5% of our revenues derived from
merchants who buy our web seal service through eBrick.
o Electronic Retailers Association. The Electronic Retailers
Association is the trade association for companies who use the
power of electronics to sell goods and services to the public
- including television, Internet and all customer-not-present
transactions. The purpose of the ERA is to foster the growth,
development and acceptance of the rapidly growing electronic
retailing industry. The ERA will endorse our web seal and will
lobby on our behalf to have merchant members use our web seal.
They will also help our product gain universal acceptance in
the electronic retailing world by including our executives as
speakers at conferences and functions and by introducing us to
high-level contacts in the electronic retail world. The ERA
will receive 5% of our revenues derived from merchants who buy
our web seal service through the ERA.
o Symposium Corporation. Symposium Corporation is a data-driven
cross media direct marketing company that combines established
direct marketing skills with new direct marketing and database
management technologies. They have direct contact with 11
million consumers annually and add over 1 million customers a
year to their database. Symposium's earnings are achieved by
selling multiple products and services to a growing customer
base through the use of traditional marketing and new direct
marketing technology. In addition to their partnerships, they
operate a member-only online discount marketplace. They will
market our web seal to their marketplace partners and
merchants. Symposium will receive 5% of our revenues from
merchants who buy our web seal service through Symposium.
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o Liquor.com. Liquor.com is the largest spirits site on the web
and a customer relationship management business-to-business
exchange company whose focus is to integrate producers,
wholesalers, retailers and consumers in the alcohol and
entertainment beverage industry. Liquor.com builds and
maintains relations with the consumer, and also provide
e-business solutions for all three tiers of the alcohol
beverage distribution system - producers, wholesalers and
retailers. Liquor.com has created a global network of retail
partner affiliates by offering them the opportunity to
generate additional revenue, reduce costs and build loyal
customer relationships. Currently, Liquor.com provides direct
delivery to 39 states and more than 40 countries. Liquor.com
will provide participating merchants with our web seal of
approval as a value added product and a purchase guarantee.
Liquor.com will receive 7.5% of our revenues derived from
merchants who buy our web seal service through Liquor.com.
o Promote our web seal service to merchants through direct merchant
campaigns. We utilize a variety of marketing programs to increase brand
awareness. We utilize a variety of direct marketing programs and public
relations campaigns focused on retailers, direct response marketers,
shopping hubs, owners of web servers and Internet service providers. We
address these customers through outbound mail, telemarketing and printed
mail campaigns to stimulate product trial, purchase and usage. We also use
banner ads and text links that connect to our website and participate in
industry-specific events, trade shows, executive seminars, industry
association activities and various national and international standards
bodies.
o Attract new merchants through joint marketing programs with various
marketing partners. The following are our marketing partners:
o Blagman Media International. Blagman Media was established in
1994 and has quickly become one of the most respected direct
response and marketing advertising agencies in the world.
Blagman Media is helping us maximize our advertising dollars
through strategic media positioning. We pay Balgman Media
$10,000 a month for these services which includes office space
at its Los Angeles offices.
o Entertainment Marketing Group. Entertainment Marketing Group
specializes in creating targeted promotional campaigns for
radio, television, cable and online audiences. They introduced
us to Earthlink, the second largest Internet service provider
in the United States, and eBrick, the official e-commerce
sourcebook, to investigate partnership opportunities in the
Internet marketing arena. Entertainment Marketing Group is
also creating various cross-promotional opportunities for us
where media dollars can be maximized.
o Transactional Marketing Partners. Transactional Marketing
Partners provides end-to-end direct marketing solutions with
an emphasis on direct response television. They are bringing a
variety of projects and opportunities together, including the
parameters, resources, and ideas for putting us in the public
eye. We pay $25,000 a month for these services.
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Our Growth Strategy
o Increase brand awareness of our "Return Assured Seal of Approval". We
intend to increase brand awareness by expanding the assortment of
available products, providing exclusive product offerings tailored to
specific customer profiles and possible private label deals.
o Expand through diversifying product lines. We plan to diversify our
current Return Assured product offering through the addition of
complementary product lines which we believe will be of interest to our
target markets. These product lines will be added over time and will be
subject to the results of our test marketing programs, some of which will
be performed through the Internet, to determine customer acceptance. We
may offer multiple payment options to online merchants. We believe that
the addition of new product lines to our web seal program will lead to
additional sales to our regular customers and create a greater level of
interest from prospective customers. We expect that this will further
enhance our brand names by broadening the range of products with which
they are associated.
o Expand through purchasing complementary businesses. We intend to pursue
strategic acquisitions of additional businesses which complement our
current businesses. Our primary focus will be to expand our current
customer offerings, introduce new product offerings and generate greater
operational efficiencies. We also may seek to acquire businesses that are
compatible products offered to our extensive customer base, although such
businesses or products have not yet been identified.
Our Strategic Relationships
We have established strategic relationships with leading companies to
deliver our web seal product. We currently have strategic relationships with
Lloyd's of London and IBM.
Lloyd's of London
Lloyd's is the world's leading insurance market, transacting business
worth billions of pounds in premiums each year. It provides insurance coverage
across the range of commercial and domestic insurance requirements. Lloyd's has
also long been known as the market where anything can be insured. While this is
not strictly true, Lloyd's underwriters' willingness to introduce new types of
insurance coverage amply justifies Lloyd's reputation for innovation.
We are insured by Lloyd's for errors and omissions relating to services
provided to merchants and consumers. Merchants and consumers however are not
insured under this policy.
As a result of our association with Lloyd's, we are authorized to display
the Lloyd's of London logo together with our own web seal on merchants'
websites. The policy and web seal are intended to develop and build an image of
stability and reliability. The policy covers cyberliability and catastrophic
losses of up to $10 million.
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The policy does not insure against every failure of a merchant to honor
its return commitments. Rather, it insures against our negligence in selecting
the merchant entitled to display our web seal or in monitoring the merchant's
compliance with its obligations. The policy has a deductible of $2 million as to
any merchant, so that we will have to bear the first $2 million of loss.
IBM
We have teamed up with IBM to develop a reliable, scalable and secure web
environment using a three-tiered approach of IBM hardware, software and
e-business services working in unison to enable our customers to transact with
us on our site. Our merchants have the ability to sign up for our "Return
Assured Seal of Approval" mark over the web. Consumers also have the ability to
submit a return claim over the web.
To make our e-business safe and easy, IBM's e-Mark presence is a tangible
sign signifying that our site is conducting e-business and is using IBM products
and services to make the site more reliable, scalable, and secure.
Our web site is hosted at the IBM Universal Server Farm. With over 5,000
hosting customers and over 74,000 servers under management worldwide, IBM' s
hosting capabilities are unmatched in the industry. Exceptional capabilities
from IBM provide a consistent world-class infrastructure to support web hosting,
e-commerce and collaborative applications. IBM provides platforms for connecting
these applications to the Internet and enables intranet and extranet solutions.
The security of our web site is a critical success factor to our business.
To ensure our web site has state-of-the-art security, we utilize IBM's web
server switching architecture that enables multiple levels of firewall support.
This unique server switching strategy allows IBM to set up security checkpoints
between our web server and the Internet.
Research and Development
We believe that some of our future success will depend in part on our
ability to continue to maintain and enhance our current technologies and
Internet-based trust services. Although we will continue to work closely with
developers and major customers in our development efforts, we expect that most
of our future enhancements to existing services and new Internet-based services
will be developed internally.
Our Other Operations
We also operate additional lines of businesses. For financial information
on the operations of our lines of business, see our consolidated financial
statements commencing on page F-1 and the notes thereto.
RemoteIT.com(R) (www.remoteit.com)
RemoteIT offers networking, Internet, and communications services. Among
the wide array of products and services RemoteIT offers are:
o Design, installation and maintenance of local and wide area networks.
Services and products include data back-up, anti-virus protection,
operating system and application maintenance and upgrades and remote site
management.
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o Internet service provider. RemoteIT 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.
o Web services. These include web site design, implementation and website
hosting.
Hertz Computers(R)
Our computer division configures and sells customized personal computers
and peripherals and provides a range of related computer integration services.
Personal computers are assembled, according to customer specifications, in a
number of different configurations, using tested qualified standard component
parts. Customization enables us to accommodate specific customer requirements
with respect to cost, storage capacity, speed, applications, size, and a range
of other considerations.
Because of fierce price competition in this market, we plan to discontinue
operations of our computer division in December 2000. Currently, our computer
division operations are solely to meet our warranty obligations.
Edutec(R) Training Facilities
Through Edutec, we provided customers with access to training facilities
equipped with personal computer workstations and related audio-visual
technology. As a result of losses from our Edutec division, we plan to
discontinue our Edutec operations in December 2000.
Hergo(R) Modular Systems (www.hergo.com)
Our 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.
We offer 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.
Manufacturing and Assembly
Our Hergo modular systems, cabinets and enclosures are manufactured at our
Long Island City, New York facility. Our Long Island City facility also handles
warehousing and shipping operations.
Suppliers
We stock most of the component parts used in the manufacture of our Hergo
products. To date, we have not experienced any material difficulty in obtaining
the required items in a short timeframe. We believe that we are not dependent on
any single source, as these alternative sources are always available. We make
most of the steel components used in our Hergo product line. We acquire our raw
materials for these components from a number of different vendors. We believe
that adequate alternative raw material sources are available if required.
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Marketing and Sales
o RemoteIT.com. We promote and market most of the support services in the
New York metropolitan area.
o Hergo Products. No single customer accounted for more than 10 percent of
total Hergo sales in 2000. 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 sold to
Federal government and various local and state government agencies. We
maintain a marketing and advertising budget for our Hergo business, which
is used primarily for an advertising program in trade and business
publications.
Our Competition
Our Return Assured business
We operate in a business that is subject to competitive pressures. We have
a few competitors, ranging from better business consumer dispute resolution
services to a number of relatively small, reverse logistics providers. In
addition, a few major e-commerce sites have their own systems for returns but
they are very limited in scope or flexibility for the consumer. There are also a
small number of escrow service companies offering limited merchandise
satisfaction programs, but their charges are widely varied, ranging from 1% to
6% of the goods involved, and where the transaction value is high, the costs of
such escrow programs are quite expensive.
We believe that the combination of product, price, branding, alliances,
performance, quality, and reliability, are important competitive factors that
set us apart. However, intense competitive pressures could affect demand for our
web seal products and services, resulting in reduced profit margins and/or loss
of market opportunity.
There are a number of other companies addressing different segments of the
reverse logistics and trust business. None of these companies have successfully
married the seamless return of goods with the money back guarantee that we
provide, and none of these companies have the strength, experience, and global
brand confidence that our association with Lloyd's provides. Some of the
companies are:
o Return.com offers a reverse logistics program, which is limited to the
physical process of returning goods to retailers. They do not, however,
provide any guarantees that the merchant's return and refund policies will
be honored nor do they provide refunds to consumers.
o ePubliceye.com is a monitoring system that provides consumers with limited
information on e-businesses, reliability, privacy, and customer
satisfaction. They are an information site relying on subjective customer
feedback which provides no return program.
o WebAssured.com evaluates the reliability of online sellers by alerting
shoppers of sites with poor reputations and acts as an arbitrator.
Customers must, however, use their browser plug in and rely only on
customer feedback to generate reliability of merchant. They only offer a
maximum refund of $200.00.
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o ReturnExchange.com only handles the physical process of returning goods to
merchants and exchanges. They provide no refunds to consumers.
o ClickSure.com, a UK-based online retailer verification program, certifies
merchants for standards of privacy, security, reliability and content.
Their verification process is lengthy and rigorous, and costly for the
merchant - about $1,500. They do not offer refunds or guarantees to
consumers.
o Yahoo recently announced a customer protection guarantee for their online
shopping portal and auction site. However, this protection is limited and
the claims process is time consuming. The online auction guarantee
protects the customer up to $250.00 with a $25.00 deductible. Their online
shopping portal protection guarantee covers the customer up to a limit of
$750.00. In addition, refunds are not automatically issued. First, the
claim goes through customer support and arbitration and only if the matter
is not resolved does it go through their claims department. The claims
department takes 45 days from when they receive the claim to when they
profess judgment on the case. It could take up to a few months to get
judgment on a case that only covers a limited amount of the total money
spent by the consumer.
Our RemoteIT business
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 or, possibly, losses, unless these products are being offered in
combination with other more sophisticated technical services.
Our Hergo business
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 us. Moreover, because of the absence of any serious
barriers to entry, it is likely that additional companies will enter the field.
Intellectual Properties
We rely primarily on a combination of copyrights, trademarks, and
restrictions on disclosure and other methods to protect our intellectual
property and trade secrets. We are in the process of applying for a trademark on
Return Assured and our arrow logo.
14
<PAGE>
Employees
As of November 10, 2000, our Return Assured operations had ten full-time
employees and one part-time employee, our Hergo operations had 46 full-time
employees and no part-time employees and our RemoteIT operations had 6 full-time
employees and no part-time employees.
We have never had a work stoppage, and no employees are represented under
collective bargaining agreements. We consider our relations with our employees
to be good.
Our ability to achieve our financial and operational objectives depends in
large part upon our continued ability to attract, integrate, train motivate and
retain highly qualified sales, technical, and managerial personnel, none of whom
is bound by an employment agreement. Competition for such qualified personnel in
our industry is moderately high.
Risk Factors
Risks associated with our business
We have a history of losses and may not be able to operate profitably in
the future. During the fiscal years ended August 31, 2000 and 1999, our Hertz
Technology operations reported net losses of $2,338,069 and $694,871. As a
result of operating expenses and development expenditures, our Return Assured
operations have incurred net losses through August 31, 2000 of $2,323,019. If
the merger occurred as of the beginning of fiscal 2000, we would have net losses
for the fiscal year ended August 31, 2000 of approximately $5,852,000 on a pro
forma basis. We may not be able to operate profitably in the future. We expect
to experience substantial quarterly net losses for the foreseeable future, due
primarily to the following factors:
o Amortization of the goodwill arising from the merger will be a
continuing drain on our earnings as that goodwill is charged
to earnings over future quarters;
o Competitive pricing pressures in our Hergo and RemoteIT
businesses are expected to continue to negatively affect gross
margins; and
o Probable significant spending on operating expenses, in
particular marketing expenses to bring the attention of
businesses and consumers to Return Assured's services, will
likely increase losses.
Our Return Assured business plan is unproven and we may not be able to
achieve profitability. We have not generated any revenues from our Return
Assured operations. We intend to focus substantially all of our efforts, and use
substantially all of our current working capital, in developing our Return
Assured operations. We expect that our sales and marketing, operations and
administrative expenses will increase in the future. As a result, we will need
to generate significant revenues to achieve and maintain profitability. We do
not know if our revenues will be sufficient to pay our expenses or that we will
achieve profitability. We cannot be certain that we will achieve or sustain
positive cash flow or profitability from our operations. Furthermore, Eli Hertz
will receive 25% of the gross profit from our Hergo operations. As a result,
little net cash flow from their operations, if any, will be available to us. Our
net losses and negative cash flow from operating activities are likely to be
substantial if:
o we are unable to attract and retain merchants using our web seal; or
o there is insufficient consumer demand for our web seal service.
15
<PAGE>
The demand for our web seal of approval service may be less than we
expect. We believe there is a considerable demand from merchants to provide
their customers with the assurance that the goods they order will be delivered
and that the merchants will honor their return policies. But our management has
not conducted any marketing studies to confirm that this demand exists or the
extent of the demand. We may find that as customers become more comfortable with
e-commerce they will not feel the need for outside assurance of delivery and
returns. If that happens, the number of merchants willing to pay for our web
seal service may be too small to be profitable.
We may be unable to achieve our operating and financial objectives if we
cannot manage our anticipated growth effectively. We anticipate that our
business will grow rapidly. Our future success depends in large part on our
ability to manage this anticipated growth. For us to manage this growth, we will
need to:
o expand and enhance our operating and financial procedures and
controls;
o replace or upgrade our operational and financial management
information systems; and
o attract, train, manage and retain key employees.
These activities are expected to place a significant strain on our
financial and management resources. If we are unable to manage growth
effectively, our business could suffer.
If our business plan is successful, other companies with more resources
and greater name recognition may make competition so intense that our web seal
business will not be profitable. Our business plan is based on us being the
first to market with our web seal service. Our service is not protected by
patents or other intellectual property rights, and if it is successful a number
of other companies with far more money and greater name recognition may decide
to compete with us. This competition could both reduce the number of merchants
who select us to provide the service and create downward pressure on the amount
we could charge for the service so that we would not have enough revenue to
generate a profit.
Our business could be harmed if we are unable to retain and attract key
personnel. We believe our short and long-term success depends largely on our
ability to attract and retain highly skilled technical, managerial and marketing
personnel, particularly additional management personnel in the areas of
application integration and technical support. Competition for such personnel is
intense. We may not be able to hire or retain the necessary personnel to
implement our business strategy, or we may need to pay higher compensation for
employees than we currently expect. Our inability to attract and retain such
personnel would limit our growth and harm our business.
Our cyber liability insurance policy does not cover substantial portions
of the cost we might incur if a merchant is unable or unwilling to deliver its
product or honor its return policy. We purchased a "cyber liability" insurance
policy from Lloyd's of London covering our own negligence in selecting a
merchant or failing to carefully monitor the shipment and return of the
merchant's products. However, that policy has a deductible of $2 million for
each merchant. Since most claims are likely to be less in the aggregate than $2
million per merchant, it is unlikely that we would ever be able to make a claim
under the policy.
16
<PAGE>
State regulations governing insurance could apply to our business, making
that business impractical. Virtually every state tightly regulates companies who
are in the business of insurance. We do not believe that our proposed business
is insurance under the laws of any state. This business, however, will be
entirely new and one or more states might try to regulate our operations as
insurance. If our business were to be regulated as insurance our business plan
would most probably not be practicable because the costs of complying with the
insurance regulations would be so high that we would have to raise our fees to a
level most merchants would not be willing to pay. In addition, the cost of
defending against state regulators' claims, if brought, could be prohibitive.
We will be almost entirely dependent on third parties to develop and
implement our web seal service. We have entered into an agreement with IBM to
evaluate our business plan and assist in developing and implementing our web
site, but we cannot give any assurance that we, even with IBM's assistance, will
be able to implement our business plan.
We are currently evaluating our future plans for our Hergo and RemoteIT
businesses. We anticipate discontinuing the operations of our Edutec and Hertz
Computer operations. We are currently evaluating our plans for Hergo, which will
need new equipment in the near future, and RemoteIT, which is currently
operating at a loss. We are also evaluating whether some of the web-based
services of RemoteIT will complement our web seal service business, and whether
the expertise of that division will enhance our ability to pursue our business
plan. Because our other operations are less closely linked to our web seal
service business plans, we do not have any definitive plans as to the future
operations of those businesses. Mr. Eli Hertz is the chief executive officer of
our Hergo and RemoteIT subsidiaries and expects to continue operating those
subsidiaries on a more or less autonomous basis. Additionally, we might
determine that one or more of these businesses is not central to our business
plan.
We cannot predict our future capital needs and we may not be able to
secure additional financing. To fully implement our business plan, we will
likely need to raise additional funds within the next 12 months in order to
develop our web seal service, to fund continuing operating losses or to acquire
complementary businesses, technologies or services. Additional financing may not
be available on terms favorable to us, or may not be available to us at all. If
we raise additional funds by issuing equity securities, our stockholders may
experience significant dilution of their ownership interest, and these
securities may have rights senior to the rights of common stock holders. If
additional financing is not available when required or is not available on
acceptable terms, we may be unable to fund continuing operations, promote our
brand name, enhance or develop our services, take advantage of business
opportunities or respond to competitive pressures, any of which could harm our
business.
We have no direct control over shipping and quality of products (returns)
shipped by merchants. We will rely on vendors to ship merchandise directly to
customers. Consequently, we will have limited control over the goods shipped by
these vendors, and shipments of goods may be subject to delays. In addition, we
may accept returns from customers for which we will not receive reimbursements
from manufacturers or vendors. If the quality of service provided by these
vendors falls below a satisfactory standard or if our level of returns exceeds
expectations, this could have a harmful effect on our business.
Our online commerce services will be vulnerable to interruption. Merchant
access to our web site will directly affect the volume of orders and thus affect
our revenues. System interruptions may make our web site unavailable or prevent
us from processing shipments and returns efficiently, reducing the
attractiveness of our services. We may need to add hardware and software and
further develop and upgrade our existing technology, transaction-processing
systems and network infrastructure to accommodate increased traffic on our web
site and increased sales volume. We will maintain substantially all of our
computer and communications hardware at one facility, in a co-location facility.
Our systems and operations could be damaged or interrupted by fire, flood, power
loss, telecommunications failure, network break-ins, earthquake and similar
events. Our backup systems and disaster recovery plan may not be adequate, and
we may not have sufficient business interruption insurance to compensate us for
losses from a major interruption.
17
<PAGE>
Computer viruses, physical or electronic break-ins, deliberate attempts by
third parties to exceed the capacity of our systems and similar disruptions
could cause system interruptions, delays and loss of critical data, and could
prevent us from providing services and processing order tracking and return.
Risks associated with the merger of Hertz Technology Group and Return Assured
We have limited operating histories as online commerce companies, which
will make the business of the combined company difficult to evaluate. The merger
combined two companies that have limited operating histories as online commerce
companies. Hertz Technology has been in the business of providing Internet and
web-based services for only a little over a year. Return Assured was formed less
than a year ago. Our prospects will therefore be subject to the risks, expenses
and uncertainties frequently encountered by young companies that operate in the
new and rapidly evolving markets for Internet products and services. These risks
include:
o evolving and unpredictable business models;
o intense competition;
o our need and ability to manage growth; and
o the rapid evolution of technology in electronic commerce.
The integration of our two companies may be difficult. Merging our two
companies involves technological, operational and personnel-related risks. The
integration process will be complex, time-consuming and expensive, and may
disrupt our business. We will use common information and communication systems,
facilities, operating procedures, financial controls and human resources
practices. We may lose key employees that we do not anticipate losing, and the
attention of our management team may be diverted from other ongoing business
concerns more than we anticipate.
We will incur significant charges to our earnings for a long time into the
future as a result of the goodwill created by accounting for the merger as a
purchase. The merger must be accounted for as a purchase of Hertz by Return
Assured. Under purchase accounting, Hertz's tangible assets will be entered on
our books at their fair market value. The excess of the value of the common
shares and warrants issued and the cost of the transaction over the net assets
of Hertz are recorded as goodwill. The transaction resulted in approximately
$10,437,000 of goodwill. That goodwill will be charged to earnings over 15
years, which will result in an expense charge of $696,000 per year for the next
15 years. This continuing write-off may make it difficult for us to obtain
financing in the future.
We will incur additional charges to our earnings for compensation payable
to Mr. Hertz under his employment agreement with Hergo and his consulting
agreement with us. The employment arrangements after the merger include a
five-year employment agreement between Eli Hertz and our Hergo subsidiary and a
two-year consulting agreement between Mr. Hertz and us. Under the employment
agreement, Mr. Hertz is to receive $250,000 per year and under the consulting
agreement he is to receive $125,000 per year. These costs will be in addition to
whatever compensation we decide to pay our senior management. In addition, Mr.
Hertz will receive 25% of the gross profit from Hergo. The share of gross
profits will be payable whether or not we or our subsidiaries earn a net profit.
The added costs will be a continuing drag on earnings over the terms of these
agreements and may make it difficult to obtain financing in the future.
18
<PAGE>
The cash payment required to redeem Mr. Hertz's common stock has reduced
our available working capital which could make it more difficult for us to meet
our obligations and limit future expansion. We purchased 115,385 shares of
common stock from Eli E. Hertz at the close of the merger for $435,000 cash and
a $290,000 note due April 17, 2001. The funds that were available to purchase
the shares were the cash of the combined companies on hand at the time the
merger was completed and the proceeds of sale of the Series A preferred stock.
As a result, it will reduce our working capital.
Risks associated with our industry
We will operate in an extremely competitive market and we could lose
revenue and customers to competitors. It is perceived to be easy to enter the
online commerce services market. Current and new competitors can launch new
online commerce web sites at relatively low cost. Competition in services to
online commerce will likely increase as well-recognized web participants decide
to enter this market segment. Increased competition may result in price
reductions, reduced gross margins, increased marketing costs or loss of market
share, or any combination of these problems.
Major credit card companies already offer some protection against both
failure to deliver and the delivery of defective products, and they may decide
to compete with us by, for example, themselves undertaking to resolve delivery
disputes or guaranty delivery and returns for customers who use their cards to
purchase online.
We may not be successful in competing against these competitors. Many of
these competitors have greater financial, marketing, customer support, technical
and other resources than us. As a result, they may be able to provide the same
services we provide on more favorable terms than us, and they may be able to
respond more quickly to changes in customer preference or to devote greater
resources to the development, promotion and sale of their services than we can.
If competition increases and our branding efforts are not successful, we may not
be able to command higher margins on our services, or we may lose revenue and
customers to our competitors.
Our business may be affected by government regulation. The need for our
services may be reduced by future state or federal regulation providing for
governmental enforcement of the obligations of online merchants to deliver their
products and honor returns policies. Even if this does not happen, it is
possible that one or more states may decide that our proposed business is close
enough to the business of insurance that it should be regulated like insurance.
This could result in an interference with our business that would create
unacceptable costs to us.
The tax treatment of the Internet and electronic commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by some foreign governments that could impose taxes on the sale of
goods and services and some other Internet activities. Our business may be
harmed by the passage of laws in the future imposing taxes or other burdensome
regulations on online commerce.
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<PAGE>
Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted with respect to the
Internet generally, covering issues such as user privacy, pricing and
characteristics and quality of products and services. Similarly, the growth and
development of the market for Internet commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business over the Internet. The adoption of any additional
laws or regulations may decrease the growth of commerce over the Internet,
increase our cost of doing business or otherwise have a harmful effect on our
business.
Risks associated with investing in us
We expect our stock price to be volatile. The market price of the shares
of our common stock has been, and will likely continue to be, subject to wide
fluctuations in response to several factors, such as:
o actual or anticipated variations in our results of operations;
o announcements of technological innovations;
o new services or product introductions by us or our
competitors;
o changes in financial estimates by securities analysts; and
o conditions and trends in the Internet and electronic commerce
industries.
The stock markets generally, and the Nasdaq SmallCap Market in particular,
have experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many companies and that often
have been unrelated or disproportionate to the operating performance of those
companies. These market fluctuations, as well as general economic, political and
market conditions such as recessions, interest rates or international currency
fluctuations may adversely affect the market price of our common stock.
Shares of our outstanding common stock may increase more than expected
because the conversion price of our Series A preferred stock is not fixed, but
is determined based on the market value of the common stock at the time of
conversion. Our operations are initially being financed by the sale of $5
million in Series A convertible preferred stock. This convertible preferred
stock has a maximum conversion price of $3.00 per share. However, if the market
price of our stock at the time of conversion is below $3.00 per share the
conversion price is reduced to the market price at that time. As a result, if
our common stock declines significantly in price, we will have to issue more
shares of common stock than we would if the conversion price were fixed. Nothing
in the agreement for sale of the preferred stock would prevent the holder of the
preferred stock from repeatedly selling the stock short and covering its short
sale at a lower price. It would not be subject to the usual risks of a short
seller, who might have to buy back the stock it has sold at an undetermined and
much higher price in order to cover his short position, because the conversion
can never go above $3.00 per share. In addition, a holder of the preferred stock
could continue converting and selling at ever lower prices without incurring an
economic loss. These sales could result in a major decline in the price of our
common stock. They could also make us more vulnerable to a takeover by an
outside party. The holder of the Series A preferred stock has agreed with us to
never own more than 4.99% of our common stock. As a result the holder must sell
enough shares upon each conversion to not violate our agreement - possibly
depressing our stock price.
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<PAGE>
The following table illustrates the number of shares that we would be
required to issue at various assumed prices upon conversion of the $5,000,000 of
the Series A preferred stock, subject to the limitations described in the text
following the table. This table is for illustrative purposes only, and should
not be assumed to represent our projections of the range of future stock prices.
<TABLE>
<CAPTION>
------------------- -------------------------------- --------------------------------------------
Conversion Share Shares of Common Stock Common Stock Underlying Series A Preferred
Price Issuable Under the Stockholders as a Percentage of Total
Series A Preferred Stock Common Stock Outstanding(1)
------------------- -------------------------------- --------------------------------------------
<S> <C> <C>
$1.00 5,000,000 41%
------------------- -------------------------------- --------------------------------------------
$2.00 2,500,000 26%
------------------- -------------------------------- --------------------------------------------
$3.00 1,666,667 19%
------------------- -------------------------------- --------------------------------------------
$4.00 1,666,667 19%
------------------- -------------------------------- --------------------------------------------
$5.00 1,666,667 19%
------------------- -------------------------------- --------------------------------------------
</TABLE>
----------
(1) Based on 7,133,604 shares outstanding on November 9, 2000.
Investors could therefore experience dilution of their ownership
percentage upon conversion of the convertible preferred stock. The exercise of
such a large amount of stock, especially if close in time, may have a
substantial negative effect on the market price of our common stock.
We may be required to redeem the preferred stock for an amount that would
force us to go out of business. The agreement for sale of the Series A preferred
stock requires us to maintain an effective registration statement covering
resale of the shares of common stock that may be issued upon conversion. If we
are unable to maintain the effectiveness of that registration statement or
otherwise do not comply with agreements we make with holders of that preferred
stock, we will have to redeem all the outstanding preferred stock at the stated
value of $1,000 per share plus accrued dividends. There is no provision in the
agreement for payment of this obligation over time, and we will not have any
commitment for credit to finance the payment of the redemption price. As a
result, a redemption may leave us with not enough liquid assets to continue
paying our other debts and we may be forced to go out of business.
If our common stock is delisted from Nasdaq, liquidity in our common stock
will likely be adversely affected. Our common stock is listed for trading on the
Nasdaq SmallCap Market. In order to continue to be listed on Nasdaq, however, we
must meet certain criteria, including one of the following:
o maintaining $2,000,000 in net tangible assets,
o having a market capitalization of at least $35,000,000, or
o having net income of $500,000.
In addition, the minimum bid price of our common stock must be at least
$1.00 per share and the market value of the public float must be at least
$1,000,000. On November 29, 2000, our bid price was $1.09. The dilution to our
stockholders which could be caused by the conversion of a substantial amount of
our Series A convertible preferred stock could cause the per share value of our
common stock to drop below the minimum bid price of $1.00. As of August 31,
2000, on a pro forma basis, we had net tangible assets of $7,002,000 and did not
satisfy the requirements for market capitalization or net income. The failure to
meet Nasdaq's maintenance criteria may result in the delisting of the our common
stock from Nasdaq, and trading, if any, in our securities would thereafter be
conducted in the non-Nasdaq over-the-counter market. As a result of such
delisting, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, our securities.
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<PAGE>
If our common stock is delisted from Nasdaq, our common stock may become
subject to the penny stock rules. Broker-dealer practices in connection with
transactions in "penny stocks" are regulated by certain rules adopted by the
Securities and Exchange Commission. Penny stocks generally are equity securities
with a price of less than $5.00 other than securities registered on certain
national securities exchanges or quoted on Nasdaq provided that current price
and volume information with respect to transactions in such securities is
provided by the exchange or system. The rules require that, prior to a
transaction in a penny stock not otherwise exempt from the rules, the
broker-dealer must:
o deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny
stock market;
o provide the customer with current bid and offer quotations for
the penny stock;
o disclose the compensation of the broker-dealer and its
salesperson in connection with the transaction;
o provide the customer monthly account statements showing the
market value of each penny stock held in the customer's
account; and
o make a special written determination that the penny stock is a
suitable investment for the customer and receive the
customer's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the
liquidity of penny stocks. If our securities are subject to the penny stock
rules, you may find it more difficult to sell your shares of our common stock.
Our ability to pay dividends is limited. We currently intend to retain any
future earnings and, therefore, do not plan to pay dividends in the foreseeable
future. Our future dividend policy will depend on our earnings, capital
requirements, financial condition and other factors that our board of directors
deems relevant. We can give no assurance that dividends will ever be paid.
Shares eligible for future sales by our current stockholders may adversely
affect the price of our stock. The market price of our common stock could
decline as a result of sales of shares of common stock by our existing
stockholders. These sales might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate.
Anti-takeover provisions and our right to issue preferred stock could make
a third party acquisition of us difficult and could deprive our stockholders of
a takeover premium for their shares. We are a Delaware corporation.
Anti-takeover provisions of Delaware law could make it more difficult for a
third party to acquire control of us, even if a change in control would be
beneficial to shareholders. Our amended certificate of incorporation provides
that our board of directors may issue preferred stock without shareholder
approval. The issuance of preferred stock could make it more difficult for a
third party to acquire us. Our board of directors may issue preferred stock with
voting or conversion rights that may have the effect of delaying, deferring or
preventing a change of control of us and would adversely affect the market price
of our common stock or voting and other rights of holders of our common stock.
22
<PAGE>
The exercise of outstanding options and warrants will dilute the interests
of our stockholders. As of November 9, 2000, we had 7,133,604 shares of our
common stock outstanding. If all our outstanding options and warrants are
exercised, we will have approximately 12.4 million shares outstanding. Thus, the
percentage of shares owned by all existing stockholders will be reduced
proportionately as warrants are exercised.
--------------------------------------------------------------------------------
ITEM 2. DESCRIPTION OF PROPERTY
--------------------------------------------------------------------------------
We have leased loft space at 75 Varick Street, New York, New York,
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. We also lease 34,000
square feet in Long Island City, New York. The lease runs through July 31, 2002
with an annual rent of approximately $105,000. We recently consolidated our
Hergo and RemoteIT operations in our Long Island City facilities and surrendered
our New York City facilities to the landlord effective December 31, 2000. For
surrendering our New York City facilities, we will no longer be responsible for
the lease, and we will receive approximately $240,000 from the landlord.
We currently rent approximately 2,000 square feet of office space at 885
West Georgia Street Vancouver, B.C. Canada. This lease runs through May 2003 at
an annual rate of Cdn$57,707.
We currently sublease office space at 1901 Avenue of the Stars, Los
Angeles, California, from Blagman Media whose president and a principal
stockholder is one of our directors, Robert Blagman. This lease is on a month to
month basis. We pay Blagman Media nominal compensation for the lease of the
space. We are currently looking to establish a permanent executive and sales
office in Los Angeles.
--------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
--------------------------------------------------------------------------------
One legal proceeding is pending against us, John A. Carter, our Chairman
and Michael Mulberry, our Vice President Investor Relations. Greg Chapman, our
Return Assured subsidiary's former president, claims that he is entitled to
receive shares from us for contributions to founding our Return Assured
subsidiary. We believe our defenses have merit and that Mr. Chapman will not be
successful. Mr. Carter and Mr. Mulberry have escrowed 780,000 shares of our
common stock they own to secure any successful claim by Mr Chapman.
We have no notice of any other pending material litigation.
23
<PAGE>
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
--------------------------------------------------------------------------------
We held a Special Meeting of Stockholders on October 3, 2000 at which time
three matters were submitted to our stockholders for a vote. The proposals and
the results are as follows:
1. Proposal to approve the issuance of shares of Hertz Technology
Group, Inc.'s common stock in connection with our proposed merger
with Return Assured Incorporated, including the issuance of the
shares that may be issued on conversion of the proposed Series A
convertible preferred stock.
for: 1,201,434 against: 7,373 abstain: 400
2. Proposal to adopt Hertz Technology Group, Inc.'s amended and
restated certificate of incorporation, which will:
o change the name of the corporation from Hertz Technology
Group, Inc. to Return Assured Incorporated;
o increase the authorized number of shares of common stock to
50,000,000; and
o create a new class of 1,000,000 shares of "blank check"
preferred stock and empower the Board of Directors to
authorize the issuance of one or more classes of that
preferred stock, or one or more series of any such class, and
to fix the preferences and relative, participating, optional
or other special rights, and qualifications, limitations or
restrictions thereof for each such class or series.
for: 1,197,834 against: 10,973 abstain: 400
3. Proposal to increase the number of shares of common stock that may
be issued under Hertz Technology Group, Inc.'s incentive stock
option plan by 1,500,000 shares to 2,250,000 and to ratify the
issuance of options previously granted outside the plan to Eli E.
Hertz and I. Marilyn Hertz to purchase 1,100,000 shares of our
common stock.
for: 1,179,540 against: 19,167 abstain: 10,500
--------------------------------------------------------------------------------
PART II
ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------
Market Information
Our common stock and warrants have been traded on the Nasdaq SmallCap
Market under the symbols "HERZ" and "HERZW", respectively, from November, 1996
through October 18, 2000. Since October 19, 2000, our common stock symbol has
been "RTRN" and our warrant symbol has been "RTRNW". The following table sets
forth, for the fiscal quarters indicated, the high and low bid prices per share
of our common stock and warrants as reported on the Nasdaq SmallCap Market. The
quotations reflect inter dealer prices, without retail mark-up, mark-down or
commissions and may not represent actual transactions.
24
<PAGE>
The prices set forth below have been adjusted to reflect:
o the one-for-three reverse stock split effective November 2, 1998,
and
o the 100% stock dividend on our common stock, effective May 18, 1999.
As a result 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.
Common Stock Warrants
Year Ended August 31, 1999 High Low High Low
First Quarter 1.66 0.75 0.56 0.19
Second Quarter 2.02 0.75 0.41 0.19
Third Quarter 9.75 1.97 5.13 0.41
Fourth Quarter 8.03 3.13 2.31 0.69
Year Ending August 31, 2000
First Quarter 4.25 1.88 1.22 0.69
Second Quarter 2.02 0.75 1.81 0.50
Third Quarter 6.68 2.13 1.63 0.41
Fourth Quarter 4.75 2.44 0.81 0.44
On November 29, 2000, the closing bid price of our common stock was $1.09.
Holders
As of November 9, 2000, there are approximately 108 record holders of our
common stock.
Dividends
As of the date hereof, no cash dividends have been declared on our common
stock. Subject to the prior rights of the holders of Series A preferred stock
and any other series of the preferred stock which may from time to time be
outstanding, if any, payment of dividends to holders of our common stock in the
future is within the discretion of our board of directors and will depend on our
earnings, capital requirements, financial condition and other relevant factors.
We presently intend to retain future earnings, if any, for use in our business
and have no present intention to pay cash dividends on our common stock.
Recent sales of securities
Below is a summary of securities offered by:
o our Return Assured subsidiary prior to the merger;
o us prior to the merger within the past three years; and
o us in connection with the merger.
25
<PAGE>
By our Return Assured subsidiary prior to the merger
In June 1999, Return Assured issued shares of common stock to its
founders, John A. Carter and Michael Mulberry at $0.001, par value. As part of
Return Assured's recapitalization on June 6, 2000, Messrs. Carter and Mulberry
agreed to waive claims to Return Assured securities in exchange for 600,000
shares each. These securities were sold under the exemption from registration
provided by Section 4(2) of the Securities Act. Neither Return Assured or any
person acting on its behalf offered or sold the securities by means of any form
of general solicitation or general advertising. Messrs. Carter and Mulberry
represented in writing that they acquired the securities for their own accounts.
A legend was placed on the stock certificates stating that the securities have
not been registered under the Securities Act and cannot be sold or otherwise
transferred without an effective registration or an applicable exemption.
In Fall 1999, Return Assured issued 265,000 shares of common stock to one
investor in connection with assisting us in locating capital. These securities
were sold under the exemption from registration provided by Section 4(2) of the
Securities Act and Rule 903 promulgated under the Securities Act. Neither Return
Assured or any person acting on its behalf offered or sold the securities by
means of any form of general solicitation or general advertising. The investor
represented in writing that he was not a United States resident and that he
acquired the securities for his own account. A legend was placed on the stock
certificate stating that the securities have not been registered under the
Securities Act and cannot be sold or otherwise transferred without an effective
registration or an applicable exemption.
In Fall 1999, Return Assured issued shares of common stock to one investor
in connection with assisting us in locating capital. As part of Return Assured's
recapitalization on June 6, 2000, this investor agreed to waive any claims to
Return Assured securities in exchange for 150,000 shares of common stock and a
common stock purchase warrant to purchase up to 300,000 shares at $1.00 per
share, which warrant expires on June 27, 2003. These securities were sold under
the exemption from registration provided by Section 4(2) of the Securities Act
and Rule 903 promulgated under the Securities Act. Neither Return Assured or any
person acting on its behalf offered or sold the securities by means of any form
of general solicitation or general advertising. The investor represented in
writing that it was not a United States resident and that it acquired the
securities for its own account. A legend was placed on the certificate stating
that the securities have not been registered under the Securities Act and cannot
be sold or otherwise transferred without an effective registration or an
applicable exemption.
From September 1999 through December 1999, Return Assured issued 259,185
shares of common stock in a private placement for $259,185. These securities
were sold under the exemptions from registration provided by Section 4(2) of the
Securities Act and Rule 506 and Rule 903 promulgated under the Securities Act.
Neither Return Assured or any person acting on its behalf offered or sold the
securities by means of any form of general solicitation or general advertising.
The purchasers represented in writing that they were either not United States
residents or were accredited investors and that they acquired the securities for
their own accounts. A legend was placed on the stock certificates stating that
the securities have not been registered under the Securities Act and cannot be
sold or otherwise transferred without an effective registration or an applicable
exemption.
26
<PAGE>
In January 2000, Return Assured issued 26,500 shares of common stock in a
private placement for $33,125. These securities were sold under the exemption
from registration provided by Section 4(2) of the Securities Act and Rule 506
and Rule 903 promulgated under the Securities Act. Neither Return Assured or any
person acting on its behalf offered or sold the securities by means of any form
of general solicitation or general advertising. The purchasers represented in
writing that they were not United States residents or were accredited investors
and that they acquired the securities for their own accounts. A legend was
placed on the stock certificates stating that the securities have not been
registered under the Securities Act and cannot be sold or otherwise transferred
without an effective registration or an applicable exemption.
In March 2000, Return Assured issued shares of common stock to two
investors in a private placement for $100,000. As part of Return Assured's
recapitalization on June 6, 2000, these two investors each agreed to waive
claims to Return Assured securities in exchange for 150,000 shares each. These
securities were sold under the exemptions from registration provided by Section
4(2) of the Securities Act and Rule 903 promulgated under the Securities Act.
Neither Return Assured or any person acting on its behalf offered or sold the
securities by means of any form of general solicitation or general advertising.
The purchasers represented in writing that they were not United States residents
and that they acquired the securities for their own accounts. A legend was
placed on the stock certificates stating that the securities have not been
registered under the Securities Act and cannot be sold or otherwise transferred
without an effective registration or an applicable exemption.
In March 2000, Return Assured issued shares of common stock to one
investor in a private placement for $150,000. As part of Return Assured's
recapitalization on June 6, 2000, this investor agreed to waive any claims to
Return Assured securities in exchange for 300,000 shares of common stock and a
common stock purchase warrant to purchase up to 150,000 shares at $1.00 per
share, which warrant expires on June 7, 2003. These securities were sold under
the exemptions from registration provided by Section 4(2) of the Securities Act
and Rule 903 promulgated under the Securities Act. Neither Return Assured or any
person acting on its behalf offered or sold the securities by means of any form
of general solicitation or general advertising. The purchaser represented in
writing that it was not a United States resident and that it acquired the
securities for its own account. A legend was placed on the certificate stating
that the securities have not been registered under the Securities Act and cannot
be sold or otherwise transferred without an effective registration or an
applicable exemption.
In March 2000, Return Assured issued shares of common stock to one
investor in a private placement for $17,713. As part of Return Assured's
recapitalization on June 6, 2000, this investor agreed to waive any claims to
Return Assured securities in exchange for 150,000 shares of common stock and a
common stock purchase warrant to purchase up to 150,000 shares at $1.00 per
share, which warrant expires on June 7, 2003. These securities were sold under
the exemptions from registration provided by Section 4(2) of the Securities Act
and Rule 903 promulgated under the Securities Act. Neither Return Assured or any
person acting on its behalf offered or sold the securities by means of any form
of general solicitation or general advertising. The purchaser represented in
writing that it was not a United States resident and that it acquired the
securities for its own account. A legend was placed on the certificate stating
that the securities have not been registered under the Securities Act and cannot
be sold or otherwise transferred without an effective registration or an
applicable exemption.
In March 2000, Return Assured issued shares of common stock to one
investor in a private placement for $17,713. As part of Return Assured's
recapitalization on June 6, 2000, this investor agreed to waive any claims to
Return Assured securities in exchange for 150,000 shares of common stock. These
securities were sold under the exemptions from registration provided by Section
4(2) of the Securities Act and Rule 903 promulgated under the Securities Act.
Neither Return Assured or any person acting on its behalf offered or sold the
securities by means of any form of general solicitation or general advertising.
The purchaser represented in writing that he was not a United States resident
and that he acquired the securities for his own account. A legend was placed on
the stock certificate stating that the securities have not been registered under
the Securities Act and cannot be sold or otherwise transferred without an
effective registration or an applicable exemption.
27
<PAGE>
In June 2000, Return Assured issued 45,000 shares of common stock to each
of Dale Vander Geissen and Robert Blagman for their service as directors of
Return Assured. These securities were issued under the exemptions from
registration provided by Section 4(2) of the Securities Act and Rule 506
promulgated under the Securities Act. Neither Return Assured or any person
acting on its behalf offered or sold the securities by means of any form of
general solicitation or general advertising. The directors represented in
writing that they acquired the securities for their own accounts. A legend was
placed on the stock certificates stating that the securities have not been
registered under the Securities Act and cannot be sold or otherwise transferred
without an effective registration or an applicable exemption.
In June 2000, Return Assured issued an aggregate of 505,000 shares of
common stock to certain employees and consultants for their service to Return
Assured, including 300,000 shares of common stock to Return Assured's President,
Matthew Sebal. These securities were issued under the exemptions from
registration provided by Section 4(2) of the Securities Act and Rule 506 and
Rule 903 promulgated under the Securities Act. Neither Return Assured or any
person acting on its behalf offered or sold the securities by means of any form
of general solicitation or general advertising. The employees and consultants
represented in writing that they were either executive officers of Return
Assured or that they were not United States residents and that they acquired the
securities for their own accounts. A legend was placed on the stock certificates
stating that the securities have not been registered under the Securities Act
and cannot be sold or otherwise transferred without an effective registration or
an applicable exemption.
In July 2000, Return Assured issued 560,000 shares of common stock in a
private placement for $800,000. In addition, Return Assured issued notes in the
principal amount of $200,000 and common stock purchase warrants to purchase up
to 28,000 shares at $1.43 per share, which warrant expires on June 20, 2003, for
$200,000. These securities were sold under the exemptions from registration
provided by Section 4(2) of the Securities Act and Rule 506 promulgated under
the Securities Act. Neither Return Assured or any person acting on its behalf
offered or sold the securities by means of any form of general solicitation or
general advertising. The purchasers represented in writing that they were
accredited investors and that they acquired the securities for their own
accounts. A legend was placed on the certificates stating that the securities
have not been registered under the Securities Act and cannot be sold or
otherwise transferred without an effective registration or an applicable
exemption.
In July 2000, Return Assured issued certain securities to two consultants
in connection with the July 2000 private placement, the execution of the
definitive merger agreement to merge with us and the execution of a definitive
stock purchase agreement for the sale of $5,000,000 convertible preferred stock.
These securities were an aggregate of 740,000 shares of common stock, a common
stock purchase warrants to purchase up to 100,000 shares at $1.00 per share,
which warrant expires on July 13, 2003, a common stock purchase warrants to
purchase up to 340,000 shares at $1.00 per share, which warrant expires on
July 13, 2005, a common stock purchase warrants to purchase up to 333,333 shares
at $3.00 per share, which warrant expires on July 13, 2005. These securities
were sold under the exemptions from registration provided by Section 4(2) of the
Securities Act and Rule 506 promulgated under the Securities Act. Neither Return
Assured or any person acting on its behalf offered or sold the securities by
means of any form of general solicitation or general advertising. The
consultants represented in writing that they were accredited investors and that
they acquired the securities for their own accounts. A legend was placed on the
certificates stating that the securities have not been registered under the
Securities Act and cannot be sold or otherwise transferred without an effective
registration or an applicable exemption.
28
<PAGE>
In July 2000, Return Assured issued to certain investors common stock
purchase warrants to purchase up to 287,500 shares of common stock at an
exercise price of $2.00 per share which expired immediately prior to the closing
of the merger with us. Two investors each exercised warrants to purchase 100,000
shares of common stock each. One investor paid $200,000. The other investor was
granted the shares without paying the exercise price for agreeing to purchase a
portion of the shares of common stock we were obligated to purchase from Eli
Hertz at the closing of the merger. These securities were sold under the
exemptions from registration provided by Section 4(2) of the Securities Act and
Rule 506 promulgated under the Securities Act. Neither Return Assured or any
person acting on its behalf offered or sold the securities by means of any form
of general solicitation or general advertising. The purchasers represented in
writing that they were accredited investors and that they acquired the
securities for their own accounts. A legend was placed on the certificates
stating that the securities have not been registered under the Securities Act
and cannot be sold or otherwise transferred without an effective registration or
an applicable exemption. The unexercised warrants to purchase up to 87,500
shares expired at the closing of the merger.
By us prior to the merger
In June, 2000 we issued to one purchaser 100,000 shares of common stock in
a private placement for $175,000. These securities were sold under the
exemptions from registration provided by Section 4(2) of the Securities Act and
Rule 506 promulgated under the Securities Act. Neither we nor any person acting
on our behalf offered or sold the securities by means of any form of general
solicitation or general advertising. The purchaser represented in writing that
it was an accredited investor and that it acquired the securities for its own
account. A legend was placed on the stock certificate stating that the
securities have not been registered under the Securities Act and cannot be sold
or otherwise transferred without an effective registration or an exemption
therefrom.
In March 1999 we issued 50,000 shares of common stock in a private
placement for the purchase of RemoteIT. These securities were sold under the
exemptions from registration provided by Section 4(2) of the Securities Act.
Neither we nor any person acting on our behalf offered or sold the securities by
means of any form of general solicitation or general advertising. The purchasers
represented in writing that they acquired the securities for their own account.
A legend was placed on the stock certificates stating that the securities have
not been registered under the Securities Act and cannot be sold or otherwise
transferred without an effective registration or an exemption therefrom.
In fiscal 1998 we issued 96,900 shares of common stock in a private
placement for the purchase of Edutec. These securities were sold under the
exemptions from registration provided by Section 4(2) of the Securities Act.
Neither we nor any person acting on our behalf offered or sold the securities by
means of any form of general solicitation or general advertising. The purchasers
represented in writing that they acquired the securities for their own account.
A legend was placed on the stock certificates stating that the securities have
not been registered under the Securities Act and cannot be sold or otherwise
transferred without an effective registration or an exemption therefrom.
29
<PAGE>
In fiscal 1998, we issued to an employee 50,000 shares of common stock for
his services to our company. These securities were issued under the exemptions
from registration provided by Section 4(2) of the Securities Act and Rule 506
promulgated under the Securities Act. Neither we nor any person acting on our
behalf offered or sold the securities by means of any form of general
solicitation or general advertising. The employee represented in writing that he
was an accredited investor and that he acquired the securities for his own
account. A legend was placed on the stock certificate stating that the
securities have not been registered under the Securities Act and cannot be sold
or otherwise transferred without an effective registration or an exemption
therefrom.
By us in the merger
In connection with the merger, we issued
o to the stockholders of Return Assured 4,895,685 shares of common stock,
and
o to the warrant holders of Return Assured warrants to purchase up to
1,401,333 shares of common stock.
These securities were sold under the exemption from registration provided by
Section 4(2) of the Securities Act and Rule 506 and Rule 903 promulgated under
the Securities Act. Neither we nor any person acting on our behalf offered or
sold the securities by means of any form of general solicitation or general
advertising. All purchasers represented in writing that they were either an
accredited investor or that they were not a United States resident and that they
acquired the securities for their own accounts. A legend was placed on the
certificates stating that the securities have not been registered under the
Securities Act and cannot be sold or otherwise transferred without an effective
registration or an exemption therefrom.
Simultaneous with the merger, we issued 5,000 shares of Series A Preferred Stock
and 404,041 common stock purchase warrants in a private placement to one
investor for $5,000,000. These securities were sold under the exemption from
registration provided by Section 4(2) of the Securities Act and Rule 506
promulgated under the Securities Act. Neither we nor any person acting on our
behalf offered or sold the securities by means of any form of general
solicitation or general advertising. The purchaser represented in writing that
it was an accredited investor and that it acquired the securities for its own
account. A legend was placed on the certificates stating that the securities
have not been registered under the Securities Act and cannot be sold or
otherwise transferred without an effective registration or an exemption
therefrom.
--------------------------------------------------------------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this document.
In addition to the information contained herein the following discussion
contains forward looking statements that involve certain risks and uncertainties
which may cause our actual results in future periods to differ materially from
forecasted results. See "Forward Looking Statements" on page 4.
30
<PAGE>
Prior to October 13, 2000, our operations consisted of our Hergo modular
systems manufacturing, Hertz computer manufacturing, RemoteIT Internet service
and Edutec training facilities. On October 13, 2000, we completed the merger
with Return Assured. Through our Return Assured operations, we have brought to
market our web seal of approval guarantee program.
We intend to focus the majority of our capital and management time and
attention to developing our Return Assured business. We also anticipate
discontinuing our Hertz computer and Edutec operations in December 2000.
Our Return Assured business has a limited operating history for
prospective investors to use as a basis for evaluating our business. Prospective
investors must consider the risks and difficulties frequently encountered by
early stage companies.
Results of Operations - Hertz Technology Group and Subsidiaries
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Hertz Technology Group, Inc. and Subsidiaries
-------------------------------------------------------------------------------------------------
For the year ended For the year ended
August, 31 2000 August 31, 1999
-------------------------------------------------------------------------------------------------
As a percent of As a percent of
Amount net revenues Amount net revenues
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Revenues $6,319,304 100% $6,881,838 100%
-------------------------------------------------------------------------------------------------
Cost of Sales $3,848,414 61% $3,542,941 51%
-------------------------------------------------------------------------------------------------
Gross Profit $2,470,890 39% $3,338,897 49%
-------------------------------------------------------------------------------------------------
Selling, General and $4,148,536 66% $4,001,717 58%
Administrative Expenses
-------------------------------------------------------------------------------------------------
Operating Income (Loss) $(2,282,446) (36%) $(662,820) (10%)
-------------------------------------------------------------------------------------------------
Net Income (Loss) $(2,338,069) (37%) $(694,871) (10%)
-------------------------------------------------------------------------------------------------
</TABLE>
Results of Operations
Revenues
Our sales for the year ended August 31, 2000, were $6.32 million, compared
to $6.88 million for the year ended August 31, 1999, an 8% decrease.
Sales from our RemoteIT, Hertz Computer and Edutec operations were
$1,236,000 for the year ended August 31, 2000, compared to $1,576,000 for the
year ended August 31, 1999, a decrease of $340,000 or 22%. RemoteIT provides
networking and communications products and services, Internet connectivity, and
other value-added services. The personal computer hardware market has become
increasingly competitive and over-saturated. Although we shifted our emphasis
from hardware manufacturing to networking and communication services during the
year ended August 31, 2000, the continued drop in hardware sales was not offset
by a significant increase in sales of networking and communications products.
The slow generation of sales in the communications area is primarily due to the
highly competitive nature of DSL communication services and the high cost of
capturing the market. The marketing needed to generate DSL sales is in radio and
other media advertising. The cost to launch such programs is high, with no real
assurance of continued customer support, since new industry programs are
continuously appearing with highly competitive rates.
31
<PAGE>
For the year ended August 31, 2000, Hergo sales were $5,083,000 compared
to sales of $5,305,000 for the year ended August 31, 1999, a decrease of
$222,000, or 4%. Although Hergo sales for the first nine months had been at
similar levels as the same period last year, Hergo experienced a substantially
slower fourth quarter. In large part, the decrease arises from the merging of
Hergo's Woodside shipping division into the Long Island City manufacturing
division. As a result of this move, which occurred at the end of August 2000,
resources were directed to a large scale effort to expedite the move.
Gross Profit
Our gross profit was $2,471,000, 39% of net sales, for the year ended
August 31, 2000 as compared with $3,339,000, 49% of net sales, for the year
ended August 31, 1999, a decrease of $868,000, or 26% decrease in gross profit.
Gross profit generated from Hergo for the year ended August 31, 2000 was
$2,325,000, 46% of net sales, compared to $2,991,000, 56% of net sales, for the
year ended August 31, 1999.
Several factors contributed to the lower gross profit margin for the
current year. Among them, major contributors were higher labor and utilities
costs, as well as increased costs of depreciation and amortization. During the
year substantial maintenance contracts were established to cover the highly
computerized technical equipment purchased in the past year. The costs of the
contracts and the depreciation on the same machines were substantial. The
additional machinery, however, is expected to increase efficiency and in the
long run should help in reducing labor costs associated with the production.
During the year ended August 31, 2000, we reduced the carrying value of
some of our inventory due to obsolescence and design changes. The amount of the
write down of the inventory was in excess of $100,000.
Gross profit generated from our RemoteIT, Hertz Computer and Edutec
operations for the year ended August 31, 2000 was $146,000, 12% of sales,
compared to $348,000, 22% of sales, for the same period last year.
In the current year, these operations included a full year of costs and
sales for RemoteIT. We purchased RemoteIT in February 1999. Many of the costs of
RemoteIT are fixed and those costs, combined with the low volume of sales of
products and services, resulted in the lower gross profit margin. This effect
was further aggravated by expenses incurred in connection with the DSL product
and co-location program.
32
<PAGE>
Selling, General and Administrative
Selling, general and administrative expenses increased for the year ended
August 31, 2000 from the comparable year ended August 31, 1999 by $147,000, or
4%.
We have decided to terminate our lease at 75 Varick Street. We believe
that with the decreased need for space, due to the reduction in PC manufacturing
and the consolidation of the Hergo warehouse and offices into the Long Island
City building, we could occupy less space and save over $200,000 each year in
rent. Additionally, we were able to negotiate the surrender of the lease so that
some relocation expenses were covered. In the fourth quarter of the year ended
August 31, 2000, we changed its estimate of the useful life of some of its
leasehold improvements and incurred additional amortization of leasehold
improvements of approximately $82,000. During the year ended August 31, 2000, we
installed new computer software in order to comply with Y2K considerations and
to supply additional functionality. The cost for the software, training and
modifications totaled approximately $78,000 and is included in selling, general
and administrative expenses. During the past year, we also utilized a marketing
test program to promote DSL services. The marketing test program included radio,
print and Internet advertising and telemarketing expenses and cost approximately
$72,000.
Impairment Loss on Assets
With the termination of the lease at Varick Street, the Edutec division
will be discontinued. Goodwill outstanding for Edutec is therefore impaired and
was written off at the end of the year ended August 31, 2000. The equipment for
the classrooms is also being written down to its realizable value. The total
written down for Edutec was $105,000. In addition, Hertz Computer has
experienced a significant reduction in production of personal computers. All of
its associated equipment and intangible costs totaling $177,000 is being written
down at this time.
Due to the merging of the Hergo warehouse facility into the Hergo
production facility, excess and obsolete production machinery was disposed,
totaling $51,000.
Web development costs totaling $ 272,000 that were formally capitalized
are now being written off due to impaired value. We changed our focus of web
technology products due to the merger and the business nature of our Return
Assured operations. The website and other web enabled functions will be
substantially modified and we will not be using the website that we had
developed in the same manner.
Other Income (Expense)
Other income for the year ended August 31, 2000 was $44,000 compared to
other expense of $7,000 for the year ended August 31, 1999.
Net interest income for the year ended August 31, 2000 decreased by
$48,000 as compared to the comparable year ended August 31, 1999. The decrease
in interest income for the current year is primarily due to the reduction of
marketable securities balances.
33
<PAGE>
Provision for Income Taxes
We recorded a provision for taxes of $136,000 for the year ended
August 31, 2000 as compared to $110,000 provision for the year ended August 31,
1999. The provision for both years arises from an increase in the valuation
allowance against the deferred tax asset. The valuation allowance increased in
each year due to our estimate of the likelihood that some portion or all of the
deferred tax asset will not be realized.
Net Income and Earnings Per Share
Net loss for the year ended August 31, 2000 resulted in a loss of
approximately $2,338,000 or $1.07 per share compared to a loss of $695,000 or
$.33 per share for the year ended August 31, 1999.
Plan of Operations - Return Assured
We have recently commenced our Return Assured operations and have not
generated any revenues since inception in June 1999 through August 31, 2000. Our
Return Assured operations have consisted of:
o determining the feasibility and potential market acceptance of our
web seal service;
o developing the infrastructure to deliver and monitor our web seal
service;
o structuring our cyber insurance policy with Lloyd's of London;
o pursuing our marketing strategy by forming strategic relationships
with web portals;
o raising capital to finance our business plan; and
o assembling our management team.
Most of our expenses through August 31, 2000 have been:
o wages and salaries;
o consulting fees; and
o financing fees.
Of the approximately $2.3 million in aggregate net losses, these wages and
fees are approximately $1.7 million. Of this $1.7 million, approximately $1.1
million is attributed to wages and fees paid in our common stock.
Liquidity And Capital Resources
For the twelve months ended August 31, 2000, we had cash provided by
operations of $608,000. Large non-cash items of depreciation, amortization, loss
on disposal of assets and amortization of goodwill amounted to over $1,263,000.
Because of this, despite the fact that our was $2,338,000, we still experienced
cash flows arising from operating activities. During the year ended August 31,
2000, we sold marketable securities in the amount of $935,000 to fund the
shortfall in working capital.
Cash used in investment activities for the twelve months ended August 31,
2000 was $409,000. The primary use was the purchase of manufacturing equipment
for the Hergo product line. Additionally, we capitalized expenses incurred in
creation of a web site of $100,000. This amount was written off at August 31,
2000.
Cash used in financing activities for the year ended August 31, 2000
totaled $84,000. During the year, we sold 100,000 shares of common stock for a
total of $175,000 and received $20,119 from the exercise of stock options. This
offset the payment of $279,000 in notes and capital leases payable, which
includes the last of three payments made for the purchase of Lan Metal Products,
a division of our Hergo subsidiary.
34
<PAGE>
To date, we have primarily financed our operations through the sale of our
equity securities:
o In May 2000, raised $175,000 from the sale of 100,000 shares of common
stock.
o In June 2000, Return Assured prior to the merger raised $800,000 from the
sale of 560,000 shares of common stock and $200,000 from the sale of
convertible notes.
o In October 2000, we raised $5,000,000 from the sale of our Series A
convertible preferred stock.
After giving effect to the merger, the sale of our Series A preferred
stock and the redemption of Eli Hertz' common stock, we had, as of August 31,
2000, on a pro forma basis, approximately:
o $4.8 million in cash and cash equivalents; and
o $5.9 million in working capital.
A significant portion of our working capital will be used to launch our
web seal operations which we anticipate will start to generate cash flow. If
cash flow from operations is not sufficient to meet our operating expenses, we
may require additional funding over the next twelve months. Should this not
materialize on favorable terms, we may be forced to curtail our plans and
spending.
We expect our capital expenditures will increase significantly in the
future as we make technological improvements to our system and technical
infrastructure. We anticipate that we will spend at least $250,000 on developing
automated business processes and tools to carry out our business plan and
streamline systems that have already been developed. Additionally, we will
continue to evaluate possible investments in complementary businesses, products
and technologies, and plan to conduct aggressive brand promotions.
We believe that our current cash will be sufficient to meet our
anticipated cash needs for working capital and capital expenditures for at least
the next twelve months. If cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities or to obtain a credit facility. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. If we issue debt securities, our fixed obligations will increase
and we may become subject to covenants that would restrict our operations. Such
financing may not be available in amounts or on terms acceptable to us, if at
all.
Year 2000 Issues
We have developed applications using generally available software for
accounting word processing and our data base applications. To date no issues
related to Y2K have emerged. We are at risk to the extent that our software
suppliers have not adequately addressed the Y2K issue. The risks faced by us,
however, are no more than the risks of all others who use the same software.
We make inquires at the time of purchase of software and as part of the
development process attempts to address the associated potential risks.
35
<PAGE>
--------------------------------------------------------------------------------
ITEM 7. FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The financial statements and supplementary data are included beginning
immediately following the signature page to this report. See Item 13 for a list
of the financial statements and financial statement schedules included.
--------------------------------------------------------------------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
None.
36
<PAGE>
--------------------------------------------------------------------------------
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
--------------------------------------------------------------------------------
Executive Officers, Directors and Key Employees
The following table sets forth certain information regarding our
executive officers, directors and key employees as of November 27, 2000.
Name Age Position
---- --- --------
Matthew Sebal 30 President & Chairman of the Board
Michael Mulberry 34 Vice President Investor Relations
Michael Sweatman 49 Vice President Finance
Barry Goldsammler 47 Chief Financial Officer
Darren Lozinik 29 Chief Information Officer
Sibylla Verdi 30 Director Marketing
Eli E. Hertz 51 Chief Executive Officer of
Hergo Ergonomic Support Systems, Inc.
John A. Carter 58 Director
Robert Blagman 44 Director
Dale Vander Geissen 60 Director
Michael Hillerbrand 39 Director
Mr. Matthew Sebal, President and Chairman of the Board
Mr. Sebal has served as President and Chief Executive officer of Return
Assured since June 2000 and our President since the merger in October 2000. Mr.
Sebal was appointed our Chairman in November 2000. From 1999 to May 2000 he was
Principal in IBM's e-business Services Group for British Columbia, Canada. From
1997 to 1998, Mr. Sebal was Director of Business Development for
Communicate.com. From 1995 to 1997, he was Senior Strategist for Emerge Online,
Inc. From 1990 to 1995, he was President of Sebal Enterprises, an import-export
business. Mr. Sebal holds a Bachelor degree in Commerce from the University of
Western Ontario.
Mr. Michael Mulberry, Vice President Investor Relations
Mr Mulberry has served as Vice President Investor Relations since June
2000. Prior to that, he was the acting president of Return Assured. Before
joining Return Assured in March 1999, Mr. Mulberry was employed by Nesbit Burns,
a Canadian brokerage firm, as a stock broker/financial planner from June 1996 to
March 1998. From 1991 to 1996 he was employed as a financial planner for
Financial Planning Group. From 1988 to 1991 he was employed as a financial
planner for London Life Insurance. Mr. Mulberry holds a Bachelors Degree in
Social Sciences from the University of Western Ontario.
37
<PAGE>
Mr. Michael Sweatman, CA, Vice President Finance
Mr. Sweatman has served as Vice President Finance for Return Assured since
1999 and our Vice President Finance since the merger in October 2000. From 1992
to 1999 he has operated MDS Management Ltd., providing consulting and investment
services to a wide variety of companies in the private and public sectors. From
1989 to 1992, he was Senior Chief Financial Officer of Yukon Energy corporation,
and in the latter years was promoted to President. From 1984 to 1986, he was
Chief Financial Officer of Kelvin Energy Co. From 1980 to 1984, he was a senior
accountant with Arthur Anderson, one of the world's leading accountancy firms
specializing in financial management for resource and development companies. Mr.
Sweatman has held numerous positions as a director and officer of a variety of
public companies. Mr. Sweatman holds a Bachelors Degree in Commerce from Simon
Fraser University and a CA designation from the provinces of B.C. and the Yukon.
Mr. Sweatman has been involved in numerous public companies. From April 1997
through October 1999, he was a director of Consolidated Texas Northern Minerals
Ltd., a mineral exploration company. From January 1998 to September 1999, he was
president and director of Cypango Ventures Ltd., a mineral exploration company.
From September 1995 through July 1997, he was president and director of Beaufort
Energy Limited, an oil and gas exploration company. Since October 1999, he has
been a director of RAT International Marketing Ltd., a holding company. Since
June 1999, he has been a director of Octagon Industries Inc. Since June 1998, he
has been a director of Treat Systems Inc., a holding company. Since January
2000, he has been a director of Maple Minerals Inc., a mining exploration
company. Since April 1996, he has been a director of Brownstone Resources, Inc.,
a holding company.
Mr. Barry J. Goldsammler, Chief Financial Officer
Mr. Goldsammler joined Hertz Technology Group in 1990 and has served in
various executive positions since then. Before joining us, he was vice president
for a sheet metal fabricator and treasurer and principal financial officer for a
public manufacturing company. Mr. Goldsammler received a Bachelor of Science
Degree in Accounting from Brooklyn College.
Mr. Darren Lozinik, Chief Information Officer and Acting Chief Operating Officer
Mr Lozinik has served as our Chief Information Officer and acting Chief
Operating Officer since October 2000. From April 1998 to October 2000, he was a
Project Manager with IBM. During his tenure with IBM, Mr. Lozinik was
responsible for defining, developing and implementing core business processes,
including the software and technology infrastructure for several IBM clients,
including dot.com start-ups. From March 1995 to March 1998, Mr. Lozinik was a
consultant for Influence Business Systems Inc, where he was responsible for
developing business process re-engineering and technology strategy documents for
several organizations in the retail, manufacturing, transportation, utility,
government, real estate, construction, and oil and gas industries. From April
1990 to March 1995, Mr. Lozinik was a Computer Systems Analyst at Gainers Inc.
where he was responsible for developing and providing operational support for
Gainers' core business applications and technology infrastructure.
38
<PAGE>
Ms. Sibylla Verdi, Director of Marketing
Ms. Verdi has served as Director of Marketing for Return Assured since
August 2000. From 1999 to July 2000, she was the research and business
development/marketing strategist for Venture Resources, an Internet incubator.
During her tenure she worked on the development of several B2B and B2C Internet
start-ups. From 1997 to 1999, she worked in the production field as an on-camera
TV Reporter, Researcher and producer for several prime time Canadian and US news
variety shows. From 1996 through 1997, Ms. Verdi was the Marketing Director for
Insight Film and video a full service TV and Film production studio. Ms. Verdi
holds a Bachelors Degree in Psychology from the University of British Columbia
and diplomas in economics and marketing and broadcasting communications.
Mr. Eli E. Hertz, Chief Executive Officer - Hergo Ergonomic Support Systems,
Inc.
Mr. Hertz was a co-founder of Hertz Technology Group in 1982. From 1982 to
2000, he was our President and Chief Executive Officer until the merger. Since
October 2000, he has been Chief Executive Officer of our Hergo subsidiary. Mr.
Hertz has a Bachelor of Science degree in Management Science and Economics and
an Master's in Business Administration in Accounting and Management from Long
Island University.
Mr. John A. Carter, Director
Mr. Carter is a founder of Return Assured and has served as its Chairman
of the Board since 1999. He has served as a director of our company since the
merger in October 2000. From 1989 to 1999, Mr. Carter was an independent
consultant to numerous companies. From 1978 to 1989, Mr. Carter served as
Chairman of the Board for Carter Oil and Gas Co., a Canadian private resource
company with annual revenues of $750 million. From 1983 to 1984 Mr. Carter was
the Chief Executive Officer and Chairman of the Board of Northern Life Insurance
Company of London, Ontario, Canada.
Mr. Robert Blagman, Director
Mr. Blagman has served as a director of our company since the merger in
October 2000. Mr. Blagman is the founder and Chief Executive Officer of publicly
traded Blagman Media International, Inc. (OTC BB: BMII), a direct marketing and
advertising company. From 1978 to 1988, Mr. Blagman was employed by Katz
Communications, a direct marketing and advertising company where he was Vice
President of National Sales. From 1992 to 1994 he was National and Local Sales
Manager for Walt Disney's owned and operated KCAL TV of Los Angeles and from
1988 to 1992 he was employed by KCOP TV of Los Angeles, in the same capacity.
Mr. Blagman is a frequent speaker at industry events and is a member of the
executive council for the Electronic Retailing association.
Mr. Dale Vander Geissen
Mr. Vander Geissen has served as a director of our company since the
merger in October 2000. In 1997 Mr. Vander Geissen was the National President of
the Independent Electrical Contractors Association (IEC), a trade association
consisting of 3,200 members and 85,000 skilled workers throughout the United
States. Prior to that he served on various IEC Executive Committees for more
than eleven years. From 1997 to the present, Mr. Vander Geissen has served as
the National Membership Chairman of the IEC. He is currently retired.
39
<PAGE>
Mr. Michael Hillerbrand
Since 1997, Mr. Hillerbrand has been with Capital Investment Partners, an
investment/merchant banking firm and since 1999, Managing Director of Capital
Investment Partners. From 1996 to 1997, he was Vice President of Gateway
Partners, a regional boutique investment banking firm specializing in mergers
and acquisitions. From 1993 to 1996 he managed a venture development consulting
practice with a focus on technology. Mr. Hillerbrand currently serves as
Chairman of YellowBrick Solutions, Inc., a Web-based customer relationship
management company and as a board member of etrials.com, a Web-based clinical
trial data capture and management company. Mr. Hillerbrand received his MBA,
with a concentration in finance, from the Kenan-Flagler Business School at the
University of North Carolina at Chapel Hill.
16(a) Beneficial Ownership Reporting Compliance
To our knowledge, no officers, directors, beneficial owners of more than
ten percent of any class of our equity securities registered pursuant to Section
12 of the Exchange Act or any other person subject to Section 16 of the Exchange
Act with respect to us, failed to file on a timely basis reports required by
Section 16(a) of the Exchange Act during the most recent fiscal year, which
ended August 31, 2000.
--------------------------------------------------------------------------------
ITEM 10. EXECUTIVE COMPENSATION
--------------------------------------------------------------------------------
The following table shows compensation earned during the fiscal years
ended August 31, 2000, 1999 and 1998 by our President and our executive officers
who made $100,000 or more last year. Mr. Hertz was our President and Chief
Executive Officer during the year ended August 31, 2000 through October 13,
2000. Mr. Sebal has been our President since October 13, 2000.
40
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
Restricted Securities All Other
Other Annual Stock Underlying LTIP Compen-
Name & Principal Position Bonus Compensation Awards Options/ Payouts sation
Year Salary ($) ($) ($) ($) SARs (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Matthew Sebal 2000 62,000 0 0 429,000(1) 0 0 0
President & CEO 1999 0 0 0 0 0 0 0
1998 0 0 0 0 0 0 0
Eli Hertz, CEO 2000 255,488 0 28,717 0 400,000(2) 0 0
of Hergo Ergonomic 1999 226,731 0 0 0 700,000(3) 0 0
Support Systems, Inc. 1998 225,000 0 0 0 200,000(4) 0 0
Barry Goldsammler 2000 124,390 25,000 1,220 0 0 0 0
Chief Financial Officer 1999 125,710 0 0 0 0 0 0
1998 122,274 0 0 79,725(5) 0 0 0
</TABLE>
(1) Represents assumed market value of 300,000 shares at date of grant.
(2) Includes 75,000 shares of common stock underlying options owned of record
by I. Marilyn Hertz, Eli Hertz's wife.
(3) Includes 133,333 shares of common stock underlying options owned of record
by I. Marilyn Hertz, Eli Hertz's wife.
(4) Options canceled without having been exercised, including 33,333 shares
that were issued to I. Marilyn Hertz, Eli Hertz' wife.
(5) Represents market value of 50,000 shares at date of grant.
Compensation Arrangements
Employment Agreement with Eli Hertz, Chief Executive Officer of Hergo
Our Hergo Ergonomic Support Systems, Inc. subsidiary has an employment
agreement with Eli E. Hertz. Under the agreement, Hergo will employ Mr. Hertz as
Chief Executive Officer of Hergo at an annual salary of $250,000 plus a bonus of
25% of the total gross profits from sales of products and services by that
subsidiary. Mr. Hertz will also be entitled to participate in employee benefit
plans maintained by Hergo for its executives, and other fringe benefits
including life insurance of at least $2 million. Under the agreement, options
presently held by Mr. Hertz on 891,667 shares of our common stock will vest
immediately and will remain exercisable until expiration regardless of whether
Mr. Hertz remains employed by Hergo. Mr. Hertz is to have overall and complete
authority over the conduct of Hergo with a minimum of interference from the
Board of Directors, and Hergo is to be kept as a separate operating entity
substantially as constituted when the merger became effective. The agreement is
to have a term of five years. It may not be terminated by Hergo except for
disability or for cause or if Hergo's tangible net worth falls below $100,000
for reasons other than those related to interference by us with Mr. Hertz's
management of the subsidiary. If the agreement is terminated before the end of
its term for reasons other than disability, reduction of Hergo's net worth or
for cause, the subsidiary is required to pay Mr. Hertz a lump sum equal to the
amount of base compensation he would have received if his employment had not
been terminated. We have surrendered our lease at 75 Varick Street to the
landlord for approximately $240,000 of which Hergo will receive half and our
parent will receive the remainder.
41
<PAGE>
Consulting Agreement with Eli E. Hertz
We have a consulting agreement with Eli E. Hertz. Under that agreement,
Mr. Hertz will provide counsel and advice in connection with the transition in
the change of control resulting from the merger. For these services, Mr. Hertz
will be entitled to $125,000 per year payable in advance of each contract year.
In addition, we are to provide Mr. Hertz with two luxury automobiles and related
expenses and coverage for himself and his wife under all health insurance plans
made available by us to our employees. If we sell or dispose of the stock or
assets of our Hertz Computer, Edutec or RemoteIT subsidiaries during the term of
the agreement or within two years after its termination, we will pay Mr. Hertz,
in addition, 15%, or 35% in the case of Remote, of the consideration received
from the sale or disposition.
Employment Agreement with Barry Goldsammler, Chief Financial Officer
We have an employment agreement with Barry Goldsammler. Under that
agreement, we will employ Mr. Goldsammler as Chief Financial Officer at an
annual salary of $125,000. Mr. Goldsammler will also be entitled to participate
in employee benefit plans maintained by us for our executives and to other
fringe benefits. Under the agreement, options presently held by Mr. Goldsammler
on 156,667 shares of our common stock will vest immediately and will remain
exercisable until expiration regardless of whether Mr. Goldsammler remains
employed by us. The agreement is to have a term of one year. It may not be
terminated by us except for cause. If the agreement is terminated before the end
of its term for reasons other than disability or for cause, we are required to
pay Mr. Goldsammler a lump sum equal to the amount of base compensation he would
have received if his employment had not been terminated.
Employment Agreement with I. Marilyn Hertz, Vice President of Hergo
Our Hergo subsidiary has an employment agreement with I. Marilyn Hertz,
the wife of Eli Hertz. Under that agreement, Hergo will employ Mrs. Hertz as a
part-time senior executive at an annual salary of $95,000. Mrs. Hertz will also
be entitled to participate in employee benefit plans maintained by Hergo for its
executives, and to other fringe benefits, including life insurance of not less
than $1 million. Under the agreement, options presently held by Mrs. Hertz on
208,333 shares of our common stock will vest immediately and will remain
exercisable until expiration regardless of whether Mrs. Hertz remains employed
by Hergo. The agreement is to have a term of two years. It may not be terminated
by Hergo except for disability or for cause or if Hergo's tangible net worth
falls below $100,000 for reasons other than those resulting from interference by
the Board of Directors in the management of Hergo. If the agreement is
terminated before the end of its term for reasons other than disability,
reduction of Hergo's net worth or for cause, Hergo is required to pay Mrs. Hertz
a lump sum equal to the amount of base compensation she would have received if
her employment had not been terminated.
Stock Option Plan
Our stock option plan provides for the grant of options intended to
qualify as "incentive stock options" or options that are not intended to so
qualify or "nonstatutory stock options". The total number of shares of common
stock reserved for issuance under the plan is 2,250,000, subject to adjustment
in the event of a stock split, stock dividend, recapitalization or similar
capital change. As of November 21, 2000, we have granted 334,451 options under
the plan, of which 24,220 have been exercised.
42
<PAGE>
The plan is presently administered by our board of directors, which
selects the eligible persons to whom options shall be granted, determines the
number of common shares subject to each option, the exercise price therefor and
the periods during which options are exercisable, interprets the provisions of
the plan and, subject to certain limitations, may amend the plan. Each option
granted under the plan shall be evidenced by a written agreement between us and
the optionee.
Options may be granted to our employees (including officers) and directors
and certain or our consultants and advisors.
The exercise price for incentive stock options granted under the plan may
not be less than the fair market value of the common stock on the date the
option is granted, except for options granted to 10% stockholders which must
have an exercise price of not less than 110% of the fair market value of the
common stock on the date the option is granted. The exercise price for
nonstatutory stock options is determined by the board of directors. Incentive
stock options granted under the plan have a maximum term of ten years, except
for 10% stockholders who are subject to a maximum term of five years. The term
of nonstatutory stock options is determined by the board of directors. Options
granted under the plan are not transferable, except by will and the laws of
descent and distribution.
Limitation on Liability and Indemnification of Directors and Officers
Our certificate of incorporation eliminates the personal liability of
directors to us and our stockholders for monetary damages for breach of
fiduciary duty as a director to the fullest extent permitted by Section 102 of
the Delaware General Corporation Law. However, this provision shall not
eliminate or limit the liability of a director:
o for any breach of the director's duty of loyalty to us or our
stockholders,
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
o arising under Section 174 of the Delaware General Corporation Law
(with respect to unlawful dividend payments and unlawful stock
purchases or redemptions), or
o for any transaction from which the director derived an improper
personal benefit.
Additionally, included in our certificate of incorporation and bylaws are
provisions to indemnify our directors, officers, employees and agents and to
purchase insurance with respect to liability arising out of the performance of
their duties as directors, officers, employees and agents as permitted by
Section 145 of the Delaware General Corporation Law. The Delaware General
Corporation Law provides further that indemnification shall not be deemed
exclusive of any other rights to which the directors, officers, employees and
agents may be entitled under a company's bylaws, any agreement, vote of
stockholders or otherwise.
The effect of the foregoing is to require us, to the extent permitted by
law, to indemnify our officers, directors, employees and agents for any claim
arising against such persons in their official capacities if such person acted
in good faith and in a manner that he reasonably believed to be in or not
opposed to our best interests, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
We have directors' and officers' liability insurance with $5 million
coverage.
43
<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth information concerning stock options
granted to each of the executives named in the Summary Compensation Table for
the fiscal year ending August 31, 2000:
<TABLE>
<CAPTION>
Percentage of Total
Number of Shares of Options Granted Exercise
Underlying to Employees Price Expiration
Name Options Granted During Fiscal Year Per Share Date
---- --------------- ------------------ --------- ----
<S> <C> <C> <C> <C>
Matthew Sebal 0 0% -- --
Eli E. Hertz 400,000(1) 74% $2.69 2/16/05
Barry Goldsammler 70,000 13% $2.69 2/16/05
</TABLE>
(1) Includes 75,000 shares underlying options owned of record by I. Marilyn
Hertz, Eli Hertz's wife.
Options Exercised in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth certain information concerning the number
of shares of common stock received upon exercise and the number of shares of
common stock covered by both exercisable and unexercisable stock options as of
August 31, 2000. Also reported are values of "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding stock options and the last sale price of our common stock as of
August 31, 2000 - $2.69 - as reported by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
Shares Number of Shares Underlying Value of Unexercised
Acquired on Value Unexercised Options In-the-Money Options
Name Exercise Realized at Fiscal Year-End at Fiscal Year-End
---- -------- -------- ------------------ ------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Matthew Sebal 0 0 0 0 0 0
Eli E. Hertz 0 0 1,100,000(1) 0 $1,295,000(2) 0
Barry Goldsammler 0 0 156,667 0 $160,334 0
</TABLE>
(1) Includes 208,333 shares underlying options owned of record by I. Marilyn
Hertz, Eli Hertz' wife.
(2) Includes $385,416 of value of unexercised in-the-money options at fiscal
year end owned of record by Mrs. Hertz.
Long Term Incentive Plans
Under the employment agreement between our Hergo subsidiary and Eli E.
Hertz, Mr. Hertz is entitled to a bonus of 25% of the total gross profits from
sales of products and services by Hergo. The bonus is determined on a quarterly
basis payable quarterly within 45 days after the end of each fiscal quarter
during his employment with Hergo. At Mr. Hertz's election, estimated monthly
payments may be made on account of incentive compensation based on monthly sales
and gross profits. Under the agreement, gross profit means:
44
<PAGE>
o total sales based on the invoice price of all sales of products and
services less taxes and freight subject to appropriate retroactive
adjustment if such invoice is not collected in full within six months;
o less cost of such goods or services,
all as determined in accordance with general accounting principles consistent
with past practice. Because our Hergo operations have not shown a profit in the
past two years, we can not reasonably estimate the amount that will be payable
to Mr. Hertz over the term of his employment contract.
Directors's Compensation and Committees
We have not paid and do not presently propose to pay compensation to any
director for acting in such capacity, except for the grant of shares of common
stock or options and reimbursement for reasonable out-of-pocket expenses in
attending meetings.
We have two formal committees:
o the Audit Committee, which consists of Michael Hillerbrand, Robert Blagman
and Dale Vander Geissen; and
o the Compensation Committee, which consists of Michael Hillerbrand and Dale
Vander Geissen.
The functions of the Audit Committee include:
o monitoring our financial reporting process and internal control systems;
o reviewing and appraising the audit efforts of our independent accountants
and internal auditing functions;
o reviewing compliance with laws and regulations under which we are required
to operate, including compliance with the Nasdaq corporate governance
standards; and
o providing an open avenue of communication among our independent
accountants, financial and senior management, internal auditing department
and Board of Directors.
The Compensation Committee is responsible for establishing compensation
arrangements for officers and directors, reviewing benefit plans and
administering our stock option plans.
The Board of Directors does not have a standing nominating committee.
Nominations for election to the Board of Directors may be made by the Board of
Directors or by any shareholder entitled to vote for the election of directors
in accordance with our bylaws and Delaware Law.
Meetings may be held from time to time to consider matters for which
approval of our Board of Directors is desirable or is required by law. Our Board
of Directors met three times during fiscal year 2000 and did not act on any
matters by written consent. Each of Bruce Borner, Beryl Ackerman and Marilyn
Hertz was absent a meeting. Eli Hertz and Marilyn Hertz were absent from the
board meeting to approve the merger as they were interested parties to the
merger. Our Audit and Compensation Committees did not meet during fiscal 2000.
Functions of those committees were acted upon by our full Board.
45
<PAGE>
Executives' Compensation Policies
Compensation of our executives is intended to attract, retain and award
persons who are essential to the corporate enterprise. The fundamental policy of
our executive compensation program is to offer competitive compensation to
executives that appropriately rewards the individual executive's contribution to
corporate performance. The Board of Directors utilizes subjective criteria for
evaluation of individual performance and relies substantially on our executives
in doing so. The Board focuses on two primary components of our executives
compensation program, each of which is intended to reflect individual and
corporate performance: base salary and long-term incentive compensation.
Executives' base salaries are determined primarily by reference to
compensation packages for similarly situated executives of companies of similar
size or in comparable lines of business with whom we expect to compete for
executive talent and with reference to revenues, gross profits and other
financial criteria. The Board also assesses subjective qualitative factors to
discern a particular executive's relative value to the corporate enterprise in
establishing base salaries.
It is the Board's philosophy that significant stock ownership by
management creates a powerful incentive for executives to build long-term
shareholder value. Accordingly, the Board believes that an integral component of
executive compensation is the award of equity-based compensation, which is
intended to align executives' long-term interests with those of our
shareholders. Awards of stock options to executives have historically been at
then-current market prices. The Board believes that option grants should be
considered on an annual basis.
--------------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------------------------
The following table sets forth information regarding the beneficial
ownership of our common stock as of November 9, 2000. The information in this
table provides the ownership information for:
o each person known by us to be the beneficial owner of more than 5%
of our common stock,
o each of our directors,
o each of our executive officers, and
o our executive officers, directors and director nominees as a group.
Beneficial ownership has been determined in accordance with the rules and
regulations of the SEC and includes voting or investment power with respect to
the shares. Unless otherwise indicated, the persons named in the table below
have sole voting and investment power with respect to the number of shares
indicated as beneficially owned by them. Unless otherwise indicated, the address
of each person named below is c/o Return Assured Incorporated, 1901 Avenue of
the Stars, Suite 1710, Los Angeles, California 90067.
46
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Owner Amount of Beneficial Ownership Percentage Owned*
------------------------- ------------------------------ -----------------
<S> <C> <C>
Eli E. Hertz (1) 1,446,877 17.57%
KGL Investments Ltd. (2) 664,000 9.01%
630 Third Avenue, 5th Floor
New York, NY 10017
John A. Carter 600,000 8.41%
Michael Mulberry 600,000 8.41%
Ascension Holdings Ltd. (3) 450,000 6.05%
Temple Building, P.O. Box 228
Tropicana Place, Leeward Highway
Providenciales, Turks & Caicos Island, BWI
Matthew Sebal 300,000 4.21%
Barry Goldsammler (4) 206,667 2.83%
Robert Blagman 45,000 (less than) 1.00%
Dale Vander Geissen 45,000 (less than) 1.00%
Michael Hillerbrand 0 (less than) 1.00%
All Executive Officers and Directors a group (6 1,196,667 16.41%
persons).
</TABLE>
(1) Includes 207,477 shares owned either by his wife, I. Marilyn Hertz, or he
and his wife jointly. Includes 400,000 shares of common stock issuable
upon exercise of stock options at an exercise price of $2.69 per share and
700,000 shares of common stock issuable upon exercise of stock options at
an exercise price of $0.84 per share, all of which are currently
exercisable.
(2) Includes 220,000 shares of common stock issuable upon exercise of warrants
at an exercise price of $1.00 and 14,000 shares of common stock issuable
upon exercise of warrants at an exercise price of $1.43 per share.
Excludes 333,333 shares of common stock issuable upon exercise of warrants
at an exercise price of $3.00 per share, which warrants have been granted
but are not yet exercisable nor exercisable within 60 days of November 17,
2000.
(3) Includes 300,000 shares of common stock issuable upon exercise of warrants
at an exercise price of $1.00 per share all of which are currently
exercisable.
(4) Includes 156,667 shares of common stock issuable upon exercise of stock
options of which 70,000 are exercisable at an exercise price of $2.69 per
share 86,667 are exercisable at an exercise price of $0.84 per share.
We have not contacted stock brokerage firms holding shares of our common
stock in "street name" to determine whether there are additional substantial
holders of our common stock.
47
<PAGE>
--------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------------------------------
Related party transactions in connection with the merger
Stock Redemption Agreement with Eli E. Hertz and I. Marilyn Hertz
When the merger was completed, we purchased from Eli E. Hertz and I.
Marilyn Hertz a total of 115,385 shares of common stock for $435,000 cash and a
$290,000 principal amount, 10% promissory note due April 17, 2001.
Employment Agreements and Consulting Agreement
At the closing of the merger, we entered into several employment and
consulting agreements with former officers of Hertz Technology Group. See
"Executive Compensation - Compensation Arrangements - Employment Agreement with
Eli Hertz, Chief Executive Officer President of Hergo", "- Consulting Agreement
with Eli E. Hertz", "- Employment Agreement with Barry Goldsammler, Chief
Financial Officer", and "- Employment Agreement with I. Marilyn Hertz, Vice
President of Hergo". Mr. Hertz is also entitled to a bonus based on the
performance of Hergo. See "Executive Compensation - Long Term Incentive Plans".
Related party transactions by Return Assured prior to the merger
Consulting Agreement with Blagman Media
We have retained Blagman Media International, Inc., a global direct
response marketing and advertising agency, to develop media, telemarketing and
fulfillment strategies, and to provide us with office space in its Los Angeles
offices, under a contract dated September 20, 2000. One of our directors, Robert
Blagman, is President and a principal stockholder of Blagman Media. We pay
Blagman Media $120,000 per year under the agreement. The agreement was
terminated in November 2000.
Issuance of Stock
We issued shares of our common stock to various officers and directors of
our company, including members of our past and current board members - John A.
Carter, Matthew Sebal, Michael Mulberry, Dale Vander Geissen and Robert Blagman.
See "Market for Common Equity and Related Stockholder Matters - Recent sales of
securities - By our Return Assured subsidiary prior to the merger".
Related party transactions by us prior to the merger
None.
Related party transactions after the merger
None.
We believe that the terms of the above transactions are commercially
reasonable and no less favorable to us than we could have obtained from an
unaffiliated third party on an arm's length basis. To the extent we may enter
into any agreements with related parties in the future, the board of directors
has determined that such agreements must be on similar terms.
48
<PAGE>
--------------------------------------------------------------------------------
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Financial Statements Page
----
<S> <C>
Financial Statements of Hertz Technology Group Inc. (now known as Return Assured Incorporated). F-1
Report of Goldstein Golub Kessler LLP, Independent Auditors F-2
Consolidated Balance Sheet as of August 31, 2000 and 1999 F-3
Consolidated Statement of Operations for the years ended
August 31, 2000 and 1999 F-4
Consolidated Statement of Shareholders' Equity for the years ended
August 31, 2000 and 1999 F-5
Consolidated Statement of Cash Flows for the years ended
August 31, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7 - F-17
Financial Statements of Return Assured Incorporated, a Nevada corporation F-18
Report of Pannell Kerr Forster P.C., Independent Chartered Accountants F-19
Balance Sheet as of August 31, 2000 and 1999 F-20
Statements of Operations for the year ended August 31, 2000, the period
from June 10, 1999 (inception) through August 31, 1999 and the period
from June 10, 1999 (inception) through August 31, 2000 F-21
Statement of Stockholders' Equity (Deficiency) for the year ended
August 31, 2000 and the period from June 10, 1999 (inception) through
August 31, 1999 F-22
Statements of Cash Flows for the year ended August 31, 2000, the period
from June 10, 1999 (inception) though August 31, 1999 and the period
from June 10, 1999 (inception) through August 31, 2000 F-23
Notes to Financial Statements F-24 - F-32
Pro Forma Financial Statements F-33
Pro Forma Balance Sheet as of August 31, 2000 F-34
Notes to Pro Forma Balance Sheet F-35
Pro Forma Statement of Operations for the year ended August 31, 2000 F-36
Notes to Pro Forma Statement of Operations F-37
Pro Forma Statement of Operations for the year ended August 31, 1999 F-38
Notes to Pro Forma Statement of Operations F-39
</TABLE>
49
<PAGE>
Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
Exhibits
The following exhibits are included as part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Title of Document
--------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment of Certificate of Incorporation (2)
3.3 By-Laws (1)
3.4 Certificate of Designations of Series A of Preferred Stock (2)
4.1 Specimen Stock Certificate *
4.2 Form of Redeemable Warrant (1)
4.3 Warrant Agreement (1)
10.1 1996 Stock Option Plan (3)
10.2 Employment Agreement between Hergo Ergonomic Support Systems, Inc. and Eli E.
Hertz (2)
10.3 Employment Agreement between Hergo Ergonomic Support Systems, Inc. and I.
Marilyn Hertz (2)
10.4 Employment Agreement between Return Assured Incorporated and Barry Goldsammler
(2)
10.5 Consulting Agreement between Return Assured Incorporated and Eli Hertz (2)
10.6 Series A Preferred Stock Purchase Agreement between Return Assured Incorporate
and GEM Global Yield Fund Limited date July 13, 2000 (2)
10.7 Statement of Work for Time Based Projects between IBM and Return Assured
Incorporated*
</TABLE>
50
<PAGE>
<TABLE>
<S> <C>
10.8 Office Lease between P. Sun's Enterprises (Vancouver) Ltd. and A Sure
eCommerce, Inc. dated May 1, 2000*
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 (1)
10.10 [Omitted]
10.11 Agreement between Symposium Corporation Inc. and Return Assured Incorporated*
10.12 Portal Agreement between eBrick Inc and Return Assured Incorporated*
10.13 Form of Lloyd's of London Inc (Hiscox) Cyber Insurance Policy*
10.14 Portal Agreement between Liquor.com, Inc. and Return Assured Incorporated*
10.15 Form of Merchant Agreement*
21 Subsidiaries of the Registrant*
23.1 Consent of Goldstein Golub Kessler LLP*
23.2 Consent of Pannell Kerr Forster P.C.*
27.1 Financial Data Schedule*
</TABLE>
* Filed herewith
(1) Incorporated by reference to Form SB-2, as amended, filed with the
Securities and Exchange Commission (SEC File No. 333-9783).
(2) Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on October 20, 2000.
(3) Incorporated by reference to Form S-8 filed with the Securities and
Exchange Commission on April 18, 2000.
(b) On October 20, 2000, we filed a Current Report on Form 8-K
disclosing the closing of the merger of Hertz Technology Group, Inc.
and Return Assured Incorporated. We are including in this Annual
Report on Form 10-KSB, the financial statements and pro forma
financial statements required to be filed under Item 7 of Form 8-K.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on it behalf by the undersigned, thereunto duly authorized.
RETURN ASSURED, INC.
Dated: December 12 2000 By: /s/ MATTHEW SEBAL
-----------------
Matthew Sebal
President & Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 12th day of December,
2000.
By: /s/ MATTHEW SEBAL
-----------------
Matthew Sebal
President and Chairman of the Board
By: /s/ MICHAEL HILLERBRAND
------------------------
Michael Hillerbrand
Director
By: /s/ JOHN A. CARTER
------------------
John A. Carter
Director
By: /s/ ROBERT BLAGMAN
-------------------
Robert Blagman
Director
By: /s/ DALE VANDER GEISSEN
------------------------
Dale Vander Geissen
Director
By: /s/ BARRY GOLDSAMMLER
---------------------
Barry Goldsammler
Chief Financial Officer
By: /s/ MICHAEL SWEATMAN
--------------------
Michael Sweatman
Vice President of Finance and
Chief Accounting Officer
52
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Independent Auditor's Report F-2
Consolidated Financial Statements:
Balance Sheet F-3
Statement of Operations F-4
Statement of Changes in Shareholders' Equity F-5
Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-17
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Hertz Technology Group, Inc.
We have audited the accompanying consolidated balance sheets of Hertz Technology
Group, Inc. and Subsidiaries as of August 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 audits provide 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, 2000 and 1999 and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
October 26, 2000
F-2
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
August 31, 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 147,404 $ 32,456
Marketable securities 657,359 1,592,158
Accounts receivable, net of allowance for doubtful accounts of
$63,000 and $96,133, respectively 766,079 1,033,726
Inventories 476,506 669,601
Prepaid expenses and other current assets 101,857 282,790
---------------------------------------------------------------------------------------------
Total current assets 2,149,205 3,610,731
Property and Equipment, net 1,304,762 1,783,728
Goodwill, net of accumulated amortization of $109,848 and
$86,349, respectively 119,762 244,284
Deferred Income Taxes -- 136,173
Other Assets 76,940 308,075
---------------------------------------------------------------------------------------------
Total Assets $ 3,650,669 $ 6,082,991
=============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 291,839 $ 261,688
Accrued expenses and other current liabilities 152,293 237,570
Current portion of capital lease obligation 59,102 46,974
Current portion of notes payable 3,484 126,666
---------------------------------------------------------------------------------------------
Total current liabilities 506,718 672,898
Capital Lease Obligation, net of current portion 182,110 194,318
Notes Payable 15,683 126,667
---------------------------------------------------------------------------------------------
Total liabilities 704,511 993,883
---------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 9)
Shareholders' Equity:
Common stock - $.001 par value; authorized 6,000,000 shares;
issued 2,527,460 and 2,306,950 shares, respectively 2,528 2,307
Additional paid-in capital 6,032,787 5,837,889
Accumulated deficit (2,803,141) (465,072)
Less treasury stock, 177,868 shares, at cost (286,016) (286,016)
---------------------------------------------------------------------------------------------
Shareholders' equity 2,946,158 5,089,108
---------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 3,650,669 $ 6,082,991
=============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Year ended August 31, 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 6,319,304 $ 6,881,838
Cost of sales 3,848,414 3,542,941
---------------------------------------------------------------------------------------------
Gross profit 2,470,890 3,338,897
Selling, general and administrative expenses (4,148,536) (4,001,717)
Impairment loss on assets (604,800) --
---------------------------------------------------------------------------------------------
Operating loss (2,282,446) (662,820)
Other income (expense) 43,540 (7,224)
Interest income, net of interest expense of $40,025 and $27,145,
respectively 37,010 85,173
---------------------------------------------------------------------------------------------
Loss before benefit for income taxes (2,201,896) (584,871)
Provision for income taxes 136,173 110,000
---------------------------------------------------------------------------------------------
Net loss $(2,338,069) $ (694,871)
=============================================================================================
Loss per common share - basic and diluted $ (1.08) $ (.33)
=============================================================================================
Weighted-average number of common shares outstanding - basic
and diluted 2,158,861 2,132,777
=============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Treasury Stock Total
----------------------- Paid-in (Accumulated --------------------- Shareholders'
Shares Amount Capital Deficit) Shares Amount Equity
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 1, 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
Sale of common stock 100,000 100 174,900 -- -- -- 175,000
Issuance of common stock 100,000 100 (100) -- -- -- --
Exercise of stock options 20,510 21 20,098 -- -- -- 20,119
Net loss -- -- -- (2,338,069) -- -- (2,338,069)
---------------------------------------------------------------------------------------------------------------------------------
Balance at August 31, 2000 2,527,460 $ 2,528 $ 6,032,787 $(2,803,141) 177,868 $ (286,016) $ 2,946,158
=================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Year ended August 31, 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,338,069) $ (694,871)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 590,015 426,241
Amortization of goodwill 68,343 59,347
Provision for doubtful accounts (33,133) (34,696)
Deferred income taxes 136,173 110,000
Impairment loss on assets 604,800 --
Changes in operating assets and liabilities:
Decrease in marketable securities 934,799 167,836
Decrease in accounts receivable 300,780 1,363,000
Decrease in inventories 193,095 39,627
Decrease (increase) in prepaid expenses and other current assets 180,933 (98,771)
Decrease in other assets 25,213 11,974
Decrease in accounts payable, accrued expenses and other
current liabilities (55,126) (533,731)
---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 607,823 815,956
---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (308,509) (437,278)
Software development costs (100,239) (171,559)
---------------------------------------------------------------------------------------------------
Cash used in investing activities (408,748) (608,837)
---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of notes payable (234,166) (133,807)
Repayment of capital lease obligations (45,080) (3,122)
Purchase of treasury stock -- (177,988)
Proceeds from sale of common stock 175,000 --
Proceeds from exercise of stock options 20,119 --
---------------------------------------------------------------------------------------------------
Net cash used in financing activities (84,127) (314,917)
---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 114,948 (107,798)
Cash and cash equivalents at beginning of year 32,456 140,254
---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 147,404 $ 32,456
===================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 42,239 $ 24,931
===================================================================================================
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock relating to purchase of subsidiaries -- $ 65,750
===================================================================================================
Capital lease obligations incurred $ 45,000 $ 244,414
===================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. PRINCIPAL The consolidated financial statements include the
BUSINESS accounts of Hertz Technology Group, Inc.
ACTIVITY AND ("Hertz-Tech") and its wholly owned subsidiaries
SUMMARY OF (hereinafter collectively referred to as the
SIGNIFICANT "Company"). The Company's subsidiaries include Hertz
ACCOUNTING Computer Corporation ("Hertz Computer"), Hergo
POLICIES: Ergonomic Support Systems, Inc. ("Hergo") and Edutec
Computer Education Institute, Inc. ("Edutec"). As
further described in Note 6, 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.
In July 2000, Asure Acquisition Corporation
("Acquisition Corp."), a wholly-owned subsidiary of
the Company, was formed to facilitate a merger with A
Sure eCommerce, Inc. ("A Sure") (see Note 14). In
conjunction with this merger, subsequent to year-end
the Company changed the name of Hertz-Tech to Return
Assured Incorporated ("Return Assured").
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.
During the year ended August 31, 2000 the Company
reduced many of the functions of Hertz Computer and
transferred the remaining operations to RemoteIT. In
addition, the Company has terminated the lease for
the Edutec training facilities and plans to
discontinue Edutec services in December 2000.
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
the Company 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.
F-7
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
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 determined that property and equipment
with a net book value of approximately $242,000,
including approximately $51,000 from Hergo and
approximately $191,000 from the Technology Group, was
impaired. The Company plans to dispose of these
assets in December 2000. An impairment charge for the
net book value was recorded during the year ended
August 31, 2000 and is included in impairment loss on
assets on the consolidated statement of operations
for the year ended August 31, 2000.
During the year ended August 31, 2000, the Company
decided to change the focus of the products and
services sold by the Technology Group. The new plans
call for a significant reduction of Hertz-brand
computer sales. The Company therefore determined that
the trademark value of the Hertz name, approximately
$34,000, may not be recoverable. The asset was
written off and the charge is included in impairment
loss on assets on the consolidated statement of
operations for the year ended August 31, 2000.
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.
During the years ended August 31, 2000 and 1999 the
Company capitalized the costs of developing an
internet store to be used primarily for the sales of
Hertz-brand computers. Approximately $172,000 of
internal-use software costs were capitalized and
included in other assets at August 31, 1999. An
additional $100,000 was capitalized during the year
ended August 31, 2000. Due to the business changes in
the Technology Group, the Company abandoned the
majority of the software developed and wrote off
approximately $272,000 of software development costs.
The charge is included in impairment loss on assets
on the consolidated statement of operations for the
year ended August 31, 2000.
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.
F-8
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
During the year ended August 31, 2000, the Company
decided not to renew a service contract with Edutec's
primary customer. In addition, the Company no longer
plans to offer training facility services. As a
result, the Company wrote off the net carrying value
of goodwill arising from the purchase of Edutec of
approximately $56,000. This charge is included in
impairment loss on assets on the consolidated
statement of operations for the year ended August 31,
2000.
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 2000 and 1999 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
SECURITIES: debt securities at August 31, 2000 and of equity and
debt securities at August 31, 1999 and are classified
as trading securities. Trading securities are
recorded at fair value, with the change in fair value
during the period included in operations.
Net unrealized holding losses on trading securities
amounted to $9,139 and $23,281 for the years ended
August 31, 2000 and 1999, respectively.
3. INVENTORIES: Inventories consist of the following:
August 31, 2000 1999
---------------------------------------------------
Components $ 6,219 $ 52,143
Raw materials 57,684 104,271
Work-in-process 11,488 22,053
Finished goods 401,115 491,134
---------------------------------------------------
$476,506 $669,601
===================================================
F-9
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. PROPERTY AND Property and equipment, at cost, consists of:
EQUIPMENT:
<TABLE>
<CAPTION>
Depreciation/
Amortization
August 31, 2000 1999 Period
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture, fixtures and office
equipment $ 144,264 $ 464,716 5-7 years
Warehouse equipment 1,387,619 1,438,280 5 years
Leasehold improvements 878,989 705,434 Term of lease
Vehicles 88,852 94,391 3 years
----------------------------------------------------------------------------------------
2,499,724 2,702,821
Less accumulated depreciation
and amortization 1,194,962 919,093
----------------------------------------------------------------------------------------
$1,304,762 $1,783,728
========================================================================================
</TABLE>
Property and equipment includes amounts acquired
under capital leases of approximately $290,000 and
$245,000 at August 31, 2000 and 1999, respectively.
Amortization of these assets is included in
depreciation and amortization expense. Accumulated
amortization of these assets amounted to
approximately $79,000 and $23,000 at August 31, 2000
and 1999, respectively.
5. NOTES PAYABLE: Notes payable consist of the following:
<TABLE>
<CAPTION>
August 31, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
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
Other $ 19,167 --
--------------------------------------------------------------------------------
19,167 253,333
Less current portion 3,484 126,666
--------------------------------------------------------------------------------
Long-term portion $ 15,683 $126,667
================================================================================
</TABLE>
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.
The note payable to an officer of LAN was paid in
full during the year ended August 31, 2000. Interest
expense on the notes amounted to $10,662 and $18,429
for the years ended August 31, 2000 and 1999,
respectively.
F-10
<PAGE>
6. ACQUISITION: In February 1999, the Company acquired all of the
outstanding stock of RemoteIT.com in exchange for the
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; revenue, net loss and loss per
share would not have been significantly impacted.
7. CAPITAL LEASE The Company leases property and equipment under
OBLIGATIONS: capital leases which expire at various dates through
April 2005. The leases require 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:
<TABLE>
<CAPTION>
Year ending August 31,
<S> <C>
2001 $ 77,000
2002 75,000
2003 71,000
2004 51,000
2005 7,000
--------------------------------------------------------------------------------
281,000
Less amount representing interest 40,000
--------------------------------------------------------------------------------
241,000
Less current maturities 59,000
--------------------------------------------------------------------------------
Capital lease obligations, less current maturities $182,000
================================================================================
</TABLE>
8. INCOME TAXES: The provision for income taxes for the years ended
August 31, 2000 and 1999 consists of the following
components:
<TABLE>
<CAPTION>
Year ended August 31, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Current:
Federal -- --
State and local -- --
Deferred:
Federal $ 95,321 $ 77,000
State and local 40,852 33,000
--------------------------------------------------------------------------------
$136,173 $110,000
================================================================================
</TABLE>
F-11
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The provision for income taxes for the years ended
August 31, 2000 and 1999 differs from the amount
computed using the federal statutory rate of 34% as a
result of the following:
<TABLE>
<CAPTION>
Year ended August 31, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Tax benefit at federal statutory rate (34)% (34)%
State and local income tax provision net of
federal tax effect (6) (6)
Increase in deferred tax asset valuation allowance 46 59
--------------------------------------------------------------------------------
6% 19%
================================================================================
</TABLE>
The approximate tax effects of temporary differences
that give rise to the net short-term deferred income
tax asset are presented below:
<TABLE>
<CAPTION>
Year ended August 31, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Reserve for bad debts $ 25,000 $ 38,000
Sales tax accrual 20,000
Unrealized losses on marketable securities 15,000 12,000
Capitalized inventory -- 8,000
Contributions carryforward 15,000 13,000
--------------------------------------------------------------------------------
Total short-term deferred income tax asset 55,000 91,000
Valuation allowance (55,000) (91,000)
--------------------------------------------------------------------------------
Net short-term deferred income tax asset $ - 0 - $ - 0 -
================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended August 31, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Federal net operating loss carryforwards $ 911,000 $ 473,995
State and local net operating loss carryforwards 412,000 205,404
Deferred rent 11,120
Depreciation 59,000 (4,570)
Basis difference in amortization of intangibles 30,000 21,224
--------------------------------------------------------------------------------
Total long-term deferred income tax asset 1,412,000 707,173
Valuation allowance (1,412,000) (571,000)
--------------------------------------------------------------------------------
Net long-term deferred income tax asset $ - 0 - $ 136,173
================================================================================
</TABLE>
F-12
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
At August 31, 2000, the Company has a federal net
operating loss carryforward of approximately
$3,300,000 available to offset taxable income through
2020. The Company also has state operating loss
carryforwards aggregating approximately $3,300,000
which expire through 2015. 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.
The net operating loss carryforwards will be subject
to annual limitations as a result of the merger
described in Note 14.
9. COMMITMENTS AND The Company is obligated under noncancelable
CONTINGENCIES: operating leases for warehouse and office space
expiring at dates through July 2005. In addition, the
Company has two operating leases for automobiles
expiring at dates through June 2003. The aggregate
approximate minimum future payments under these
leases are payable as follows:
Year ending August 31,
2001 $182,000
2002 112,000
2003 3,000
---------------------------------------
$297,000
---------------------------------------
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
$418,000 and $272,000 for the years ended August 31,
2000 and 1999, respectively.
The Company has employment agreements with five key
employees and a consulting agreement with one of
these employees expiring through October 2005. The
aggregate approximate minimum commitment for future
salaries and fees are as follows:
Year ending August 31,
2001 $ 600,000
2002 486,000
2003 345,000
2004 345,000
2005 345,000
Thereafter 43,000
---------------------------------------------------
$2,164,000
===================================================
The agreements provide for base compensation and
fringe benefits. One of the agreements provides for
additional compensation based on the gross profit on
certain sales, as defined.
F-13
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. 401(k) PLAN: In January 1999, the Company adopted an employee
savings 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 $27,000 and $24,000 for the years ended
August 31, 2000 and 1999, respectively.
11. SEGMENT INFORMATION: The Company operates primarily in two industry
segments: (i) Technology Group and (ii) Hergo. The
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, 2000:
<TABLE>
<CAPTION>
Technology
Group Hergo Other Consolidated
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales (unaffiliated) $ 1,236,132 $ 5,083,172 $ 6,319,304
Gross profit 146,014 2,324,876 2,470,890
Operating loss (777,147) (1,277,943) (227,356) (2,282,446)
Assets 440,395 2,356,765 853,509 3,650,669
Capital expenditures 4,721 348,788 353,509
Depreciation and
amortization expense 242,744 347,271 590,015
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At August 31, 1999:
Technology
Group Hergo Other Consolidated
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales (unaffiliated) $ 1,576,499 $ 5,305,339 $ 6,881,838
Gross profit 347,757 2,991,140 3,338,897
Operating loss (233,885) (210,133) $ (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 and
amortization expense 153,136 273,105 426,241
--------------------------------------------------------------------------------
</TABLE>
12. GEOGRAPHIC The Company had sales to customers in the New York
AND CUSTOMER Tri-State area of approximately 69% and 63% of net
CONCENTRATION: sales for the years ended August 31, 2000 and 1999,
respectively. Approximately 16% of net sales were to
federal, state and city agencies and
government-affiliated organizations, including
hospitals and schools, for the year ended August 31,
1999.
F-14
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
13. CAPITAL On February 16, 2000, the Company amended the number
TRANSACTIONS: of shares of common stock authorized from 3,000,000
to 6,000,000. In addition, the Company increased the
number of stock options available under its stock
option plan (the "Plan") from 500,000 to 750,000
shares.
Subsequent to year-end, the Company increased the
number of shares of common stock authorized to
50,000,000 and increased the number of stock options
available under the Plan to 2,250,000. In addition,
the Company authorized the issuance of 1,000,000
shares of preferred stock.
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.
In June 2000, the Company sold 100,000 shares of
common stock to a private investor and agreed to
register the shares in an S-3 filing within a certain
time period, as defined. The Company was required to
place an additional 100,000 shares in escrow to be
delivered to the investor if the Company defaulted on
the agreement. The Company registered the original
shares per the agreement in September 2000. The
escrow shares are eligible to be released at the
sooner of two years or upon the disposal of the
registered shares by the investor or its assignee.
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.
Under the Plan the Company may grant incentive and/or
nonqualified options to purchase shares of common
stock 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 313,941 shares of common stock
(excluding canceled shares) are outstanding under the
Plan as of August 31, 2000. In addition, options to
purchase 1,272,001 shares of common stock are
outstanding outside the Plan as of August 31, 2000.
F-15
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A summary of the status of the Company's options as
of August 31, 2000 and 1999, and changes during the
years then ended is presented below:
<TABLE>
<CAPTION>
2000 1999
-------------------------------------------------------------------------------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,090,052 $ .93 851,853 $ 6.55
Granted 537,000 2.69 1,101,452 .93
Canceled (20,600) 1.31 (863,253) 6.43
Exercised (20,510) .98 -- --
-------------------------------------------------------------------------------------
Outstanding at end of year 1,585,942 $ 1.52 1,090,052 $ .93
=====================================================================================
</TABLE>
The range of exercise prices at August 31, 2000 was
$.845 to $2.69 and the weighted-average contractual
life was approximately 4.3 years.
The weighted-average fair value of options granted
during the years ended August 31, 2000 and 1999 was
$2.28 and $ .86, respectively.
There were approximately 335,000 options exercisable
at August 31, 2000 with a weighted-average exercise
price of $ .92. No options were exercisable at August
31, 1999.
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:
<TABLE>
<CAPTION>
Year ended August 31, 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
Net loss as reported $(2,338,069) $ (694,871)
Net loss - pro forma (2,952,694) (2,297,416)
Loss per share - as reported (basic and diluted) (1.08) (.33)
Loss per share - pro forma (basic and diluted) (1.37) (1.08)
----------------------------------------------------------------------------------------
</TABLE>
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, 2000 and 1999: expected volatility of 165%
and 209%, respectively; risk-free interest rates of
6.76% and 5%, respectively; expected lives of 4
years; and no dividend yield.
F-16
<PAGE>
HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
On October 13, 2000, the Acquisition Corp. merged
with A Sure and each share of A Sure common stock was
converted into one share of Returned Assured
(formerly Hertz-Tech) common stock. Return Assured
issued 4,895,685 shares of common stock in connection
with the merger. Subsequent to the merger, an outside
investor purchased 5,000 shares of the newly created
Series A Convertible Preferred Stock for $5,000,000
and was granted a warrant to purchase up to
$1,000,000 of additional shares of Return Assured
common stock. In accounting for the transaction, the
Company was considered to be the acquiree in a
reverse merger.
F-17
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Financial Statements
August 31, 2000 and 1999
(U.S. Dollars)
INDEX Page
Report of Independent Chartered Accountants F-1
Financial Statements
Balance Sheets F-2
Statement of Operations F-3
Statement of Stockholders' Equity (Deficiency) F-4
Statement of Cash Flows F-5
Notes to Financial Statements F-6-14
F-18
<PAGE>
Pannell Kerr Forster
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
TO THE BOARD OF DIRECTORS
OF RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
We have audited the accompanying balance sheets of Return Assured Incorporated
(formerly A Sure eCommerce, Inc.) (A Development Stage Company) as at August 31,
2000 and 1999 and the related statements of operations, stockholders' equity
(deficiency) and cash flows for the year ended August 31, 2000 and initial 82
days ended August 31, 1999 and the cumulative period from June 10, 1999
(inception) through August 31, 2000. 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 audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance whether these financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in these 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 audits provide a reasonable basis for our
opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at August 31, 2000 and 1999
and the results of its operations and its cash flows for the initial 82 day
period ended August 31, 1999 and the cumulative period from June 10, 1999
(inception) through August 31, 2000 in conformity with generally accepted
accounting principles in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in note 3 to the financial
statements, the Company has no established source of revenue. This raises
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
"Pannell Kerr Forster"
Chartered Accountants
Vancouver, Canada
September 27, 2000, except for note 14(a)
which is as of October 17, 2000
[LOGO]
F-19
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Balance Sheet
August 31
(U.S. Dollars)
<TABLE>
<CAPTION>
===========================================================================================
2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $ 132,107 $ 2,674
Accounts receivable 37,759 372
Prepaid expenses (note 4) 270,599 585
-------------------------------------------------------------------------------------------
Total Current Assets 440,465 3,631
Property and Equipment (note 5) 97,036 1,016
Deferred Offering Costs (note 8(a)(iv)) 1,129,361 0
-------------------------------------------------------------------------------------------
$ 1,666,862 $ 4,647
===========================================================================================
Liabilities
Current
Accounts payable and accrued liabilities (note 6) $ 346,166 $ 14,664
Due to shareholders 0 16,302
-------------------------------------------------------------------------------------------
Total Current Liabilities 346,166 30,966
Notes Payable (note 7) 200,000 0
-------------------------------------------------------------------------------------------
Total Liabilities 546,166 30,966
-------------------------------------------------------------------------------------------
Commitment (note 11)
Contingencies (note 12)
Stockholders' Equity (Deficiency) (note 8)
Common Stock and Paid-In Capital In Excess of $0.001 Par Value
Authorized
100,000,000 Shares
Issued and outstanding
4,695,685 Shares (August 31, 1999 - 90) 3,443,212 1
Subscriptions Received 0 35,426
Other Comprehensive Income (Loss) 503 (33)
Deficit Accumulated During the Development Stage (2,323,019) (61,713)
-------------------------------------------------------------------------------------------
Total Stockholders' Equity (Deficiency) 1,120,696 (26,319)
-------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 1,666,862 $ 4,647
===========================================================================================
</TABLE>
See notes to financial statements.
F-20
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Statements of Operations
Period From June 10, 1999 (Inception) through August 31, 1999, Year Ended August
31, 2000 and period from June 10, 1999 (Inception) through August 31, 2000
(U.S. Dollars)
<TABLE>
<CAPTION>
================================================================================
Period from Period from
June 10, June 10,
1999 1999
(Inception) (Inception)
Year Ended Through Through
August 31, August 31, August 31,
2000 1999 2000
--------------------------------------------------------------------------------
<S> <C> <C> <C>
General and Administrative Expenses
Wages and salaries (note 8(a)(ii)) $ 1,102,971 $ 0 $ 1,102,971
Professional fees 216,533 10,590 227,123
Development costs 211,911 0 211,911
Financing fees 207,500 0 207,500
Travel and promotion 184,498 23,821 208,319
Consulting fees 148,646 21,317 169,963
Rent 58,494 1,655 60,149
Office and miscellaneous 46,641 4,330 50,971
Internet service and web design 29,189 0 29,189
Telephone 15,259 0 15,259
Loan receivable write-off 14,255 0 14,255
Interest and finance charges 8,592 0 8,592
Depreciation 16,817 0 16,817
--------------------------------------------------------------------------------
Net Loss for Period $(2,261,306) $ (61,713) $(2,323,019)
================================================================================
Net Loss Per Share $ (1.96)
================================================================================
Weighted Average Number of Shares 1,155,950
================================================================================
</TABLE>
See notes to financial statements.
F-21
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Statement of Stockholders' Equity (Deficiency)
Period From June 10, 1999 (Inception) to August 31, 1999 and Year Ended August
31, 2000
(U.S. Dollars)
<TABLE>
<CAPTION>
Common Shares
and Paid in Capital in Total
Excess of $0.001 Par Value Deficit Comprehensive Stockholders'
-------------------------- Accumulated during Income Subscriptions Equity
Number Amount Development stage (Loss) Received (Deficiency)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of
Common Stock
For cash
- Initial shares 90 $1 $0 $0 $0 $1
Subscriptions Received 0 0 0 0 35,426 35,426
Exchange Loss 0 0 0 (33) 0 (33)
Net Loss 0 0 (61,713) 0 0 (61,713)
------------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 1999 90 1 (61,713) (33) 35,426 (26,319)
Common Stock
Private placement 1,445,685 1,056,310 0 0 0 1,056,310
Shares issued for offering costs
For going public 340,000 486,200 0 0 0 486,200
For private placement 200,000 286,000 0 0 0 286,000
For private placement 200,000 286,000 0 0 0 286,000
Value of warrants issued in connection
with going public 0 233,726 0 0 0 233,726
Founders' and
other employees
and consultants and recapitalization 2,095,000 887,476 0 0 (35,426) 852,050
Cancellation of original shares (90) (1) 0 0 0 (1)
Financing fees 415,000 207,500 0 0 0 207,500
Exchange Gain 0 0 0 536 0 536
Net Loss 0 0 (2,261,306) 0 0 (2,261,306)
------------------------------------------------------------------------------------------------------------------------------------
Balance, August 31, 2000 4,695,685 $3,443,212 $(2,323,019) $503 $0 $1,120,696
====================================================================================================================================
</TABLE>
See notes to financial statements.
F-22
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Statement of Cash Flows
Period From June 10, 1999 (Inception) Through August 31, 1999, Year Ended August
31, 2000 and period from June 10, 1999 (Inception) Through August 31, 2000
(U.S. Dollars)
<TABLE>
<CAPTION>
==========================================================================================
Period From Period From
June 10, June 10,
1999 1999
(Inception) (Inception)
Year Ended Through Through
August 31, August 31, August 31,
2000 1999 2000
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net loss $(2,261,306) $ (61,713) $(2,323,019)
Items not involving cash
Depreciation 16,817 0 16,817
Services rendered in exchange for
shares and subscriptions 1,094,976 35,426 1,130,402
Changes in operating assets and liabilities
Accounts receivable (37,387) (372) (37,759)
Changes in amount due to shareholders (16,302) 16,302 0
Prepaid expenses (270,014) (585) (270,599)
Accounts payable and accrued liabilities 331,502 14,664 346,166
-----------------------------------------------------------------------------------------
Net Cash (Used By) Operating Activities (1,141,714) 3,722 (1,137,992)
-----------------------------------------------------------------------------------------
Investing Activities
Acquisition of property and equipment (112,837) (1,016) (113,853)
-----------------------------------------------------------------------------------------
Financing Activities
Deferred offering costs (123,435) 0 (123,435)
Issuance of notes payable 200,000 0 200,000
Issuance of common stock 1,306,883 1 1,306,884
-----------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,383,448 1 1,383,449
-----------------------------------------------------------------------------------------
Effect of Foreign Currency Translation on Cash 536 (33) 503
-----------------------------------------------------------------------------------------
Inflow of Cash 129,433 2,674 132,107
Cash, Beginning of Year 2,674 0 0
==========================================================================================
Cash, End of Year $ 132,107 $ 2,674 $ 132,107
==========================================================================================
Supplemental Disclosure of Non-Cash Items
Issue of common stock
For services (note 8(a)) $ 850,850 $ 35,426 $ 886,276
For financing fees 1,265,700 0 1,265,700
Supplemental Cash-Flow Information
Interest paid 0 0 0
Income taxes paid 0 0 0
==========================================================================================
</TABLE>
See notes to financial statements.
F-23
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Period From June 10, 1999 (Inception) to August 31, 1999, and Year Ended August
31, 2000
(U.S. Dollars)
1. ORGANIZATION AND NATURE OF OPERATIONS
The Company was incorporated under the laws of the State of Nevada on
June 10, 1999. The Company is in the development stage as more fully
defined in Statement No. 7 of the Financial Accounting Standards Board.
The Company is in the early stages of implementing its business plan
and it does not have any revenue to date. The Company intends to
provide a service that will guarantee customers who order products
through the web sites of merchant members will get the product and that
the merchant member will honor its stated return policies.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Deferred offering costs
Deferred offering costs represent costs for issuing preferred
shares and will be netted to other paid in capital when the
preferred shares are issued.
(b) Revenue recognition
As the Company is continuing to develop its technologies, no
revenues have been earned to date. Once sales have been earned
by the Company, the Company will recognize such revenues.
(c) Development expenditures
Development expenditures are charged to operations as
incurred.
(d) Depreciation
Depreciation is provided using the declining-balance method on
the following annual rates:
Computer hardware and software - 20%
Office furniture and equipment - 30%
The Company reviews long-term assets to determine if the
carrying amount is recoverable based on the estimate of future
cash flows expected to result from the use of the assets and
its eventual disposition. If in this determination there is an
apparent shortfall, the loss will be recognized as a current
charge to operations.
(e) Income taxes
The Company uses the asset and liability approach in its
method of accounting for income taxes which requires the
recognition of deferred tax liabilities and assets for
expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and
liabilities. A valuation allowance against deferred tax assets
is recorded if, based upon weighted available evidence, it is
more likely than not that some or all of the deferred tax
assets will not be realized.
See notes to financial statements.
F-24
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Period From June 10, 1999 (Inception) to August 31, 1999 and Year Ended August
31, 2000
(U.S. Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Loss per share
Loss per share computations are based on the weighted average
number of common shares outstanding during the period. Common
share equivalents consisting of stock purchase warrants (note
8(b)) are not considered in the computation because their
effect would be anti-dilutive. Loss per share for the period
ended August 31, 1999 was not calculated since it gives no
meaningful information.
(g) Foreign currency translation
Amounts recorded in foreign currency are translated into
United States dollars as follows:
(i) Monetary assets and liabilities are translated at the
rate of exchange in effect as at the balance sheet
date; and
(ii) Revenues and expenses at the average rate of exchange
for the year.
Unrealized gains and losses arising from this translation of
foreign currency are excluded from net loss for the period and
accumulated as a separate component of stockholders' equity.
(h) Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates and would impact future results of operations
and cash flows.
(i) Stock based compensation
The Company applies APB Opinion No. 25 and related
interpretations in accounting for its employee stock option
plans. Compensation expense is recorded when options are
granted to management at discounts to market.
(j) Financial instruments
The Company's financial instruments consist of cash, accounts
receivable, accounts payable and accrued liabilities, due to
shareholders and notes payable. Unless otherwise noted it is
management's opinion that these financial instruments
approximate their fair market values and the Company is not
exposed to significant interest, currency or credit risks
arising from these financial instruments.
F-25
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Period From June 10, 1999 (Inception) to August 31, 1999 and Year Ended August
31, 2000
(U.S. Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Recent accounting pronouncements
(i) In June 1999, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 137, "Accounting
for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No.
133". This statement defers the effective date of
SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," to fiscal years beginning
after June 15, 2000, although early adoption is
encouraged. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments. It
requires a company to recognize all derivatives as
either assets or liabilities in the statement of cash
flows and to measure those instruments at fair value.
Additionally, the fair value adjustments will affect
either stockholders' equity or net income depending
on whether the derivative instrument qualifies as a
hedge for accounting purposes and, if so, the nature
of the hedging activity. The Company will adopt this
standard as of September 1, 2000. Management does not
expect the adoption to have a material effect on the
Company's results of operations; however, the effect
on the Company's financial position depends on the
fair values of the Company's derivatives and related
financial instruments at the date of adoption.
(ii) In December 1999, the SEC issued Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition," which
outlines the basic criteria that must be met to
recognize revenue and provide guidance for
presentation of revenue and for disclosure related to
revenue recognition policies in financial statements
filed with the SEC. The Company believes the adoption
of SAB 101 will not have a material impact on the
Company's financial position and results of
operations.
(iii) In March 2000 the Financial Accounting Standards
Board issued "Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation".
Among other issues, this interpretation clarifies:
(a) the definition of employee for purposes of
applying APB Opinion No. 25;
(b) the criteria for determining whether a plan
qualifies as a non-compensatory plan;
(c) the accounting consequence of various
modifications of the terms of a previously
fixed stock option award; and
(d) the accounting for an exchange of stock
compensation awards in a business
combination.
F-26
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Period From June 10, 1999 (Inception) to August 31, 1999 and Year Ended August
31, 2000
(U.S. Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
In relation to (c) the interpretation states, "if the exercise
price of a fixed stock option award is reduced, the award
shall be accounted for as a variable from the date of the
modification to the date the award is exercised, is forfeited,
or if expired unexercised, the exercise price of an option
award has been reduced if the fair value of the consideration
required to be remitted pursuant to the award's original
terms".
The interpretation is generally effective July 1, 2000 and the
Company may incur additional compensation expense in fiscal
2001.
3. GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and liquidation of liabilities
in the normal course of business. However, the Company has no current
source of revenue. Without realization of additional capital, there is
substantial doubt about the Company's ability to continue as a going
concern.
4. PREPAID EXPENSES
=======================================================================
2000 1999
-----------------------------------------------------------------------
Prepaid professional and cyber liability $250,000 $ 0
Deposits on leases and other 20,599 585
-----------------------------------------------------------------------
$270,599 $ 585
=======================================================================
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
================================================================================
2000 1999
--------------------------------------------------------------------------------
Accumulated
Cost Depreciation Net Net
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Computer hardware and
software $105,808 $ 16,023 $ 89,785 $ 1,016
Office furniture
and equipment 8,045 794 7,251 0
--------------------------------------------------------------------------------
$113,853 $ 16,817 $ 97,036 $ 1,016
================================================================================
</TABLE>
F-27
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Period From June 10, 1999 (Inception) to August 31, 1999 and Year Ended August
31, 2000
(U.S. Dollars)
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
=======================================================================
2000 1999
-----------------------------------------------------------------------
Trade payables $304,775 $ 14,664
Accrued wages and salaries 41,391 0
-----------------------------------------------------------------------
$346,166 $ 14,664
=======================================================================
7. NOTES PAYABLE
<TABLE>
<CAPTION>
==========================================================================================
2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
12% two year promissory notes payable, due June 20, 2002
convertible upon default into common stock at a price of $1.429 per $200,000 $0
share (note 8(a))
==========================================================================================
</TABLE>
8. STOCKHOLDERS' EQUITY
(a) Common stock
During the year ended August 31, 2000,
(i) the Company completed several private placements
whereby the Company issued:
(a) 560,000 shares of common stock at a price of
$1.429 per share and in connection with this
offering a 12%, $200,000 two year promissory
note payable, convertible upon default into
common stock at a price of $1.429 per share,
with attached 28,000 stock purchase warrants
exercisable into common stock at a price of
$1.429 for a period of three years from
issuance.
(b) 285,595 shares of common stock were issued
at prices ranging between $1.00 and $1.25
for total proceeds of $292,310.
(c) 600,000 shares of common stock of which
150,000 shares include one share purchase
warrant exercisable within three years at a
price of $1.00 per share. These shares were
issued at prices ranging from $0.33 to $0.50
per share for total proceeds of $250,000.
(ii) the Company issued 595,000 shares to directors,
officers, employees and consultants of the Company.
It was determined at the time of issuance that the
market value of those shares was $1.43 per share.
Consequently, an amount of $850,850 was recorded as
wages and salaries for these shares.
F-28
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Period From June 10, 1999 (Inception) to August 31, 1999 and Year Ended August
31, 2000
(U.S. Dollars)
8. STOCKHOLDERS' EQUITY (Continued)
(iii) the Company agreed with its founders to reduce the
number of shares to be issued as founder's shares to
1,200,000 shares at par value. No additional
compensation expense was recorded in the books since
par value was considered market value at
incorporation.
(iv) the Company issued 740,000 shares as offering cost of
the merger with Hertz, at $1.43 per share. Of these;
(a) 340,000 shares issued for going public with
340,000 warrants attached (note 8(b)). These
warrants were given a fair value of $233,726
and these amounts along with the shares were
recorded as deferred offering cost.
(b) 200,000 shares issued for completion of the
$800,000 financing in note 8(a)(i)(a) above
with warrants attached to acquire 333,333
shares (note 8(b)).
(c) 200,000 shares issued for Bridge financing
with warrants attached to acquire 100,000
shares (note 8 (b)).
Of the above (a) and (c) represent costs to issue
preferred shares which were issued subsequent to year
end, consequently these shares along with the fair
value of the warrants have been recorded as deferred
offering costs in the balance sheet. Additionally
$123,435 of legal fees relating to the merger are
included in deferred offering costs.
(v) the Company issued 300,000 shares as payment for the
$35,426 subscriptions received.
(vi) the Company issued 415,000 shares of common stock
with 300,000 warrants attached. These shares were
issued as consideration for financing fees the
Company incurred but the financing was never
completed.
(b) Warrants
<TABLE>
<CAPTION>
=====================================================================================
Number Exercise
Expiry Date of Shares Price
-------------------------------------------------------------------------------------
<S> <C> <C>
Closing of merger (note 14(a)) (100,000 exercised subsequent to 110,000 $2.00
August 31, 2000)
June 7, 2003 600,000 $1.00
June 7, 2003 100,000 $1.00
June 7, 2003 333,333 $3.00
June 20, 2003 28,000 $1.429
June 7, 2005 340,000 $1.00
=====================================================================================
</TABLE>
F-29
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Period From June 10, 1999 (Inception) to August 31, 1999 and Year Ended August
31, 2000
(U.S. Dollars)
================================================================================
9. RELATED PARTY TRANSACTIONS
(a) Consulting fees includes $102,471 (1999 - Nil) paid to
directors, officers and a company owned by one of the
directors of the Company.
(b) Accounts payable at August 31, 2000 includes $68,591 (1999 -
Nil) due to directors, officers and a company owned by one of
the directors of the Company.
(c) The Company paid $96,511 (1999 - Nil) for wages to directors
and officers and $557,700 (1999 - $Nil) by issuance of 390,000
(1999 - Nil) shares to directors and officers (note 8(a)).
10. INCOME TAXES
<TABLE>
<CAPTION>
================================================================================
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets
Net operating loss and credit carryforwards $ 830,000 $ 21,000
--------------------------------------------------------------------------------
Gross deferred tax assets 830,000 21,000
Valuation allowance (830,000) (21,000)
--------------------------------------------------------------------------------
$ 0 $ 0
================================================================================
</TABLE>
As at August 31, 2000 the Company's net operating loss carryforwards
for income tax purposes were approximately $2,800,000. If not utilized,
they will start to expire in 2019.
11. COMMITMENT
The Company occupies leased office premises in Vancouver, Canada under
the terms of a lease expiring April 30, 2003, requiring annual rental
payments of U.S. $36,135, totalling U.S. $96,360.
12. CONTINGENCIES
During the year a former president and director of the Company
commenced an action against the Company and other parties, claiming an
interest in certain founders' shares to be issued by the Company as
well as damages arising from his termination. It is the opinion of
management of the Company that these claims have no merit. There is no
assurance that the outcome will be favourable to the Company. As the
outcome cannot be determined at this time, any adjustment, if required,
will be recorded by the Company when settlement occurs. Two of the
directors of the Company have agreed to escrow 780,000 of the merged
company common stock to secure any success in this claim. These two
directors have also agreed to indemnify the Company if the claim is
successful.
F-30
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Period From June 10, 1999 (Inception) to August 31, 1999 and Year Ended August
31, 2000
(U.S. Dollars)
13. COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
================================================================================
Period From Period From
June 10, 1999 June 10, 1999
(Inception) (Inception)
Year Ended Through Through
August 31, August 31, August 31,
2000 1999 2000
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss $(2,384,741) $ (61,713) $(2,446,454)
Other comprehensive income (loss) 536 (33) 503
--------------------------------------------------------------------------------
Comprehensive loss $(2,384,205) $ (61,746) $(2,445,951)
================================================================================
</TABLE>
14. SUBSEQUENT EVENTS
(a) Merger
The Company has announced a reverse triangular merger ("the
merger") with a NASD listed company, Hertz Technology Group
Inc. ("Hertz") in which the Company will become a wholly-owned
subsidiary of Hertz. As a result of the merger the current
shareholders of Hertz will own approximately 33% of the common
stock of the merged company and the current shareholders of
the Company will own approximately 67% of the common stock of
the merged company.
Subsequent to the merger, the merged company, Hertz, will
change its name to Return Assured, Inc. ("Return").
The merger was completed October 13, 2000.
(b) Preferred stock
The merged Company has entered into an agreement to issue
5,000 shares of series A convertible preferred stock and stock
purchase warrants to purchase up to 404,041 common shares of
the merged company for total proceeds of $5,000,000 which
cleared on October 13, 2000.
(i) The preferred shares are entitled to cumulative
dividends at a rate of 1% per annum and are payable
in cash or by issuing Series A preferred shares.
These shares are convertible into common stock at the
lesser of:
(a) $3.00; and
(b) 100% of the average of the 3 lowest per
share market value prices during the 45 day
period immediately preceding the conversion
date.
(ii) The stock purchase warrants are exercisable for three
years at a price of $3.00 per share.
F-31
<PAGE>
RETURN ASSURED INCORPORATED
(Formerly A Sure eCommerce, Inc.)
(A Development Stage Company)
Notes to Financial Statements
Period From June 10, 1999 (Inception) to August 31, 1999 and Year Ended August
31, 2000
(U.S. Dollars)
================================================================================
14. SUBSEQUENT EVENTS (Continued)
(c) Stock options
Subsequent to August 31, 2000 the Company reserved for grant
1,200,000 stock options to various officers, directors and
employees of the Company exercisable at a price of $1.43 per
share.
F-32
<PAGE>
PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited consolidated pro forma financial statements give effect
to the merger of Hertz Technology Group, Inc. ("Hertz") and Return Assured
Incorporated "Return Assured". This merger, a purchase transaction, has been
accounted for as a reverse acquisition with Return Assured as the accounting
acquiror. In addition, the consolidated pro forma financial statements also give
effect to the sale of $5 million of newly created Series A Preferred Stock
immediately following the merger. The unaudited pro forma consolidated balance
sheet presents the financial position of Hertz and Return Assured as of August
31, 2000 assuming the merger and sale of Preferred Stock had occurred on that
date. Such pro forma information is based upon the historical balance sheet data
of Hertz and Return Assured as of that date. The unaudited pro forma
consolidated statements of operations give effect to the merger of Hertz and
Return Assured by combining the results of operations of Hertz for the years
ended August 31, 1999 and 2000 with the results of Return Assured from inception
(June 10, 1999) through August 31, 1999 and for the year ended August 31, 2000,
respectively, as if the merger and the Preferred Stock transaction had occurred
on September 1, 1998. Return Assured is a development stage company.
The unaudited pro forma consolidated financial statements are based on the
estimates and assumptions set forth in the notes to these financial statements,
which have been made solely for purposes of developing this pro forma
information. The unaudited pro forma consolidated financial statements are not
necessarily an indication of the results that would have been achieved had such
transactions been consummated as of the dates indicated or that may be achieved
in the future.
These unaudited pro forma consolidated financial statements should be read in
conjunction with the historical financial statements and related notes of Hertz
and Return Assured.
F-33
<PAGE>
Return Assured Incorporated
Pro Forma Consolidated Balance Sheet
August 31, 2000
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Historical
-------------------------
Return Pro Forma
Hertz Assured Adjustments Pro Forma
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash $ 147 $ 132 $ 4,975 3 $ 4,819
(435) 2
Marketable securities 657 657
Accounts receivable 766 38 804
Inventories 477 477
Prepaid expenses and other current assets 102 271 373
-------------------------------------------------------------------------------------------------------------------------------
Total current assets 2,149 441 4,540 7,130
-------------------------------------------------------------------------------------------------------------------------------
Property and Equipment, net 1,305 97 1,402
Goodwill 120 10,437 1 10,437
(120) 1
Deferred Offering Costs 1,129 (843) 1 -
(286) 3
Other Assets 77 77
-------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,651 $ 1,667 $ 13,728 $ 19,046
===============================================================================================================================
Current Liabilities:
Accounts payable $ 292 $ 346 $ 638
Accrued expenses and other current liabilities 152 67 1 219
Current portion of capital lease obligations 59 59
Current portion of notes payable 3 290 2 293
-------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 506 346 357 1,209
===============================================================================================================================
Capital Lease Obligations, net of current portion 182 182
Notes Payable 16 200 216
-------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 704 546 357 1,607
-------------------------------------------------------------------------------------------------------------------------------
Shareholders Equity:
Preferred Stock 5,000 3 5,000
Common Stock 3 3,443 15,741
Additional paid-in-capital 6,033 12,354 1
(6,033) 1
(3) 1
(725) 2
669 3
Less: treasury stock (286) 286 1 -
Accumulated other comprehensive income 1 1
Accumulated deficit (2,803) (2,323) 2,803 1 (3,303)
(980) 3
-------------------------------------------------------------------------------------------------------------------------------
Shareholders Equity 2,947 1,121 13,371 17,439
-------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders Equity $ 3,651 $ 1,667 $ 13,728 $ 19,046
===============================================================================================================================
</TABLE>
F-34
<PAGE>
Return Assured Incorporated
Notes to Unaudited Pro Forma Consolidated Balance Sheet
August 31, 2000
The pro forma consolidated balance sheet of Return Assured gives effect to the
issuance of Hertz common stock and warrants to purchase common stock in exchange
for all the outstanding common stock and warrants to purchase common stock of
Return Assured as if it had occurred on August 31, 2000. For accounting
purposes, this transaction is being accounted for as a purchase with Return
Assured being the acquiror. Further, Hertz and Return Assured have entered into
other agreements that will take place concurrently with the closing of this
merger. Following is a summary of the pro forma adjustments to reflect the
foregoing:
1. Adjustment to reflect (a) the issuance of 4,895,685 shares of common
stock at $2 per share, (b) the issuance of 1,401,333 warrants,
recorded at fair value using the Black Scholes method and (c) costs of
the merger amounting to approximately $190,000 in cash and $720,000 for
the fair market value of shares of common stock and warrants issued by
Return Assured prior to the merger. The excess of the value of the
shares and warrants issued and the costs of the transaction over the
net assets of Hertz has been recorded as goodwill.
2. Adjustment to record the purchase of 115,385 shares of common stock
from Eli E. Hertz and I. Marilyn Hertz for $435,000 in cash and the
issuance of a $290,000 note payable, due April 17, 2001.
3. Adjustment to record (a) sale of $5,000,000 of newly created Series A
Preferred Stock to GEM Global Yield Fund ("GEM"), (b) $25,000 of cash
paid for related professional fees associated with the Preferred Stock
transaction and (c) the fair value under the Black Scholes method of
404,041 warrants issued to GEM in connection with the Preferred Stock
transaction.
F-35
<PAGE>
Return Assured Incorporated
Pro Forma Consolidated Statement of Operations
For the Year ended August 31, 2000
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical
-------------------------
Return Pro Forma
Hertz Assured Adjustments Pro Forma
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 6,319 $ 6,319
Cost of Sales 3,848 3,848
---------------------------------------------- ---------
Gross Profit 2,471 - - 2,471
Selling, general and administrative expenses 4,149 $ 2,261 125 (1) 7,634
578 (2)
521 (4)
Loss on Disposal 605 605
---------------------------------------------- ---------
Operating loss (2,283) (2,261) (1,224) (5,768)
Other Income (Expense):
Other 44 44
Interest, net 37 (29) (5) 8
---------------------------------------------- ---------
Loss before provision for income taxes (2,202) (2,261) (1,253) (5,716)
Provision for income taxes 136 136
---------------------------------------------- ---------
Net Loss (2,338) (2,261) (1,253) (5,852)
Preferred stock dividends 50 (3) 50
---------------------------------------------- ---------
Amount available to common shareholders $ (2,338) $ (2,261) $ (1,303) $ (5,902)
============================================== =========
Loss per common share - basic and diluted (6) $ (1.08) $ (1.96) $ (0.85)
========================= =========
Weighted-average number of common shares
outstanding - basic and diluted (6) 2,159 1,156 6,939
========================= =========
</TABLE>
F-36
<PAGE>
Return Assured Incorporated
Notes to Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended August 31, 2000
1. Adjustment to record the consulting agreement with Eli Hertz amounting
to $125,000 for the year. No adjustment has been made for the base salaries
of the employment agreements with Eli Hertz, I. Marilyn Hertz and Barry
Goldsammler as the employment agreements are not significantly different
than the actual salaries earned by these individuals during the year.
2. Adjustment to record the bonus due to Eli Hertz under his employment
agreement amounting to 25% of the gross profit of Hergo.
3. Adjustment to record 1% dividend on $5,000,000 of Series A Preferred
Stock to GEM Global Yield Fund and which records the immediate accretion of
both the $25,000 of costs associated with the Preferred Stock transaction
and the fair value of the issuance of 500,000 warrants in connection with
the Preferred Stock transaction.
4. Adjustment to record the amortization of approximately $7,815,000 of
goodwill over a period of 15 years.
5. Adjustment to record the interest expense at a rate of 10% on the
$290,000 note payable to Eli & Marilyn Hertz.
6. Pro forma net income per share is computed by dividing the pro forma net
income by Hertz's weighted average number of shares after giving effect to
the issuance of 4,895,685 shares of common stock at $2 per share and the
purchase of 115,385 shares of common stock from Eli and Marilyn Hertz in
conjunction with the merger for $435,000 cash and a $290,000 note payable.
Incremental shares from the effect of options, warrants and convertible
preferred stock have not been included in the weighted average shares
calculation on a diluted basis as the effect would have been antidilutive.
F-37
<PAGE>
Return Assured Incorporated
Pro Forma Statement of Operations
For the year ended August 31, 1999
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical
--------------------------
Return Pro Forma
Hertz Assured Adjustments Pro Forma
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 6,882 $ 6,882
Cost of Sales 3,543 3,543
Gross Profit 3,339 -- 3,339
Selling, general and administrative expenses 4,002 $ 62 125 (1) 5,458
748 (2)
521 (4)
----------------------------------------------------------------
Operating loss (663) (62) (1,394) (2,119)
Other Income (Expense):
Other (7) (7)
Interest, net 85 29 (5) 114
----------------------------------------------------------------
Loss before provision (benefit) for income taxes (585) (62) (1,365) (2,012)
Provision (benefit) for income taxes 110 110
----------------------------------------------------------------
Net Loss (695) (62) (1,365) $ (2,122)
Preferred stock dividends 50 (3) 50
------------------------------------------ ---------
Amount available to common shareholders $ (695) $ (62) $ (1,415) $ (2,172)
========================================== =========
Loss per common share - basic and diluted (6) $ (0.33) $ (688.89) $ (0.31)
========================== =========
Weighted-average number of common shares
outstanding - basic and diluted (6) 2,133 0.09 6,913
========================== =========
</TABLE>
F-38
<PAGE>
Return Assured Incorporated
Notes to Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended August 31, 1999
1. Adjustment to record the consulting agreement with Eli Hertz amounting
to $125,000 for the year. No adjustment has been made for the base salaries
of the employment agreements with Eli Hertz, I. Marilyn Hertz and Barry
Goldsammler as the employment agreements are not significantly different
than the actual salaries earned by these individuals during the year.
2. Adjustment to record the bonus due to Eli Hertz under his employment
agreement amounting to 25% of the gross profit of Hergo.
3. Adjustment to record 1% dividend on $5,000,000 of Series A Preferred
Stock to GEM Global Yield Fund ("GEM")
4. Adjustment to record the amortization of approximately $7,815,000 of
goodwill over a period of 15 years.
5. Adjustment to record the interest expense at a rate of 10% on the
$290,000 note payable to Eli & Marilyn Hertz.
6. Pro forma net income per share is computed by dividing the pro forma net
income by Hertz's weighted average number of shares after giving effect to
the issuance of 4,895,685 shares of common stock at $2 per share and the
purchase of 115,385 shares of common stock from Eli and Marilyn Hertz in
conjunction with the merger for $435,000 cash and a $290,000 note payable.
Incremental shares from the effect of options, warrants and convertible
preferred stock have not been included in the weighted average shares
calculation on a diluted basis as the effect would have been antidilutive.
7. Note: In connection with the Preferred Stock transaction discussed in
footnote (3) above, Return Assured (a) paid $25,000 in cash for related
professional fees and (b) issued 404,041 of warrants to GEM with a fair
value under the Black Scholes method of approximately $669,000. The
accretion of these costs will reduce the amount available to common
shareholders of the merged companies. This accretion is deemed to be
nonrecurring and therefore has not been considered in the accompanying pro
forma consolidated statement of operations.
F-39
<PAGE>
Exhibit Index:
Exhibit
Number Title of Document
--------------------------------------------------------------------------------
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment of Certificate of Incorporation (2)
3.3 By-Laws (1)
3.4 Certificate of Designations of Series A of Preferred Stock (2)
4.1 Specimen Stock Certificate *
4.2 Form of Redeemable Warrant (1)
4.3 Warrant Agreement (1)
10.1 1996 Stock Option Plan (3)
10.2 Employment Agreement between Hergo Ergonomic Support Systems, Inc. and
Eli E. Hertz (2)
10.3 Employment Agreement between Hergo Ergonomic Support Systems, Inc. and
I. Marilyn Hertz (2)
10.4 Employment Agreement between Return Assured Incorporated and Barry
Goldsammler (2)
10.5 Consulting Agreement between Return Assured Incorporated and Eli Hertz
(2)
10.6 Series A Preferred Stock Purchase Agreement between Return Assured
Incorporate and GEM Global Yield Fund Limited date July 13, 2000 (2)
10.7 Statement of Work for Time Based Projects between IBM and Return Assured
Incorporated*
10.8 Office Lease between P. Sun's Enterprises (Vancouver) Ltd. and A Sure
eCommerce, Inc. dated May 1, 2000*
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 (1)
10.10 [Omitted]
10.11 Agreement between Symposium Corporation Inc. and Return Assured
Incorporated*
<PAGE>
10.12 Portal Agreement between eBrick Inc and Return Assured Incorporated*
10.13 Form of Lloyd's of London Inc (Hiscox) Cyber Insurance Policy*
10.14 Portal Agreement between Liquor.com, Inc. and Return Assured
Incorporated*
10.15 Form of Merchant Agreement*
21 Subsidiaries of the Registrant*
23.1 Consent of Goldstein Golub Kessler LLP*
23.2 Consent of Pannell Kerr Forster P.C.*
27.1 Financial Data Schedule*
-----------
* Filed herewith
(1) Incorporated by reference to Form SB-2, as amended, filed with the
Securities and Exchange Commission (SEC File No. 333-9783).
(2) Incorporated by reference to Form 8-K filed with the Securities and
Exchange Commission on October 20, 2000.
(3) Incorporated by reference to Form S-8 filed with the Securities and
Exchange Commission on April 18, 2000.
