-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FOdjAHLB8SxdcpDYYEYUEwnXa/sEp/C9kdCoOPKeIUmtbivrJ1D9zQrB8dzEZsVl EtDK6uMj7xs0CkgiDMhY3Q== 0001005477-98-001208.txt : 19980414 0001005477-98-001208.hdr.sgml : 19980414 ACCESSION NUMBER: 0001005477-98-001208 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980413 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERTZ TECHNOLOGY GROUP INC CENTRAL INDEX KEY: 0001020726 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 133896069 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-21679 FILM NUMBER: 98592297 BUSINESS ADDRESS: STREET 1: 75 VARICK ST STREET 2: 11TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10013-1917 BUSINESS PHONE: 2126344000 MAIL ADDRESS: STREET 1: 75 VARICK STREET STREET 2: 11TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10013 10QSB 1 QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended February 28, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1939 For the transition period from ___________ to ___________ Commission File Number: 0-21679 HERTZ TECHNOLOGY GROUP, INC. ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) DELAWARE 13-3896069 - --------------------------------- ---------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) identification number) 75 Varick Street 10013 - ---------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) 212-634-4000 --------------------------- (Issuer's telephone number) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of Common equity, as of the latest practicable date. April 13, 1998 Common Stock, par value $.001 per share 3,208,600 - ----------------------- ------------------ Class Shares Outstanding HERTZ TECHNOLOGY GROUP, INC. FEBRUARY 28, 1998 INDEX Page PART I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of February 28, 1998 and August 31, 1997 3 Consolidated Statements of Operations for the three months and six months ended February 28, 1998 and February 28, 1997 4 Consolidated Statements of Cash Flows for the six months ended February 28, 1998 and February 28, 1997 5 Consolidated Statements of Stockholders Equity for years ended August 31, 1996 and August 31, 1997 and six months ended February 28, 1998 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of financial condition and results of operations for the three months and six months ended February 28, 1998 11 PART II. Other Information Item 2. Changes in securities and use of proceeds 16 SIGNATURES 17 -2- PART I FINANCIAL INFORMATION HERTZ TECHNOLOGY GROUP, INC. CONSOLIDATED BALANCE SHEETS
ASSETS FEBRUARY 28, AUGUST 31, 1998 1997 Unaudited Audited ----------- ----------- CURRENT ASSETS: Cash $ 145,180 326,121 Marketable securities 2,788,430 3,570,799 Accounts receivable, less allowance for doubtful accounts of $221,818 and $151,818 respectively 1,455,372 1,185,258 Inventories, net 899,638 997,766 Prepaid expenses and other current assets 517,058 192,219 ----------- ----------- Total current assets 5,805,678 6,272,163 ----------- ----------- PROPERTY AND EQUIPMENT, net 1,277,812 617,501 ----------- ----------- GOODWILL, net of accumulated amortization 163,860 -- ----------- ----------- OTHER ASSETS 133,910 100,387 ----------- ----------- Total assets $ 7,381,260 6,990,051 =========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
FEBRUARY 28, AUGUST 31, 1998 1997 ----------- ----------- CURRENT LIABILITIES: Accounts payable $ 358,005 179,289 Notes payable 126,667 -- Accrued expenses - other current payables 226,338 163,389 ----------- ----------- Total current liabilities 711,010 342,678 ----------- ----------- NONCURRENT LIABILITIES: Notes payable to banks and others 252,759 12,573 ----------- ----------- Total noncurrent liabilities 252,759 12,573 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.001 par value: 25,000,000 shares authorized 3,240,000 shares issued and 3,208,600 shares outstanding as of February, 28 1998 3,240 3,165 Additional paid-in capital 5,689,956 5,591,556 Treasury Stock, 31,400 shares at cost (47,459) -- Retained earnings 771,754 1,040,079 ----------- ----------- Total stockholders' equity 6,417,491 6,634,800 ----------- ----------- Total liabilities and stockholders' equity $ 7,381,260 6,990,051 =========== =========
The accompanying notes are an integral part of these consolidated statements -3- HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1997 (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED FEBRUARY 28, FEBRUARY 28, ------------------ ---------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- NET SALES $ 1,970,614 $ 2,974,489 $ 3,770,326 $ 5,921,831 COST OF GOODS SOLD 1,340,850 1,803,720 2,440,426 3,716,295 ----------- ----------- ----------- ----------- Gross Profit 629,764 1,170,769 1,329,900 2,205,536 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,273,502 907,970 1,928,438 1,578,356 PROVISION FOR CLOSING COSTS OF HERTZ ISRAEL -- 158,749 -- 158,749 ----------- ----------- ----------- ----------- 1,273,502 1,066,719 1,928,438 1,737,105 ----------- ----------- ----------- ----------- Operating income (loss) (643,737) 104,050 (598,537) 468,431 OTHER INCOME (EXPENSE) Other (18,112) 4,043 (16,957) 4,043 Interest, net 53,242 64,474 110,890 25,707 ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes (608,607) 172,567 (504,605) 498,181 PROVISION FOR INCOME TAXES (284,373) 87,000 (236,280) 149,465 ----------- ----------- ----------- ----------- Net income (loss) $ (324,234) $ 85,567 $ (268,325) $ 348,716 =========== =========== =========== =========== NET INCOME (LOSS) PER SHARE - BASIC $ (0.10) 0.03 (0.09) 0.13 =========== =========== =========== =========== NET INCOME (LOSS) PER SHARE - DILUTED $ (0.10) 0.03 (0.09) 0.12 =========== =========== =========== =========== HISTORICAL INCOME BEFORE PROVISION FOR INCOME TAXES $ 498,181 UNAUDITED PROFORMA PROVISION FOR INCOME TAXES 251,542 ----------- PRO FORMA NET INCOME $ 246,639 =========== PRO FORMA NET INCOME PER SHARE $ 0.09 =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic 3,155,946 3,165,000 3,142,227 2,657,610 =========== =========== =========== =========== Diluted 3,155,946 3,250,142 3,142,227 2,964,266 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements -4- HERTZ TECHNOLOGY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOW THREE MONTHS ENDED FEBRUARY 28, 1998 AND 1997 (UNAUDITED)
SIX MONTHS ENDED FEBRUARY 28, ---------------- 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ (268,325) $ 348,716 Adjustments to reconcile net income to net cash provided by activities- Depreciation and amortization 123,416 48,577 Allowance for doubtful accounts 70,000 15,000 Issuance of stock to Employees 79,725 -- Issuance of stock options 18,750 -- Changes in operating assets and liabilities- Accounts receivable (76,357) (242,131) Inventories 209,154 (60,401) Due from related parties -- -- Prepaid expenses and other current assets (331,088) 309,903 Other assets (33,523) 13,810 Accounts payable and accrued expenses 226,417 56,699 Income taxes payable -- (134,035) Other liabilities (2,245) 2,694 ----------- ----------- Net cash provided by operating activities 15,925 358,832 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property and equipment (307,587) (427,038) Sale of Marketable Securities 782,369 (3,557,541) Acquisition of Business Acquired, net (624,190) -- ----------- ----------- Net cash used in investment activities (149,407) (3,984,579) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under notes payable to banks -- (25,083) Purchase of treasury stock (47,459) -- Repayment of credit line to a bank -- (895,000) Proceeds from issuance of common stock and warrants, net of underwriting expense -- 6,053,025 Payments of registration costs of common stocks and warrants -- (569,304) Net (repayments) under note payable to stockholder -- (246,686) Sub S distribution to stockholder -- (594,255) ----------- ----------- Net cash provided by financing activities (47,459) 3,722,697 ----------- ----------- Net increase in cash and cash equivalents (180,942) 96,950 CASH and cash equivalents, beginning of period 326,121 275,529 ----------- ----------- CASH and cash equivalents, end of period $ 145,180 $ 372,479 =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION: Business Acquired Assets Acquired 850,925 - Goodwill 163,860 - less: Liabilities Assumed 390,595 624,190 - - Issuance of stock to Employees $ 79,725 - Issuance of stock options $ 18,750 - Interest paid $ 1,895 $ 21,683 Income taxes paid $ 94,370 $ 221,035
The accompanying notes are an integral part of these consolidated statements -5- HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR YEARS ENDED 8/31/96 AND 8/31/97, AND SIX MONTHS ENDED 2/28/98 (UNAUDITED)
Additional Common Paid- in Treasury Retained Stock Capital Stock Earnings Total ----------- ----------- ----------- ----------- ----------- BALANCE, August 31, 1995 $ 1,900 $ 124,100 $ -- $ 614,966 $ 740,966 Net income -- -- -- 540,450 540,450 S corporation Distributions to stockholders -- -- -- (390,648) (390,648) ----------- ----------- ----------- ----------- ----------- BALANCE, August 31,1996 1,900 124,100 -- 764,768 890,768 Net income -- -- -- 572,699 572,699 Issuance of common stock and warrants in connection with initial public offering, net of expenses of $1,488,778 1,265 5,467,456 -- -- 5,468,721 S corporation Distributions to stockholders -- -- -- (297,388) (297,388) ----------- ----------- ----------- ----------- ----------- BALANCE, August 31,1997 3,165 5,591,556 -- 1,040,079 6,634,800 Net income -- -- -- (268,325) (268,325) Issuance of stock to Employees 75 79,650 -- -- 79,725 Issuance of stock options -- 18,750 -- -- 18,750 Treasury stock -- -- (47,459) -- (47,459) ----------- ----------- ----------- ----------- ----------- BALANCE, February 28, 1998 $ 3,240 $ 5,689,956 $ (47,459) $ 771,754 $ 6,417,491 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements -6- HERTZ TECHNOLOGY GROUP, INC. Notes to Consolidated Financial Statements (Unaudited) February 28, 1998 1. BASIS OF PRESENTATION AND OPERATIONS The accompanying consolidated financial statements are unaudited and in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation in accordance with generally accepted accounting principles and with the instructions to Form 10-QSB. Operating results for the six-month period ended February 28, 1998 are not necessarily indicative of the results that may be expected for the year ended August 31, 1998. For further information, refer to the financial statements and footnotes thereto included in the Hertz Technology Group, Inc. ("Hertz" or the "Company") audited financial statements for the year ended at August 31, 1997. Income Taxes Hergo, with the consent of its stockholders, elected to be treated as an S Corporation for federal and state tax purposes, which provides that, in lieu of Hergo paying income taxes, the stockholders separately account for their pro rata shares of Hergo's items of income, deductions, losses and credits. Effective November 12, 1996, the date of the Company's IPO, Hergo's S Corporation status was terminated and effective November 13, 1996 Hergo became a C Corporation. As such, Hergo did not incur federal income tax expense prior to November 13, 1996, although it did incur state and local tax expense for the September 1, 1996 through November 12, 1996 period. Immediately subsequent to this date, Hergo incurred federal income tax expense. Hertz Computer is a C corporation which incurs federal, state and local income tax expense. Pro Forma Net Income Pro forma net income is calculated as if Hergo were a C corporation for tax filing purposes during the three-month period ended November 30, 1996. As such, an effective tax rate of approximately 46% was used in calculating Hergo's pro forma income tax provision for this period. The Company has included the effect of the warrants as if they were exercised in the calculation for pro forma net income per share. -7- 2. EARNINGS PER SHARE For the periods ended February 28, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". In Accordance with the requirements of SFAS No. 128, net earnings per common share Amounts ("basic EPS") were computed by dividing net earnings by the weighted average number of common shares outstanding and contingently issue-able shares (which satisfy certain conditions) and excluding any potential dilution. Net earnings per common share amounts - assuming dilution ("diluted EPS") were computed by reflecting potential dilution from the exercise of stock options. SFAS No. 128 requires the presentation of both basic EPS and diluted EPS on the face of the income statement. Earnings per share amounts for the same prior-year periods have been restated to conform with the provisions of SFAS No. 128. A reconciliation between the numerators and denominators of the basic and diluted EPS computations for net earnings is as follows:
Three months ended Three months ended February 28, 1998 February 28, 1997 ----------------- ----------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts Net earnings (loss) (324,234) 85,567 BASIC EPS Net earnings (loss) attributed to common stock $ (324,234) 3,155,946 $ (.10) $ 85,567 3,165,000 $ .03 ----------- --------- ------- -------- --------- ----- EFFECT OF DILUTED SECURITIES Stock Option Stock Warrents 85,142 DILUTED EPS Net earnings (loss) attributable to common stock and option exercises $ (324,234) 3,155,946 $ (.10) $ 85,567 3,250,142 $ .03 ----------- --------- ------- -------- --------- -----
-8-
Six months ended Six months ended February 28, 1998 February 28, 1997 ----------------- ----------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts Net earnings (loss) (268,325) 348,716 BASIC EPS Net earnings (loss) attributed to common stock $ (268,325) 3,142,227 $ (.09) $ 348,716 2,657,610 $ .13 ----------- --------- ------- --------- --------- ----- EFFECT OF DILUTED SECURITIES Stock Option Stock Warrants 306,656 DILUTED EPS Net earnings (loss) attributable to common stock and option exercises $ (268,325) 3,142,227 $ (.09) $ 348,716 2,964,266 $ .12 ----------- --------- ------- --------- --------- -----
No diluted EPS is presented, for the three month and six month periods ending on February 28, 1998 as the effect of dilutive securities would be anti-dilutive on loss per common share. Options to purchase the following shares of common stock were not included in the computation of diluted EPS because the exercise price of those options were greater than the average market price of the common shares. The options were still outstanding at the end of the period. Three months ended Six months ended 2/28/98 4,152,779 2/28/98 4,152,779 Three months ended Six months ended 2/28/97 330,000 2/28/97 330,000 3. PURCHASE OF BUSINESS ASSETS - LANDAU METAL PRODUCTS CORP On December 5, 1997, a wholly - owned subsidiary of Hertz Technology Group, Inc. (Lan Metal Products Corp) acquired substantially all of the assets and business of Landau Metal Products Corp., a company engaged in the of sheet metal fabrication in Long Island City, New York ("Landau"). The aggregate consideration paid to Landau was $660,000 in cash and a promissory note in the principal amount of $380,000, payable over a three-year period. The principal officer and sole stockholder of Landau was employed effective as of the closing by the Buyer for five years at a fixed annual salary with additional incentive compensation if sales of the new company exceed certain prescribed targets. -9- Pro-forma Income Statement Six months ended Six months ended 2/28/98 2/28/97 Sales 795,000 728,000 NI 55,650 26,225 EPS - - 4. DISCRETIONARY BONUS AWARDS The company has reserved 100,000 shares for issuance to employees as a reward for past performance or as an incentive for future performance. The determination of the persons to receive Share Bonus Awards, the amount of shares for each recipient and the time of vesting shall be determined by the Board of Directors or by a committee to be designated by the Board of Directors. Shares may be awarded with immediate vesting or with deferred vesting. On February 12, 1998 the company awarded 75,000 shares to an employee. The value of the stock issued is compensation and charged against earnings 5. STOCK OPTIONS On February 28, 1998, the company entered into an agreement with an investment-banking firm, to promote the Company, products, and services and implement a strategy of growth through acquisition. The agreement under which the company, on February 28, 1998 issued 15,000 stock options in payment of investment advisory services is an expense for the current period. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company custom designs and assembles PC's and related products and provides technical services and support under the "Hertz" name through its Hertz Computer subsidiary. It also designs, manufactures and sells ergonomically engineered modular support structures and technical furniture for micro computers and electronic devices under the "Hergo" name through its Hergo subsidiary. Three Months and Six Months Ended February 28, 1998 compared to Three Months and Six Months Ended February 28, 1997 Revenues Company sales for the three months ended February 28, 1998, were $1.97 million, compared to $2.97 million for the period ended February 28, 1997, a 34% decrease. Net sales for the six months ended February 28, 1998 were $3.77 million compared to $5.92 million in the previous year, a 36% decrease. A substantial portion of the reduction in sales was attributed to the decline in computer sales. Computer sales for the quarter ended February 1998 were $689,000 compared to $1,994,000 for the comparable period in the previous year. For the six months ended February 28, 1998 computer sales were $1,520,000 compared to $3,939,000 for the six months ended February 28, 1997. Sales were impacted by several factors including the elimination of the Hertz Israel division in February 1997, the reduction in sales from several customers who had made substantial purchases for the comparable quarter and six months ended February 28, 1998, and intense price competition in the PC market, which is continuing. Partially offsetting this decline in sales was increased computer sales activity in the governmental sales area generated, in part, by an office that was established in Albany in November 1997 to better promote and service Hertz Computer clients. During the three months ended February 28, 1998, sales generated from computer sales to the government increased by $317,000 over the same period in the previous year. Hergo sales slightly decreased by $60,000 for the two quarters ended February 28,1998. During this period Hergo concentrated on efforts to increase capacity, efficiency, product diversity and market share. Towards this end Hertz Technology Group purchased on December 5, 1997, substantially all the assets of a machine shop known as Landau Metal Products Corp. for $1,040,000 and established a new division called Lan Metal Products Corp. The purchase resulted in increased machinery needed for expansion, increased manufacturing space, and a potential for increased sales from the new division. Additionally, management from the previous company was retained, thereby adding additional depth in production and sales. Sales for the Lan division for the three months ended February 28, 1998 were $328,000. -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Profit Gross profit was $630,000 (32% of net sales) and $1,171,000 (39% of net sales) for the three months ended February 28, 1998 and February 28,1997, respectively, a decrease of $541,000. Gross profit was $1,330,000 (35% of net sales) and $2,206,000 (37% of net sales) for the six months ended February 28, 1998 and February 28,1997, respectively, a decrease of $876,000. The costs incurred in ramping up of the new entity of Lan Metal Products, the transferring and merging of Hergo production to the new facility, and the conversion of Hergo's Woodside location to a new warehousing and distribution facility reduced gross profit. Because of this, Hergo gross profit was 53% of sales for the period ended February 28, 1998 as compared to 60% for the same period last year. The Hertz Computer division, likewise, experienced inefficiencies. Gross profit from Hertz Computer for the six months ended February 28, 1998 was 13% of computer sales compared to 25% of sales for the same period last year. Although Hertz experienced a significant reduction in sales, it has kept it's skilled and trained integration personnel in place. Hertz intends to put these resources to work as it's new sales and marketing program will bear fruit. Other factors that contributed to the decline in Gross profit included an increase in depreciation due to the purchase of the Lan equipment, as well as other capital expenditures. Gross profit generated by the newly acquired Lan division for the three months ended February 28, 1998 was 36% of sales. Selling, General and Administrative Selling, general, and administrative expenses increased for the quarter and six months ended February 28, 1998 as compared to the preceding periods, by $366,000 and $350,000 respectively. Most of the increases occurred primarily in the second quarter. Selling General and administrative expenses were impacted by the establishment of a warehousing facility for the Hergo line as well as increases in selling expenses both in Hergo and in Hertz Computer. Selling Expense increases included increased expenses in operating the new Albany Sales office, increased advertising, and sales salaries as well as increased marketing costs. Administrative expense increases included increased costs being a public entity including the year-end annual report, issuance of stock to an employee, and some additional legal and accounting costs. Finally, during the period, additional reserves were established for resolution of an IRS audit, payment of final income taxes in reference to the Hertz Israel entity, and reserve for bad debts. A partial offset to these expenses was the benefit derived in the comparative decline in expenses due to the closing of Hertz Israel Provision for closing costs of Hertz-Israel During the three month period ended February 28, 1997, the company recorded a provision of $158,749 for the closing costs of Hertz-Israel. This reflects a reduction of SG&A expenses for the current period. -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Income (Expense): Other Expenses Other expenses increased by $22,000 and $21,000 for the quarter and six-month period ended February 28, 1998. The increase is primarily due to options that were issued in connection with the retention of a Financial Consultant. Interest, net Interest Income for the quarter and six months ended February 28, 1998 decreased by $11,000 and increased by $46,000 respectively, as compared to the proceeding respective periods. The decrease in interest income for the quarter was due, primarily to the reduction in funds available, due to the use of cash in the purchase of the assets from Landau Metal Corp on December 5,1997. Interest Expense stayed approximately the same for the quarter but decreased by $39,000 for the six months as compared to the same period last year. The decrease in Interest expense was due to the fact that the first quarter ended November 30, 1996 was included in the six months of the prior year and prior to the company's Initial Public Offering.. The interest paid at that time was due to the repayment of its line of credit with the United Mizrahi Bank, interest paid to an Israeli bank, and the repayment of loans to the principal shareholders. Provision for Income Taxes The tax benefit for the three months and the six months ended February 28, 1998 was $285,000 and $236,000, respectively. The tax provision for the three months and six months ended February 28,1997 ($87,000 and $149,000, respectively) was calculated with Hertz Computer as a "C" corporation and Hergo as a subchapter "S" corporation, For the period of 9/1/96 to 11/12/96. From September 1, 1996 through November 12,1996 Hergo was classified as a subchapter "S" corporation and incurred no federal corporation tax. The tax provision from November 13, 1996 through February 28, 1997 was calculated at a blended rate between Hertz Computer as a "C" corporation for the full period and Hergo as a "C" corporation from November 13, 1996 through February 28, 1997. Net Income and Earnings Per Share Net income for the three months ended February 28, 1998 resulted in a loss of $324,000 or ($.10) per share compared to a net income of $86,000 or $.03 per share for the three months ended February 28, 1997. Net income for the six months ended February 28,1998 was a loss of $268,000 or ($.09) per share compared to net income of $349,000 or $.13 per share for the six months ended February 28,1997. A significant decline in Computer sales due to decreased purchasing from a few large customers offset the benefits obtained from increased government sales to the State of New York and the beginning of sales from the newly acquired Lan Metal Products Corp. subsidiary. Gross Profit declined due to the costs incurred by the start up of Lan, the moving of the Hergo production -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS facilities and increased depreciation expense. Additionally, gross profit on the Hertz side was adversely effected by the decrease in revenues without a proportionate decrease in direct labor and other expenses. Management feels that the maintenance of a highly skilled strong manufacturing and support staff is necessary to meet expectations of future business. Liquidity and Capital Resources For the six-month period ended February 28, 1998, the Company generated a cash flow from operations of $16,000, as compared to $359,000, for the six-month period ended February 28, 1997. The operating loss accounts for the principal reason for the decrease. Non cash transactions including depreciation, granted options and issued shares comprised a substantial portion of the loss and thus did not impact on cash. Net purchases of fixed assets in the six months ended February 28, 1998, were $308,000 as compared to $427,000 in the same period last year. Included in the purchases in the recent six month period was equipment for Hergo production in the amount of $168,000 and improvements to the new Lan facility of $91,000. On December 5, 1997 the company purchased substantially all of the assets of Landau Metal Products Corp and established Lan Metal Products Corp. Additional equipment purchases that were included in the initial Lan purchase ($476,000) are included in the cash paid for the assets of ($624,000). Sale of marketable securities increased by $782,000 for the current year. Funds were used predominantly for the purpose of financing the new Lan acquisition. During the six months ended February 28, 1998, the Company purchased on the open market a total of 31,400 shares of it's stock for a total of $47,000. Working capital for the six months ended February 28, 1998 was $5,095,000 compared to $5,825,000 for the period ended February 28, 1997, a 730,000 decline. The purchase of the Landau Metal Products assets as well as the purchases of additional production equipment accounted for the majority of the decline. -14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements made in this Quarterly Report on Form 10-QSB including statements contained in the foregoing "Management's Discussion and Analysis of Financial Conditions and Results of Operations" are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations and projections of revenues, earnings and capital expenditures. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company's plans objectives and expectations are based, in part, on assumptions involving the growth of the Company's business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives, plans or expectations of the Company will be achieved -15- PART II. OTHER INFORMATION Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Use of Proceeds The Company registered Common Stock and Warrants in an initial public offering on Form SB-2 which because effective on November 12, 1996. After deducting $1,488,778 in expenses incurred in connection with the offering, an aggregate of $5,468,721 of net proceeds was realized by the Company. The use of these net proceeds was reported on Forms SR filed with the Securities and Exchange Commission on February 11, 1997 and August 18, 1997, and in the Company's annual report on Form 10KSB for the year ended August 31, 1997. Updating these reports, as of February 28, 1998 the disposition of the proceeds was as follows:
Changes Balance 11/1/97 11/1/97-2/28/98 2/28/98 Construction of plant building and facilities. 360,140 360,140 Purchases and installation of machinery and equipment. 152,587 538,933 a) Acquisition of Landau Metal Products 386,346 624,190 624,190 Repayment of Indebtedness. 1,315,058 1,315,058 S Corporation Distribution. 688,034 688,034 Marketing Plan. 170,070 16,850 186,920 To be used to fund marketing plan, acquire equipment, 2,549,073 (793,627) 1,755,446 Grand Total: $ 5,468,721 $ 1,587,254 $ 5,468,721
-16- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant, caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Hertz Technology Group, Inc /s/ Eli E. Hertz Dated: 04/13/98 --------------------------------- Eli E. Hertz, Chairman, President And Chief Executive Officer /s/ Barry J. Goldsammler Dated: 04/13/98 --------------------------------- Barry J. Goldsammler, Chief Financial and Accounting Officer -17- EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS AUG-31-1998 FEB-28-1998 145,180 2,788,430 1,677,190 221,818 899,638 5,805,678 1,634,064 356,252 7,381,260 711,010 0 0 0 3,240,000 6,414,251 7,381,260 3,770,326 3,770,326 2,440,426 2,440,426 0 70,000 6,720 (504,605) (236,280) (268,325) 0 0 0 (268,325) (.09) (.09)
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