As filed with the Securities and Exchange Commission on October 18, 1996
Registration No. 333-9783
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HERTZ TECHNOLOGY GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------
Delaware 3570 13-3896069
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification
Number)
325 Fifth Avenue, New York, New York 10016-5012
(212) 684-4141
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Executive Offices)
-----------
ELI E. HERTZ
Chairman, President and Chief Executive Officer
Hertz Technology Group, Inc.
325 Fifth Avenue
New York, New York 10016-5012
(212) 684-4141
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code of Agent for Service)
-----------
with a copy to:
HOWARD L. WEINREICH, ESQ. STEVEN WASSERMAN, Esq.
Morse, Zelnick, Rose & Lander, LLP Bernstein & Wasserman, LLP
450 Park Avenue 950 Third Avenue
New York, New York 10022 New York, New York 10022
(212) 838-4312 (212) 826-0730
(212) 838-9190 (FAX) (212) 371-4730 (FAX)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the Registration Statement becomes effective.
-----------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act"), check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
CALCULATION OF REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Amount Being Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered Offering Price Aggregate Registration
Per Unit (1) Offering Price (1) Fee
----------------------------------------------------------------------------------------------------------------------------
Units consisting of one share of Common Stock,
par value $.001 per share and one Redeemable
Warrant to Purchase Common Stock(2) 1,265,000 $5.25 $6,641,250 $2,290.09
---------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock included in the Units(3) 1,265,000 -- -- --
---------------------------------------------------------------------------------------------------------------------------
Redeemable Warrants included in the Units(4) 1,265,000 -- -- --
---------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock issuable upon exercise of
the Redeemable Warrants included in the Units 1,265,000 $5.50 $6,957,500 $2,399.14
---------------------------------------------------------------------------------------------------------------------------
Redeemable Warrants(4) (not included in the
Units) 1,265,000 $.25 $316,250 $109.05
---------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock issuable upon exercises
of Redeemable Warrants not included in the
Units 1,265,000 $5.50 $6,957,500 $2,399.14
---------------------------------------------------------------------------------------------------------------------------
Underwriter's Option 110,000 $.001 $110 (4)
---------------------------------------------------------------------------------------------------------------------------
Units issuable on exercise of Underwriter's
Option 110,000 $6.30 $693,000 $238.96
---------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock included in the Units
underlying Underwriter's Option 110,000 -- -- --
---------------------------------------------------------------------------------------------------------------------------
Redeemable Warrants included in Units underlying
Underwriter's Option 110,000 -- -- --
---------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock issuable upon exercise of
Redeemable Warrants included in the Units
underlying Underwriter's Option 110,000 $5.50 -- $208.62
---------------------------------------------------------------------------------------------------------------------------
Redeemable Warrants issuable upon exercise of
Underwriter's Option (not included in Units) 110,000 $.30 $605,000 $11.38
---------------------------------------------------------------------------------------------------------------------------
Shares of Common Stock issuable upon exercise of
Underwriter's Option (not included in Units) 110,000 $5.50 605,000 $208.62
---------------------------------------------------------------------------------------------------------------------------
Common Stock to be sold by Selling Shareholders 750,000 $5.00 $3,750,000 $1,293.10
---------------------------------------------------------------------------------------------------------------------------
Total Registration Fee $9,158.10
---------------------------------------------------------------------------------------------------------------------------
Pursuant to Rule 416, there are also being registered hereby, such
additional indeterminate number of shares of Common Stock as may become
issuable pursuant to the anti-dilution provisions of the Redeemable Warrants
and the Underwriter's Option.
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act.
(2) Includes 165,000 Units issuable upon exercise of the Underwriter's
Over-Allotment Option.
(3) Includes 165,000 Shares of Common Stock issuable upon exercise of the
Underwriter's Over-Allotment Option.
(4) Includes 165,000 Redeemable Warrants issuable upon exercise of the
Underwriter's Over-Allotment Option.
(5) No registration fee required pursuant to Rule 457 under the Securities Act.
-----------
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
2
HERTZ TECHNOLOGY GROUP, INC.
CROSS-REFERENCE SHEET
(Showing Location in the Prospectus of Information
Required by Items 1 through 23, Part I of Form SB-2)
Item and Caption in Form SB-2 Location in Prospectus
----------------------------- ----------------------
1. Front of SB-2 Registration Statement and
Outside Cover Page of Prospectus......................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus................................................ Inside Front
Cover Page; Outside Back Cover Page
3. Summary Information and Risk Factors...................... Prospectus Summary; Risk Factors
4. Use of Proceeds........................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........................... Outside Front Cover Page of Prospectus;
Risk Factors; Underwriting
6. Dilution.................................................. Risk Factors; Dilution
7. Selling Security-Holders.................................. Risk Factors; Dilution
8. Plan of Distribution...................................... Outside Front Cover Page; Inside Front Cover Page;
Underwriting
9. Legal Proceedings......................................... Legal Proceedings
10. Directors, Executive Officers, Promoters and
Control Persons........................................... Risk Factors; Management
11. Security Ownership of Certain Beneficial Owners
and Management............................................ Risk Factors; Management; Principal Shareholders
12. Description of Securities................................. Description of Securities; Underwriting
13. Interests of Named Experts and Counsel.................... Legal Matters
14. Disclosure of Commission Position of
Indemnification for Securities Act Liabilities............ Risk Factors; Management
15. Organization within Last Five Years....................... Not applicable
16. Description of Business................................... Summary; Management's Discussion and Analysis of
Financial Conditions and Results of Operations;
Business
17. Management's Discussion and Analysis of Plan
of Operation............................................... Management's Discussion and Analysis of Financial
Conditions and Results of Operations
18. Description of Property.................................... Prospectus Summary; Management's Discussion and
Analysis of Financial Conditions and Results of
Operations; Business
3
19. Certain Relationships and Related Party
Transactions............................................... The Company; S Corporation Distribution;
Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters........................................ Outside Front Cover Page of; Prospectus
Summary; Risk Factors; Dividend Policy; Underwriting
21. Executive Compensation..................................... Management
22. Financial Statements....................................... Financial Statements
23. Changes and Disagreements with Accountants
on Accounting and Financial Disclosure..................... Not Applicable
4
EXPLANATORY NOTE
This registration statement (the "Registration Statement") contains
two prospectuses: one relating to the Offering by Hertz Technology Group, Inc.
(the "Company") of (i)1,100,000 Units, each Unit consisting of one Share of
Common Stock (the "Shares") and one Class A Warrant (the "Class A Warrants" or
"Warrants") and (ii) 1,100,000 Class A Warrants, plus 165,000 additional Units
and 165,000 additional Class A Warrants to cover over-allotments, if any (the
"Prospectus"), and one relating to the Offering, by the two principal
shareholders of the Company (the "Selling Shareholders") of 750,000 Shares (the
"Selling Shareholder Prospectus"). Following the Prospectus are certain
substitute pages of the Selling Shareholder Prospectus, including alternate
front outside and back cover pages, an alternate "The Offering" section of the
"Prospectus Summary" and sections entitled "Concurrent Offering" and "Plan of
Distribution." Each of the alternate pages for the Selling Shareholder
Prospectus included herein is labeled "Alternate Page for Selling Shareholder
Prospectus." All other sections of the Prospectus, other than "Underwriting",
are to be used in the Selling Shareholder Prospectus. In addition,
cross-references in the Prospectus will be adjusted in the Selling Shareholder
Prospectus to refer to the appropriate sections.
5
1,100,000 Units,
each Unit consisting of one
Share of Common Stock and
one Class A Warrant
and
PROSPECTUS
1,100,000 Class A Warrants
HERTZ TECHNOLOGY GROUP, INC.
Hertz Technology Group, Inc. ("Company"), a Delaware corporation, is
offering 1,100,000 Units ("Units") at a price of $5.25 per Unit and 1,100,000
Class A Warrants ("Class A Warrants" or "Warrants") at a price of $.25 per
Warrant. Each Unit consists of one share of Common Stock, $.001 par value per
share ("Shares") and one Class A Warrant. The Units, Shares and Class A
Warrants are sometimes collectively referred to as the "Securities". The Class
A Warrants not included in the Units may be offered together with, or
separately from, the Units. The Shares and Class A Warrants included in the
Units are detachable and may trade separately on issuance. See "Risk Factors"
and "Description of Securities."
The Class A Warrants shall be exercisable commencing one year after
the date of this Prospectus ("Effective Date"). Each Class A Warrant entitles
the holder to purchase one Share at $5.50 per share during the four year period
commencing one year from the Effective Date. The Class A Warrants are
redeemable by the Company for $.01 per Warrant, if the average closing price or
bid price of the Shares, as reported by the principal exchange on which the
Shares are traded, equals or exceeds $8.75 per share, for any twenty (20)
consecutive trading days ending within five (5) days prior to the date of the
notice of redemption. See "Description of Securities."
The Company has applied for inclusion of the Shares and Class A
Warrants on the Nasdaq SmallCap Market, although there can be no assurance that
such securities will be accepted for quotation or, if accepted, that an active
trading market will develop. The Units will not be listed for quotation.
Additionally, if the Company's Securities are accepted for quotation and active
trading develops, the Company is required to maintain certain minimum criteria
established by Nasdaq and there can be no assurance that the Company will be
able to continue to fulfill such criteria. See "Risk Factors."
The registration statement of which this Prospectus is a part covers
the offering of an additional 750,000 Shares, 375,000 of which are being
offered by Eli E. Hertz, Chairman, President and Chief Executive Officer of the
Company, and 375,000 of which are being offered by his wife, I. Marilyn Hertz,
Vice Chairperson and a director of the Company (Eli and Marilyn Hertz are
sometimes hereinafter referred to as the "Selling Shareholders"). The Shares
being offered by the Selling Shareholders are not being underwritten. The
Company will not receive any of the proceeds from such sale. Of the 750,000
Shares being offered by the Selling Shareholders, 225,000 shares may be sold
during the twelve (12) months from the Effective Date at such time within such
12 month period as is acceptable to Biltmore Securities, Inc. (the
"Underwriter") and the balance, consisting of 525,000 Shares, may be sold at
any time after the expiration of eighteen (18) months from the Effective Date,
subject to earlier release at the sole discretion of the Underwriter.
Certificates evidencing these securities will bear a legend reflecting such
restrictions. The Underwriter may release the Securities held by the Selling
Shareholders at any time after all
Securities subject to the Over-Allotment Option (as hereinafter defined) have
been sold or such option has expired. The Underwriter's Over-Allotment Option
period will expire thirty (30) days following the date of this Prospectus. In
other offerings where Biltmore Securities, Inc. has acted as the managing
underwriter, it has released similar restrictions applicable to selling
shareholders prior to the expiration of the lock-up period and in some cases
immediately after the exercise of the Over-Allotment Option or the expiration
of the Over-Allotment Option period. The resale of the Securities held by the
Selling Shareholders is subject to prospectus delivery and other requirements
of the Securities Act of 1933, as amended (the "Securities Act"). Sales of such
securities or the potential for such sales at any time may have an adverse
effect on the market prices of the securities offered hereby. See "Selling
Shareholders."
Prior to this offering, there has been no public market for the Units,
Shares or Class A Warrants. The prices of the Units, Shares and Class A
Warrants, as well as the exercise price of the Class A Warrants, have been
determined by negotiation between the Company and the Underwriter, and do not
necessarily bear any relationship to the Company's assets, book value, net
worth or results of operations or any other established criteria of value. For
additional information regarding the factors considered in determining the
initial public offering price of the Securities and the exercise price of the
Class A Warrants, see "Risk Factors - Arbitrary Offering Price," "Description
of Securities" and "Underwriting."
The Company does not presently file reports and other information with
the Securities and Exchange Commission ("Commission"). However, following the
completion of this offering, the Company intends to furnish its shareholders
with annual reports containing audited financial statements and such interim
reports, in each case as it may determine to furnish or as may be required by
law.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE SHARES
AND SHOULD BE CONSIDERED ONLY BY PERSONS
WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS", WHICH BEGINS ON PAGE _____ , AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Discounts Proceeds to the
Price to Public and Commissions (1) Company (2)
--------------- ----------------------- ---------------
Per Unit . . . . . . . . . . . . . . . $5.25 $.525 $4.725
Per Class A Warrant . . . . . . . . . . $.25 $.025 $.225
Total (3) . . . . . . . . . . . . . . . $6,050,000 $605,000 $5,445,000
The Securities are offered by the Underwriter subject to prior sale
when, as and if delivered to and accepted by the Underwriter, and subject to
the Underwriter's right to reject orders in whole or in part and to certain
other conditions. It is expected that delivery of certificates representing the
Securities will be made on or about __________, 1996.
-----------------------------
BILTMORE SECURITIES, INC.
The date of this Prospectus is __________, 1996
2
NOTES
(1) The value of each Share and Warrant included in a Unit is $5.00 and
$.25, respectively. The figures shown in this column do not include
additional compensation to be received by the Underwriter in the form of
(i) a nonaccountable expense allowance of $181,500 (or $208,725 if the
Underwriter's Over-Allotment Option (as defined below) is fully
exercised); and (ii) an option (exercisable for a period of four years
commencing one year after the Effective Date) entitling the Underwriter
to purchase 110,000 Units at $6.30 per Unit and 110,000 Class A Warrants
at $.30 per Class A Warrant ("Underwriter's Purchase Option"). In
addition, the Company and the Underwriter have agreed to indemnity and
contribution provisions regarding certain civil liabilities, including
liabilities under the Securities Act. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company,
estimated at $576,500, including the Underwriter's nonaccountable
expense allowance. See "Underwriting."
(3) The Company has granted the Underwriter an option to purchase up to
165,000 additional Units and 165,000 additional Class A Warrants upon
the same terms and conditions as set forth above solely to cover
over-allotments, if any ("Underwriter's Over-Allotment Option"). If the
Underwriter's Over-Allotment Option is exercised in full, the total
Price to the Public, Underwriting Discounts and Proceeds to the Company
will be $6,957,500, $695,750 and $6,261,750, respectively. See
"Underwriting."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
ALTHOUGH OTHER BROKER-DEALERS HAVE EXPRESSED AN INTENTION TO
PARTICIPATE IN THE OFFERING, ALL OR A SIGNIFICANT NUMBER OF THE SECURITIES TO
BE SOLD IN THIS OFFERING MAY BE SOLD, IN THE ORDINARY COURSE OF BUSINESS, TO
CUSTOMERS OF THE UNDERWRITER WHICH MAY AFFECT THE MARKET FOR AND LIQUIDITY OF
THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL BROKER-DEALERS DO NOT
MAKE A MARKET IN THE COMPANY'S SECURITIES. ALTHOUGH OTHER BROKER-DEALERS HAVE
EXPRESSED AN INTENTION TO MAKE A MARKET IN THE COMPANY'S SECURITIES FOLLOWING
THE OFFERING, THERE CAN BE NO ASSURANCE THAT ANY OF SUCH BROKER-DEALERS WILL
ACTUALLY COMMENCE SUCH MARKET-MAKING ACTIVITIES OR, IF COMMENCED, THAT SUCH
ACTIVITIES WILL BE MAINTAINED. BASED UPON THE UNDERWRITER'S EXPERIENCE IN PAST
OFFERINGS, IT IS EXPECTED THAT SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE SECURITIES COVERED THEREBY THROUGH
AND/OR WITH THE UNDERWRITER. NO AGREEMENTS OR UNDERSTANDINGS, WRITTEN OR ORAL,
EXIST WITH RESPECT TO THE PURCHASE OR RESALE OF THE SECURITIES TO BE SOLD IN
THIS OFFERING THROUGH OR WITH THE UNDERWRITER AND/OR ITS AFFILIATES.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME
TO TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE
COMPANY'S SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY
BECOME A DOMINATING INFLUENCE IN THE MARKET FOR THE SHARES AND CLASS A
WARRANTS. HOWEVER, THERE IS NO ASSURANCE THAT THE UNDERWRITER WILL OR WILL
CONTINUE TO BE A DOMINATING INFLUENCE. THE PRICES AND LIQUIDITY OF THE
SECURITIES OFFERED HEREUNDER MAY BE SIGNIFICANTLY AFFECTED BY THE DEGREE OF THE
UNDERWRITER'S PARTICIPATION IN SUCH MARKET. THE UNDERWRITER MAY DISCONTINUE
SUCH ACTIVITIES AT ANY TIME OR FROM TIME TO TIME. SEE "RISK FACTORS-LACK OF
PRIOR MARKET FOR SECURITIES OF THE COMPANY" AND "UNDERWRITER'S INFLUENCE ON THE
MARKET MAY HAVE ADVERSE CONSEQUENCES."
SPECIAL STANDARDS FOR SECURITIES SOLD IN CALIFORNIA
EACH CALIFORNIA INVESTOR MUST HAVE AN ANNUAL GROSS INCOME OF AT LEAST
$65,000 AND A NET WORTH, EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES, OF AT
LEAST $250,000, OR IN THE ALTERNATIVE, A NET WORTH EXCLUSIVE OF HOME,
FURNISHINGS AND AUTOMOBILES, OF AT LEAST $500,000. IN ADDITION, AN INVESTOR'S
TOTAL PURCHASE MAY NOT EXCEED 10% OF SUCH INVESTOR'S NET WORTH.
3
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-2, pursuant to the Securities Act, with respect to the securities
offered by this Prospectus. This Prospectus does not contain all of the
information set forth in said Registration Statement, and the exhibits thereto.
For further information with respect to the Company and the securities offered
hereby, reference is made to such Registration Statement and exhibits which may
be inspected without charge at the Commission's principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company intends to furnish its shareholders and holders of Class A
Warrants with annual reports containing audited financial statements and such
interim reports as it deems appropriate or as may be required by law. The
Company's fiscal year ends August 31.
The Company will provide without charge to each person who receives
this Prospectus, upon written or oral request of such person, a copy of any of
the information that is incorporated by reference herein (excluding exhibits)
by contacting the Company at Hertz Technology Group, Inc., 325 Fifth Avenue,
New York, New York 10016-5012, telephone (212) 684-4141, attention: I. Marilyn
Hertz, Vice Chairperson and Secretary.
4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information, including information contained under the caption "Risk
Factors," and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all information in
this Prospectus (i) assumes no exercise of the Class A Warrants offered hereby,
the Over-Allotment Option, the Underwriter's Purchase Option, or any of the
options issued to Eli E. Hertz or to employees of the Company and (ii) reflects
the effect of the Recapitalization described under "Certain Transactions"
appearing elsewhere in this Prospectus. As used herein, unless the context
otherwise requires, the term Company includes Hertz Computer Corporation (and
its Israeli subsidiary, Hertz Computer Information System (1985) Ltd.), "Hertz
Israel", which, together with its parent, are referred to as "Hertz Computer")
and Hergo Ergonomic Support Systems, Inc. ("Hergo").
The Company
The Company custom designs, assembles and sells microcomputers ("PCs")
and provides related technology support and services under the "Hertz" name.
The Company also designs, manufactures and sells ergonomically engineered
mounting and support structures ("Modular Racking Systems") for PCs and related
computer peripheral equipment under the "Hergo" name. Ergonomically engineered
products are designed to take into consideration the physical characteristics
of computer users and the manner in which they and their computers interact
with each other. The Company's sales are concentrated in the metropolitan New
York area.
Hertz Customized Computers and Related Services. The Company designs
and sells customized PCs and provides a broad range of related services,
including system architecture design, consulting, installation, personnel
training and customer support. PCs are assembled in a number of different
configurations using standard component parts. Customization enables the
Company to accommodate customer computer needs with respect to storage
capacity, speed, price, applications, size, configuration and a range of other
considerations that can be accommodated in whole or in part by the selection of
appropriate components. Hertz PCs are primarily sold for use in network
configurations. They are also sold to original equipment manufacturers ("OEMs")
for use in Magnetic Resonance Imaging ("MRI") machines, to provide voice mail
services, for use in military radar systems and for use in shopping center
kiosks to enable prospective purchasers of music discs and tapes to select and
hear their musical selections prior to purchase.
Hergo Modular Racking Systems. The Company's Hergo Division designs,
manufactures and sells Modular Racking Systems which serve to conserve space
and help organize and facilitate the accessibility of all types of computer
hardware, communication and electronic devices, and other peripherals. Hergo
systems are suitable for use in any size computer room or technical
environment. The market for these Modular Racking Systems was created in large
part by the replacement of mainframe computers by multiple PCs. The Company
provides a cohesive, functional and architecturally attractive racking system
that vertically mounts and supports multiple computers, servers and related
peripherals, such as printers, monitors, scanners and modems, used in tandem
with each other, or in juxtaposition with each other and interconnected for
networking functions. Purchasers of the Company's Modular Racking Systems
include some of the largest industrial, commercial and financial companies in
5
the United States, such as Citibank, N.A., AT&T, Dow Jones, Bell Atlantic,
Pfizer, Hewlett Packard, The New York Times and Time Warner.
The Company's strategic plan is to strengthen its business lines by
updating their respective physical facilities and manufacturing equipment and
then intensifying their respective marketing efforts. With respect to the PC
business, the Company intends to develop a national sales force and increase
its efforts to market Hertz PCs to the Federal Government and OEMs. For the
Hergo line, the Company plans on bringing to market new products, including
"Hergolite", and on strengthening its relationships with its customer base of
large U.S. corporations. "Hergolite" is a line of Modular Racking Systems,
specifically designed for the small business or home office user. The Company
also plans on actively pursuing a cross marketing program between its Hertz
Computer and Hergo Divisions with special emphasis on marketing the Company as
a PC supplier to its Hergo customers. Finally, the Company plans on
establishing a new division to offer a variety of Internet services, such as
Internet access and Web site design, to its corporate clients.
The Company was incorporated in the State of Delaware, on June 18,
1996. Immediately prior to the Effective Date, it will have acquired all the
outstanding stock of Hertz Computer and Hergo, which will become wholly owned
subsidiaries of the Company (the "Recapitalization"). The principal executive
offices of the Company are located at 325 Fifth Avenue, New York, New York
10016-5012 and its telephone number is (212) 684-4141. On or about November 15,
1996, the Company plans to move its New York facilities, including its
executive offices, to 75 Varick Street, New York, New York , 10013.
See "Risk Factors," "Management," "Business" and "Certain
Transactions" for a discussion of certain factors which should be considered in
evaluating the Company and its business.
The Offering
Securities Offered (1)............................. 1,100,000 Units,
1,100,000 Warrants
Securities outstanding prior to Offering........... 1,900,000 Shares
0 Warrants
Securities outstanding after Offering (2).......... 3,000,000 Shares
2,200,000 Warrants
Comparative Shares Ownership Upon Completion
of Offering:
Present Shareholders (1,900,000
Shares)(2)(3)........................... 63.3%
Public Shareholders (1,100,000
Shares)(3).............................. 36.7%
Use of Net Proceeds................................ The Company intends to use the net proceeds for
debt retirement, an S Corporation distribution,
a Hertz PC marketing program, purchase of new Hergo
machinery, Hergo's new product development, establishment
of a Internet Service Division, updating computer
systems, Hergo marketing, upgrading new facility and
production equipment of Hertz Computer and for working
capital purposes. See "Use of Proceeds."
Proposed Nasdaq Symbols
Common Stock....................................... HTGI
Class A Warrants................................... HTGIW
- ----------
(1) The Company is offering 1,100,000 Units (each Unit consisting of one
Share and one Warrant) at a price of $5.25 per Unit and 1,100,000
Warrants at a price of $.25 per Warrant. Each Warrant entitles the
holder to purchase one Share at $5.50 per share during the four year
period commencing one year from the Effective Date. The Warrants are
redeemable upon certain conditions. Should
6
the Warrants be exercised, of which there is no assurance, the Company
will receive the proceeds therefrom aggregating up to an additional
$12,100,000. See "Description of Securities."
(2) Does not include Shares issuable upon the exercise of (i) the Warrants
offered hereby; (ii) the Underwriter's Over-Allotment Option to
purchase up to 165,000 Units and 165,000 Warrants; (iii) the
Underwriter's Purchase Option to purchase up to 110,000 Units and
....110,000 Warrants; (iv) the option held by Eli E. Hertz to
purchase 900,000 Shares; (vi) the options to purchase 750,000 Shares
reserved for issuance under the Company's Stock option Plan.; and
(vii) the issuance of 100,000 Shares reserved for issuance under
.......the Company's Employee Bonus Plan.
See "Description of Securities."
(3) See "Dilution."
7
Summary Financial Information
The summary financial information set forth below is derived from the
more detailed financial statements appearing elsewhere in this Prospectus. This
information should be read in conjunction with the financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operation appearing elsewhere in this Prospectus. The following
consolidated data, insofar as it relates to the years ended August 31, 1995 and
August 31, 1994, has been derived from the audited financial statements and
notes thereto appearing elsewhere herein.
The data for the nine months ended May 31, 1996 and 1995 has been
derived from the unaudited financial statements also appearing elsewhere herein
which, in the opinion of management, includes all adjustments, consisting of
only normal, recurring adjustments, necessary for a fair presentation of the
results of operations for the unaudited periods. The results of operations for
the nine months ended May 31, 1996 and 1995 are not necessarily indicative of
the results to be expected for the entire year.
Hertz Technology Group, Inc.
Hertz Technology Group, Inc.
--------------------------------------------------------------
Nine Months ended Years ended
May 31, August 31
Consolidated Statements of
Operations Data: 1996 1995 1995 1994
---- ---- ---- ----
Net Sales $9,375,857 $8,224,492 $11,220,183 $10,929,308
Cost of goods sold 6,532,666 6,117,860 8,102,977 8,386,365
Gross Profit 2,843,191 2,106,632 3,117,206 2,542,943
Selling, general & administrative expense 2,072,389 1,942,355 2,868,665 2,288,388
Other expense, net 138,790 96,372 116,813 44,946
Income before Provision for income taxes 632,012 67,905 131,728 209,609
Provision for income taxes 244,500 3,900 77,615 63,138
Net income 387,512 64,005 54,113 174,895
Pro forma net income(1) 265,779 67,905 58,126 102,057
Pro forma net income per share $0.14 $0.04 $0.03 $0.05
Weighted average number of shares outstanding 1,900,000 1,900,000 1,900,000 1,900,000
Supplementary net income per share(2) $0.16 -- $0.06 --
8
Hertz Technology Group, Inc.
------------------------------------------
May 31, 1996
As
Consolidated Balance Sheet Data: Actual Adjusted(3)
Working Capital $546,750 $5,415,250
Total Assets 3,388,212 6,588,581
Capital lease obligation 19,309 19,309
Distributions payable to shareholders 224,567 --
Total Liabilities 2,484,301 816,170
Stockholders' Equity 903,911 5,772,411
- -----------------
(1) Pro forma net income reflects a provision for income taxes as if Hergo
had been a C Corporation throughout such period.
(2) Supplementary net income per share is calculated for the nine month
period ended May 31, 1996 as if $1,443,564 of interest bearing debt
obligations was repaid from the net proceeds of this Offering as of
September 1, 1995 and assuming that (i) 288,713 Shares were issued as
of September 1, 1995 to repay the interest bearing debt obligations;
(ii) $82,200 of interest expense net of income tax expense was
eliminated as a result of such payment for the nine months ended May
31, 1996; and (iii) pro forma net income of $265,779 (which reflects a
provisions for income taxes as if Hergo were a C corporation for the
nine months ended May 31, 1996) was the base utilized in the
calculation of supplementary net income per share. Supplementary net
income per share is calculated for the year ended August 31, 1995 as
if $1,559,743 of interest bearing debt obligations was repaid from the
net proceeds of this Offering as of September 1, 1994 and assuming
that (i) 311,949 Shares were issued as of September 1, 1994 to repay
the interest bearing debt obligations; and (ii) $74,385 of interest
expense, net of income tax expense was eliminated as a result of such
payment for the twelve months ended August 31, 1995.
(3) Adjusted to reflect (i) the sale of Securities consisting of 1,100,000
Units and 1,100,000 Warrants by the Company and the net proceeds
therefrom and the uses thereof (assuming an initial public offering
price of $5.25 per Unit and $.25 per Warrant and after deducting the
underwriting discounts and commissions and expenses of this offering
estimated at $1,181,500), and (ii) the repayment of certain
indebtedness from the proceeds of this Offering. Does not include the
proceeds from the sale of Shares pursuant to the exercise of any
Warrants or Options, including the Underwriter's Purchase Option. See
"Underwriting."
9
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK. ONLY THOSE PERSONS ABLE TO LOSE THEIR ENTIRE INVESTMENT SHOULD
PURCHASE THESE SECURITIES. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT
DECISION, SHOULD CAREFULLY READ THIS PROSPECTUS AND CONSIDER, ALONG WITH OTHER
MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
Highly Competitive Microcomputer Market - Pressure on Profit Margins.
The business of manufacturing and selling PCs is intensely competitive
and rapidly changing. The Company believes that the principal competitive
factors in the microcomputer sales and service industry include relative price
and performance, product availability, technical expertise, financial
stability, service, support and reputation. The Company's computers are
constructed with standardized parts which are available to others in the
market. The Company's competitors include established computer product
manufacturers, some of which supply products to the Company, computer
resellers, distributors and service providers. Some of the Company's current
and potential competitors have substantially greater financial, sales,
marketing, technical and other competitive resources than those of the Company.
As a result, the Company's competitors may be able to devote greater resources
than the Company to the sales and service of microcomputer products. As the
computer market in which the Company competes has matured, product price
competition has intensified and is likely to continue to intensify, which may
make it too costly for the Company to continue its "made to order" method of
doing business. One of the results of this competition may be to lower sale
prices and decrease profit margins. A significant portion of the Company's
computer business is to governmental agencies where sales will depend on
government budgets and government contracts, which contracts are subject to
renewal on a periodic basis. There can be no assurance that the Company will
win bids in the future just because it won similar bids in the past. The
Company has been increasing its selling efforts in the private commercial
market and particularly in the OEM market where margins are expected to be
higher. There can be no assurance, however, that the Company will be successful
in refocusing its computer business to the private commercial market, or that
it will be able to keep up with its competition and still improve profit
margins.
10
Geographic and Customer Concentration; Risk of Expansion.
The Company's sales are concentrated in the New York metropolitan
area. Approximately 61% and 66% of its total sales were concentrated in the New
York metropolitan area for the year ended August 31, 1995 and for the nine
months ended May 31,1996, respectively. A majority of these sales (36% and 41%
of total sales for these respective periods) were to federal, state and city
agencies or government affiliated organizations, including hospitals and
schools ("Governmental Entities"). Because these sales are pursuant to
contracts awarded by competitive bidding, there is no assurance that
notwithstanding a favorable past relationship with a particular Government
Entity that the Company will be the successful bidder in future contracts with
such Entity. Moreover, spending by Governmental Entities is subject to
budgetary constraints and is vulnerable to political challenges for over
spending and the like. The result is that projections based on continuing
governmental sales are often unreliable and any dependence by the Company on
continuing governmental business may have materially adverse consequences.
The Company is seeking to expand its market for computer sales to
include most of the United States, and intends to specifically target OEM
accounts where the markup is generally expected to be higher than governmental
and commercial accounts. While the Hertz name is known by many prospective
customers within its existing market area, it has less name recognition outside
of the New York metropolitan area. Consequently, there is no assurance that the
Company's efforts will be successful. A larger sales volume may require the
Company to maintain larger storage facilities, which it does not currently
maintain, in order to stock completed units pending shipment. The Company
offers as one of its options on-site servicing, and installation for its
computer sales accounts. As it expands its computer business, it might need to
make arrangements either for its own newly hired personnel, or with a
third-party service provider outside of the metropolitan area, to provide
on-site servicing. The transition of a company servicing a regional area into a
company servicing a large portion of the United States will require the Company
to make some adjustments in its methods of operation and in its orientation and
focus, which, if not effectively made, could create serious obstacles to
achieving a successful expansion.
Limited Operating History of Hergo's Product Line.
The Company's Hergo Division provides Modular Racking Systems to house
and organize stand-alone or multiple computers and electronic devices used in
tandem or in juxtaposition with each other. The market for these support
systems was created in large part by the replacing of main frame computers by
microcomputers. Hergo's sales in its 1995 fiscal year represented a significant
increase over the prior year's sales. Moreover, Hergo's profit margins
historically have been higher than those obtained in the computer business.
There is no assurance, however, that growth in the Hergo business or its gross
profit margins will continue at the same pace as before, if at all. In
addition, as the profit margins in this line of business become better
appreciated in the trade, there is every reason to expect a larger number of
companies to enter the field as competitors.
The Company intends to use Hergo's customer list, which includes some
of the largest and best known companies in America, to create cross marketing
opportunities to promote the Hertz computer line to these existing Hergo
customers. However, in many of these companies, the personnel charged with the
responsibility for purchasing computers are not the same as the
11
personnel buying the Hergo Modular Racking System, and many companies prefer to
do their computer business with larger better known companies. and such cross
marketing potential may never be realized. Moreover, there is no assurance that
the companies that have purchased Hergo products will continue to favor the
Company with their structural support units and technical furniture needs.
There are no long term commitments from buyers in this business, and the
Company has no significant back-log. If for any of these reasons, the Company
is unable to realize on the potential which management sees in its Hergo
operations to date, the Company's overall profit margins and profits will
suffer and its projected growth may never materialize.
Lack of Proprietary Rights; Trademarks
The Company relies on trade secret protection and confidentiality
agreements with its employees, customers and others to protect its proprietary
rights in both of its business lines. The Company's computers are manufactured
in a number of configurations using standardized component parts and
accessories built by others, and available in the market place for others to
purchase and use in assembling computers. The Hertz computer does not enjoy any
patent protection. Similarly, modular component parts used by the Company in
its Hergo Modular Racking Systems are functional in nature and for the most
part not protectable. This is the opinion of the Company's management even
though the Company is currently a defendant in a lawsuit in which the plaintiff
claims that Hergo's modular designs infringe plaintiff's common law rights
thereto. See "Legal Proceedings." Consequently, competitors of the Company, in
one or both of its product lines, may be able to replicate and improve on the
Company's methods of doing business and those with greater resources than the
Company may more effectively market their products.
The Hertz trademark has not yet been registered on the principal
Registrar of the United States Patent and Trademark Office. Although
application for such mark has been made, the Examining Attorney in the
Trademark and Trial Appeals Board refused to register the mark on the grounds
that it was in conflict with two registered marks of an affiliate of the Hertz
Corporation (the car rental company) (the "Car Rental Company"). On March 8,
1995, the Company filed a petition for partial cancellation of the Car Rental
Company's registrations on the ground that the registrations covered renting
and leasing of heavy tools and machines for industrial and construction
purposes, did not cover computer and computer peripherals and therefore did not
conflict with the Company's proposed use of the name. The Car Rental Company's
answer is due on October 30, 1996. The granting of the Company's registration
application is being held in abeyance pending resolution of this dispute. Some
settlement discussions have also been conducted in an effort to obtain the Car
Rental Company's consent to the Company's registration of the Hertz Computer
Corporation name, although no such settlement has been agreed to.
The Car Rental Company has an affiliate named Hertz Technology, Inc.,
incorporated in New York in 1991. No claim has been made against the Company
based on its use of the Hertz name. If any such claim were made, the Company
believes that it has good defense against any such claim. The Hertz name is
regarded as a very valuable asset of the Company, and in the event that the
Company were enjoined from using the Hertz Technology name, the Company
believes it can adapt to the use of Hertz Computer or some other form of the
Hertz name as an alternative with a minimum disruption and loss of good will.
12
1996 Loss in Israel Subsidiary; Changes in Import Duties
A significant portion (17% in fiscal 1995) of the Company's total
sales are accounted for by sales to Israel, to or through its Israel
subsidiary. For the first nine months of fiscal 1996, Hertz Israel had an
operating loss of $83,000. This loss was due in large part to a change in the
Israeli tax law. Prior to this change, computers imported to Israel were
assessed a high tariff. Certain companies and universities were exempt from
this tax if the products were purchased in the US. In August 1994, the tariffs
on imported goods to Israel were eliminated, a move that took away the price
difference between a computer imported from the Far East and a computer
imported from the U.S. This in turn made the purchase of computers in the local
Israeli market, which is dominated by Far East imports, a more convenient
purchase than a purchase from the United States. With the removal of the
incentive to buy from the U.S., many of Hertz's customers, such as the
universities which had been purchasing directly from Hertz in the U.S., chose
to do most of their purchasing in Israel. To accommodate these customers, the
Company now ships computers for Israeli customers to Hertz Israel which then
reships such computers to the ultimate customers. The new routing schedule
involved increased expense which the Company has not been able to completely
pass on to its Israeli customers. The nine month loss also reflects severance
payments and other expenses incurred in connection with the buy-out of a
minority interest and in replacing the general manager of the Israeli
subsidiary. On a going forward basis, the Company has established more
effective cost controls and a better defined organization, which the Company
believes will help restore its Israel operations to profitability. The Company
also believes that the change in the Israel Duty Tax will not materially affect
sales. There cannot, however, be any assurance that either of the above
expectations will be confirmed, or that the subsidiary's losses will not
continue. If the losses in the subsidiary continue, the Company will consider
liquidating the subsidiary and replacing it with a manufacturer's
representative in Israel.
There is always a risk when selling in Israel (as in other foreign
countries) that changes (other than changes in the Importation Duty) in
existing laws, policies and conditions could materially affect Company
operations. In addition, the proceeds of sales to Israeli customers are always
subject to change in currency exchange valuations which could adversely affect
profits from overseas sales.
Immediate and Substantial Dilution
The Company had a net tangible book value of $862,327 or $.45 per
share, derived from the Company's May 31, 1996 consolidated balance sheet and
based upon 1,900,000 shares being outstanding immediately prior to the closing
of this offering. After projecting the effect of the sale of the Units and
Warrants offered hereby at an offering price of $5.00 per Share and $.25 per
Warrant, after deducting underwriting discounts and estimated offering
expenses, adjusted net tangible book value will be $5,730,827 or $1.91 per
share. The result will be an immediate increase in net tangible book value per
share of $1.46 to existing shareholders and an immediate dilution to new
investors of $3.09 per share (62%). See "Dilution."
Litigation Involving Underwriter May Affect Securities
The Company has been advised by the Underwriter that on or about May
22, 1995, the Underwriter and Elliot Loewenstern and Richard Bronson,
principals of the Underwriter, and the Commission agreed to an offer of
settlement (the "Offer of Settlement") in connection with a
13
complaint filed by the Commission in the United States District Court
for the Southern District of Florida alleging violations of the federal
securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) and
15(c) of the Securities Exchange Act of 1934, and Rules 10b-5, 10b-6 and 15c1-2
promulgated thereunder. The complaint also alleged that in connection with the
sale of securities in three (3) IPO's in 1992 and 1993, the Underwriter engaged
in fraudulent sales practices. The proposed Offer of Settlement was consented
to by the Underwriter and Messrs. Loewenstern and Bronson without admitting or
denying the allegations of the complaint. The Offer of Settlement was approved
by Judge Gonzales on June 6, 1995. Pursuant to the final judgment (the "Final
Judgment"), the Underwriter:
o was required to disgorge $1,000,000 to the Commission, which
amount was paid in four (4) equal installments on or before June
22, 1995;
o agreed to the appointment of an independent consultant
("Consultant").
Such Consultant is obligated, on or before November 1, 1996:
o to review the Underwriter's policies, practices and procedures
in six (6) areas relating to compliance and sales practices;
o to formulate policies, practices and procedures for the
Underwriter that the Consultant deems necessary with respect to
the Underwriter's compliance and sales practices;
o to prepare a report devoted to and which details the
aforementioned policies, practices and procedures (the
"Report");
o to deliver the Report to the President of the Underwriter and to
the staff of the Southeast Regional office of the Commission;
o to prepare, if necessary, a supervisory procedures and
compliance manual for the Underwriter, or to amend the
Underwriter's existing manual; and
o to formulate policies, practices and procedures designed to
provide mandatory on-going training to all existing and newly
hired employees of the Underwriter. The Final Judgment further
provides that, within thirty (30) days of the Underwriter's
receipt of the Report, unless such time is extended, the
Underwriter shall adopt, implement and maintain any and all
policies, practices and procedures set forth in the Report.
The Final Judgment also provides that an independent auditor
("Auditor") shall conduct four (4) special reviews of the Underwriter's
policies, practices and procedures, the first such review to take place six (6)
months after the Report has been delivered to the Underwriter and thereafter at
six-month intervals. The Auditor is also authorized to conduct a review, on a
random basis and without notice to the Underwriter, to certify that any persons
associated with the Underwriter who have been suspended or barred by any
Commission order are complying with the terms of such orders.
On July 10, 1995, the action as against Messrs. Loewenstern and
Bronson was dismissed with prejudice. Mr. Bronson has agreed to a suspension
from associating in any supervisory capacity with any broker, dealer, municipal
securities dealer, investment advisor or investment company for a period of
twelve (12) months, dating from the beginning of such suspension. Mr.
Loewenstern has agreed to a suspension from associating in any supervisory
capacity with any broker, dealer, municipal securities dealer, investment
advisor or investment company for a period of twelve (12) months commencing
upon the expiration of Mr. Bronson's suspension.
14
In the event that the requirements of the foregoing judgment adversely
affect the Underwriter's ability to act as a market maker for the Shares, and
additional brokers do not make a market in the Company's securities, the market
for, and the liquidity of, the Company's securities may be adversely affected.
In the event that other broker dealers fail to make a market in the Company's
securities, the possibility exists that the market for and the liquidity of the
Company's securities may be adversely affected to such an extent that public
security holders may not have anyone to purchase their securities when offered
for sale at any price. In such event, the market for, liquidity and prices of
the Company's securities may not exist. See "Underwriting." For additional
information regarding the Underwriter, investors may call the National
Association of Securities Dealers, Inc. at (800) 289-9999.
Recent State Action Involving the Underwriter--Possible Loss of Liquidity
The State of Indiana has commenced an action seeking among other
things to revoke the Underwriter's license to do business in such state. A
hearing in this matter was scheduled for October 7, 1996 and has been adjourned
pending settlement discussions. Such proceeding if ultimately successful may
adversely affect the market for and liquidity of the Company's securities if
additional broker dealers do not make a market in the Company's securities.
Moreover, should Indiana investors purchase any of the securities sold in this
offering from the Underwriter prior to the possible revocation of the
Underwriter's license in Indiana, such investors will not be able to resell
such securities in such state through the Underwriter but will be required to
retain a new broker dealer firm for such purpose. The Company cannot ensure
that other broker dealers will make a market in the Company's securities. In
the event that other broker dealers fail to make a market in the Company's
securities, the possibility exists that the market for and the liquidity of the
Company's securities may be adversely affected to an extent that public
security holders may not have anyone to purchase their securities when offered
for sale at any price. In such event, the market for, liquidity and prices of
the Company's securities may not exist. The Company does not intend to seek
qualification for the sale of the Securities in the state of Indiana. It should
be noted that although the Underwriter may not be the sole market maker in the
Company's securities, it will most likely be the dominant market maker in the
Company's securities. See "Underwriting."
Substantial Portion of Proceeds to be Used to Repay Indebtedness
Approximately 25% of the net proceeds of this offering, or $1,241,000
is intended to be used to repay existing indebtedness of the Company. Of this
amount, approximately $189,000 will be used to repay Eli and Marilyn Hertz for
advances and loans to the Company, and $895,000 will be used to pay down a bank
line from United Mizrachi Bank, which obligations of the Company have been
guaranteed by Eli and Marilyn Hertz. See "Use of Proceeds."
Benefit of Offering to Principal Shareholders;
The Company has an outstanding loan balance to Mr. and Mrs. Hertz of
approximately $189,000 as of September 30, 1996. In addition, they have
guaranteed the payment of the Company's indebtedness to the United Mizrachi
Bank (the "Bank"), which amount, as of September 30, 1996, was $895,000. The
Company intends to use a portion of the net proceeds of this offering to repay
the Company's borrowings from Eli and Marilyn Hertz, the Company's obligation
to the Bank guaranteed by them and also to fund a distribution to Eli and
Marilyn Hertz (See S Corporation Distribution) estimated at $225,000 as of May
31, 1996.
15
Consequently, both Eli and Marilyn Hertz stand to benefit from this
offering and the foregoing transactions including the manner in which the net
proceeds of this offering are to be allocated, represent a potential conflict
of interest for Mr. and Mrs. Hertz. See "S Corporation Distribution" and "Use
of Proceeds."
Dependence on Management
The Company's business is principally dependent on certain key
management personnel for the operation of its business. In particular, Eli E.
Hertz has played the primary role in the promotion, development and management
of both facets of the Company's business. The Company has entered into a five
year employment agreement with Mr. Hertz. Under this agreement, Mr. Hertz is to
be paid an annual salary of $225,000 per year. The Company is the owner and
beneficiary of a key-man life insurance on Mr. Hertz in the amount of $1
million. There can be no assurance, however, that the death of Mr. Hertz or his
departure from the Company for any reason would not have a materially adverse
effect on the operations of the Company. See "Business" and "Management."
Need to Develop Sales Force and Expand Employee Base
The Company's plan for the future contemplates the training and
development of a national sales organization to sell and service Hertz
Computer's products. Heretofore, most of the Company's computer sales activity
have been confined to process unsolicited orders by telephone. Consequently,
the Company does not have a core of experienced sales persons upon which to
build a sales force. It is committed to allocating a significant amount of
money which it expects to obtain from this Offering, to the hiring of a sales
force, including a national sales director of sufficient experience and
stature, for the marketing and selling of computers nationally. There can be no
assurance, however, that any such sales force developed by the Company will be
successful in marketing and selling its computers to an expanding geographic
market.
The Company has approximately 56 employees as of July 1, 1996. This
number is expected to increase significantly in the next year as the Company
expands its manufacturing, sales and service operations. The Company's success
depends upon its ability to attract and retain highly qualified management and
technical personnel in addition to the national sales organization it is
committed to build. Competition for qualified employees is intense. In
addition, the process of locating needed personnel with the combination of
skills and attributes required to implement the Company's expansion plans may
take more time than is currently contemplated.
Pending Litigation
The Company is a party to two pending suits one as a defendant and the
other as a plaintiff, in which the defendant has asserted a counterclaim
seeking a large amount of damage from the Company. Though the Company believes
that the outcome of these cases, taken together, will not have a materially
adverse effect on the Company, litigation results are often unpredictable and
if a large damage award were rendered against the Company in either case, the
result could adversely affect Company operations. See "Legal Proceedings."
16
Voting Control By Management; Potential Anti-Takeover Effect
After giving effect to this offering (but without giving effect to the
sales of any securities by the Selling Shareholders), Eli and Marilyn Hertz
will beneficially own over 50% of the outstanding Shares. Accordingly, they
may, by themselves, have sufficient Shares to be able to approve major
corporate transactions including amending the Certificate of Incorporation of
the Company, the sale of substantially all of the Company's assets, the
election all of the directors of the Company and to control the Company's
affairs. This voting control may have the effect of delaying or preventing a
change in control of the Company and may adversely affect the rights of the
shareholders of the Company. In addition, the Company is subject to a State of
Delaware statute regulating business combinations which may also hinder or
delay a change of control.
Absence of Dividends
Except for an S Corporation Distribution, the Company does not expect
to pay cash or stock dividends on its Shares in the foreseeable future, but
instead, intends to retain all earnings, if any, to invest in the Company's
operations. The payment of future dividends is within the discretion of the
Board of Directors and will depend upon the Company's future earnings, if any,
its capital requirements, financial condition and other relevant factors. See
"Dividend Policy."
Limitation on Director Liability
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation limits the liability of directors to the Company
or its shareholders for monetary damages for breach of a director's fiduciary
duty, except for liability in four specific instances. These are for (i) any
breach of the director's duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or knowing violations of law, (iii) unlawful payments of dividends
or unlawful stock purchases or redemption's as provided in Section 174 of the
Delaware General Corporation Law, or (iv) any transaction from which the
director derived an improper personal benefit. As a result of the Company's
charter provision and Delaware law, shareholders may have more limited rights
to recover against directors for breach of fiduciary duty. See
"Management--Limitation on Liability of Directors."
Arbitrary Offering Price
There has been no prior public market for the Company's Securities.
The price to the public of the Securities offered hereby has been arbitrarily
determined by negotiations between the Company and the Underwriter and bears no
relationship to the Company's earnings, book value or any other recognized
criteria of value. The value of $5.00 per Share reflected in the offering price
of the Units is substantially in excess of the net tangible book value of $.45
per Share, derived from the Company's May 31, 1996, consolidated balance sheet
and in excess of the price received by the Company for shares sold in prior
transactions. See "Prospectus Summary--Selected Financial Data,"
"Underwriting," "Dilution" and "Certain Transactions."
17
Requirements of Current Prospectus and Potential Restrictions on Exercise of
the Warrants
The Company will be able to issue the Shares upon the exercise of the
Warrants and the Underwriter's Purchase Option only if (i) there is a current
prospectus relating to the Securities offered hereby under an effective
registration statement filed with the Commission, and (ii) such Shares are then
qualified for sale or exempt therefrom under applicable state securities laws
of the jurisdictions in which the various holders of Warrants reside. There can
be no assurance, however, that the Company will be successful in maintaining a
current registration statement. After a registration statement becomes
effective, it may require updating by the filing of a post-effective amendment.
A post effective amendment is required under the Securities Act (i) anytime
after nine (9) months subsequent to the Effective Date when any information
contained in the prospectus is over sixteen (16) months old; (ii) when facts or
events have occurred which represent a fundamental change in the information
contained in the registration statement; or (iii) when any material change
occurs in the information relating to the plan or distribution of the
securities registered by such registration statement. The Prospectus forming a
part of this Registration Statement will remain current within the meaning of
the Securities Act for not more than nine (9) months following the date of this
Prospectus, or until __________, 1997, assuming a post-effective amendment is
not filed by the Company. The Company intends to qualify the sale of the
Securities in a limited number of states, although certain exemptions under
certain state securities ("Blue Sky") laws may permit the Warrants to be
transferred to purchasers in states other than those in which the Warrants were
initially qualified. The Company will be prevented, however, from issuing
Shares upon exercise of Warrants in those states where exemptions are
unavailable and the Company has failed to qualify the Shares issuable upon
exercise of the Warrants. The Company may decide not to seek, or may not be
able to obtain qualification of the issuance of such Shares in all of the
states in which the ultimate purchasers of the Warrants reside. In such a case,
the Warrants of those purchasers will expire and have no value if such warrants
cannot be exercised or sold. Accordingly, the market for the Warrants may be
limited because of the Company's obligation to fulfill both of the foregoing
requirements. The Company is either exempt or has filed applications to
register its securities as of the Effective Date in the following
jurisdictions: California, Colorado, Connecticut, Delaware, District of
Columbia, Florida, Georgia, Hawaii, Illinois, Louisiana, Maryland, Nevada, New
York and Rhode Island.
Issuance of Authorized but Unissued Shares and Sales of Restricted Shares May
Adversely Affect the Market
The Company is authorized to issue 25,000,000 Shares. If all of the
1,100,000 Units (containing 1,100,000 Shares and 1,100,000 Warrants) offered
hereby are sold, there will be a total of 3,000,000 Shares issued and
outstanding. In addition, the following Shares have been reserved for issuance:
2,200,000 Shares issuable upon exercise of the Warrants offered to investors in
this offering (including those contained in the Units); 165,000 Shares issuable
pursuant to the Underwriter's Over-Allotment Option; 330,000 shares issuable
upon the exercise of the Warrants included in the Underwriter's Over-Allotment
Option; 110,000 Shares issuable pursuant to the Underwriter's Purchase Option;
220,000 shares issuable upon exercise of the Warrants included in the
Underwriter's Purchase Option; 900,000 Shares issuable upon exercise of a stock
option granted to Eli E. Hertz, up to 750,000 Shares issuable upon exercise of
options that may be granted under the Company's Stock Option Plan for officers
and key employees and up to 100,000 Shares issuable pursuant to a Company
Employee Bonus Plan. After the exercise
18
of all such warrants and options the Company will have 7,775,000
Shares outstanding and 17,225,000 Shares of authorized but unissued capital
stock available for issuance without further shareholder approval. As a result,
any issuance of additional Shares may cause current shareholders of the Company
to suffer significant dilution which may adversely affect the market.
All of the Company's currently outstanding Shares are "restricted
securities" and, in the future, may be sold upon compliance with Rule 144,
adopted under the Securities Act. Rule 144 provides, in essence, that a person
holding "restricted securities" for a period of two years may sell only an
amount every three months equal to the greater of (a) one percent of the
Company's issued and outstanding shares, or (b) the average weekly volume of
sales during the four calendar weeks preceding the sale. The amount of
"restricted securities" which a person who is not an affiliate of the Company
may sell is not so limited, since non-affiliates may sell without volume
limitation their shares held for three years if there is adequate current
public information available concerning the Company. A proposed rule which may
be adopted by the Commission would reduce these two and three year periods to
one and two years, respectively. Upon the sale of the Securities offered
hereby, and assuming that there is no exercise of any issued and outstanding
Warrants, the Company will have 3,000,000 Shares issued and outstanding, of
which 1,150,000 Shares are "restricted securities", 750,000 Shares are being
registered under the registration statement of which this Prospectus is a part
and offered under the Alternative Prospectus and 1,100,000 are publicly traded
shares. Therefore, during each three month period, beginning ________, 1996, a
holder of restricted securities who has held them for at least the two year
period may sell under Rule 144, a number of shares up to 30,000 Shares.
Non-affiliated persons who hold for the three-year period described above may
sell unlimited shares once their holding period is met. Notwithstanding the
above, the current officers, directors and principal shareholders have agreed,
except as noted below, not to sell, transfer, assign or issue any securities of
the Company for a period of twenty-four (24) months following the Effective
Date without the consent of the Underwriter. The sale or availability for sale
of significant quantities of restricted securities could adversely affect the
market price of the Securities. See "Selling Shareholders" and "Description of
Securities--Restricted Shares Eligible for Future Sales."
The registration statement of which this Prospectus is a part also
covers the offering of 750,000 Shares being offered by the Selling
Shareholders. Of the 750,000 Shares being offered by the Selling Shareholders,
225,000 Shares may be sold during the twelve (12) months from the Effective
Date at such time within this 12 month period as is acceptable to the
Underwriter, and the balance, consisting of 525,000 Shares after the expiration
of 18 months from the Effective Date, subject to earlier release at the sole
discretion of the Underwriter. In other offerings where the Underwriter has
acted as the managing Underwriter, it has released similar restrictions
applicable to selling shareholders prior to the expiration of the lock-up
period and in some cases immediately after the exercise of the Over-Allotment
Option or the expiration of the Over-Allotment Option period. Certificates
evidencing these securities will bear a legend reflecting such restrictions.
The resale of the Shares held by the Selling Shareholders is subject to
prospectus delivery and other requirements of the Securities Act, as amended.
Sales of such Shares or the potential of such sales at any time may have an
adverse effect on the market prices of the Securities offered hereby. See
"Selling Shareholders."
Prospective investors should be aware that the possibility of sales
may, in the future, have a depressive effect on the price of the Shares in any
market which may develop and therefore, the ability of any investor to market
his Shares may be dependent directly upon the number of shares
19
that are offered and sold. Affiliates of the Company may sell Shares during a
favorable movement in the market price of the Shares which may have a
depressive effect on its price per share. See "Description of Securities."
Lack of Prior Market for Securities of the Company
No prior market has existed for the Securities offered hereby and no
assurance can be given that one will develop subsequent to this offering. The
Company has applied for inclusion of the Shares and Warrants on the Nasdaq
SmallCap Market, although there can be no assurance that an active trading
market will develop, even it the Shares and Warrants are accepted for
quotation. Additionally, if these Company Securities are accepted for quotation
and active trading develops, the Company is required to maintain certain
minimum criteria established by Nasdaq, the continued fulfillment of which by
the Company cannot be assured. The Company has been advised that the Shares and
Warrants will be listed on the Nasdaq SmallCap Market upon the Effective Date
of this offering. The Units will not be listed for quotation. The Underwriter
may make a market in the Securities upon the closing of this offering, but
there is no assurance that it will be successful in its efforts. The loss or
failure of market makers for the Securities will have a material adverse effect
on the market for the Securities. See "Description of Securities."
Warrants Subject to Redemption
The Class A Warrants shall be exercisable for a period of four (4)
years commencing one year after the Effective Date. Each Warrant entitles the
holder to purchase one Share at $5.50 per Share during the four year period
commencing one year from the Effective Date hereof. The Warrants are redeemable
by the Company for $.01 per Warrant if the average closing price or bid price
of the Shares, as reported by the principal exchange on which the Shares are
quoted, equals or exceeds $8.75 per share, for any twenty (20) consecutive
trading days ending within five (5) days of the notice of redemption. In the
event that the Warrants are called for redemption, the Warrant holders may not
be able to exercise their Warrants if the Company has not updated this
Prospectus in accordance with the requirements of the Securities Act or these
securities have not been qualified for sale under the laws of the state where
the warrant holder resides. See "Requirements of Current Prospectus and
Potential Restrictions on Exercise of the Warrants". In addition, in the event
that the Warrants have been called for redemption, such call for redemption
could force the warrant holder to either (i) assuming the necessary updating to
the prospectus and state blue sky qualifications have been effected, exercise
the Warrants and pay the exercise price at a time when, in the event of a
decrease in market price from the period preceding the issuance of the call for
redemption, it may be less than advantageous economically to do so, or (ii)
accept the redemption price, which, in the event of an increase in the price of
the Shares, could be substantially less than the market value thereof at the
time of redemption. See "Certain Transactions," "Description of Securities,"
"Selling Shareholders" and "Underwriting."
Underwriter's Influence on the Market May Have Adverse Consequences
A significant number of Securities may be sold, in the ordinary course
of business, to customers of the Underwriter. Such customers subsequently may
engage in transactions for the sale or purchase of such Securities through or
with the Underwriter. Although it has no legal obligation to do so, the
Underwriter from time to time in the future may make a market in and otherwise
effect transactions in the Company's Securities. To the extent the Underwriter
acts as
20
market maker in the Securities, it may be a dominating influence in
that market. The price and liquidity of such Securities may be affected by the
degree, if any, of the Underwriter's participation in the market, inasmuch as a
significant amount of such securities may be sold to customers of the
Underwriter. Such customers subsequently may engage in transactions for the
sale or purchase of such securities through or with the Underwriter. Such
market making activities, if commenced, may be discontinued at any time or from
time to time by the Underwriter without obligation or prior notice. If a
dominating influence at such time, the Underwriter's discontinuance may
adversely affect the price and liquidity of the securities.
Further, unless granted an exemption by the Commission to its Rule
10b-6, the Underwriter and any soliciting broker-dealers may be prohibited from
engaging in any market making activities with regard to the Securities for the
period from two or nine business days prior to any solicitation of the exercise
of Warrants until the later of the termination of such solicitation activity or
the termination, by waiver or otherwise, of any right that the Underwriter may
have to receive a fee for the exercise of Warrants following such solicitation.
As a result, the Underwriter and soliciting broker-dealers may be unable to
continue to provide a market for the Securities under certain periods while the
Warrants are exercisable which may adversely affect the price and liquidity of
the securities.
Exercise of Warrants May Have Dilutive Effect on Market
The Class A Warrants to be issued in connection with this offering
will provide, during their term, an opportunity for the holder to profit from a
rise in the market price, of which there is no assurance, with resulting
dilution in the ownership interest in the Company held by the then present
shareholders. Holders of the Warrants most likely would exercise the Warrants
and purchase the underlying Shares at a time when the Company may be able to
obtain capital by a new offering of securities on terms more favorable than
those provided by such Warrants, in which event the terms on which the Company
may be able to obtain additional capital would be affected adversely. See
"Underwriting."
"Penny Stock" Regulations May Impose Certain Restrictions on Marketability of
Securities
The Commission has adopted regulations which generally define "penny
stock" to be any equity security that has a market price (as defined) of less
than $5.00 per share or an exercise price of less than $5.00 per share subject
to certain exceptions. In the event of authorization of the Shares offered
hereby for quotation on the Nasdaq SmallCap Market, such securities will
initially be exempt from the definition of "penny stock." If the Securities
offered hereby are removed from listing on Nasdaq at any time following the
Effective Date, the Securities may become subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
Securities to persons other than established customers and accredited investors
(generally, those persons with assets in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with their spouse). For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of the Securities and have received the
purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
21
securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on
the limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Securities and may affect
the ability of purchasers in this offering to sell the Securities in the
secondary market.
In the event that the Company were not able to qualify the Securities
for listing on the Nasdaq SmallCap Market, the Company would attempt to have
the Securities traded in the over-the-counter market via the Electronic
Bulletin Board or the "pink sheets." In such event, holders of the Securities
may encounter substantially greater difficulty in disposing of their securities
and/or in obtaining accurate quotations as to the prices of the Securities.
Benefits of Offering to Underwriter
The Underwriter will receive substantial benefits from the Company in
connection with this offering. These benefits include underwriting
discounts/commissions, a non-accountable expense allowance and an Underwriter's
Purchase Option. In addition, the Underwriter has been granted certain rights
under the Unit Purchase Option, which rights include the ability to require the
Company to include the Underwriter's securities in a registration statement
under the Securities Act. The exercise of these rights will result in the
Company incurring substantial expenses and may cause the Company to register an
offering of its securities at a time which is detrimental to the Company's
plans. See "Underwriting."
22
S CORPORATION DISTRIBUTION
Hergo has elected to be treated for federal income tax purposes as an
S Corporation. As a result of Hergo's status as an S Corporation, Hergo's
current shareholders, rather than Hergo, have been taxed directly on the Hergo
earnings for federal and certain state income tax purposes, whether or not such
earnings were distributed. Shortly before the closing of this Offering, Hergo
will terminate its status as an S Corporation and will thereafter be subject to
federal and state income taxes at applicable C Corporation rates.
Prior to the termination of its S Corporation status, Hergo intends to
declare a distribution (the "S Corporation Distribution") to Eli and Marilyn
Hertz, its current shareholders. The distribution (estimated at $ 225,000 as of
May 31, 1996), represents substantially all of Hergo's remaining undistributed
S Corporation earnings. The actual amount of the S Corporation Distribution
will be adjusted to include the taxable income of the Company for the period
from June 1, 1996 through the day immediately preceding the date on which S
Corporation status is terminated, less any New York City income tax payable by
the Company with respect to such income and any distributions made to the
current shareholders during that time period.
USE OF PROCEEDS
After deducting underwriting discounts of $605,000 and other expenses
of the offering estimated to be $576,500 (which includes the Underwriter's
nonaccountable expense allowance), assuming an offering price of $5.25 per Unit
and $.25 per Warrant, the Company will receive net proceeds from the offering
of approximately $4,868,500, which does not include the exercise of the
Underwriter's Over-Allotment Option. These proceeds, excluding the exercise of
any of the Warrants, will be utilized by the Company substantially for the
following:
Approximate Amount
of Net Proceeds %
Debt Retirement(1).......................... $1,241,000 25.5%
S Corporation distribution(2)............... 225,000 4.6%
Hertz Computer Marketing Program(3)......... 600,000 12.3%
Hergo Machinery(4).......................... 300,000 6.2%
Hergo New Product Development(5)............ 400,000 8.2%
Hertz Computer - Equipment to Provide
Internet Services and other
communications(6).................... 300,000 6.2%
Hertz Computer - Update Computer system..... 250,000 5.1%
Hergo Marketing(7).......................... 400,000 8.2%
Hertz up-grade of new facility and
production line......................... 295,000 6.1%
Working Capital............................. 857,500 17.6%
- ----------
(1) Represents payment of $189,000 as of September 30, 1996 for advances
and loans to the Company by Mr. and Mrs. Hertz payable on demand
carrying an interest of 1% over prime, and $895,000 representing the
balance as of September 30, 1996 for loans from the United Mizrachi
Bank (the "Bank") under a line of credit terminating on May 31, 1997,
which loans bear interest at Premium plus 1% and $205,000 for
short-term loans from the Bank, maturing on March 9, 1997 with
interest at Libor plus 1%.
(2) See S Corporation Distribution.
(3) Includes hiring a national sales director, sales persons and sales
representatives and implementation of a national promotional campaign,
including focused marketing directed at sales to the General Service
Administration and to the OEM market.
(4) Modernizing and adding equipment in order to give Hergo greater
production capacity and flexibility.
(5) Estimated cost of developing new products, including Hergolite line
for use by small businesses and home users.
(6) Includes installing of high speed telecommunication lines.
(7) Hiring and training sale representatives and increasing promotion and
advertising levels.
Although it is uncertain that the price of Shares will rise to a level
at which the Warrants would be exercised, in the event subscribers in this
offering elect to exercise all of the Warrants included in the Offering
(including those which are components of the Units), the Company will realize
gross proceeds of approximately $12,100,000. Management anticipates that the
proceeds from the exercise of the Warrants would be contributed to working
capital of the Company. Nonetheless, the Company may at the time of exercise
allocate a portion of the proceeds to any other corporate purpose. Accordingly,
investors who exercise their Warrants will entrust their funds to management,
whose specific intentions regarding the use of such funds are not presently and
specifically known.
The amounts set forth in the use of proceeds merely indicate the
proposed use of proceeds, and actual expenditures may vary substantially from
these estimates depending on market conditions, on the fiscal health of the
Company, the success, if any, for the Company's proposed business expansion,
activities and the availability of other financing arrangements, such as lines
of credit and loans. The Company is unable to predict whether the proceeds of
this Offering will be sufficient to accomplish all of the objectives sought to
be achieved as set forth above. The Company believes, however, that it should
have sufficient capital to pursue its objectives as outlined above for the next
twenty-four (24) months. Accordingly, at some future period, the Company may
need to seek additional funds through loans of other financing arrangements. No
such arrangement exists or are currently contemplated and there can be no
assurance that they may be obtained in the future should the need arise.
24
DILUTION
As of May 31, 1996, the Company had a net tangible book value of
$862,327 or $.45 per share (assuming that the Company had 1,900,000 Shares
outstanding as of that date ), derived from the Company's consolidated balance
sheet as of that date. Net tangible book value per Share means the tangible
assets of the Company less all liabilities, divided by the number of Shares
outstanding. After giving effect to the sale of the Shares included in the
Units offered hereby a price of $5.00 per Share, after deducting underwriting
discounts and estimated offering expenses, net tangible book value as adjusted
would be $5,730,827 or $1.91 per share. The result will be an immediate
increase in net tangible book value per share of $1.46 to existing shareholders
and an immediate dilution to new investors of $3.09 (62%) per share. "Dilution"
is determined by subtracting net tangible book value per share after the
offering from the offering price to investors. The following table illustrates
this dilution.
Assumed value of Shares included in Units offered hereby.............. $5.00
Net tangible book value per Share, before the offering....... .45
Increase per share attributable to the sale by the
Company of the Shares offered hereby......................... 1.46
-----
Pro forma net tangible book value per Share, after the offering....... 1.91
-----
Dilution per Share to new investors................................... $3.09
=====
The above table assumes no exercise of the Warrants, the Underwriter's
Over-Allotment or the Underwriter's Purchase Option. If the Underwriter's
Over-Allotment Option is exercised in full, dilution to the public stockholder
will be $2.94 per share. See "Description of Securities" and "Selling
Shareholders."
The following table summarizes the investments of all existing
shareholders and new investors after giving effect to the sales of the
Securities offered hereby assuming no exercise of the Underwriter's
Over-Allotment Option:
Percentage Aggregate Percentage of Average
Shares of Total Consideration Total Price Per
Purchased Shares Paid Invested Share
Existing Shareholders 1,900,000 63.3% $ 903,911 14.1% $.48
Public Shareholders 1,100,000 36.7% 5,500,000 85.9% $5.00
---------- ----- ---------- -----
Total 3,000,000 100% $6,403,911 100% $2.13
========= ==== ========== ====
If the Underwriter's Over-Allotment Option is exercised in full, the
new investors will have paid $6,325,000 as the assumed value of the Shares
included in the Units and will hold 1,265,000 Shares, representing 87.5 percent
of the total consideration and 40 percent of the total number of outstanding
Shares. See "Description of Securities" and "Underwriting."
25
Capitalization
The following tables sets forth the capitalization of the Company (i)
as of May 31, 1996, and (ii) as adjusted to reflect the sale of the Securities
offered hereby. The table should be read in conjunction with the Financial
Statements, the notes thereto and the pro forma financial information included
elsewhere in this Prospectus.
May 31, 1996
As
Actual Adjusted(1)(2)
------------------- -------------------
Short-term debt(3) $1,673,519 $5,388
Long-term capital lease obligation 19,309 19,309
---------- ------
Stockholders' Equity
Common stock, $.001 par value; 25,000,000
authorized, issued and outstanding, 1,900,000 shares
outstanding, as adjusted 1,900 3,000
Additional paid in capital 124,100 4,991,500
Retained earnings 777,911 777,911
---------- ----------
Total Stockholders' Equity $903,911 $5,772,411
-------- ----------
Total Capitalization $2,596,739 $5,797,108
- ----------
(1) Adjusted to reflect (i) the sale of 1,100,000 Units, each
Unit consisting of one Shares and one Warrant, and 1,100,000
Warrants by the Company and the net proceeds therefrom and
the uses thereof (assuming an initial public offering price
of $5.25 per Unit and $.25 per Warrant and after deducting
the underwriting discounts and commissions and expenses of
this offering estimated at $1,181,500 and (ii) the repayment
of certain indebtedness from the use of proceeds. Does not
include the proceeds from the sale of Shares pursuant to the
exercise of any Warrants or the exercise of the Underwriter's
Purchase Option. See "Underwriting."
(2) Assumes no exercise of (i) the Warrants; (ii) the
Underwriter's Over-Allotment Option to purchase up to 165,000
Units and 165,000 Warrants; and (iii) the Underwriter's
option to purchase up to 110,000 Units and 110,000 Warrants.
See "Description of Securities" and "Underwriting."
(3) Short term debt consists of:
Current N/P to banks to pay $1,117,093
Current Maturities of long-term capital
Lease obligation 5,388
Dividend Payable 224,567
Loans to shareholder 326,471
----------
Total short term debt $1,673,519
==========
26
DIVIDEND POLICY
Holders of the Company's Shares are entitled to cash dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor. The Company does not anticipate the declaration or payments of any
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance the developments and expansion of its business. Future dividend
policy will be subject to the discretion of the Board of Directors and will be
contingent upon future earnings, if any, the Company's financial condition,
capital requirements, general business conditions and other factors. Therefore,
there can be no assurance that cash dividends of any kind will ever be paid.
27
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
General
The Company custom designs and assembles PC's and related products and
provides technological services and support under the "Hertz" name through its
Hertz Computer subsidiary. It also designs, manufactures and sells
ergonomically engineered modular mounting support structures and technical
furniture for micro computers and electronic devices under the "Hergo" name
through its Hergo subsidiary. Computer sales figures, as used herein and
elsewhere in this prospectus, include related services, such as systems
architecture designs, consulting, installation, personnel training and customer
support, most of which services are not separately charged to customers. The
proceeds of those charges, which are separately billed, are not material.
Nine Months Ended May 31, 1996 Compared to Nine Months Ended May 31, 1995
Revenues
Company sales for the nine months ended May 31, 1996, were $9.38
million, compared to $8.22 million for the period ended May 31, 1995, an
increase of 14%. Hertz Computer sales increased from $6.81 million to $7.55
million, an 11% increase over the same period. Increased sales of computers to
OEMs and governmental agencies accounted for the majority of the increase.
Hergo sales increased from $1.41 million to $1.83 million, a 30% increase over
the same period. This increase was due primarily to increased advertising in
trade publications, and an increasing rate of repeat orders by existing
clients.
Gross Profit
Gross profit of the Company for the nine months ended May 31, 1996,
represented 30% of sales compared to 26% for the nine months ended May 31,
1995. The gross profit percentage for Hertz Computer in the period ending on
May 31, 1996 reflected a 5% increase over the same period last year, primarily
due to a larger share of sales to the OEM and Government markets. Additionally,
gross profit improved for the period due to cost reductions in memory and other
components, of which some of these benefits were not immediately passed on to
customers. The Hergo subsidiary, with its 56% gross profit margin accounted for
$1.02 million in gross profit. This compares favorably with the gross profit
amount for the nine months ended May 31, 1995 of $0.81 million. The increase of
$210,000 in gross profit is primarily the result of an increase in the volume
of sales.
28
Selling, General and Administrative
For the nine months ended May 31, 1996, selling, general and
administrative expenses, of the Company were $2.07 million as compared to $1.94
million for the nine months ended May 31, 1995 representing a favorable
decrease as a percentage of sales from 24% to 22% of sales.
For the period ending May 31, 1996 Hergo trade show and advertising
expenses decreased by approximately $81,000. A consulting agreement with a
former Hergo minority shareholder expired which resulted in savings of $63,000
for the nine months ending May 31, 1996. In September 1995 the Company
purchased a minority interest held by the former manager of its Hertz Israel
subsidiary and simultaneously entered into a consulting agreement with him.
Such services increased consulting fees by approximately $20,000 in the current
period. In addition, the termination of Israeli duties relating to computer
purchases from the Far East eliminated a competitive advantage that American
exporters making direct sales to Israeli purchasers enjoyed, and to accommodate
its customers, Hertz Israel was required to take deliver of computer purchases
by Israeli customers for redelivery to such customers. This circuitous routing
resulted in increased shipping costs and other costs associated with
maintaining an inventory in Israel. In addition, increased competition from
Israeli suppliers resulted in the reduction of the Company's gross margins with
respect to sales to Israeli customers. See "Risk Factors--1996 Loss in Israeli
Subsidiary; Changes in Import Duties."
Other professional fees increased by $20,000 in the current period,
the majority of which were expensed for additional accounting services for
Hergo. During the nine month period ending May 31,1996 sales salaries and
commissions increased by $91,000 as a result of new sales and marketing
initiatives. Salaries of the two principal officers increased by $48,000 in the
current period. In order to accommodate additional revenue growth, salaries and
general expense increased by about $95,000 in the current period.
Interest Expense
The net interest expense for the nine month period ended May 31, 1996
was $148,113 as compared to $96,650 for the nine month period ended May
31,1995, an increase of $51,463, of which about $30,000 was attributable to
finance additional levels of inventories and working capital and about $21,000
was primarily due to a fluctuations in the exchange rate between the U.S. and
Israeli currencies (shekel) for that period. This fluctuation rate was
negligible in the comparable nine month period ended May 31, 1995 as currency
exchange rates were relatively stable during that period.
Provision for Income Taxes
Through May 31, 1996 Hergo was classified as a subchapter "S"
corporation and incurred no federal corporate taxes. As a result, net income of
$387,512 includes a tax provision calculated at a blended tax rate of Hergo and
Hertz Computer of 10% and 46%, respectively. Had Hergo been a "C" corporation
during this period, the tax provision would have been $366,233 as compared to
the actual tax expense of $244,500 for the nine months ended May 31, 1996.
29
Net Income
Net Income for the nine months ended May 31, 1996 was $387,512 as
compared to $64,005 for the nine months ended May 31, 1995. This increase was
mainly due to improved cost controls and the overall increase in sales and
gross margins.
Fiscal Year Ended August 31, 1995 Compared to
Fiscal Year Ended August 31, 1994 Revenues
Sales of the Company for the year ended August 31, 1995, were $11.22
million, compared to $10.93 million for the year ended August 31, 1994, an
increase of 3%. Although Hertz Computer sales to other corporate customers grew
by approximately $1.73 million, the completion in fiscal 1994 of a nationwide
corporate project for a particular customer caused the overall decrease in
revenues in the current period. Revenues, attributable to this project, were
reduced by a net of $2.40 million when comparing fiscal 1995 revenue to fiscal
1994 revenue. Offsetting the current period reduction in Hertz revenues of
approximately $670,000 were increased sales from Hergo of $960,000 in the
current period (from $1.27 million during fiscal 1994 to $2.23 million in
fiscal 1995, a 76% increase). The sales increases are mainly attributable to
new marketing and sales programs.
Gross Profit
Gross profit for fiscal 1995 represented 28% of sales as compared to
23% of sales for fiscal 1994. The primary reason for this is the increased
contribution Hergo has made as a percentage of total sales in fiscal 1995. The
higher profit margin of Hergo sales allowed consolidated Company margins to
rise faster than consolidated Company sales.
Selling, General and Administrative
For the fiscal year ended, August 31, 1995, selling, general and
administrative expenses were $2.87 million (26% of sales ) as compared to $2.29
million (21% of sales) for fiscal year ended August 31, 1994, an increase of
$580,000.
Legal fees increased $123,000, most of which are primarily
attributable to a Hergo litigation ($112,000). See "Legal Proceedings.".
Consulting fees increased by $63,000 in the current period due to a consulting
services agreement with a former Hergo minority shareholder which commenced on
August 26, 1994, which costs were offset in part by the eliminations of the
minority shareholder's annual salary of $50,000 as an employee. Other
professional fees increased by $50,000 in the current period primarily as a
result of increased computer programming fees for modifications of existing
computer systems. Hertz Computer and Hergo implemented new sales and marketing
programs which were the main reason for increased trade show expenses of
$58,000, advertising expenses of $36,000, telephone expenses of $45,000, and
sales and marketing salaries and associated expenses of $245,000. The
establishment of a larger administrative department to control the increased
activities resulted in administrative salaries and associated expenses to
increase by $92,000 in the period ended August 31, 1995. Other increases of
$90,000, in the 1995 period , were due to increased travel expenses and repair
and maintenance expenses related mainly to moves to new locations made by Hertz
Israel and Hergo. In response to the necessity of putting all the above
programs in place, the shareholders reduced their compensation in the period
ended August 31, 1995 by approximately $175,000.
30
Interest Expense
Net interest expense for the year ended August 31, 1995 was $131,484
as compared to $58,340 for the year ended August 31, 1994. Interest to finance
the increases in inventory and accounts receivable levels was the primary
reason for the increase in net interest expense of $73,144.
Provision for Income Taxes
Through August 31, 1995 Hergo has been classified as a subchapter "S"
corporation, and as such, incurred no federal corporate taxes. As a result, net
income of $54,113 includes a tax provision calculated at a blended tax rate of
Hergo and Hertz Computer of 10% and 46%, respectively. Had Hergo been a "C"
corporation during this period, the tax provision would have been $73,602, as
compared to the actual tax expense of $77,615 for the fiscal year ended August
31, 1995 as the Company would have been able to offset the taxable losses
incurred by Hergo during this period.
Net Income
Net Income for the year ended August 31, 1995 was $54,113 as compared
to $174,895 for the year ended August 31, 1994. Improved margins generated
through better customer and product mix sufficiently allowed for expenses
necessary for potential future growth.
Liquidity and Capital Resources
For the Nine Months Ended May 31, 1996 and May 31, 1995
The Company has available a total of $1,000,000 pursuant to a
Revolving Line of Credit secured by substantially all the personal property of
the Company and personally guaranteed by the principal shareholders. The
borrowings bear interest at the prime rate plus 1% (effective rate at May 31,
1996 was 9.25% as compared to a rate at May 31, 1995 of 10%). As of May 31,
1996, the outstanding balance under this agreement was $895,000 which remained
unchanged from May 31, 1995.
In February 1996, the Company entered into a line of credit agreement
with the Bank through Hertz Israel for $300,000 with an interest rate at the
six month Libor Rate plus 1.25% (6.91% at May 31, 1996) which is effective
through March 9, 1997. As of May 31, 1996, the outstanding line of credit
balance was $211,375 which consists of two short term notes ($205,240 in
total). These loans were originally due on September 9, 1996, but were extended
six months and are presently due on March 9, 1997. The interest rate for the
extension period is the six month libor rate plus 1.0%. In addition, an
overdraft of $6,135 is outstanding at May 31, 1996.
For the nine months ended May 31, 1996, the Company generated positive
cash flow from operating activities of $336,419 as compared to a negative cash
flow of $409,185 for the previous nine month period. The primary reason for
this difference is due to the increase in sales and net income for the period
ended as of
31
May 31, 1996 as compared to the period ended as of May 31, 1995,
and the improvement of collections of accounts receivable. The Company
generated a negative cash flow of $91,482 from financing activities for the
nine months ended May 31, 1996 as compared to a positive cash flow from
financing activities of $433,610 for the previous nine month period. The
primary reason for the negative financing activities is due to a repayment of a
note payable to a shareholder for $195,127 as compared to proceeds received
from a shareholder of $200,689 from the previous nine month period. In
addition, the increase in net bank borrowings for the nine months ended May 31,
1996 was $103,645 as compared to $224,019 for the previous nine month period.
Net purchases of fixed assets in the nine months ended May 31, 1996
were $82,623 as compared to $38,396 for the previous nine month period.
The Company currently anticipates that the gross proceeds from the
sale of the Units and Warrants will generate $6,050,000 (or $6,957,500 if the
Underwriter's Overallotment Option is exercised in full) before commissions and
offering expenses of $1,181, 500. The Company expects to utilize these proceeds
to pay the outstanding balance of notes payable to the current shareholders and
the revolving line of credit with the Bank. The Company further intends to make
a subchapter S Distribution of $224,567 to the current shareholders of Hergo.
See "Risk Factors--Litigation Involving Underwriter May Affect Securities."
For the Fiscal Years Ended August 31, 1995 and 1994
As of August 31, 1995, the Company had available a total of $1,000,000
($800,000 as of August 31, 1994) pursuant to a Revolving Line of Credit secured
by substantially all the personal property of the Company and is personally
guaranteed by the principal shareholders. The borrowings bear interest at the
prime rate plus 1% (effective rate at August 31, 1995 was 9.75% as compared to
a rate at August 31, 1994 of 7.7%). As of August 31, 1995, the outstanding
balance under this agreement was $895,000 as compared to $700,000 at August 31,
1994.
For the fiscal year ended August 31, 1995, the Company generated a
negative cash flow from operating activities of $394,587 as compared to a
positive cash flow of $22,721 for the fiscal year ended August 31, 1994. The
negative operating cash flow was due primarily to an increase in accounts
receivable of approximately $298,000 and ending inventory of $140,000 at year
end. Inventory levels rose as a primary result of two factors: (i) increased
inventory levels for Hergo to meet demands of rising sales; (ii) increased
inventory levels for Hertz-Israel due to the shift by certain customers to
purchase goods directly from Hertz-Israel as opposed to directly purchasing
goods from Hertz Computer. This shift was primarily attributable to a change in
the import tax laws in Israel effectuated in 1995. The increase in accounts
receivable is mainly a result of the increased sales of Hertz-Israel, which was
due to a change in the import tax laws, as discussed above. As the length of
time to process sales orders to customers increased, since Hertz Computer was
no longer drop shipping goods to the Israeli customers, the Hertz-Israel
accounts receivable balances increased by approximately $263,000.
Net purchases of fixed assets in the fiscal years ended August 31,
1995 and 1994 were $46,888 and $96,591, respectively.
The Company generated a positive cash flow from financing activities
of $489,119 as compared to a positive cash flow of $35,917 for the fiscal years
ended August 31, 1995 and August 31, 1994, respectively. The primary reasons
for this increase was the increased
32
borrowing base generated from the Revolving Line Of Credit and a shareholder
loan of $176,083 in the 1995 fiscal year with an interest rate of 10% due
September 1, 1997.
33
BUSINESS
The Company custom designs, assembles and sells PCs and related
technology and provides services under the "Hertz" name. It also designs,
manufactures and sells ergonomically engineered modular mounting and support
structures ("Modular Racking Systems") for PCs and related peripherals under
the "Hergo" name.
Products and Service
Hertz Customized Computers and Related Services. The Company designs
and sells customized PCs and provides a broad range of related services,
including system architecture design, consulting, installation, personnel
training and customer support. PCs are assembled in a number of different
configurations using standard component parts. Customization enables the
Company to accommodate customer computer needs with respect to storage
capacity, speed, price, applications, size, configuration and a range of other
considerations that can be accommodated in whole or in part by the selection of
appropriate components. Hertz PCs are currently being used to operate MRI
machines, to provide voice mail services, for use in military radar systems and
for use in shopping center kiosks to enable prospective purchasers of music
discs and tapes to select and hear their musical selections prior to purchase.
Most of the PCs sold by the Company are for use in a network
configuration. The Company, as an additional service, will configure the
network for the customer for which it will charge an additional hourly fee. The
Company also provides its customers with continuing support and assistance in
the maintenance and operation of Company purchased products.
Hergo Modular Racking Systems. The Company's Hergo division designs
and manufactures and sells Modular Racking Systems which serve to conserve
space and help organize and facilitate the accessibility of all types of
computer hardware, communication and electronic devices and other peripherals.
Hergo systems are suitable for use in any size computer room or technical
environment. The market for these Modular Racking Systems was created in large
part by the replacement of mainframe computers by multiple PCs. The Company was
one of the first companies to provide a cohesive, functional and
architecturally attractive racking system that vertically mounts and supports
multiple computers, servers and related peripherals, such as printers,
monitors, scanners and modems, used in tandem with each other, or in
juxtaposition with each other and interconnected for networking functions.
The Company has designed basic modular components in a variety of
colors that in combination can be used to create limitless mounting and support
structures. The components, made of a heavy-duty steel, are interchangeable so
as to permit the user to easily add new equipment or reconfigure existing
setups. The Modular Racking Systems are suitable for a variety of applications
including multiple LAN file servers and communication control centers, on
trading floors, in testing laboratories, in training rooms, in multimedia,
video and broadcast production centers and in manufacturing areas as well as
for personal workstations.
The basic charge by the Company for its Modular Racking Systems does
not include shipment or installation. The Company will ship the completed unit
by common carrier at the customer's expense, or if the customers wishes the
Company to install the unit, the Company will deliver the unit in a Company
owned van and arrange for its installation at the customer's
34
premises. The charge for theses additional services are usually determined on a
percentage of the purchase price charged for the basic unit.
New Products and Services.
"Hergolite". The Company has recently begun development of a new line
of Modular Racking Systems, specially designed for the smaller business or the
home office user. These systems are lighter and smaller than those prepared for
the larger commercial company market. It is expected that this new line will be
called "Hergolite." Approximately $400,000 of the net proceeds of this Offering
has been allocated for use in the test marketing and promotion of the Hergolite
line and changes in the current line.
Internet Services. A number of the Company's commercial customers have
indicated an interest in establishing a presence on the World Wide Web. The
Company sees in this interest, an opportunity to provide Internet solutions to
these customers in addition to serving their computer hardware and/or computer
racking needs. Beginning sometime toward the end of the year, the Company plans
to establish a new division to begin offering its corporate customers a menu of
Internet services, including Internet Access, Web site design and consulting,
and Web hosting services.
The Company currently has a high speed dedicated connection through a
T1 to the Internet from its corporate offices in New York. By building and
installing additional server equipment at its facilities, the Company believes
it can effectively sublease its Internet connection to its corporate customers
in the New York metropolitan area and corporate clients would be able to access
the Internet by dialing into the Company's facility. Web design involves the
transformation of the traditional paper brochure into a digitized format. The
Company has one Web designer in-house and intends to hire at least one more
designer. The Web designer is a graphic designer with programming skills in Web
protocol (hyper text markup language). The Company will offer assistance to its
customers in their planning and designing of home pages. Finally, the Company
will offer its clients the ability to publish their Web sites within their own
facilities or from the Company's computer facilities. Currently, the Company
has started to market a line of Web servers. For smaller companies, that are
not interested in the higher expense associated with publishing Web sites from
their own facilities, the Company can effectively rent server space from its
facilities to publish its clients Web sites.
Strategic Growth Plan
The Company's strategic growth plan consists of strengthening both of
its business lines by updating their respective physical facilities and
equipment and then intensifying their respective marketing efforts. With
respect to the PC business, the Company intends to develop a national sales
force, increase its efforts to market Hertz PCs with the Federal Government and
expand its OEM business. For the Hergo line, the Company plans on bringing to
market new and improved products including "Hergolite" and on strengthening its
relationships with its already large company customer base. The Company also
plans on actively pursuing a cross marketing program between its Hertz Computer
and its Hergo Divisions with special emphasis on marketing the Company as a PC
supplier to Hergo Customers. Finally, the Company plans on establishing a new
division to offer a variety of Internet services to its corporate clients.
35
Manufacture and Assembly
Computers are manufactured at the Company's manufacturing facilities
in New York City, which has a capacity to produce between 30 and 35 computers a
day. The Company expects to move its New York facility to its new location on
Varick Street in November 1996, where the computer capacity per day should
increase to 96. The Modular Racking Systems are manufactured at the Company's
Woodside, Queens facility. This facility has the capacity (with its existing
space, not including machinery) to double its current production rate.
The Company gives limited warranty coverage for its computers and
Modular Racking Systems for varying time periods depending on several factors
including the component parts affected, during which period the Company will
repair or replace defective products or parts at no cost to the customer. Where
product failure is the result of a defect in a component part, the Company is
often covered through warranty agreements with its vendors. The net cost to the
Company for its warranty service has not been significant to date.
Suppliers
The Company stocks most of the component parts used both in the
manufacture of its computers and in the manufacture of its Modular Racking
Systems. The cost of some components used in the computers, such as central
processing units ("CPU's") and memory, can fluctuate from week to week or from
one day to the next, and for this reason, the Company tries not to stock these
items for use over a long period of time. It generally seeks to purchase these
price sensitive items within about two weeks advance of use. To date, the
Company has not experienced any difficulty in receiving the needed items on
short notice. Most of the component parts purchased by the Company in
connection with the computers are obtained from a number of different sources.
The Company believes that it is not dependent on any single source, as
alternative sources are available. Most of the heavy duty steel components used
in the Modular Racking Systems are made by Hergo. The Company acquires its raw
materials for these components from a number of different companies and
believes that adequate alternative raw material sources are available if
required.
36
Marketing and Sales
The customized computer and related services. Sales to commercial
customers are generally made by unsolicited telephone calls initiated by
prospective customers. Salespersons at the Company are trained to work with the
caller and elicit his company's computer needs and work out the specifications
of a computer which best satisfies its needs. In cases where a large potential
sale is involved or where a sale is regarded as a significant entree into a new
market or in other special situations, senior management may take an active
role in sales negotiations which may also involve a visit or visits to the
customer's premises. Government sales are made through competitive bidding in
response to published specifications, invitations to bid or requests for
proposals. The Company is an approved provider to the New York State Office of
General Services ("OGS") and to the Federal Government's General Services
Administration ("GSA").
Approximately 36% of the Company's total sales for its 1995 fiscal
year (41% of total sales for the nine month period ended on May 31, 1996) were
to Governmental Entities. The Company has been approved by OGS as an approved
provider to New York State governmental purchasing units and by GSA, which
monitors all U.S. government procurement of computers and equipment. While the
Company has concentrated its computer selling on state and some federal
agencies, it has not made any significant sales to the Federal Government,
though it has been accredited by it as an approved provider. The Company
believes this is an area that should be exploited and intends to allocate a
portion of the net proceeds to be received in this offering to support the
dedication of at least one person, whether he be newly hired or a current
employee, to the cultivation and development of the Federal Government market.
While the Company intends to expand its position in the governmental market, it
believes that such markets are generally more sensitive to budgetary
constraints. The Company has been focusing its sales efforts on the commercial
market and particularly on the OEM market where the gross margins are generally
higher.
The OEM market, broadly defined, includes any business where the final
product incorporates parts, assemblies or full products of a third party
manufacturer. For example, most of today's elevator controls, MRI machines and
voice mail phone systems all use PCs as integral components in their final
products. Many OEM's depend on PCs to operate their computer driven products.
Failure of their PCs would render their own products non-functional.
Consequently OEM's place a higher premium for quality and reliability in their
computers and for such computers, they are generally prepared to pay more.
For the year ended August 31, 1995, no single customer accounted for
as much as 10% of total sales. Sales of computers to Israel for the 1995 fiscal
year were approximately $1,900,000 or 17% of the Company's total sales for such
year. For the nine month period ending on May 31, 1996, sales of computers to
Governmental Entities accounted for 41% of total Company sales (as compared to
36% for the 1995 fiscal year) including sales to the New York Department of
Social Services which alone accounted for 18% of total sales.
The Company has exhibited its computers at trade shows and has, from
time to time, circulated brochures and articles containing excerpts from
favorable trade press reviews of one or more of its computers. Much of its
computer business is repeat business, and the source of new customers has been
largely by word of mouth and responses from favorable media product reviews.
The Company's small sales staff is primarily occupied with taking and filling
orders by telephone. The Company is now committed to developing a sale force
that will seek out new
37
business and has allocated a portion of the net proceeds to be received in this
Offering for this purpose.
Hergo Modular Racking Systems. The Company constructed and sold Hergo
Modular Racking Systems to approximately 450 customers in 1995. These customers
included 15 to 20 of the largest and best known corporations in America.
Companies of the size and stature of Citibank, N.A., AT&T, Dow Jones, Bell
Atlantic, Pfizer, Hewlett Packard, the New York Times and Time Warner, all
purchased Hergo Structural Support Units in 1995. Sales are generated in large
part through advertising. The Company also deals with resellers who act as
intermediaries for the end user.
The Company has an advertising budget for its Hergo Modular Racking
Systems. For the 12 month period ended August 31, 1995, the Company spent
approximately $120,000 on advertising the "Hergo" product line, primarily in
trade publications and in the preparation and circulation of brochures. The
Company currently maintains a staff of five Hergo sales people who are paid on
a base salary plus commission.
Competition
There are many companies selling computers that may be regarded as
competitors of the Company. Computers are sold directly to commercial and
government entities by manufacturers such as IBM, Hewlett Packard and Apple, by
large retail outlets such as Comp USA and Staples, by mail order houses,
electronic equipment catalogues and by assemblers and entities like the Company
selling computers under their own names. Many of these companies have
substantially greater financial, sales, marketing, technical and other
competitive resources then those of the Company. As a result, these competitors
may be able to devote greater resources than the Company to the sale and
service of microcomputer products. Some of these companies, by themselves, have
the economic power to control prices and the technical expertise to develop and
bring to market, improved versions of existing products long before they become
available to the Company. Many of the computers manufactured by the Company
have received favorable reviews in the trade press. By way of example, in the
December 5, 1995 issue of PC Magazine's cover story in which PC Labs tested 83
Windows 95-based PCs from 52 Leading PC Companies, the Hertz Pentium 133MHZ
"was the best performing 133-MHz Pentium system" in the roundup.The Company's
senior management tries to keep abreast of changes in the computer technology
market with respect to the claims and limitations of new component parts and
accessories. In many cases they are able to combine this information with their
intimate knowledge of their customers needs to fine tune their selection of
component parts to produce computers which better suit the specific needs of
their customers. The Company believes that management's knowledge of the
market, the Company's 15 years in business and the favorable name recognition
that the Hertz computer enjoys are factors that set the Company apart from many
of its competitors. However, whatever advantage the Company enjoys from these
factors can easily be lost if the Company's pricing and technical features of
its products will not be able to compete with the prices and technology of
comparable products from other suppliers.
The business of providing functional, architecturally attractive
Modular Racking Systems specifically designed to mount, support and allow easy
access to PCs and related equipment is a relatively new business. Nevertheless,
there are a number of companies already in the business, some of whom are
considerably larger and better established than the Company. Moreover,
38
because of the attractive profit margins in the business and the absence of any
serious barriers to entry, it is likely that a plethora of additional companies
might soon enter the field.
The market for Internet access and related services is extremely
competitive. The Company, however, intends to initially enter this market on a
very limited basis. Initially, at least, it intends to offer a narrow range of
Internet services to its existing customers, many of whom are not currently
being serviced by an Internet service provider. The Company believes that there
are some advantages , which it will seek to exploit, of being a single source
provider combining the ability to offer computers and related equipment with
Internet access, training and similar services.
Intellectual Property Rights
The Company seeks to protect its proprietary rights by obtaining non
disclosure and confidentiality agreements from its employees and consultants.
The Company has trademark registrations for "Hergo" and "Hergonized." It has
applied for registration of the Hertz Computer name, but such registration has
not been issued pending resolution of a claim by another party that claims
rights to use the name. Neither of the two principal products of the Company
enjoys patent protection. See "Risk Factors," "Lack of Proprietary Rights;
Trademarks".
Employees
The Company employs 56 persons. In addition to three (3) executives at
the corporate level its computer division employs nine (9) persons, two of whom
are skilled in computer technology, in the actual production of computers, five
(5) persons in computer sales, five (5) in administration, and one (1)
marketing manager. For the Hergo operations, the Company employs fifteen (15)
production workers, one (1) plant manager, one (1) installation specialist, two
(2) graphic designers, two (2) in administration and five (5) sales persons.
The Israeli office employs seven (7) people.
Facilities
The Company currently occupies under leases which expired on August
31, 1996 an aggregate of approximately 10,000 square feet in two buildings on
lower Fifth Avenue at 33rd Street in New York City, which it uses for
manufacturing computers and as the principal sales office for both product
lines. The Company has leased new loft space on 75 Varick Street, consisting of
13,201 square feet for a six year period beginning on September 1, 1996, at an
annual rental of $115,508 a year. The Company expects to move its entire
operations on Fifth Avenue to the Varick Street premises sometime in November.
Until such move it is able to continue at the Fifth Avenue premises on a month
to month basis The Company also leases an aggregate of 16,000 square feet in
Woodside, Queens, New York for its Hergo manufacturing facility. The leases for
this space, which end on February 28. 2000, has an annual rent of approximately
$100,000. The Company also leases space in Ashdod, Israel. The annual rental
for such space is $16,500, under a lease that expires on May 31, 1998 with the
right to renew the lease for three successive one year periods.
39
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors, persons elected to serve as directors
commencing on the Effective Date and executive officers of the Company are as
follows:
Name Age Position
---- --- --------
Eli E. Hertz 47 Chairman, President and Chief Executive
Officer; Director
I. Marilyn Hertz 45 Vice Chairperson, Secretary and Director
John C. Rudy 54 Vice President, Principal Financial Officer,
and Chief Accounting Officer
Beryl Ackerman 47 Director
Bruce Borner 45 Director*
- ------------
*Elected as a director, effective as of the Effective date.
Each of the directors of the Company holds office until the next
annual meeting of shareholders, or until his successor is elected and
qualified. At present, the Company's bylaws provide for not less than one
director nor more than five directors. Currently, the Company has three
directors. The Board will be expanded to four directors following this
Offering. The Board has elected Bruce Borner to fill the vacancy on the Board,
effective upon the Effective Date. The bylaws permit the board of directors to
fill any vacancies and directors so elected may serve until the next annual
meeting of shareholders or until their successors are elected and qualified.
Officers serve at the discretion of the Board of Directors. I. Marilyn Hertz is
the wife of Eli E. Hertz. See "Certain Transactions."
The principal occupation and business experience for each officer and
director of the Company, including those directors elected, effective as of the
Effective Date, for at least the last five years are as follows:
Eli E. Hertz was a co-founder of Hertz Computer and has been a
principal officer of Hertz Computer and Hergo since their respective formations
in 1982 and 1991. He has a B.S. degree in Management Science and Economics and
an MBA in Accounting and Management from Long Island University.
I. Marilyn Hertz was a co-founder of Hertz Computer and the founder of
Hergo. She has been a principal officer of Hertz Computer and Hergo since their
respective formations in 1982 and 1991. Before becoming a full time employee of
the Company, Mrs. Hertz was an officer of Citibank in its computer systems
department. Mrs. Hertz is a graduate of Queens College, and
40
for over 12 years, has lectured on micro and mainframe computer programming at
Queens College.
John C. Rudy was elected Vice President, Principal Financial Officer
and Chief Accounting Officer on October 10, 1996. Mr. Rudy's employment does
not require him to devote his full-time to the business of the Company. He is a
Certified Public Accountant, and, President, which he has been since 1992, of
Beacon Consulting Associates, a development and management company providing
financial and business consulting services. From 1990 to 1992, he was Director
of Turnaround Services at Coopers & Lybrand.
Bruce Borner has, for more than five years, been president of Computer
Projections, a company which is a consultant to, and developer of, a wide range
of information/database systems for diverse industries. Mr. Borner has a MBA
from the Harvard Business School, Management Development Institute (IMD) in
Lausanne, Switzerland.
Beryl Ackerman was elected to the Board on October 10, 1996. Since
June 1994, Mr. Ackerman has been a consultant to Justified Computer System, a
computer consulting firm. Prior thereto, he was a computer specialist for the
New York City Department of Transportation. He is also a Coordinator for
Computer Systems in the Continuing Education Program at Queens College, and a
lecturer at Baruch College.
Committees of the Board of Directors
The Board of Directors has an Audit Committee which will be comprised
of Bruce Borner and Beryl Ackerman. The Audit Committee recommends to the Board
of Directors the appointment of independent auditors, reviews and approves the
scope of the annual audit of the Company's financial statement, reviews and
approves any non-audit services performed by the independent auditors and
periodically reviews and approves major accounting policies and significant
internal accounting control procedures.
The Board of Directors also has a Compensation Committee which will be
comprised of Bruce Borner and Beryl Ackerman. The Compensation Committee
reviews and recommends compensation for officers and directors, administers
stock option plans and reviews major personnel matters.
Remuneration
The following table sets forth the combined remuneration paid by Hertz
Corporation and Hergo during fiscal years ended August 31, 1994, 1995 and 1996,
to the named officers and directors of the Company. For the periods shown, no
other executive officer received remuneration in excess of $100,000 per annum.
41
Summary Compensation Table
Annual Compensation
Name and Principal Position Year Salary Bonus
- --------------------------- ---- ------ -----
Eli E. Hertz, 1996 $175,000 --
Chairman, President and 1995 140,769 --
Chief Executive Officer 1994 217,873 --
I. Marilyn Hertz, 1996 $165,000 --
Vice Chairperson 1995 180,769 --
1994 278,702 --
Barry J. Goldsammler, 1996 $111,500 --
Executive Vice President 1995 97,401 --
1994 105,395 --
Employment Agreements
The Company has entered into employment agreements ("Agreements") each
dated as of July 1, 1996 with Eli E. Hertz and with I. Marilyn Hertz. The term
of their employment will commence upon the Effective Date and will expire on
the fifth anniversary thereof. The annual salary under the Agreement with Mr.
Hertz is $225,000 and under the Agreement with Mrs. Hertz is $75,000. Their
salaries may not be increased during the first three years and can be increased
thereafter only with the approval of a disinterested majority of the Board of
Directors. Under Mr. Hertz' Agreement, he is granted options to purchase
900,000 Shares at the same exercise price and on the same terms as the Class A
Warrants issuable hereunder.
The Agreements provide, among other things, for participation in an
equitable manner in any profit-sharing or retirement, separation and disability
plans for employees or executives and for participation in other employee
benefits applicable to employees and executives of the Company. The Agreements
further provide for the use of an automobile and other fringe benefits
commensurate with their duties and responsibilities. The Agreement with Mr.
Hertz also provides for benefits in the event of retirement, separation and
disability.
Under the Agreements, employment may be terminated by the Company with
cause or by the executive with good reason. Termination by the Company without
cause, or by the executive for good reason, would subject the Company to
liability for liquidated damages in an amount equal to the terminated
executive's base salary for the remaining term of his employment agreement or
12 months, whichever is higher.
Stock Options
On August 7, 1996, in order to attract and retain persons necessary
for the success of the Company, the Company adopted its 1996 Stock Option Plan
(the "Option Plan") covering up to 750,000 of its Shares, pursuant to which
officers, directors and key employees of the Company and consultants' to the
Company are eligible to receive incentive and/or non-incentive stock
42
options. The Option Plan, which expires on a August 6, 2006, will be
administered by the Board of Directors or a committee designated by the Board
of Directors. The selection of participants, allotment of shares, determination
of price and other conditions relating to the purchase of options will be
determined by the Board of Directors, or a committee thereof, in its sole
discretion. Incentive stock options granted under the Option Plan are
exercisable for a period of up to 10 years from the date of grant at an
exercise price which is not less than the fair market value of the Shares on
the date of the grant, except that the term of an incentive stock option
granted under the Option Plan to a shareholder owning more than 10% of the
outstanding Shares may not exceed five years and its exercise price may be not
less than 110% of the fair market value of the Shares on the date of the grant.
As of September 12, 1996, no options had been granted under the Option Plan.
Discretionary Share 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.
Limitations on Liability of Directors
As permitted by Delaware law, the Company's Certificate of
Incorporation includes a provision which provides that a director of the
Company shall not be personally liable to the Company or its shareholders for
monetary damages for a breach of fiduciary duty as a director, except (i) for
any breach of the director's duty of loyalty to the Company or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the General Corporation Law of the State of Delaware, which prohibits the
unlawful payment of dividends or the unlawful repurchase or redemption of
stock, or (iv) for any transaction from which the director derives an improper
personal benefit. This provision is intended to afford directors protection
against, and to limit their potential liability for monetary damages resulting
from, suits alleging a breach of the duty of care by a director. As a
consequence of this provision, shareholders of the Company will be unable to
recover monetary damages against directors for action taken by them that may
constitute negligence or gross negligence in the performance of their duties
unless such conduct falls within one of the foregoing exceptions. The
provision, however, does not alter the applicable standard governing a
director's fiduciary duty and does not eliminate or limit the right of the
Company or any shareholder to obtain an injunction or any other type of
nonmonetary relief in the event of a breach of fiduciary duty. Management of
the Company believes this provision will assist the Company in securing and
retaining qualified persons to serve as directors.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
Company's Shares owned on the date of this Prospectus and, as adjusted, to
reflect the sale of Shares offered by this Prospectus, by (i) each person who
is known by the Company to own beneficially more than five percent (5%) of the
Company's Shares; (ii) each of the Company' officers and directors; and (iii)
all officers and directors as a group:
43
Percentage of Shares
Name and Address (1) Position with Company Number of Shares Before Offering After Offering (2)
---------------- --------------------- ---------------- --------------- --------------
Eli E. Hertz Chairman,
President and Chief
Executive Officer;
Director 920,000 48.4% 30.7%(3)
I. Marilyn Hertz Vice Chairperson,
Secretary and 920,000 48.4% 30.7%(3)
Director
John C. Rudy Vice President,
Principal Financial
Officer and Chief
Accounting Officer -- -- --
Beryl Ackerman Director -- -- --
All Officers and
Directors as a Group
(5 persons) 1,840,000 96.8% 61.3%
- --------------------
(1) Mr. Rudy's address is 450 Park Avenue, New York, New York 10022, Mr.
Ackerman's address is 1570 East 29th Street, Brooklyn, New York 11229
and Mr. and Mrs. Eli Hertz' address is c/o Hertz Technology Group,
Inc. 325 Fifth Avenue, New York, New York 10016-5012.
(2) Does not include the exercise of up to 2,200,000 Class A Warrants
offered herein, or any other option or warrant issued by the Company.
The Company is offering 1,100,000 Units, each Unit containing one
Share and one Warrant, at a price of $5.25 per Unit and 1,100,000
Warrants at a price of $.25 per Warrant. Each Class A Warrant
entitles the holder to purchase one Share at $5.50 per Share during
the four year period commencing one year from the Effective Date. The
Class A Warrants are redeemable upon certain conditions. Should the
Class A Warrants be exercised, of which there is no assurance, the
Company will receive the proceeds therefrom, aggregating up to an
additional $12,100,000, which does not include the Class A Warrants
in the Underwriter's Over-Allotment Option. See "Description of
Securities."
(3) Assumes none of the 750,000 Shares offered under the Alternate
Prospectus are sold. If the 750,000 Shares are sold, Eli and Marilyn
Hertz will own 18.2%, individually, and 36.3%, collectively, of the
outstanding Shares.
CERTAIN TRANSACTIONS
Since 1993, the Company has borrowed moneys from Mr. and Mrs. Hertz
with interest at rates ranging from 7% to 10% per annum. The outstanding amount
of such borrowings varied from time to time. The highest amount of such
borrowing in fiscal years ended on August 31, 1995 and August 31, 1994, were
$353,000 and $465,613, respectively. The highest amount of such borrowings
since September 1, 1995 was $537,648. This amount was $189,000 as of September
30, 1996. In June of 1995, the Company entered into a Revolving Line of Credit
with the United Mizrachi Bank under which the Company could borrow up to
$1,000,000. The Company's obligation under this agreement was guaranteed by Eli
and Marilyn Hertz. As of September 30, 1996, the balance outstanding under this
agreement was $895,000.
44
Pursuant to an agreement dated August 26, 1994, by and among Eli E.
Hertz, Amir Rotlevi ("Rotlevi") and Hergo
(a) Eli E. Hertz acquired the 25% stock interest in Hergo, held by
Rotlevi (an original shareholder of Hergo) for $10,000; and
(b) Hergo reimbursed Rotlevi $18,345 for equipment which Rotlevi had
contributed to the Company. In connection with Rotlevi's sale of his stock
interest, Hergo entered into a consulting agreement for one year with AFC
Industries Inc., a corporation in which Rotlevi was the principal, under which
the corporation was paid $134,800, $34,800 on the execution of the agreement
$40,000 on January 3, 1995 and the balance in 26 semi weekly installments.
As of July 31, 1996, the Company agreed to acquire all of Mr. and Mrs.
Hertz's shareholdings in Hertz Corporation and Hergo in exchange for which the
Company would issue to them an aggregate of 1,840,000 Shares. The exchange of
Shares under this Recapitalization will have been effected immediately prior to
the Effective Date. All unregistered securities issued by the Company prior to
this Offering are deemed "restricted securities" within the meaning of that
term as defined in Rule 144 and have been issued pursuant to certain "private
placement' exemptions under Section 4(2) of the Securities Act of 1933, as
amended, and the rules and regulations as promulgated by the Commission. See
"Description of Securities."
The Company intends to indemnify its officers and directors to the
full extent permitted by Delaware law. Under Delaware law, a corporation may
indemnify its agents for expenses and amounts paid in third party actions and,
upon court approval in derivative actions, if the agents acted in good faith
and with reasonable care. A majority vote of the Board of Directors, approval
of the shareholder or court approval is required to effectuate indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to officers, directors or persons controlling the Company, the
Company has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by an officer, director or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
officer, director or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in such Act and will be governed by the final adjudication
of such issue.
Any future transactions with affiliates will be on terms no less
favorable than could be obtained from unaffiliated parties and will be approved
by a majority of the independent and disinterested directors. Any future loans
to Company officers, directors, affiliates and/or shareholders will be approved
by a majority of the independent and disinterested directors.
45
DESCRIPTION OF SECURITIES
Common Stock
The authorized capital stock of the Company consists of 25,000,000
shares of Common Stock, $.001 par value per share. There are 1,900,000 issued
and outstanding Shares. Holders of the Shares do not have preemptive rights to
purchase additional Shares or other subscription rights. The Shares carry no
conversion rights and are not subject to redemption or to any sinking fund
provisions. All Shares are entitled to share equally in dividends from sources
legally available therefor when, as and if declared by the Board of Directors
and, upon liquidation or dissolution of the Company, whether voluntary or
involuntary, to share equally in the assets of the Company available for
distribution to shareholders. All outstanding Shares are validly authorized and
issued, fully paid and nonassessable, and all Shares to be sold and issued as
contemplated hereby, will be validly authorized and issued, fully paid and
nonassessable. The Board of Directors is authorized to issue additional Shares
not to exceed the amount authorized by the Company's Certificate of
Incorporation, and to issue options and warrants for the purchase of such
shares, on such terms and conditions and for such consideration as the Board
deems appropriate without further shareholders' action. The above description
concerning the Shares does not purport to be complete. Reference is made to the
Company's Certificate of Incorporation and bylaws which are available for
inspection upon proper notice at the Company's offices, as well as to the
applicable statutes of the State of Delaware for a more complete descriptions
concerning the rights and liabilities of shareholders.
Prior to this offering, there has been no market for the Shares of the
Company, and no predictions can be made of the effect, if any, that market
sales of Shares and the availability of Shares for sale will have on the market
price prevailing from time to time . Nevertheless, sales of significant amounts
of the Shares in the public market may adversely effect prevailing market
prices, and may impair the Company's ability to raise capital at that time
through the sale of its Shares.
Each holder of Shares is entitled to one vote per share on all matters
on which such shareholders are entitled to vote. Since the Shares do not have
cumulative voting rights, the holders of more than fifty percent (50%) of the
Shares voting for the election of directors can elect all the directors if they
choose to do so and, in such event, the holders of the remaining shares will
not be able to elect any person on the Board of Directors.
Class A Warrants
The Company is offering 1,100,000 Warrants at a price of $.25 per
Warrant, as well as 1,100,000 Warrants included in the 1,100,000 Units being
offered.
The Class A Warrants shall be exercisable commencing one year after
the date of this Prospectus ("Effective Date"). Each Class A Warrant entitles
the holder to purchase one Share at $5.50 per share during the four year period
commencing one year from the Effective Date. The Shares underlying the Warrants
will, upon exercise of the Warrants, be validly issued, fully paid and
nonassessable. The Class A Warrants are redeemable by the Company for $.01 per
Warrant if the average closing price or bid price of the Shares, as reported by
the principal exchange on
46
which the Shares are traded, equals or exceeds $8.75 per share, for any twenty
(20) consecutive trading days ending within five (5) day prior to the date of
the notice of redemption.
The Warrants can only be exercised when there is a current effective
registration statement covering the Shares underlying the Warrants. If the
Company does not or is unable to maintain a current effective registration
statement the Warrant holders will be unable to exercise the Warrants and the
Warrants may become valueless. Moreover, if the Shares underlying the Warrants
are not registered or qualified for sale in the state in which a Warrant holder
resides, such holder might not be permitted to exercise the Warrants. See "Risk
Factor--Requirements of Current Prospectus and State Blue Sky Registration in
Connection with the Exercise of the Warrants Which May Not Be Exercisable and
May Therefore Be Valueless."
The Company will deliver Warrant certificates to the purchaser of
Warrants or of Units in this Offering, in which latter case at the rate of one
Warrant for each Unit purchased. Thereafter, Warrant certificates may be
exchange for new certificates of different denominations, and may be exercised
or transferred by presenting them at the offices of the Transfer Agent. Holders
of the Warrants may sell the Warrants if a market exists rather than exercise
them. However, there can be no assurance that a market will develop or continue
as to such Warrants. If the Company is unable to qualify its Shares underlying
such Warrants for sale in certain states, holders of the Company's Warrants in
those states will have no choice but to either sell such Warrants or allow them
to expire.
Each Warrant may be exercised by surrendering the Warrant certificate,
with the form of election to purchase on the reverse side of the Warrant
certificate properly completed and executed, together with payment of the
exercise price to the Warrant Agent. The Warrants may be exercised in whole or
from time to time in part. If less than all of the Warrants evidenced by a
Warrant certificate are exercised, a new Warrant certificate will be issued for
the remaining number of Warrants.
Holders of the Warrants are protected against dilution of the equity
interest represented by the underlying Shares upon the occurrence of certain
events, including, but not limited to, issuance of stock dividends. If the
Company merges, reorganizes or is acquired in such a way as to terminate the
Warrants, the Warrants may be exercised immediately prior to such action. In
the event of liquidation, dissolution or winding up of the Company, holders of
the Warrants are not entitled to participate in the Company's assets.
For the life of the Warrants, the holders thereof are given the
opportunity to profit from rise in the market price of the Shares. The exercise
of the Warrants will result in the dilution of the then book value of the
Shares held by the public investor and would result in a dilution of their
percentage ownership of the Company. The terms upon which the Company may
obtain additional capital may be adversely affected through the period that the
Warrants remain exercisable. The holders of these Warrants may be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain equity capital on terms more favorable than those provided for by the
Warrants.
Because the Warrants included in the Securities being offered hereby
may be transferred, it is possible that the Warrants may be acquired by persons
residing in states where the Company has not registered, or is not exempt from
registration such that the Shares underlying the Warrants may not be sold or
transferred upon exercise of the Warrants. Warrant holders residing
47
in those state would have no choice but to attempt to sell their Warrants or to
let them expire unexercised. Also, it is possible that the Company may be
unable, for unforeseen reasons, to cause a registration statement covering the
Shares underlying the Warrants to be in effect when the Warrants are
exercisable. In that event, the Warrants may expire unless extended by the
Company as permitted by the Warrant because a registration statement must be in
effect, including audited financial statements for companies acquired, in order
for Warrant holders to exercise their Warrants.
In the event that the Warrants are called for redemption, the Warrant
holders may not be able to exercise their Warrants in the event that the
Company has not updated this Prospectus in accordance with the requirements of
the Securities Act or these securities have not been qualified for sale under
the laws of the state where the Warrant holder resides. See "Requirements of
Current Prospectus and State Blue Sky Registration in Connection with the
Exercise of the Warrants Which May Not Be Exercisable and May Therefore Be
Valueless." In addition, in the event that the Warrants have been called for
redemption, such call for redemption could force the Warrant holder to either
(i) assuming the necessary updating to the Prospectus and state blue sky
qualifications have been effected, exercise the Warrants and pay the exercise
price at a time when, in the event of a decrease in market price from the
period preceding the issuance of the call for redemption, it may be less than
advantageous economically to do so, or (ii) accept the redemption price, which,
in the event of an increase in the price of the Shares, could be substantially
less than the market value thereof at the time of redemption.
Restricted Shares Eligible for Future Sale
All of the Company's currently outstanding Shares are "restricted
securities" and, in the future, may be sold upon compliance with Rule 144,
adopted under the Securities Act. Rule 144 provides, in essence, that a person
holding "restricted securities" for a period of two years may sell only an
amount every three months equal to the greater of (a) one percent of the
Company's issued and outstanding shares, or (b) the average weekly volume of
sales during the four calendar weeks preceding the sale. The amount of
"restricted securities" which a person who is not an affiliate of the Company
may sell is not so limited, since non-affiliates may sell without volume
limitation their shares held for three years if there is adequate current
public information available concerning the Company. A proposed rule which may
be adopted by the Commission would reduce these two and three year periods to
one and two years, respectively. Upon the sale of the Securities, and assuming
that there is no exercise of any issued and outstanding warrants, the Company
will have 3,000,000 Shares issued and outstanding, of which 1,150,000 Shares
are "restricted securities", 750,000 share are being registered under the
registration statement of which this Prospectus is part and offered under the
Alternative Prospectus and 1,100,000 are publicly traded shares. Therefore,
during each three month period, beginning _____, 1996, a holder of restricted
securities who has held them for at least the two year period may sell under
Rule 144, a number of shares up to 30,000 Shares. Non-affiliated persons who
hold for the three-year period described above may sell unlimited shares once
their holding period is met. Notwithstanding the above, the current officers,
directors and principal shareholders have agreed, except as noted below, not to
sell, transfer, assign or issue any securities of the Company for a period of
twenty-four (24) months following the Effective Date without the consent of the
Underwriter.
The registration statement of which this Prospectus is a part also
covers the offering of 750,000 Shares being offered
48
by the Selling Shareholders. Of the 750,000 Shares being offered by the Selling
Shareholders, 225,000 Shares may be sold during the twelve (12) months from the
Effective Date at such time within this 12 month period as is acceptable to the
Underwriter and the balance consisting of 525,000 Shares may be sold after
eighteen (18) months from the Effective Date, subject to earlier release at the
sole discretion of the Underwriter. In other offerings where the Underwriter
has acted as the managing Underwriter, it has released similar restrictions
applicable to selling shareholders prior to the expiration of the lock-up
period and in some cases immediately after the exercise of the Over-Allotment
Option or the expiration of the Over-Allotment Option period. Certificates
evidencing these securities will bear a legend reflecting such restrictions.
The Underwriter may release the securities held by the Selling Shareholders at
any time after all securities subject to the Over-Allotment Option have been
sold or such option has expired. The resale of the securities held by the
Selling Shareholders is subject to prospectus delivery and other requirements
of the Securities Act. Sales of such securities or the potential of such sales
at any time may have an adverse effect on the market prices of the Securities
offered hereby. See "Selling Shareholders."
Transfer Agent and Registrar
The transfer agent and registrar for the securities of the Company is
the American Stock Transfer and Trust Company located at 40 Wall Street, New
York, New York 10005.
Reports to Shareholders and Warrantholders
The Company will furnish to holders of the Shares and Warrants annual
reports containing audited financial statements. The Company may issue other
unaudited interim reports to such persons as it deems appropriate.
Contemporaneously, with this Offering, the Company shall register its
Shares with the Commission, under the provisions of Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, the Company will be required to comply with certain
reporting, proxy solicitation and other requirements of the Exchange Act.
49
SELLING SHAREHOLDERS
The registration statement of which this Prospectus is a part also
covers the offering of 750,000 Shares being officered by the Selling
Shareholders. Of the 750,000 Shares being offered by the Selling Shareholders,
225,000 Shares may be sold during the twelve (12) months from the Effective
Date at such time within this 12 month period as is acceptable to the
Underwriter and the balance consisting of 525,000 Shares may be sold after
eighteen (18) months after the Effective Date, subject to earlier release at
the sole discretion of the Underwriter. In other offerings where the
Underwriter has acted as the managing Underwriter, it has released similar
restrictions applicable to Selling Shareholders prior to the expiration of the
lock-up period and in some cases immediately after the exercise of the
Over-Allotment Option or the expiration of the Over-Allotment Option period.
Certificates evidencing these securities will bear a legend reflecting such
restrictions. The Underwriter may release the securities held by the Selling
Shareholders at any time after all securities subject to the Over-Allotment
Option have been sold or such option has expired. The resale of the securities
held by the Selling Shareholders is subject to prospectus delivery and other
requirements of the Securities Act, as amended. Sale of such securities or the
potential of such sales at any time may have an adverse effect on the market
prices of the securities offered hereby.
The securities offered hereby may be sold from time to time directly
by the Selling Shareholders. The Company will not receive any of the proceeds
from such sale. Alternatively, the Selling Shareholders may from time to time
offer such securities through underwriters, dealers or agents. The Selling
Shareholders are not required to effect sales through the Underwriter. The
distribution of securities by the Selling Shareholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transaction or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary
or specifically negotiated brokerage fees or commissions may be paid by the
Selling Shareholders in connection with such sales of securities. The
securities offered by the Selling Shareholders may be sold by one or more of
the following methods, without limitations: (a) a block trade in which a broker
or dealer so engaged will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers, and (d)
face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Shareholders may arrange for other brokers or dealers to participate. The
Selling Shareholders and intermediaries through whom such securities are sold
may be deemed "underwriters" within the meaning of the Act with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
At the time a particular offer of Securities is made by or on behalf
of a Selling Shareholder, to the extent required, a Prospectus will be
distributed which will set forth the numbers of Shares being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for shares
purchased from the Selling Shareholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
50
Under the Exchange Act, and the regulations thereto, any person
engaged in a distribution of the Securities of the Company offered by this
Prospectus may not simultaneously engage in market-making activities with
respect to such Securities of the Company during the applicable "cooling off"
period (nine days) prior to the commencement of such distribution. In addition,
and without limiting the foregoing, the Selling Shareholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Rule 10b-6 and 10b-7, in connection
with the transactions in such securities, which provisions may limit the timing
of purchases and sales of such securities by the Selling Shareholders.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a
copy of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part, the Underwriter has agreed to purchase from the
Company 1,100,000 Units and 1,100,000 Warrants offered hereby from the Company
on a "firm commitment" basis, if any are purchased. The Underwriter has advised
the Company that it proposes to offer to the public the Units at $5.25 per Unit
and the Warrants at $.25 per Warrant as set forth on the cover page of this
Prospectus and that they may allow to certain dealers who are NASD members, and
such dealers may reallow, concessions not to exceed $.____ per Unit and $____
per Warrant. After the initial public offering, the public offering prices,
concession and reallowance may be changed by the Underwriter.
The public offering price of the Securities and the exercise price and
other terms of the Warrants were arbitrarily determined by negotiations between
the Company and the Underwriter and do not necessarily relate to the assets,
book value or results of operations of the Company or any other established
criteria of value.
The Company has granted an option to the Underwriter, exercisable
during the 30-day period from the date of this Prospectus, to purchase up to a
maximum of 165,000 additional Units and 165,000 additional Warrants at the
offering prices, less the underwriting discount, to cover over-allotments, if
any.
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriter against certain liabilities in
connection with the Registration Statement, including liabilities under the
Securities Act. Insofar as indemnification for liabilities under the Securities
Act may be provided to officers, directors or persons controlling the Company,
the Company has been informed that in the opinion of the Commission, such
indemnification is against public policy and is therefore unenforceable.
The Company has agreed to pay to the Underwriter a non-accountable
expense allowance of three percent (3%) of the aggregate offering price of the
Securities offered hereby, including any Securities purchased pursuant to the
Over-Allotment Option. The Underwriter's Expenses in excess of the stated
expense allowance will be borne by the Underwriter. To the extent that the
expenses of the Underwriter are less than the stated expense allowance, the
difference may be deemed compensation to the Underwriter in addition to the
sales commission payable to the Underwriter.
51
The Company has agreed to grant to the Underwriter, or its designees
an option ("Underwriter's Purchase Option") to purchase up to an aggregate of
110,000 Units and 110,000 Warrants. The Underwriter's Purchase Option shall be
exercisable during the four-year period commencing one (1) year after the
Effective Date. The Underwriter's Purchase Option may not be assigned,
transferred, sold or hypothecated by the Underwriter after the Effective Date
of this Prospectus, except to officers or partners of the Underwriter or of
selling group members in this offering. Any profits realized by the Underwriter
upon the sale of the Securities issuable upon exercise of the Underwriter's
Securities Purchase Option may be deemed to be additional underwriting
compensation. The exercise price of the Securities issuable upon exercise of
the Underwriter's Purchase Option during the period of exercisability shall be
120% of the initial public offering prices of such Securities. The exercise
price of the Underwriter's Purchase Option and the number of Units and Warrants
covered thereby are subject to adjustment in certain events to prevent
dilution. For the life of the Underwriter's Purchase Option, the holders
thereof are given, at a nominal cost, the opportunity to profit from a rise in
the market price of the Company's Shares and Warrants with a resulting dilution
in the interest of other shareholders. The Company may find it more difficult
to raise capital for its business if the need should arise while the
Underwriter's Purchase Option is outstanding. At any time when the holders of
the Underwriter's Purchase Option might be expected to exercise it, the Company
would probably be able to obtain additional capital on more favorable terms.
If the Company enters into a transaction (including a merger, joint
venture or the acquisition of another entity) introduced to the Company by the
Underwriter, the Company has agreed to pay the Underwriter a fee equal to five
percent of the first $3 million of consideration received by the Company, four
percent of the next $3 million, three percent of the next $2 million, two
percent of the next $2 million and one percent of the excess, if any, over $10
million.
Prior to the date of this Prospectus, except as set forth below, all
holders of the Shares as of the Effective Date have agreed in writing not to
sell, assign or transfer any of the Company's securities without the
Underwriter's prior written consent for a period of twenty-four (24) months
from the Effective Date. 750,000 Shares of Stock are being offered by the
Selling Shareholders under this Offering of which 225,000 shares may be sold
during the twelve (12) months from the Effective Date at such time within such
twelve month period as is acceptable to the Underwriter, and the balance
consisting of 525,000 Shares may be sold at any time after the eighteen (18)
months from the Effective Date, subject to earlier release at the sole
discretion of the Underwriter. The Company has also agreed not to issue any
additional securities except for designated purposes for a period of twenty
four (24) months following the Effective Date without the consent of the
Underwriter.
The Company will also pay a warrant solicitation fee to the
Underwriter equal to four percent (4%) of the exercise price of the Class A
Warrants beginning one year from the date of this Prospectus, if the
Underwriter causes the exercise of such Warrants prior to the expiration
thereof as set forth in the Warrant Agreement, subject to the Underwriter's
compliance with the rules and regulations of the NASD. In accordance with NASD
Notice to Members 81-38, no warrant solicitation fee shall be paid (i) upon
exercise where the market price of the underlying Common Stock is lower than
the exercise price, (ii) for the exercise of warrants held in any discretionary
account; (iii) upon the exercise of warrants where disclosure of compensation
arrangements has not been made in documents provided to customers both as part
of the original offering and at the time of exercise; and (iv) upon the
exercise of warrants in unsolicited
52
transactions. The broker-dealer to receive the warrant solicitation fee must be
designated, in writing, as the soliciting broker. See "Risk Factors-Exercise of
Class A Warrants May Have Dilutive Effect on Market" and "Underwriter's
Influence on the Market May Have Adverse Consequences."
The Underwriter, for three (3) years after the Effective Date, shall
have the option to designate a director to serve on the Company's Board of
Directors or at its option a non-director observer to attend meetings of the
Company's Board of Directors. The Underwriter has indicated that it will
designate a person as a non-director observer.
Following the consummation of this offering, the Underwriter intends
to seek others to make a market in the Company's Securities in addition to the
Underwriter. The foregoing is a summary of certain provisions of the
Underwriting Agreement and Underwriter's Purchase Option which have been filed
as an exhibit hereto.
Litigation Involving Underwriter May Affect Securities
The Company has been advised by the Underwriter that on or about May
22, 1995, the Underwriter and Elliot Loewenstern and Richard Bronson,
principals of the Underwriter, and the Commission agreed to an offer of
settlement (the "Offer of Settlement") in connection with a complaint filed by
the Commission in the United States District Court for the Southern District of
Florida alleging violations of the federal securities laws, Section 17(a) of
the Securities Act of 1933, Section 10(b) and 15(c) of the Securities Exchange
Act of 1934, and Rules 10b-5, 10b-6 and 15c1-2 promulgated thereunder. The
complaint also alleged that in connection with the sale of securities in three
(3) IPO's in 1992 and 1993, the Underwriter engaged in fraudulent sales
practices. The proposed Offer of Settlement was consented to by the Underwriter
and Messrs. Loewenstern and Bronson without admitting or denying the
allegations of the complaint. The Offer of Settlement was approved by Judge
Gonzales on June 6, 1995. Pursuant to the final judgment (the "Final
Judgment"), the Underwriter:
o was required to disgorge $1,000,000 to the Commission, which
amount was paid in four (4) equal installments on or before June
22, 1995;
o agreed to the appointment of an independent consultant
("Consultant").
Such Consultant is obligated, on or before November 1, 1996:
o to review the Underwriter's policies, practices and procedures
in six (6) areas relating to compliance and sales practices;
o to formulate policies, practices and procedures for the
Underwriter that the Consultant deems necessary with respect to
the Underwriter's compliance and sales practices;
o to prepare a report devoted to and which details the
aforementioned policies, practices and procedures (the
"Report");
o to deliver the Report to the President of the Underwriter and to
the staff of the Southeast Regional office of the Commission;
o to prepare, if necessary, a supervisory procedures and
compliance manual for the Underwriter, or to amend the
Underwriter's existing manual; and
o to formulate policies, practices and procedures designed to
provide mandatory on-going training to all existing and newly
hired employees of the Underwriter. The Final Judgment further
provides that, within thirty (30) days of the Underwriter's
53
receipt of the Report, unless such time is extended, the
Underwriter shall adopt, implement and maintain an and all
policies, practices and procedures set forth in the Report.
The Final Judgment also provides that an independent auditor
("Auditor") shall conduct four (4) special reviews of the Underwriter's
policies, practices and procedures, the first such review to take place six (6)
months after the Report has been delivered to the Underwriter and thereafter at
six-month intervals. The Auditor is also authorized to conduct a review, on a
random basis and without notice to the Underwriter, to certify that any persons
associated with the Underwriter who have been suspended or barred by any
Commission order are complying with the terms of such orders.
On July 10, 1995, the action as against Messrs. Loewenstern and
Bronson was dismissed with prejudice. Mr. Bronson has agreed to a suspension
from associating in any supervisory capacity with any broker, dealer, municipal
securities dealer, investment advisor or investment company for a period of
twelve (12) months, dating from the beginning of such suspension. Mr.
Loewenstern has agreed to a suspension from associating in any supervisory
capacity with any broker, dealer, municipal securities dealer, investment
advisor or investment company for a period of twelve (12) months commencing
upon the expiration of Mr. Bronson's suspension.
In the event that the requirements of the foregoing judgment adversely
affect the Underwriter's ability to act as a market maker for the Shares, and
additional brokers do not make a market in the Company's securities, the market
for, and the liquidity of, the Company's securities may be adversely affected.
In the event that other broker dealers fail to make a market in the Company's
securities, the possibility exists that the market for and the liquidity of the
Company's securities may be adversely affected to such an extent that public
security holders may not have anyone to purchase their securities when offered
for sale at any price. In such event, the market for, liquidity and prices of
the Company's securities may not exist. See "Underwriting." For additional
information regarding the Underwriter, investors may call the National
Association of Securities Dealers, Inc. at (800) 289-9999.
Recent State Action Involving the Underwriter--Possible Loss of Liquidity
The State of Indiana has commenced an action seeking among other
things to revoke the Underwriter's license to do business in such state. A
hearing in this matter was scheduled for October 7, 1996 and has been adjourned
pending settlement discussions. Such proceeding if ultimately successful may
adversely affect the market for and liquidity of the Company's securities if
additional broker dealers do not make a market in the Company's securities.
Moreover, should Indiana investors purchase any of the securities sold in this
offering from the Underwriter prior to the possible revocation of the
Underwriter's license in Indiana, such investors will not be able to resell
such securities in such state through the Underwriter but will be required to
retain a new broker dealer firm for such purpose. The Company cannot ensure
that other broker dealers will make a market in the Company's securities. In
the event that other broker dealers fail to make a market in the Company's
securities, the possibility exists that the market for and the liquidity of the
company's securities may be adversely affected to an extent that public
security holders may not have anyone to purchase their securities when offered
for sale at any price. In such event, the market for, liquidity and prices of
the Company's securities may not exist. The Company does not intend to seek
qualification for the sale of the Securities in the state of Indiana. It should
be noted that although the Underwriter may not be the sole market
54
maker in the Company's securities, it will most likely be the dominant
market maker in the Company's securities.
Determination of Public Offering Price
Prior to this offering, there has been no public market for the Shares
or the Class A Warrants. The initial public offering price for the Securities
and the exercise price of the Class A Warrants have been determined by
negotiations between the Company and the Underwriter. Among the factors
considered in the negotiations were an analysis of the areas of activity in
which the Company is engaged, the present state of the Company's business, the
Company's financial condition, the Company's prospects, an assessment of
management, the general condition of the securities market at the time of this
offering and the demand for similar securities of comparable companies. The
public offering price of the Securities and the exercise prices of the Class A
Warrants does not necessarily bear any relationship to assets, earnings, book
value or other criteria of value applicable to the Company.
55
LEGAL PROCEEDINGS
Hergo and Hertz Computer have been sued by Ergotron, Inc. in federal
court in the Southern District of New York. The plaintiff, a competitor, claims
that Hergo has been infringing its rights in a computer support system marketed
and sold by plaintiff. The action was commenced on August 23, 1993. On March
26, 1996, the Court granted Hergo summary judgment on plaintiff's "trade dress"
infringement claims, its principal claims in the suit. The Company is presently
discussing settlement of the remaining issues. These consist of plaintiff's
remaining claims consisting of its claim against Hergo for copyright
infringement and its claim against Hertz for contributing to copyright
infringement and Hergo's claims against plaintiff consisting of unfair
competition and violation of Sections 349 and 350 of the New York General
Business Law, dealing with deceptive acts and practices and false advertising.
In light of the Court decision, the Company believes that it has limited risks
with respect to the remaining claims. Plaintiff, however, has indicated that it
may wish to appeal the summary judgment decision of the lower court when such
appeal becomes timely. The Company believes that if such appeal were made, it
would be dismissed, but there can be no assurance of such a result, and if
plaintiff were able to prevail on appeal, and to thereafter succeed in a
subsequent trial, Hergo might be liable for damages for its past sales. In
addition, Hergo might be required to redesign some of its products so as to
avoid any of the claimed infringement of plaintiff's products, which in turn
could have an adverse affect on the Company's plans for expanding this part of
the business. On or about October 15, 1996 the parties reached a complete
settlement of the matter in principle, which the parties expect to reduce to a
writing within the next 30 days. Under the terms of the proposed settlement,
Hergo will pay plaintiff $50,000 and will redesign one item in its product
line.
On or about August 9, 1995, Hertz Computer commenced an action against
A.C. Purchasing Securities, Inc. and others in Federal Court in the Southern
District, New York to collect approximately $140,000 for goods sold and
delivered to defendant which was purchasing computers for resale to the
Government of Israel. The defendants have counterclaimed, charging that Hertz
Computer sold computers directly to the Government of Israel, thereby,
tortiously interfering with defendants business arrangement with the Government
of Israel. The Company believes that Hertz Computer has meritorious defenses to
the counterclaim. Moreover, notwithstanding defendants large claim for damages,
the maximum amount it could reasonably expect to recover if it were successful
in this suit would be the amount of the profits it was deprived of by reason of
Plaintiff's allegedly tortious conduct.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed
upon for the Company by Morse, Zelnick, Rose & Lander, LLP, 450 Park Avenue,
New York, New York 10022-2605. Morse, Zelnick, Rose & Lander, LLP is the owner
of 60,000 Shares. Certain legal matters will be passed upon for the Underwriter
by Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New York 10022.
56
EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen,
LLP, independent public accountants, as set forth in its report. In that
report, that firm states that with respect to Hertz-Israel its opinion is based
on the reports of other independent public accountants, namely, Shlomo Ziv &
Co. The financial statements and supporting schedules referred to above have
been included herein in reliance upon the authority of those firms as experts
in giving said reports.
57
INDEX TO FINANCIAL STATEMENTS
HERTZ TECHNOLOGY GROUP, INC.
Pages
Report of Independent Public Accountants............................ F-1
Consolidated Balance Sheet as of August 31, 1995.................... F-2
Consolidated Statements of Operations for the Years Ended
August 31, 1995 and 1994 (unaudited)........................... F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended August 31, 1995 and 1994.................................. F-4
Consolidated Statements of Cash Flows for the Years Ended
August 31, 1995 and 1994........................................ F-5
Notes to Consolidated Financial Statements as of
August 31, 1995 and 1994....................................... F-6
Report of independent Public Accountants for Hertz Computer
Information System (1985) Ltd................................... F-13
Consolidated Balance Sheet as of May 31, 1996 (unaudited).......... F-15
Consolidated Statements of Operations Nine Months Ended
May 31, 1996 and 1995 (unaudited).............................. F-16
Consolidated Statements of Cash Flows Nine Months Ended
May 31, 1996 and 1995 (unaudited).............................. F-17
Notes to Consolidated Financial Statements Nine Months Ended
May 31, 1996 and 1995 (unaudited).............................. F-18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
After the recapitalization discussed in Note 1 to the consolidated financial
statements is effected, the undersigned would be able to render the following
audit report.
/s/ Arthur Andersen, LLP
New York, New York
November 30, 1995
To the Board of Directors and Stockholders of Hertz Technology Group, Inc.:
We have audited the accompanying consolidated balance sheet of Hertz Technology
Group, Inc. (a New York Corporation) as of August 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years then ended August 31, 1995 and 1994. 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 did
not audit the financial statements of Hertz Computers Information System (1985)
Ltd. ("Hertz-Israel"), which statements reflect total assets and revenues of 23
percent and 17 percent, respectively in 1995 and total revenues of 9 percent in
1994 of the consolidated totals. Those statements were audited by other
auditors whose report has been furnished to us and our opinion, insofar as it
relates to the amounts included for this entity, is based solely on the report
of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Hertz Technology Group, Inc. as of August
31, 1995 and the results of its operations and its cash flows for each of the
two years in the period ended August 31, 1995, in conformity with generally
accepted accounting principles.
As explained in Note 8 to the financial statements, effective September 1,
1993, the Company changed its method of accounting for income taxes.
F-1
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEET
AUGUST 31,1995
ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY
- ------ ------------------------------------
CURRENT ASSETS: CURRENT LIABILITIES:
- --------------- --------------------
Cash $ 121,929 Notes payable to banks and others $1,028,295
Accounts receivable, less allowance for Accounts payable and accrued expenses 1,038,500
doubtful accounts of $22,000 1,931,848 Income taxes payable 11,377
Inventories 958,209 Note payable to stockholder 205,515
----------
Due from related parties 17,276 Total current liabilities 2,283,687
Prepaid expenses and other current assets 46,641 ----------
---------
Total current assets 3,075,903 NOTES PAYABLE TO BANKS AND OTHERS 9,850
--------- ----------
NOTE PAYABLE TO RELATED PARTY AND STOCKHOLDER(Note 4) 316,083
PROPERTY AND EQUIPMENT, net 214,097 ----------
---------
OTHER LIABILITIES 15,617
----------
COMMITMENTS AND CONTINGENCIES (Note 6.)
GOODWILL, net of accumulated amortization of STOCKHOLDERS' EQUITY:
$31,684 47,525 ---------------------
--------- Common stock, $.001 par value: 25,000,000
authorized, issued and outstanding
1,900,000 shares 1,900
Additional paid-in capital 124,100
Retained earnings 614,966
----------
Total stockholders' equity 740,966
----------
OTHER ASSETS 28,678 Total liabilities and stockholder's equity $3,366,203
---------- ==========
Total assets $3,366,203
==========
The accompanying notes are an integral part of this consolidated balance sheet.
F-2
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 1995 AND 1994
1995 1994
---------- ----------
NET SALES $11,220,183 $10,929,308
COST OF GOODS SOLD 8,102,977 8,386,365
---------- ----------
Gross Profit 3,117,206 2,542,943
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,868,665 2,288,388
---------- ----------
Operating income 248,541 254,555
OTHER INCOME (EXPENSE):
Other income 14,671 13,394
Interest, net of interest income of $6,266 and $22,219 (131,484) (58,340)
---------- ----------
Income before provision for income taxes and cumulative
effect of change in accounting principle 131,728 209,609
PROVISION FOR INCOME TAXES 77,615 63,138
---------- ----------
Income before cumulative effect of change in accounting
principle 54,113 146,471
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- 28,424
---------- ----------
Net Income $ 54,113 $ 174,895
========== ==========
HISTORICAL INCOME BEFORE PROVISION FOR INCOME TAXES $ 131,728 $ 209,609
PRO FORMA PROVISION FOR INCOME TAXES 73,602 107,552
---------- ----------
PRO FORMA NET INCOME $ 58,126 $ 102,057
========== ==========
PRO FORMA NET INCOME PER SHARE $ 0.03 $ 0.05
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 1,900,000 1,900,000
========== ==========
SUPPLEMENTARY NET INCOME PER SHARE $ 0.06
==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1995 AND 1994
Additional
Common Paid-in Retained
Stock Capital Earnings Total
--------- ---------- --------- ---------
Balance at August 31, 1993 $ 1,900 $ 124,100 $ 385,958 $ 511,958
--------- ---------- --------- ---------
Net income for the year ended August 31, 1994 -- -- 174,895 174,895
Balance at August 31, 1994 1,900 124,100 560,853 686,853
--------- ---------- --------- ---------
Net income for the year ended August 31, 1995 -- -- 54,113 54,113
Balance at August 31, 1995 $ 1,900 $ 124,100 $ 614,966 $ 740,966
--------- ---------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1995 AND 1994
1995 1994
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 54,113 $ 174,895
Adjustments to reconcile net income to net cash
(used in) provided by operating activities.
Depreciation and amortization 21,200 29,103
Bad debt expense 14,000 --
Changes in operating assets and liabilities
Accounts receivable (298,293) (130,577)
Inventories (140,849) (27,254)
Due from related parties (22,366) (115,125)
Prepaid expenses and other assets 10,131 (46,822)
Accounts payable and accrued expenses (15,616) 214,266
Income taxes payable (31,758) 19,135
Deferred income taxes payable -- (64,400)
Other liabilities 1,621 --
Note payable to stockholder 13,230 (30,500)
---------- ---------
Net cash (used in) provided by operating activities (394,587) 22,721
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (46,888) (96,591)
Proceeds from repayment of note receivable from related party 8,902 --
---------- ---------
Net cash used in investing activities (37,986) (96,591)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note receivable from related party -- 103,625
Principal payments under notes payable to banks (715,259) (6,734)
Borrowings under notes payable to banks 1,028,295 20,078
Borrowings (Payments) under note payable to stockholder 176,083 (81,052)
---------- ---------
Net cash provided by financing activities 489,119 35,917
---------- ---------
Net increase (decrease) in cash 56,546 (37,953)
CASH, beginning of year 65,383 103,336
---------- ---------
CASH, end of year $ 121,929 $ 65,383
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 111,927 $ 68,984
---------- ---------
Income taxes paid $ 82,947 $ 158,709
---------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995 AND AUGUST 31, 1994
1. COMPANY BACKGROUND AND SUMMARY
AND SIGNIFICANT ACCOUNTING POLICIES
Recapitalization
The Hertz Technology Group, Inc. ("Company") was formed on June 18, 1996. Prior
to the effective date of an initial public offering ("IPO") (see Note 11),
Hertz Computer Corporation ("Hertz Computer") and Hergo Ergonomic Support
Systems, Inc. ("Hergo"), two entities under common control, will be acquired by
the Company (which is owned by the same shareholders) and become wholly owned
subsidiaries. Accordingly, the financial statements are presented as
consolidated. Hertz Computer owns 100% of Hertz Computers Information System
(1985) Ltd. ("Hertz-Israel").
Nature of Business
Hertz Computer and Hergo are both located in New York City and Hertz-Israel is
located in Ashod, Israel. Hertz Computer assembles and sells personal computers
in the United States primarily within the New York Metropolitan area and also
exports to customers in Israel. Hertz-Israel primarily sells and services Hertz
Computer manufactured personal computers in Israel. Hergo manufactures and
sells space saving modular racks and technical furniture to help organize all
types of computer hardware, communication and electronic equipment.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Hertz Computer, Hertz-Israel and Hergo. All
intercompany transactions have been eliminated in consolidation.
Revenue Recognition
Sales are recognized when the products are shipped. Payments received for
products not yet shipped are recorded as a current liability. The provision for
warranties is not material as all components are warrantied to the Company by
the manufacturers.
Inventories
Inventories, which consist primarily of finished goods, raw material,
components, and work in process, are valued at the lower of cost or market on
the first-in, first-out (FIFO) basis.
Inventories as of August 31, 1995 consist of:
1995
--------
Components $527,551
Raw materials and work in process 86,316
Finished goods and evaluation units 344,342
--------
$958,209
F-6
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995 AND AUGUST 31, 1994
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed under the
straight-line method over estimated useful lives ranging from 5 to 10 years.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful lives of the assets.
Goodwill
Goodwill, which arose in 1991 in connection with the acquisition of
Hertz-Israel, is amortized on a straight-line basis over a period of 10 years.
Amortized expense for the years ended August 31, 1995 and 1994 was $7,921.
Translation of Foreign Currency
The functional currency of Hertz-Israel is the U.S. dollar. The accounts of
Hertz-Israel have been translated in accordance with Statement of Financial
Accounting Standards No. 52. The financial statements of Hertz-Israel have been
remeasured into U.S. dollars as follows: at rates prevailing during the year
for revenue and expense items (except depreciation and amortization); at
year-end rates for assets and liabilities except for equipment and leasehold
improvements, which are translated at the rate in effect at the time of their
acquisition. Depreciation and amortization are remeasured based on the
historical dollar cost of underlying assets. The effect of translation has been
reflected currently in the Consolidated Statement of Operations and it is not
material.
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. As
such, Hergo does not incur federal income tax expense, although it does incur
state and local 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 was a C corporation for tax
filing purposes during the years ended August 31, 1995 and August 31, 1994. As
such, an effective tax rate of approximately 46% was used in calculating both
Hergo's and Hertz's pro forma income tax provision.
Net Income Per Share
Proforma net income per share has been computed by dividing proforma net income
by the weighted average number of shares of common stock outstanding during the
period as if the company were recapitalized on September 1, 1994.
Supplementary net income per share is calculated for the year ended August 31,
1995. Supplementary net income per share is computed as if $1,559,743 of
interest bearing debt obligations was repaid from the net proceeds of the IPO as
of September 1, 1994 and assuming that (i) 311,949 of common shares were issued
as of September 1, 1994 to repay the interest bearing debt obligations; (ii)
$74,385 of interest expense, net of income tax expense, was eliminated as a
result of such payment for the twelve months ended August 31, 1995.
F-7
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995 AND AUGUST 31, 1994
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 amount of assets and liabilities and disclosure 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.
Risks
The Company faces a number of risks, including a highly competitive
microcomputer market environment which places pressure on profit margins,
customer and geographic concentrations, the potential continual operating losses
of Hertz-Israel, dependence on key personnel, limited operating history of
Hergo's product line whose current margins may not be indicative of future
margins, no assurance of attainment of proprietary rights and trademarks of the
Hertz and Hergo names and businesses and the ability to manage the growth of the
sales force and employee base of which the Company expects to expand with the
proceeds from the IPO. Such risks could impact the future results of the
Company.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at August 31, 1995:
1995
--------
Furniture, fixtures and equipment $219,305
Warehouse equipment 60,187
Leasehold improvements 39,683
--------
319,175
Less: Accumulated depreciation
and amortization 105,078
--------
Property and equipment, net $214,097
========
3. NOTES PAYABLE TO BANKS AND OTHERS
Line of Credit
In June 1995, Hertz Computer entered into a Revolving Line of Credit
("Agreement") with a bank under which the Company could borrow up to $1,000,000
with interest accruing on any outstanding balance at the prime rate of the bank,
plus 1% (effective rate at August 31, 1995 was 9.75%). Repayment of the
borrowings is secured by a general security interest in substantially all
personal property of Hertz Computer and is personally guaranteed by the
stockholders. The Agreement expires May 30, 1996. As of August 31, 1995, the
balance outstanding under this agreement was $895,000.
Hertz-Israel has a bank overdraft of $114,133. The interest rate on the
overdraft is the Israeli prime rate plus 1.2% (15.9% at August 31, 1995).
F-8
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995 AND AUGUST 31, 1994
Long Term
Hertz-Israel has notes payable due with banks, aggregating $29,012 and are
payable as follows:
1995 $19,162
1996 9,850
-------
29,012
-------
Less: current maturities 19,162
-------
$9,850
=======
4. RELATED PARTY TRANSACTIONS
Note Payable to Stockholder - Short-term
Hertz Computer has a note payable to a stockholder due on demand at August 31,
1995, in the amount of $140,000, which is collateralized by the Company's assets
and subordinated to the notes payable to bank described in Note 3. The interest
rate on this note payable is prime plus 1.4 % (10.2 % at August 31, 1995) and
interest expense for the years ended August 31, 1995 and 1994 were $9,643 and
$9,629, respectively.
Hergo has a 10%, due on demand note payable for $145,515 and $132,287 at
August 31, 1995 and August 31, 1994, respectively, owed to a stockholder. The
note is collateralized by the Company's assets. The individual has represented
that $80,000 will not be demanded before September 1, 1996. Interest expense
incurred on this note payable for the years ended August 31, 1995 and August 31,
1994 was $13,229 and $9,260, respectively.
Note Payable to Stockholder - Long-Term
Hertz Computer has a 10%, due on demand note payable to a stockholder in the
amount of $176,083. The note is collateralized by the Company's assets and
subordinated to the notes payable to bank described in Note 3. The individual
has represented that the note will not become due before September 1, 1997.
Interest expense for the year ended August 31, 1995 was $15,985.
Note Payable to Related Party
Hertz Computer has a 9%, due on demand note payable for $60,000 owed to an
individual related to a stockholder. The note is collateralized by the Company's
assets and subordinated to the notes payable to bank described in Note 3. The
individual has represented that the note will not become due before September 1,
1997. Interest expense for the years ended August 31, 1995 and August 31, 1994
was $5,400 and $6,446, respectively.
5. LIFE INSURANCE
Hertz Computer is the beneficiary of a life insurance policy in the amount of
$1,140,897 on the life of an officer of Hertz Computer. The policy's related
cash surrender value is included in other assets in the accompanying
consolidated balance sheet and amounted to $26,191, as of August 31, 1995.
F-9
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995 AND AUGUST 31, 1994
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
Hertz Computer and Hergo occupy their premises under operating leases expiring
in August 1996 and March 2000, respectively.
The future minimum lease payments of all operating leases as of August 31, 1995
for the Company are as follows:
Fiscal Year
-----------
1996 $199,587
1997 117,871
1998 107,723
1999 104,788
2000 51,924
--------
Total $581,893
Total rent expense related to the Company's premises for the periods ended
August 31, 1995 and August 31, 1994 was $153,404 and $148,276, respectively.
Litigation
The Company is currently involved in litigation regarding, tradedress, and
copyright infringement. Mangement believes it has valid defenses against these
claims; however, there is no certainty as to the possible outcome, nor is there
any reasonable estimation of possible monetary exposure.
Hertz Computer commenced an action against A.C. Purchasing Securities, Inc. and
others in Federal Court in the Southern District, New York to collect
approximately $140,000 for goods sold and delivered to defendant which was
purchasing computers for resale to the Government of Israel. The defendants
have counterclaimed, charging that Hertz Computer sold computers directly to the
Government of Israel, thereby, tortiously interfering with defendants business
arrangement with the Government of Israel. The Company believes that Hertz
Computer has meritorious defenses to the counterclaim and that notwithstanding
defendants large claim for damages, the maximum amount it could reasonably
expect to recover if it were successful in this suit would be the amount of the
profits it was deprived of by reason of Plaintiff's allegedly tortious conduct.
While the ultimate results of the matters described above cannot be determined,
management does not expect that they will have a material adverse effect on the
Company's results of operations or financial position.
7. PROFIT SHARING PLAN
Hertz Computer has a profit sharing plan covering all eligible employees. For
the years ended August 31, 1995 and 1994, the Board of Directors approved the
contribution of approximately $60,000 and $83,000 to this plan and these amounts
are reflected as a component of selling, general and administrative expense in
the Company's Consolidated Statements of Operations.
F-10
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995 AND AUGUST 31, 1994
8. INCOME TAXES
Effective September 1, 1993, Hertz Computer changed its method of accounting for
income taxes from the deferred method to the liability method as required by
Statement of Financial Accounting Standards No. 109 - "Accounting for Income
Taxes" ("SFAS No. 109"). As permitted under SFAS No. 109, Hertz Computer
adopted this method of accounting via a cumulative effect of a change in
accounting principle. This adoption resulted in a benefit of $28,424.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The most significant
components relate to the allowances for doubtful accounts and obsolescence,
different methods of depreciation for book and tax, and capitalization of
certain inventory costs for tax purposes. Included in other current assets at
August 31, 1995 is a deferred tax asset of $14,291.
A reconciliation between the federal tax rate (34%) and the effective tax rate
for the years ended 8/31/95 and 8/31/94 is as follows:
1995 1994
---- ----
Federal tax rate 34% 34%
State and local income taxes,
net of federal benefit 12% 12%
Other 13% (16%)
-- ---
Effective tax rate 59% 30%
The effective tax rate per the financial statements exceeds the statutory rate
for the year ended 8/31/95. This difference (reflected in the "Other" category)
arises because the Company files three separate tax returns for Hertz Computer,
Hertz-Israel, and Hergo and, as such, taxable losses can not be netted against
taxable income on a consolidated basis.
The effective tax rate per the financial statements is less than the applicable
statutory rate for the year ended 8/31/94. This difference results because
Hertz Computer is taxed at the federal statutory rate of 34% as it is a C
Corporation and, as a New York S Corporation, Hergo does not remit federal
taxes. In fiscal 1994, Hergo generated the majority of the consolidated taxable
income which was not subject to federal income taxes and, as a result the
effective tax rate is lower than the statutory rates.
9. SEGMENT OPERATIONS
The operating results of significant segments of the consolidated company at
8/31/95 are as follows:
Hertz Computer Hertz-Israel Hergo Consolidated
Sales (Unaffiliated) $7,055,231 $1,936,080 $2,228,872 $11,220,183
Inventory Transfers from/(to) 1,015,634 (1,015,634) - -
Gross Profit 1,443,088 369,224 1,304,894 3,117,206
Operating Income 195,859 21,926 30,756 248,541
Assets 1,848,574 780,873 736,756 3,366,203
F-11
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1995 AND AUGUST 31, 1994
The operating results of significant segments of the consolidated company at
8/31/94 are as follows:
Hertz Computer Hertz-Israel Hergo Consolidated
Sales (Unaffiliated) $8,710,218 $949,997 $1,269,093 $10,929,308
Inventory Transfers from/(to) 322,416 (322,416) - -
Gross Profit 1,511,203 269,216 762,524 2,542,943
Operating Income (Loss) 149,134 (17,675) 123,096 254,555
10. GEOGRAPHIC AND CUSTOMER CONCENTRATION
The Company has a concentration of its sales in the New York metropolitan area
of approximately 61% and 60% for the years ended August 31, 1995 and 1994,
respectively. Approximately 36% and 33% of its total sales in the years ended
August 31, 1995 and 1994, respectively, were to federal, state and city agencies
or government affiliated organizations, including hospitals and schools. The
Company had significant sales with two operating units of a customer, each which
comprised 14% and 11% of total sales for the year ended August 31, 1994. This
customer was not a significant part of total sales for the year ended August 31,
1995 and there were no significant sales to other customers during the year
ended August 31, 1995.
11. INITIAL PUBLIC OFFERING
On September 24, 1996, the Company filed Amendment No. 1 to the registration
statement with the Securities and Exchange Commission to register approximately
1,100,000 units each unit consisting of one share of common stock, $.001 par
value per share and once Class A warrant at an expected IPO price of $5.25 per
unit and 1,100,000 Class A warrants at an expected IPO price of $.25 per
warrant. The warrants are exercisable one year from the effective date of the
IPO at a price of $5.50. The Company's management expects to realize proceeds
from the sale of common stock and warrants of $4,868,500 net of commissions and
offering expenses of $1,181,500.
F-12
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED BALANCE SHEET
MAY 31, 1996
(UNAUDITED)
ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY
- ------ ------------------------------------
CURRENT ASSETS: CURRENT LIABILITIES
- --------------- -------------------
Cash $ 284,243 Notes payable to banks and others $ 1,117,093
Accounts receivable, less allowance for Accounts payable and accrued expenses 595,568
doubtful accounts of $68,246 1,605,538 Current maturities of capital lease
obligation 5,388
Inventories 1,005,531 Income taxes payable 195,905
Prepaid expenses and other current assets 116,430 Distribution payable to stockholders 224,567
----------------- Notes payable to stockholder 326,471
Total current assets 3,011,742 ------------
----------------- Total current liabilities 2,464,992
------------
CAPITAL LEASE OBLIGATION 19,309
------------
PROPERTY AND EQUIPMENT, net 262,920
-----------------
COMMITMENTS AND CONTINGENCIES (Note 5)
GOODWILL, net of accumulated amortization
of $37,625 41,584
----------------- STOCKHOLDERS' EQUITY:
Common stock, $.001 par value: 25,000,000
authorized, issued and outstanding
1,900,000 shares 1,900
Additional paid-in capital 124,100
Retained earnings 777,911
------------
OTHER ASSETS 71,966 Total stockholders' equity 903,911
----------------- ------------
Total assets $ 3,388,212 Total liabilities and stockholders' $ 3,388,212
================= ============
The accompanying notes are an integral part of this consolidated balance sheet.
F-15
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MAY 31, 1996 AND 1995
(UNAUDITED)
NINE MONTHS ENDED
MAY 31,
1996 1995
------------ ------------
NET SALES $ 9,375,857 $ 8,224,492
COST OF GOODS SOLD 6,532,666 6,117,860
------------ ------------
Gross Profit 2,843,191 2,106,632
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,072,389 1,942,355
------------ ------------
Operating income 770,802 164,277
OTHER INCOME (EXPENSE):
Other income 9,323 278
Interest, net of interest income of
$4,114 and $1,970 (148,113) (96,650)
------------ ------------
Income before provision
for income taxes 632,012 67,905
PROVISION FOR INCOME TAXES 244,500 3,900
------------ ------------
Net income $ 387,512 $ 64,005
============ ============
-
HISTORICAL INCOME BEFORE PROVISION FOR INCOME
TAX $ 632,012 $ 67,905
PROFORMA PROVISION FOR INCOME TAXES 366,233 --
------------ ------------
PRO FORMA NET INCOME $ 265,779 $ 67,905
============ ============
PRO FORMA NET INCOME PER SHARE $ 0.14 $ 0.04
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 1,900,000 1,900,000
============ ============
SUPPLEMENTARY NET INCOME PER SHARE $ 0.16
============
The accompanying notes are an integral part of these consolidated financial
statements
F-16
HERTZ TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MAY 31, 1996 AND 1995
(UNAUDITED)
NINE MONTHS ENDED
MAY 31,
1996 1995
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 387,512 $ 64,005
Adjustments to reconcile net income to net
cash provided by (used in) operating activities -
Depreciation and amortization 39,741 28,998
Bad debt expense (recovery) 46,246 (60,246)
Changes in operating assets and liabilities-
Accounts receivable 280,064 (154,077)
Inventories (47,322) (119,294)
Due from related parties 17,276 (6,842)
Prepaid expenses and other current assets (69,789) (52,499)
Other assets (43,288) (17,622)
Accounts payable and accrued expenses (442,932) (55,516)
Income taxes payable 184,528 (56,822)
Other liabilities (15,617) 20,730
---------- ---------
Net cash provided by (used in)
operating activity 336,419 (409,185)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (82,623) (38,396)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under notes payable to banks 103,645 224,019
Net (repayments) borrowings under notes payable
to stockholder (195,127) 200,689
Repayment of note receivable from related party - 8,902
---------- ---------
Net cash (used in) provided by
financing activity (91,482) 433,610
---------- ---------
Net increase (decrease) in cash 162,314 (13,971)
CASH, beginning of period 121,929 65,384
---------- ---------
CASH, end of period $ 284,243 $ 51,413
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 117,275 $ 58,767
Income taxes paid 79,972 98,331
The accompanying notes are an integral part of these consolidated financial
statements
F-17
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MAY 31, 1996 AND MAY 31,1995
(UNAUDITED)
Note 1. Significant Accounting Policies
A. Unaudited Period
The unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States relating to the
provision of interim financial information. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the nine
month period ending May 31, 1996 are not necessarily indicative of the results
that may be expected for the year ending August 31, 1996.
B. Accounting for Impairments in Long-lived Assets
The Financial Accounting Standards Board has issued SFAS No. 121, "Accounting
for Impairments in Long-lived Assets and Long-lived Assets Being Disposed Of,"
which the Company adopted on September 1, 1995. This statement requires that
long-lived assets and identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate the carrying amounts of
the assets not to be recoverable. In evaluating recoverability, Hertz
Technology Group's (the "Company") management estimates the future cash flows
expected to result from the assets and its eventual disposition. If the sum of
future undiscounted cash flows is less than the carrying amount of the asset,
an impairment loss is recognized. No such loss was recognized in the May 31,
1996 consolidated financial statements.
C. Accounting for Stock-based Compensation
The Financial Accounting Standards Board has issued Statement of Accounting
Standards No. 123, "Accounting for Stock-based Compensation ("SFAS 123")."
This statement establishes financial accounting and reporting standards for
stock-based employee compensation plans. The requirements of SFAS 123 are
effective for transactions entered into in fiscal years that begin after
December 15, 1995, though they may be adopted upon issuance. The disclosure
requirements of SFAS 123 are effective for financial statements for fiscal
years beginning after December 15, 1995. The adoption of this statement has no
effect on the May 31, 1996 consolidated financial statements.
D. Pro Forma Net Income
Pro forma net income is calculated as if Hergo Ergonomic Systems, Inc.
("Hergo") was a C corporation for tax filing purposes during the nine months
ended May 31, 1996 and May 31, 1995. As such, an effective tax rate of
approximately 46% was used in calculating both Hergo's and Hertz Computer
Corporation's ("Hertz Computer") pro forma net income.
F-18
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MAY 31, 1996 AND MAY 31,1995
(UNAUDITED)
E. Supplementary Net Income Per Share
Supplementary net income per share is calculated for the nine month period
ended May 31, 1996. Supplementary net income per share is computed as if
$1,443,564 of interest bearing debt obligations was repaid from the net
proceeds of the IPO as of September 1, 1995 and assuming that (i) 288,713 of
common shares were issued as of September 1, 1995 to repay the interest bearing
debt obligations; (ii) $82,200 of interest expense, net of income tax expense,
was eliminated as a result of such payment for the nine months ended May 31,
1996; (iii) pro forma income of $265,779 (as if Hergo was a C corporation for
the nine months ended May 31, 1996) is the base utilized in the calculation of
net income.
Note 2. Notes Payable
In June 1995, Hertz Computer entered into a Revolving Line of Credit
("Agreement") with a bank ("Bank") under which the Company could borrow up to
$1,000,000 with interest accruing on any outstanding balance at the base rate
of the Bank, plus 1% (effective rate at May 31, 1996 was 9.25%). Repayment of
the borrowings is secured by a general security interest in substantially all
personal property of the Company and is personally guaranteed by the
stockholders. The Agreement was renewed on May 31, 1996 with substantially
similar terms and is effective through May 31, 1997. As of May 31, 1996, the
balance outstanding under this Agreement was $895,000.
In February 1996, Hertz Computers Information System (1985) Ltd. (Hertz-Israel)
entered into a line of credit agreement with a bank for $300,000 and an
interest rate of the six month Libor rate plus 1.25% (6.91% at May 31, 1996)
which is effective through March 9, 1997. Presently, two short term loans
totaling $205,240 at May 31, 1996 are outstanding against this line of credit.
These loans were originally due on September 9, 1996, but were extended six
months and are presently due on March 9, 1997. The interest rate for the
extension period is the six month Libor rate plus 1.0%. An additional $6,135
is outstanding at May 31, 1996 against this line of credit.
The Company is expected to utilize the proceeds from the IPO to pay the entire
balance of notes payable to the current stockholders and the current revolving
credit line with the Bank. In addition, the Company will utilize the proceeds
from the IPO to pay the distribution payable of $224,567 to the current
stockholders. This distribution payable represents the May 31, 1996 retained
earnings balance of Hergo and has been reflected as a current liability in the
May 31, 1996 consolidated balance sheet.
F-19
HERTZ TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED MAY 31, 1996 AND MAY 31,1995
(UNAUDITED)
Note 3. Stock Option Plan
On August 7,1996, in order to attract and retain persons necessary for the
success of the Company, the Company adopted its 1996 Stock Option Plan ("Option
Plan") covering up to 750,000 of its shares of its common stock ("Shares"),
pursuant to which officers, directors and key employees of the Company and
consultants to the Company are eligible to receive incentive and/or
non-incentive stock options. The Option Plan, which expires on August 6, 2006,
will be administered by the Company's Board of Directors or a committee
designated by such group. The selection of participants, allotment of shares,
determination of price and other conditions relating to the purchase of options
will be determined by the Board of Directors, or a committee thereof, in its
sole discretion. Incentive stock options granted under the Option Plan are
exercisable for a period of up to 10 years from the date of grant at an
exercise price which is not less than the fair market value of the Shares on
the date of the grant, except that the term of an incentive stock option
granted under the Option Plan to a shareholder owning more than 10% of the
outstanding Shares may not exceed five years and its exercise price may not be
less than 110% of the Fair market value of the Shares on the date of the grant.
As of September 12, 1996, no options have been granted under the Option Plan.
Note 4. Geographic and Customer Concentration
The Company has a concentration of its sales in the New York metropolitan area
of approximately 66% and 60% for the periods ended May 31, 1996 and 1995,
respectively. Approximately 41% and 36% of its total computer's sales in the
nine month periods ended May 31, 1996 and 1995 were to federal, state and city
agencies or government affiliated organizations, including hospitals and
schools. The Company has significant sales with one customer, which comprises
18% of total sales for the May 31, 1996 nine month period. No customers
exceeded 10% of sales in the nine month period ended May 31, 1995.
Note 5. Commitments and Contingencies
Hertz Computer entered into an operating lease agreement effective September 1,
1996 for a rental property located in New York City as it is vacating the
premises it occupies currently on August 31, 1996. The minimum lease
commitments for the new premises are as follows:
Fiscal Year
Ending May 31,
--------------
1997 $66,703
1998 115,508
1999 115,508
2000 115,508
2001 115,508
Thereafter 192,513
--------
Total $721,248
F-20
================================================================================
No Underwriter, salesman or other person has been authorized to give
any information or to make any representations not contained in this Prospectus
in connection with the offer made hereby. If given or made, such information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer of any securers other
than the securities to which it relates or an offer to any person in any
jurisdiction in which such an offer would be unlawful. Any material
modification of the offering will be accomplished by means of an amendment to
the registration statement. In addition, the right is reserved by the Company
to cancel any confirmation of sale prior to the release of fund, if, in the
opinion of the Company, completion of such sale would violate federal or state
securities laws or a rule or policy of the National Association of Securities
Dealers, Inc., Washington, D.C. 20006.
================================================================================
TABLE OF CONTENTS
Page
Available Information.............................................
Prospectus Summary................................................
S Corporation Distribution........................................
Risk Factors......................................................
Use of Proceeds...................................................
Dilution .........................................................
Capitalization....................................................
Dividend Policy...................................................
Management's Discussion and Analysis of
Financial Condition
and Plan of Operations.........................................
Business..........................................................
Management........................................................
Principal Shareholders............................................
Certain Transactions..............................................
Description of Securities.........................................
Selling Shareholders..............................................
Underwriting......................................................
Legal Matters.....................................................
Experts...........................................................
Additional Information............................................
Index to Financial Statements.....................................
Until October ____, 1996 (25 days after the date of this Prospectus), all
broker-dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a
Prospectus. This delivery is in addition to the obligations of dealers to
deliver a Prospectus which respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
1,100,000 Units,
each Unit consisting of one
Share of Common Stock and
one Class A Warrant
and
1,100,000 Class A Warrants
HERTZ TECHNOLOGY GROUP, INC.
PROSPECTUS
BILTMORE SECURITIES, INC.
October ____, 1996
================================================================================
[ALTERNATE PAGE FOR SELLING SHAREHOLDERS' PROSPECTUS]
SUBJECT TO COMPLETION, DATED OCTOBER ___, 1996
PROSPECTUS
HERTZ TECHNOLOGY GROUP, INC.
750,000 SHARES OF COMMON STOCK
This Prospectus relates to 750,000 shares of common stock, $0.001 par
value per share (the "Shares") of Hertz Technology Group, Inc., a Delaware
corporation (the "Company"), which are held by certain shareholders (the
"Selling Shareholders") of the Company.
The Shares offered by this prospectus may be sold from time to time by
the Selling Shareholders, provided a current registration statement with
respect to such securities is then in effect. Of the 750,000 Shares being
offered by the Selling Shareholders, 225,000 Shares may be sold during the
twelve (12) months after the Effective Date at such time within such 12 month
period as is acceptable to Biltmore Securities, Inc. (the "Underwriter") and
the balance consisting of 525,000 Shares may be sold at any time after the
expiration of eighteen (18) months from the Effective Date subject to earlier
release at the sole discretion of the Underwriter. See "Description of
Securities"- Registration "Rights" and "Plan of Distribution."
The distribution of the Shares offered hereby by the Selling
Shareholders may be effected on one or more transactions that may take place on
the over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more dealers for
resale of such securities as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or negotiated
prices. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Shareholders.
The Selling Shareholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
The Company will not receive any of the proceeds from the sale of the
securities by the Selling Shareholders. Expenses of this offering, other than
fees and expenses of counsel to the Selling Shareholders and selling
commissions, will be paid by the Company. See "Plan of Distribution."
Application has been made to have the Common Stock and Warrants
approved for quotation on the Nasdaq SmallCap Market under the symbols HTGI and
HTGIW, respectively.
On the date of this Prospectus, a registration statement, filed under
the Securities Act with respect to an underwritten public offering by the
Company of 1,100,000 Units, each Unit consisting of one Share and one
redeemable Class A Warrant (the "Warrant") and 1,100,000 Warrants and up to
165,000 additional Units and 165,000 Warrants to cover over-allotments, if any,
was declared effective by the Securities and Exchange Commission (the
"Commission"). The Company will receive net proceeds of approximately
$4,868,500 from the sale of the Units and Warrants included in the underwritten
public offering, and will receive approximately $790,000 in additional net
proceeds if the over-allotment option is exercised in full after payment of
underwriting discounts and commissions and estimated expenses of the
underwritten public offering. Sales of securities by the Selling Shareholders
or even the potential of such sales, would likely have an adverse affect on the
market price of the Shares and Warrants.
THE SECURITIES OFFERED HEREBY INVOLVE HIGH DEGREE AND RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE _____.
---------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATES SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE
[ALTERNATE PAGE FOR SELLING SHAREHOLDERS PROSPECTUS]
THE OFFERING
Securities offered hereby(1)...................... 750,000 Shares.
Securities outstanding after this offering:
Common Stock (2)(3) ......................... 3,000,000 shares
Warrants..................................... 2,200,000 warrants
Proposed Nasdaq Symbols
Common Stock................................. HTGI
Warrants..................................... HTGIW
Use of Proceeds................................... None of the proceeds from this
offering will go to the Company.
Risk Factors...................................... The securities offered hereby involve
a high degree of risk.
------------------
(1) 1,100,000 Units, each unit consisting of one Share and one Warrant and
1,100,000 Warrants and up to 165,000 additional Units and 165,000
additional Warrants to over over-allotments, if any, are being offered
by the Company in the concurrent underwritten public offering. See
"Concurrent Offering."
(2) Assumes that the Shares registered under the Concurrent Offering have
been sold by the Company.
(3) Does not include Shares issuable upon exercise of (i) Warrants offered
under the Concurrent Offering, (ii) the Underwriter's over-allotment
option to purchase up to 165,000 Units and 165,000 Warrants, (iii) the
Underwriter's Purchase Options to purchase up to 110,000 Units and
110,000 Warrants, (iv) options held by Eli E. Hertz to purchase
900,000 Shares, (v) options to purchase 750,000 Shares reserved for
issuance under the Company's Stock Option Plan or (vi) the issuance of
100,000 Shares reserved for issuance under the Company's Employee
Bonus Plan. See "Description of Securities."
2
[ALTERNATE PAGE FOR SELLING SHAREHOLDERS PROSPECTUS]
CONCURRENT OFFERING
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the Company
of 1,100,000 Units and 1,100,000 Warrants and up to an additional 165,000 Units
and 165,000 additional Warrants to cover over-allotments, if any, was declared
effective by the Commission. Sales of securities by the Company and the Selling
Shareholders, or even the potential of such sales, would likely have an adverse
affect on the market price of the Shares and the Warrants. See "Risk Factors -
Shares Eligible for Future Sale."
3
[ALTERNATE PAGE FOR SELLING SHAREHOLDER PROSPECTUS]
PLAN OF DISTRIBUTION
The Shares of Common Stock being offered hereby by the Selling
Shareholders, subject to the agreement with the Underwriter of the concurrent
public offering that the Shares being offered hereby, consisting of 375,000
Shares being offered by Eli E. Hertz, Chairman, President and Chief Executive
Officer of the Company and 375,000 Shares being offered by his wife, I. Marilyn
Hertz, Vice Chairperson and Director of the Company may be sold as follows:
225,000 Shares in the aggregate may be sold during the twelve (12) months from
the Effective Date at such time within such 12 month period as is acceptable to
Biltmore Securities, Inc. (the "Underwriter"), and the balance, consisting of
525,000 Shares may be sold at any time after the expiration of eighteen (18)
months from the Effective Date, subject to earlier release at the sole
discretion of the Underwriter. Such Shares will be freely tradable provided
that when the Shares are released by the Underwriter, a current registration
statement with respect to such Shares then in effect. The following table sets
forth certain information regarding each of the Selling Shareholders.
Shares Beneficially Number of Shares Shares Beneficially
Owned Prior to this Being Offered Owned After
Name(1) Offering For Sale(2) this Offering(2)
---- -------- -------- -------------
No. of Shares Percentage
------------- ----------
Eli E. Hertz . . . . . . . . . . . . 920,000 375,000 545,000 18.2%
. . . . . .
I. Marilyn Hertz. . .. . . . . . . . 920,000 375,000 545,000 18.2%
. . . .
Total. . . . . . . . . . . . . . . . 1,840,000 750,000 1,090,000 36.3%
- ---------------------
(1) The address for each of these Selling Stockholders is:
c/o Hertz Technology Group, Inc.
325 Fifth Avenue
New York, New York 10016-5012
(2) Assumes all of the shares being registered will be sold.
The securities offered hereby may be sold from time to time directly
by the Selling Shareholders. Alternatively, the Selling Shareholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Shareholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transaction or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary
or specifically negotiated brokerage fees or commissions may be paid by the
Selling Shareholders in connection with such sales of securities. The
securities offered by the Selling Shareholders may be sold by one or more of
the following methods, without limitations: (a) a block trade in which a broker
or dealer so engaged will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers, and (d)
face-to-face transactions
4
[ALTERNATE PAGE FOR SELLING SHAREHOLDER PROSPECTUS]
between sellers and purchasers without a broker-dealer. In effecting sales,
brokers or dealers engaged by the Selling Shareholders may arrange for other
brokers or dealers to participate. The Selling Shareholders and intermediaries
through whom such securities are sold may be deemed "underwriters" within the
meaning of the Securities Act of 1933, as amended (the "Act") with respect to
the securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
securities may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with by the Company and
the Selling Shareholders.
The Selling Shareholders and any broker-dealers, agents or
underwriters that participate with the Selling Shareholders in the distribution
of the shares may be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act of 1933, as amended (the "Act") and any securities
purchased by them may be deemed to be underwriting commissions or discounts
under the Act.
5
[ALTERNATE PAGE FOR SELLING SECURITYHOLDERS PROSPECTUS]
Under applicable rules and regulations under the Securities Exchange
Act of 1934, as amended ("the Exchange Act"), any person engaged in the
distribution of the securities may not simultaneously engage in market-making-
activities with respect to the securities for a period of two business days
prior to the commencement of such distribution. In additional and without
limiting the foregoing, each Selling Securityholder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Rules 10b-6, 10b-6A and 10b-7, which
provisions may limit the timing of the purchases and sales of securities by the
Selling Shareholders.
The Company has agreed to pay all fees and expenses incident to the
registration of the Shares, except selling commissions and fees and expenses of
counsel or any other professionals or other advisors, if any, to the Selling
Shareholders.
6
[ALTERNATE PAGE FOR SELLING SHAREHOLDER PROSPECTUS]
================================================================================
No Underwriter, salesman or other person has been authorized to give
any information or to make any representations not contained in this Prospectus
in connection with the offer made hereby. If given or made, such information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer of any securities other
than the securities to which it relates or an offer to any person in any
jurisdiction in which such an offer would be unlawful. Any material
modification of the offering will be accomplished by means of an amendment to
the registration statement. In addition, the right is reserved by the Company
to cancel any confirmation of sale prior to the release of fund, if, in the
opinion of the Company, completion of such sale would violate federal or state
securities laws or a rule or policy of the National Association of Securities
Dealers, Inc., Washington, D.C. 20006.
TABLE OF CONTENTS
Page
----
Available Information...............................................
Prospectus Summary..................................................
S Corporation Distribution..........................................
Risk Factors........................................................
Use of Proceeds.....................................................
Dilution ...........................................................
Capitalization......................................................
Dividend Policy.....................................................
Concurrent Offering.................................................
Plan of Distribution................................................
Management's Discussion and Analysis of
Financial Condition
and Plan of Operations...........................................
Business............................................................
Management..........................................................
Principal Shareholders..............................................
Certain Transactions................................................
Description of Securities...........................................
Selling Shareholders................................................
Underwriting........................................................
Legal Matters.......................................................
Experts.............................................................
Additional Information..............................................
Index to Financial Statements.......................................
================================================================================
================================================================================
750,000 Shares of Common Stock
HERTZ TECHNOLOGY GROUP, INC.
PROSPECTUS
October ____, 1996
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Sections 145 of the Delaware General Corporation Law grants to the
Company the power to indemnify the officers and directors of the Company, under
certain circumstances and subject to certain conditions and limitations as
stated therein, against all expenses and liabilities incurred by or imposed
upon them as a result of suits brought against them as such officers and
directors if they act in good faith and in a manner they reasonably believe to
be in or not opposed to the best interests of the Company and, with respect to
any criminal action or proceeding, have no reasonable cause to believe their
conduct was unlawful.
The Company's certificate of incorporation provides as follows:
"NINTH: A director of the corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the derived an improper
personal benefit.
TENTH: (a) Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
forof whom he or she is the legal representative, is or was a director or
officer, of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or
agent or in any other capacity while serving as a director, officer, employee
or agent, shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the General Corporation Law, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights thanthat said law permitted the Corporation to provide
prior to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by such
person in connection therewith and such indemnification shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of his or her heirs, executors and administrator;
provided, however, that except as provided in paragraph (b) hereof, the
Corporation shall indemnify anyand such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Section shall
be a contract right and
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the General Corporation Law requires, the payment of such
expenses incurred by a director or officer (in his or her capacity as a
director or officer and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the
Corporation of an undertaking, by or on behalf of such director or officer, to
repay all amounts so advanced if it shall ultimately be determined that such
director or officer is not entitled to be indemnified under this Section or
otherwise. The Corporation may, by action of its Board of Directors, provide
indemnification to employees and agents of the Corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
(b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of
this Section is not paid in full by the Corporation within thirty days after a
written claim has been received by the Corporation, the claimant may at any
time thereafter bring suit against the corporation to recover the unpaid amount
of the claim and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the General Corporation Law for the
Corporation to indemnify the claimant for the amount claimed, but the burden of
proving such defense shall be on the Corporation. Nether the failure of the
Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard or
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
(c) Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusiveexclusively of any
other right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, by-law, agreement, vote of
stockholder or disinterested directors or otherwise.
(d) Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the General Corporation Law."
Reference is made to the form of the Underwriting Agreement, filed as
Exhibit 1.1 hereto, which contains provisions for indemnification of the
Company, its directors, officers, and
2
any controlling persons, by the Underwriter against certain liabilities for
information furnished by the Underwriter.
Item 25. Other Expenses of Issuance and Distribution.
Expenses in connection with the issuance and distribution of the
shares of Common Stock being registered hereunder other than underwriting
commissions and expenses, are estimated below.
Registration fee $9,158.10
NASD fee 3,155.86
NASDAQ Listing fee 10,000.00
Printing expenses 50,000.00
Accounting fees and expenses 125,000.00
Legal fees and expenses 150,000.00
State securities law fees and expenses 35,000.00
Transfer agent and registrar fees and expenses 2,500.00
Miscellaneous expenses $ 10,000.00
---------
Total $394,813.96
==========
The Selling Shareholders will not pay any of the foregoing expenses in
connection with the alternative Offering.
Item 26. Recent Sales of Unregistered Securities
During the past three years the Registrant has issued the following
unregistered securities:
(a) On September 5, 1996, the Company granted Eli E. Hertz options to
purchase 900,000 Shares at a price of $5.50 per Share.
(b) Immediately prior to the Effective Date, the Company issued 920,000
Shares each to Eli E. Hertz and to I. Marilyn Hertz. The consideration for such
shares was the transfer by Mr. and Mrs. Hertz of all their shares in Hertz
Computer and Hergo to the Corporation.
(d) The Company has agreed to issue to Morse, Zelnick, Rose & Lander, LLP
60,000 Shares for services rendered and to be rendered for the Company.
3
EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ----------- ----
1.1 Form of Underwriting Agreement*
1.2 Form of Selected Dealer Agreement*
2.1 Form of Exchange Agreement*
3.1A Certificate of Incorporation of the Company*
3.1B Certificate of Amendement to Certificate of Incorporation of the Company
3.2 By-Laws of the Company*
4.1 Specimen Stock Certificate**
4.2 Form of Redeemable Warrant*
4.3 Form of Underwriter's Purchase Option*
4.4 Form of Warrant Agreement*
5.1 Form of Opinion of Morse, Zelnick, Rose & Lander, LLP*
10.1 1996 Stock Option Plan*
10.2 Form of Employment Agreement between the Company and Eli E. Hertz *
10.3 Form of Employment Agreement between the Company and I. Marilyn Hertz*
10.7 Agreement of Lease between Simon Trakinski and William Trakinski and Hergo Ergonomic
Support Systems, Inc. for 26-58 Borough Place, Woodside, NY 11377.*
4
10.8 Agreement of Lease between Simon Trakinski and William Trakinski and Hergo Ergonomic
Support Systems, Inc. for 60-01 27th Avenue, Woodside, NY.*
10.9 Agreement of Lease between The Rector, Church-Wardens and Vestrymen of Trinity Church
in the City of New York and Hertz Computer Corporation for 75 Varick Street.*
10.10 Lease for premises in Ashdod, Israel.*
10.12 Revolving Credit Agreement dated as of June 28, 1995 by and between Hertz Computer
Corporation and Mizrachi Bank and Trust Company.
10.13 Security Agreement dated June 28, 1995 between Hertz Computer Corporation and United
Mizrachi Bank and Trust Company.
10.14 Share Purchase Agreement, dated August 26, 1994, by and among Eli E. Hertz, Amir
Rotlevi and Hergo Ergonomic Support Systems, Inc.
21 Subsidiaries of the Registrant.*
23.1 Consent of Arthur Andersen, LLP.
23.2 Consent of Shlomo Ziv & Co., Certified Public Accountants.
23.3 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1).
23.4. Consent of Bruce Borner
24. Power of Attorney (included in signature page).
- ------------------
* Previously filed.
5
Item 28. Certain Undertakings
A. The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales
are being made, a post effective amendment to this Registration Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement provided, however, that any increase or decrease in
volume of securities offered (if the total dollar value of securities offered
would not exceed that which is registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 24(b), if, in the
aggregate, the changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement ; and
(iii) to include any material information with respect
to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(4) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
(5) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
6
(6) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating t the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
B. Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant of expenses incurred or paid by
a director, officer of controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
7
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 and authorized
this Registration Statement to be signed on its behalf by the undersigned, in
the City of New York, State of New York on October 10, 1996.
HERTZ TECHNOLOGY GROUP, INC.
By: /s/Eli E. Hertz
_____________________________
Eli E. Hertz
Chairman, President and Chief
Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Amendment No.1 to the Registration Statement has been signed on
October 10, 1996 by the following persons in the capacities indicated and each
of the undersigned persons, in any capacity, hereby severally constitutes Eli
E. Hertz and Howard L. Weinreich, and each of them singularly, his true and
lawful attorney with full power to them and each of them to sign for him and in
his name and in the capacity indicated below, this Registration Statement and
any and all amendments thereto.
Signature Title
--------- -----
/s/Eli E. Hertz Chairman, President and Chief Executive
------------------ Officer and Director
Eli E. Hertz
/s/Marilyn Hertz Vice Chairperson, Secretary and Director
-------------------
I. Marilyn Hertz
/s/ John C. Rudy Vice President, Principal Financial
-------------------- Officer and Chief Accounting Officer
John C. Rudy
/s/Beryl Ackerman Director
--------------------
Beryl Ackerman
8
EXHIBIT INDEX
Exhibit
No. Description Page
- --------- ----------- ----
1.1 Form of Underwriting Agreement*
1.2 Form of Selected Dealer Agreement*
2.1 Form of Exchange Agreement*
3.1A Certificate of Incorporation of the Company*
3.1B Certificate of Amendement to Certificate of Incorporation of the
Company
3.2 By-Laws of the Company*
4.1 Specimen Stock Certificate**
4.2 Form of Redeemable Warrant*
4.3 Form of Underwriter's Purchase Option*
4.4 Form of Warrant Agreement*
5.1 Form of Opinion of Morse, Zelnick, Rose & Lander, LLP*
10.1 1996 Stock Option Plan*
10.2 Form of Employment Agreement between the Company and Eli E.
Hertz *
10.3 Form of Employment Agreement between the Company and I. Marilyn
Hertz*
10.7 Agreement of Lease between Simon Trakinski and William Trakinski
and Hergo Ergonomic Support Systems, Inc. for 26-58 Borough
Place, Woodside, NY 11377.*
10.8 Agreement of Lease between Simon Trakinski and William Trakinski
and Hergo Ergonomic Support Systems, Inc. for 60-01 27th Avenue,
Woodside, NY.*
10.9 Agreement of Lease between The Rector, Church-Wardens and
Vestrymen of Trinity Church in the City of New York and Hertz
Computer Corporation for 75 Varick Street.*
10.11 Lease for premises in Ashdod, Israel.*
10.12 Revolving Credit Agreement dated as of June 28, 1995 by and
between Hertz Computer Corporation and Mizrachi Bank and Trust
Company.
10.13 Security Agreement dated June 28, 1995 between Hertz Computer
Corporation and United Mizrachi Bank and Trust Company.
10.14 Share Purchase Agreement, dated August 26, 1994, by and among
Eli E. Hertz, Amir Rotlevi and Hergo Ergonomic Support Systems,
Inc.
21 Subsidiaries of the Registrant.*
23.1 Consent of Arthur Andersen, LLP.
23.2 Consent of Shlomo Ziv & Co., Certified Public Accountants.
23.3 Consent of Morse, Zelnick, Rose & Lander, LLP (included in
Exhibit 5.1).
23.4. Consent of Bruce Borner
24. Power of Attorney (included in signature page).
- ------------------
* Previously filed.