U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended May 31, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1939 For the transition period from _______ to _________ Commission File Number: 0-21679 HERTZ TECHNOLOGY GROUP, INC. ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) DELAWARE 13-3896069 - ---------------------------- ------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) identification number) 75 Varick Street 10013 - --------------------------- ------------------------- (Address of principal executive offices) (Zip Code) 212-634-4000 --------------------------------- (Issuer's telephone number) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| State the number of shares outstanding of each of the issuer's classes of Common equity, as of the latest practicable date. July 14, 2000 Common Stock, par value $.001 per share 2,249,593 - -------------------------------- ------------------ Class Shares Outstanding HERTZ TECHNOLOGY GROUP, INC. MAY 31, 2000 INDEX Page ---- PART I. Financial Information Item 1. Financial Statements Accountants Review Report 3 Consolidated Balance Sheets as of May 31, 2000 and August 31, 1999 4 Consolidated Statements of Operations for the three months and nine months ended May 31, 2000 and May 31, 1999 5 Consolidated Statements of Cash Flows for the three months and nine months ended May 31, 2000 and May 31, 1999 6 Consolidated Statements of Stockholders Equity for year ended August 31, 1999 and Nine months ended May 31, 2000 7 Notes to Financial Statements 8 Item 2. Management's Discussion and Analysis of financial condition and results of operations for the three months and nine months ended May 31, 2000 10-13 SIGNATURES 14 -2- ACCOUNTANT'S REVIEW REPORT To the Board of Directors and Shareholders of Hertz Technology Group, Inc. We have reviewed the accompanying consolidated balance sheet of Hertz Technology Group, Inc. and Subsidiaries as of May 31, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for the three-month period and nine-month period then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements in order for them to be in conformity with generally accepted accounting principles. GOLDSTEIN GOLUB KESSLER LLP New York, New York July 11, 2000 -3- PART I FINANCIAL INFORMATION HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS MAY 31, AUGUST 31, ------- ---------- 2000 1999 ---- ---- Unaudited Audited CURRENT ASSETS: Cash and cash equivalents $ 245,134 $ 32,456 Marketable securities 767,353 1,592,158 Accounts receivable, less allowance for doubtful accounts of $81,133 and $96,133 respectively 908,252 1,033,726 Inventories 569,737 669,601 Prepaid expenses and other current assets 205,403 282,790 ----------- ----------- Total current assets 2,695,879 3,610,731 ----------- ----------- PROPERTY AND EQUIPMENT, net 1,545,925 1,783,728 GOODWILL, net 194,689 244,284 DEFERRED INCOME TAXES 0 136,173 OTHER ASSETS 405,100 308,075 ----------- ----------- Total assets $ 4,841,593 $ 6,082,991 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY MAY 31, AUGUST 31, ----------- ----------- 2000 1999 ----------- ----------- CURRENT LIABILITIES: Accounts payable $ 272,436 $ 261,688 Accrued expenses and other current liabilities 367,439 237,570 Current portion of capital lease obligations 57,924 46,974 Current portion of notes payable 130,046 126,666 ----------- ----------- Total current liabilities 827,845 672,898 ----------- ----------- CAPITAL LEASE OBLIGATION, NET OF CURRENT PORTION 190,054 194,318 NOTES PAYABLE 16,595 126,667 ----------- ----------- Total liabilities 1,034,494 993,883 ----------- ----------- SHAREHOLDERS EQUITY: Common stock, $.001 par value: 6,000,000 shares authorized 2,315,418 shares and 2,306,950 shares issued as of May 31, 2000 and August 31, 1999, respectively 2,315 2,307 Additional paid-in capital 5,845,091 5,837,889 Less: Treasury Stock, 177,867 shares at cost (286,016) (286,016) Accumulated Deficit (1,754,291) (465,072) ----------- ----------- Total shareholders' equity 3,807,099 5,089,108 ----------- ----------- Total liabilities and shareholders' equity $ 4,841,593 $ 6,082,991 =========== =========== See Notes to Consolidated Financial Statements -4- HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED MAY 31, 2000 AND 1999 (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED MAY 31, MAY 31, --------------------------- --------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- NET SALES $ 1,666,055 $ 1,734,931 $ 4,946,371 $ 5,007,769 COST OF SALES 1,166,483 878,838 2,964,535 2,619,904 ----------- ----------- ----------- ----------- Gross Profit 499,572 856,093 1,981,836 2,387,865 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,212,313 971,243 3,143,932 2,942,858 ----------- ----------- ----------- ----------- Operating loss (712,741) (115,150) (1,162,096) (554,993) OTHER INCOME (EXPENSE) Other (49,799) (3,925) (26,291) (7,095) Interest, net (154) 19,256 35,341 61,084 ----------- ----------- ----------- ----------- Loss before provision (benefit) for income taxes (762,694) (99,819) (1,153,046) (501,004) PROVISION (BENEFIT) FOR INCOME TAXES 136,173 (9,542) 136,173 (34,363) ----------- ----------- ----------- ----------- Net loss $ (898,867) $ (90,277) $(1,289,219) $ (466,641) =========== =========== =========== =========== LOSS PER COMMON SHARE - BASIC AND DILUTED $ (0.42) (0.04) (0.61) (0.22) =========== =========== =========== =========== WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED 2,130,688 2,129,083 2,129,623 2,135,480 =========== =========== =========== =========== See Notes to Consolidated Financial Statements -5- HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW NINE MONTHS ENDED MAY 31, 2000 AND 1999 (UNAUDITED) NINE MONTHS ENDED MAY 31, ---------------------------- 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($1,289,219) ($ 466,641) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 397,884 273,714 Amortization of goodwill 49,595 46,381 Provision for doubtful accounts (15,000) (34,696) Loss on disposal/sale of assets 38,319 0 Changes in operating assets and liabilities: Decrease in marketable securities 824,805 56,431 Decrease in accounts receivable 140,474 1,475,599 Decrease in inventories 99,864 70,245 (Increase) decrease in prepaid expenses and other current assets 77,387 (218,569) Decrease in deferred income taxes 136,173 0 (Increase) decrease in other assets 3,175 (142,024) Increase (decrease) in accounts payable, accrued expenses and other current liabilities 140,617 (552,997) ----------- ----------- Net cash provided by operating activities 604,074 507,443 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (142,043) (272,300) Software development cost (100,200) 0 Proceeds from sale of assets 9,655 0 ----------- ----------- Net cash used in investment activities (232,588) (272,300) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable (127,704) (126,667) Repayment of capital lease obligations (38,314) 0 Purchase of treasury stock 0 (176,498) Proceeds from exercise of stock options 7,210 0 ----------- ----------- Net cash used in financing activities (158,808) (303,165) ----------- ----------- Net decrease in cash and cash equivalents 212,678 (68,022) CASH and cash equivalents, beginning of period 32,456 140,254 ----------- ----------- CASH and cash equivalents, end of period $ 245,134 $ 72,232 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 23,759 $ 16,215 Income taxes paid $ 0 $ 35,277 SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Capital lease obligations incurred $ 45,000 $ 187,000 Entry into financing agreement $ 21,012 $ 0 See Notes to Consolidated Financial Statements -6- HERTZ TECHNOLOGY GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER EQUITY FOR YEAR ENDED AUGUST 31,1999 AND NINE MONTHS ENDED MAY 31,2000 (UNAUDITED) Retained Additional Earnings Common Paid- in Treasury Accumulated Stock Capital Stock Deficit) Total ----- ------- ----- -------- ----- BALANCE, August 31, 1998 $ 2,257 $ 5,772,189 $ (108,028) $ 229,799 $ 5,896,217 Net Loss - - - (694,871) (694,871) Issuance of stock to Employees 50 65,700 - - 65,750 Treasury stock - - (177,988) - (177,988) ------------------------------------------------------------------------- BALANCE, August 31, 1999 2,307 5,837,889 (286,016) (465,072) 5,089,108 Net Loss - - - (1,289,219) (1,289,219) Stock Options Exercised 8 7202 7,210 ------------------------------------------------------------------------- BALANCE, May 31, 1999 $ 2,315 $ 5,845,091 $ (286,016) $(1,754,291) $ 3,807,099 ========================================================================= See Notes to Consolidated Financial Statements -7- HERTZ TECHNOLOGY GROUP, INC. Notes to Consolidated Financial Statements (Unaudited) MAY 31, 2000 1. BASIS OF PRESENTATION AND OPERATIONS The accompanying consolidated financial statements are unaudited and in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation in accordance with generally accepted accounting principles and with the instructions to Form 10-QSB. Operating results for the three-month and nine-month periods ended May 31, 2000 are not necessarily indicative of the results that may be expected for the year ended August 31, 2000. For further information, refer to the financial statements and footnotes thereto included in the Hertz Technology Group, Inc. ("Hertz" or the "Company") audited financial statements for the year ended at August 31, 1999. 2. EARNINGS PER SHARE No diluted shares were used in the calculation of diluted EPS for the three-month and nine-month periods ended May 31, 2000 and 1999, since they would have an antidilutive effect. 3. SEGMENT INFORMATION The Company operates primarily in two industry segments: (i) The Technology Group and (ii) Hergo. The tables below present information about the reported segments. Quarter Ended May 31, 2000: Technology Group Hergo Other Consolidated - --------------------------------------------------------------------------------------------------------------------------------- Sales (unaffiliated) $ 339,000 $1,327,000 $1,666,000 Loss before Tax (428,000) (98,000) (237,000) (763,000) - --------------------------------------------------------------------------------------------------------------------------------- Quarter ended May 31, 1999: Technology Group Hergo Other Consolidated - --------------------------------------------------------------------------------------------------------------------------------- Sales (unaffiliated) $ 452,000 $1,283,000 $ 1,735,000 Loss before Tax (373,000) 313,000 (40,000) (100,000) - --------------------------------------------------------------------------------------------------------------------------------- -8- Nine Months Ended May 31, 2000: Technology Group Hergo Other Consolidated - -------------------------------------------------------------------------------------------------------------------------------- Sales (unaffiliated) $ 1,062,000 $3,884,000 $4,946,000 Loss before Tax (609,000) 265,000 (809,000) (1,153,000) - -------------------------------------------------------------------------------------------------------------------------------- Nine Months ended May 31, 1999: Technology Group Hergo Other Consolidated - -------------------------------------------------------------------------------------------------------------------------------- Sales (unaffiliated) $ 1,101,000 $3,907,000 $ 5,008,000 Loss before Tax (1,111,000) 722,000 (112,000) (501,000) - -------------------------------------------------------------------------------------------------------------------------------- Assets at May 31, 2000: Technology Group Hergo Other Consolidated - -------------------------------------------------------------------------------------------------------------------------------- Assets 1,410,000 2,448,000 984,000 4,842,000 - -------------------------------------------------------------------------------------------------------------------------------- 4. CAPITAL TRANSACTIONS At the Annual Meeting of Shareholders on February 16, 2000, the Company increased the authorized Common Stock from 3,000,000 to 6,000,000 shares. In addition, the Company increased the stock options available under the 1996 Stock Option Plan from 500,000 to 750,000 shares. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company offers full networking solutions and Internet and Web related services, including high speed communication services such as T1 and DSL, under the "RemoteIT.com" name, through its RemoteIT.com subsidiary. The Company custom designs and assembles personal workstations, networking, communication and WEB servers under the "Hertz Computer(R)" name through its Hertz Computer subsidiary. Through its Edutec(R) subsidiary, the Company offers customizable state-of-the-art training rooms at its New York City headquarters. These rooms are equipped with the latest PC workstations and A/V presentation technology. RemoteIT.com, Hertz Computer and Edutec comprise the Technology Group. The Company also designs, manufactures and sells ergonomically engineered modular technical office furniture, open racking systems, data and communications cabinets and enclosures, personal workstations, training desks, assembly workbenches, KVM switches and other technical workspace solutions under the "Hergo(R)" name through its Hergo subsidiary. The Company, through its LAN Metal division, provides custom specialty metal manufacturing and fabrication products and also manufactures the line of Hergo products. Together Hergo and LAN comprise the "Hergo Group." Three Months and Nine Months Ended May 31, 2000 compared to Three Months and Nine Months Ended May 31, 1999 Revenues Company net sales for the three months ended May 31, 2000, were $1.67 million, compared to $1.73 million for the period ended May 31, 1999, a 4% decrease. Net sales for the nine months ended May 31, 2000 were $4.95 million compared to $5.01 million for the nine month period ended May 31, 1999, a 1% decrease. For the three months ended May 31, 2000 the Hergo Group sales were $1,327,000 compared to sales of $1,283,000 last year for the comparable period, an increase of 3%. The Hergo Group sales for the nine months ended May 31, 2000 were $3,884,000 compared to $3,907,000 for the nine month period ended May 31, 1999, a 1% decrease. The Technology Group sales for the quarter ended May 31, 2000 were $339,000 compared to $452,000 for the comparable period in the previous year, a decrease of 25%. For the nine months ended May 31, 2000 Technology Group sales were $1,062,000 compared to $1,101,000 for the nine months ended May 31, 1999, a decrease of 4%. The decrease in volume is attributed to the reduced emphasis by the Company on the personal computer line of business which is generating negative margins. -10- Gross Profit Gross profit was $500,000 (30% of net sales) for the three months ended May 31, 2000 as compared with $856,000 (49% of net sales) for the three months ended May 31, 1999, a decrease of $356,000. Gross profit was $1,982,000 (40% of net sales) and $2,388,000 (48% of net sales) for the nine months ended May 31, 2000 and May 31,1999, respectively, a decrease of $406,000. Gross profit generated from the Hergo division for the three months and nine months ended May 31, 2000 was $495,000 (37% of net sales) and $1,822,000 (47% of net sales) compared to $748,000 (58% of net sales) and $2,163,000 (55% of net sales) for the three months and nine months ended May 31, 1999. Several factors contributed to lower gross profit for the quarter. Among them, higher labor and utilities costs as well as increased costs of depreciation and amortization. During the current quarter substantial maintenance contracts were established to cover the highly computerized technical equipment purchased in the past year. The costs of the contracts and the depreciation on the same machines were substantial. The additional machinery, however, is expected to increase efficiency and in the long run should help in reducing labor cost associated with the equipment. During the quarter ended May 31, 2000 the Company reduced the carrying value of some of its inventory due to obsolescence and design changes. The amount of the write down of the inventory was in excess of $75,000. The combination of the increases of these expenses amounted to $159,000 and $225,000,respectively, for the three month and nine month periods ended on May 31, 2000 Gross profit generated from the Technology Group for the three months ended May 31, 2000 was $5,000 (1% of net sales) compared to $108,000 (24% of net sales) for the comparable three-month period last year. Gross profit for the Technology Group for the nine months ended May 31, 2000 was $160,000 (15% of net sales) compared to gross profit of $ 225,000 (20% of net sales) for the nine-month period ended May 31, 1999. Many of the costs of this group are fixed in nature and the group's low volume of sales of products and services resulted in the high Cost of Sales. This result was further aggravated during the previous quarter by the expenses incurred in connection with the DSL product and the completion of the collocation program . The communication costs incurred for these projects was $57,000 for the quarter and $118,000 for the nine month period. Selling, General and Administrative Selling, general and administrative expenses increased for the quarter ended May 31, 2000 as compared to the preceding period by $241,000 and increased by $201,000 for the nine months ended May 31, 2000 compared to the nine months ended May 31, 1999. Among the increases in expenses for the quarter and nine months ended May 31, 2000 was a marketing test program promoting DSL services. This marketing test program included radio advertising, print, Internet and telemarketing campaign at costs exceeding $72,000. Additional costs were incurred in purchasing , installing, and customizing a new accounting system. Other Income (Expense): Other expense for the three months and nine months ended May 31, 2000 was $50,000 and $26,000 compared to other expense of $4,000 and $7,000 for the comparable periods last year. -11- The largest component of the other expense was the large expense incurred in the disposal of obsolete and redundant equipment. Net interest income for the three months and nine months ended May 31, 2000 decreased by $19,000 and $26,000 for the comparable periods last year. The decrease in interest income was primarily due to the reduction of marketable securities balances. Provision for Income Taxes For accounting purposes the Company wrote off its deferred tax asset of $136,000 during the quarter ended May 31, 2000, which amounted to about 15% of the Company loss for the quarter. Because of this, and due to the fact that the Company had recorded a $10,000 and $34,000 tax benefit in the quarter and nine months ended May 31, 1999, total provision for taxes increased by $146,000 and $170,000 for the three months and nine months ended May 31, 2000. Net Income and Earnings Per Share Operations for the three months ended May 31, 2000 resulted in a loss of approximately $899,000 or $.42 per share compared to a loss of $90,000 or $.04 per share for the three months ended May 31, 1999. Operations for the nine months ended May 31, 2000 resulted in a loss of approximately $1,289,000 or $.61 per share compared to a loss of approximately $467,000 or $.22 per share for the comparable period last year. Liquidity and Capital Resources For the nine months ended May 31, 2000, the Company had cash provided by operations of $604,000 as compared to $507,000 for the comparable period last year. In the current year the bulk of the cash provided was generated from the sale of marketable securities. Net purchases of fixed assets for the nine months ended May 31, 2000, were $142,000 as compared to $272,000 for the nine months ended May 31, 1999. Additionally, the Company had incurred $100,000 of expenses in software development costs during the nine months ended May 31, 2000. The Company, as of May 31, 2000 had working capital of $1,868,000 of which $1,012,000 was in cash and marketable securities, which are available to fund the Company's operations -12- Special Note Regarding Forward-Looking Statements Certain statements under the caption "Management's Discussion and Analysis" and elsewhere in this Form 10-QSB constitute "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934. Words "believe," "expect," "future," "intend," "plan," and similar expressions as they relate to the Company or the Company's management identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, competition, success of new product development, effect of advertising and promotional efforts, brand awareness, the existence of or adherence to development schedules, continued patronage by existing customers, the ability to attract qualified managerial personnel, the existence or absence of adverse publicity, changes in business strategy or development plans, quality of management and terms and deployment of capital, business abilities and judgment of personnel and success in acquiring businesses. -13- SIGNATURES In accordance with the requirements of the Exchange Act, the registrant, caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Hertz Technology Group, Inc /s/ Eli E. Hertz Dated: 07/17/00 ---------------------------------------- Eli E. Hertz, Chairman, President And Chief Executive Officer /s/ Barry J. Goldsammler Dated: 07/17/00 ---------------------------------------- Barry J. Goldsammler, Chief Financial and Accounting Officer -14-