UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________.
Commission File No.:000-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware | 11-2230715 |
(State or other jurisdiction of | (I.R.S. Employer |
50 Engineers Road, Hauppauge, New York 11788
(Address of principal executive offices)
Registrant’s telephone number, including area code: (631) 436-7100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock,
as of October 21, 2007.
Class of Common Equity | Number of Shares |
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Class A Common Stock par value $.01 | 9,070,902 |
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Class B Common Stock, par value $.01 | 400,018 |
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information | Page | |
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Item 1. | Financial Statements |
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| Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 | 3-4 |
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| Consolidated Statements of Operations for the Three and Nine Months Ended | 5 |
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| Consolidated Statements of Cash Flows for the Nine Months Ended | 6 |
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| Notes to Consolidated Financial Statements | 7-10 |
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Item 2. | Management’s Discussion and Analysis of Financial | 11-13 |
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 13 |
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Item 4. | Controls and Procedures | 14 |
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Part II. | Other Information |
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Item 1. | Legal Proceedings | 14 |
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Item 1A. | Risk Factors | 14 |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 14 |
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Item 3. | Defaults Upon Senior Securities | 14 |
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Item 4. | Submission of Matters to a Vote of Security Holders | 14-15 |
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Item 5. | Other Information | 15 |
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Item 6. | Exhibits | 15-16 |
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| Signatures | 17 |
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
| September 30, 2007 |
| December 31, 2006 |
| (unaudited) |
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ASSETS CURRENT ASSETS: |
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Cash and cash equivalents | $ 12,712 |
| $ 14,498 |
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Restricted cash (Note 7) | 2,220 |
| — |
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Accounts receivable, net of an allowance for possible losses of $673 and $555 respectively and a sales return reserve of $50 for both periods | 5,786 |
| 5,756 |
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Inventories, net (Note 3) | 6,420 |
| 5,710 |
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Other current assets | 454 |
| 367 |
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Total current assets | 27,592 |
| 26,331 |
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PROPERTY, PLANT AND EQUIPMENT, net | 365 |
| 319 |
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OTHER ASSETS (Note 4 ) | 51 |
| 538 |
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TOTAL ASSETS | $ 28,008 |
| $ 27,188 |
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See notes to consolidated financial statements.
3
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
| September 30, 2007 |
| December 31, 2006 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | (unaudited) |
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CURRENT LIABILITIES: |
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Accounts payable and accrued expenses (Note 5) | $ 8,817 |
| $ 10,058 |
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Capitalized termination obligation (Note 6) | 120 |
| 120 |
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Customer deposits | 302 |
| 457 |
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Other current liabilities | 36 |
| 20 |
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Total current liabilities | 9,275 |
| 10,655 |
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Other long term liabilities – less current maturities (Note 6) | 30 |
| 120 |
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Total liabilities | 9,305 |
| 10,775 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, $.01 par value; authorized: | — |
| — |
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Class A common stock, $.01 par value; authorized: | 102 |
| 93 |
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Class B common stock, $.01 par value; authorized: | 4 |
| 5 |
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Additional paid-in capital | 42,756 |
| 41,933 |
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Accumulated deficit | (22,162) |
| (23,621) |
| 20,700 |
| 18,410 |
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Less: Treasury Class A Common stock at cost - 1,143 shares at September 30, 2007 and December 31, 2006 | 1,997 |
| 1,997 |
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Total stockholders’ equity | 18,703 |
| 16,413 |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ 28,008 |
| $ 27,188 |
See notes to consolidated financial statements.
4
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
| Three Months Ended |
| Nine Months |
| Eight Months | ||
| September 30, 2007 |
| September 30, 2006 |
| September 30, 2007 |
| September 30, 2006 |
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NET SALES | $ 11,909 |
| $ 12,383 |
| $ 38,143 |
| $ 34,688 |
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COST OF SALES | 7,382 |
| 7,926 |
| 23,709 |
| 22,596 |
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GROSS PROFIT | 4,527 |
| 4,457 |
| 14,434 |
| 12,092 |
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OPERATING EXPENSES | 4,731 |
| 4,100 |
| 13,095 |
| 10,907 |
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OPERATING INCOME (LOSS) | (204) |
| 357 |
| 1,339 |
| 1,185 |
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OTHER EXPENSE (INCOME) |
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Interest expense | 4 |
| — |
| 10 |
| 61 |
Interest and other income | (98) |
| (87) |
| (214) |
| (207) |
Total other income | (94) |
| (87) |
| (204) |
| (146) |
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INCOME (LOSS) BEFORE INCOME TAX PROVISION | (110) |
| 444 |
| 1,543 |
| 1,331 |
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INCOME TAX EXPENSE | 9 |
| 20 |
| 84 |
| 34 |
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NET INCOME (LOSS) | $ (119) |
| $ 424 |
| $ 1,459 |
| $ 1,297 |
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EARNINGS (LOSS) PER SHARE |
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Basic | $ (0.01) |
| $ 0.05 |
| $ 0.16 |
| $ 0.15 |
Diluted | $ (0.01) |
| $ 0.04 |
| $ 0.15 |
| $ 0.13 |
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WEIGHTED AVERAGE NUMBER OF SHARES IN THE CALCULATION OF EARNINGS (LOSS) PER SHARE |
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Basic | 9,413 |
| 8,510 |
| 9,078 |
| 8,495 |
Diluted | 9,413 |
| 9,750 |
| 9,449 |
| 9,735 |
See notes to consolidated financial statements.
5
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
| Nine Months Ended |
| Eight Months Ended |
September 30, 2007 |
| September 30, 2006 | |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income | $ 1,459 |
| $ 1,297 |
Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation and amortization | 160 |
| 184 |
Recognized gain on sale of building | — |
| (20) |
Gain on lease termination | — |
| (128) |
Lease termination payment | — |
| (200) |
Provision for reserves | (26) |
| 437 |
Stock option expense (Note 2) | 565 |
| 147 |
Gain on settlement | (450) |
| — |
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Changes in assets and liabilities: |
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Restricted cash | (2,220) |
| 510 |
Accounts receivable | 345 |
| 125 |
Inventories | (610) |
| (2,320) |
Other assets | (111) |
| 154 |
Accounts payable and accrued expenses | (1,363) |
| (73) |
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Net cash (used in) provided by operating activities | (2,251) |
| 113 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures | (205) |
| (130) |
Net cash used in investing activities | (205) |
| (130) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Repayments of long term debt | (90) |
| — |
Collection of officers loan receivable | 495 |
| — |
Exercise of stock options | 265 |
| 100 |
Net cash provided by financing activities | 670 |
| 100 |
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(Decrease) increase in cash and cash equivalents | (1,786) |
| 83 |
Cash and cash equivalents, beginning of period | 14,498 |
| 13,166 |
Cash and cash equivalents, end of period | $ 12,712 |
| $ 13,249 |
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Supplemental disclosure of cash flow information: |
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Interest paid | $ 10 |
| $ 61 |
Income taxes paid | $ 84 |
| $ 14 |
See notes to consolidated financial statements.
6
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2007 and Three and Eight Months Ended September 30, 2006
1. | Summary of Significant Accounting Policies |
a) Business Organization and Basis of Presentation
In the opinion of management of Hirsch International Corp. (the “Company”), the accompanying unaudited consolidated financial statements contain all the adjustments, consisting of normal accruals, necessary to present fairly the financial position at September 30, 2007 and December 31, 2006, the results of operations for each of the three and nine month periods ended September 30, 2007 and the three and eight month periods ended September 30, 2006, and cash flows for the nine month period ended September 30, 2007 and the eight month period ended September 30, 2006. Such adjustments consisted only of normal recurring items. The consolidated financial statements and notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K for the calendar year ended December 31, 2006 as filed with the Securities and Exchange Commission.
Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements.
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts 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. There are risks inherent in making estimates and assumptions and, therefore, actual results could differ from those estimates.
The interim financial results are not necessarily indicative of the results to be expected for the full year. Certain amounts from prior periods have been reclassified to conform to the current period’s presentation.
b) Change in Reporting Period
In April 2006, our Board of Directors approved a change in our fiscal year from a 52/53 week fiscal year ending on the last Saturday in the last month of each quarterly period in the year end January to the period ending December 31 each year. In this report we compare the three and nine month periods ended September 30, 2007 to the three and eight month periods ended September 30, 2006 because it is not practical to recast the prior year comparative eight months ended September 30, 2006.
c) Reclassifications
Certain reclassifications have been applied to prior year amounts to conform to current year presentation.
d) Income Tax Expense
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”), which is an interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial
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statements. FIN 48 also provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.
The Company adopted FIN 48 on January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed or to be claimed in tax returns that do not meet these recognition and measurement standards. The Company’s adoption of FIN 48 did not have a material effect on the Company’s financial statements, and the Company does not expect the adoption of FIN 48 to have a significant impact on our results of operations or financial position during the next twelve months.
As permitted by FIN 48, the Company also adopted an accounting policy to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in the Company’s income tax provision. Previously, the Company’s policy was to classify interest and penalties as an operating expense in arriving at pre-tax income. At September 30, 2007, the Company does not have accrued interest and penalties related to any unrecognized tax benefits. As in the past, the years subject to potential audit vary depending on the tax jurisdiction. Generally, the Company’s statute of limitation for tax liabilities are open for tax years ended January 29, 2005, January 28, 2006, December 31, 2006 and forward. The Company’s major taxing jurisdictions include the U.S., California and New York.
e) New Accounting Standards
In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”) which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS 157 is not expected to have a material impact on our results of operations or our financial position.
In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS 159 on its financial position, cash flows, and results of operations.
2. | Share-Based Compensation |
For the nine months ended September 30, 2007, the Company recognized $565,000 of non-cash compensation expense (included in Operating Expenses in the unaudited Consolidated Statement of Operations) attributable to stock options granted or vested subsequent to December 31, 2006. For the eight months ended September 30, 2006, the Company recognized $147,000 of non-cash compensation expense. The Company used the Black-Scholes valuation model and straight-line amortization of compensation expense over the requisite service period of the grant.
Following is a reconciliation of shares used in calculating basic and diluted earnings per common share for the three and nine months ended September 30, 2007 and the three and eight months ended September 30, 2006:
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| Three months ended | Nine months ended |
| Three months ended | Eight months ended |
| September 30, 2007 |
| September 30, 2006 | ||
Basic number of shares | 9,413,510 | 9,078,127 |
| 8,510,366 | 8,495,408 |
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Number of shares issued if employee stock options were exercised | — | 370,666 |
| 1,240,337 | 1,240,337 |
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Diluted number of shares | 9,413,510 | 9,448,793 |
| 9,750,703 | 9,735,745 |
346,916 options were excluded from the computation of diluted earnings per share because they were anti-dilutive for the three months ended September 30, 2007. No options were excluded from the computation of diluted earnings per share for the nine months ended September 30, 2007 or the three and eight months ended September 30, 2006 because there were no exercisable options with exercise prices exceeding the average fair market value of the Company’s common stock.
3. | Inventories |
| September 30, 2007 |
| December 31, 2006 |
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New Machines and Software | 5,523 |
| $ 4,956 |
Used Machines | 95 |
| 116 |
Parts | 2,291 |
| 2,315 |
| 7,909 |
| 7,387 |
Less: Reserve for slow moving inventory | (1,489) |
| (1,677) |
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Inventories, net | $ 6,420 |
| $ 5,710 |
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4. | Other Assets |
On July 20, 2005, the Company entered into a definitive merger agreement with Sheridan Square Entertainment, Inc. (“Sheridan Square”), a privately held producer of recorded music, and SSE Acquisition Corp, our wholly-owned subsidiary. In connection with the merger agreement the Company purchased 40 shares of Series B Preferred Stock of Sheridan Square for $1,000,000. The Series B Preferred Stock was senior to all other equity securities of Sheridan in terms of dividends, distributions and liquidation preference. Dividends, whether or not declared, accrued at the rate of 8% per annum of the sum of the stated value of each share ($25,000), commencing on January 1, 2006, provided that in the event a “Disposition Transaction” (as defined in the Certificate of Designation of the Series B Preferred Stock) did not occur by April 1, 2006, the dividend rate would increase to 14% per annum and provided further that if a Disposition Transaction did not occur by July 1, 2006, the dividend rate would increase to 18% per annum.
On July 12, 2006, the Company entered into a Stock Purchase Agreement with Sheridan Square pursuant to which Hirsch sold and Sheridan Square repurchased all of Hirsch’s right, title and interest in the forty (40) shares of Series B Preferred Stock of Sheridan Square, together with all payment-in-kind dividends whether or not issued (the “Purchased Stock”) for an aggregate purchase price of $1,200,000 (the “Purchase Price”). The purchase price was due to be paid on October 31, 2006, but was not paid on that date. As of December 31, 2006, the Company took a charge of $1,000,000 to other expense to fully reserve against the note receivable.
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On March 5, 2007, the Company filed a Notice of Motion for Summary Judgment in Lieu of Complaint in New York State Supreme Court. In this Motion, the Company alleged that Sheridan Square failed to make payment for all of Hirsch’s right, title, and interest in and to the Purchased Stock in accordance with the terms of the Stock Purchase Agreement, dated July 12, 2006, between Hirsch and Sheridan Square. Hirsch asked the court to enter a judgement in its favor in the amount of $1,200,000, plus accrued interest.
On May 21, 2007, summary judgment was awarded in favor of the Company in the amount of approximately $1,335,000 and was filed with the New York State Supreme Court on June 1, 2007.
On June 29, 2007, the Company entered into a settlement agreement with Sheridan Square which provided for payment of $450,000 as full settlement, compromise and satisfaction of all claims. In connection with the signing of the agreement, the Company recorded $450,000 in income from operations and extinguished the Sheridan Square note receivable and the related reserve that was recorded at December 31, 2006. On July 2, 2007 the Company received payment from Sheridan Square in full satisfaction of the settlement.
Prior to January 2003, the Company had advanced approximately $495,000 for premiums on split dollar life insurance for Henry Arnberg, the Company’s Chairman of the Board, and Paul Levine, our former Vice-Chairman of the Board. The spouse of each Messrs. Arnberg and Levine are the beneficiaries of these respective policies. These advances were collateralized by the cash surrender value of the policies. During the quarter ended June 30, 2007, both policies were redeemed and on June 18, 2007, the Company collected $495,000 in full satisfaction of the advances.
5. | Warranty Reserve |
The warranty reserve included in Accounts Payable and Accrued Expenses was $612,000 at September 30, 2007 and $563,000 at December 31, 2006. The Company recorded approximately $71,000 in warranty expense for the nine months ended September 30, 2007 and reversed $50,000 in warranty expense for the eight months ended September 30, 2006.
6. | Long Term Obligations |
On February 23, 2006, the Company agreed to terminate the lease on its corporate facility located in Hauppauge, New York and concurrently signed a new operating lease for a facility also located in Hauppauge, New York. During the quarter ended March 31, 2006, the Company wrote off certain balance sheet items (approximately $1.2 million) related to the sale-leaseback transaction that the Company had previously recorded, and recognized $128,000 gain associated with the deferred termination. In connection with the lease termination, the Company incurred $500,000 in termination fees related to the lease termination agreement ($200,000 due on signing and $300,000 over 2 ½ years commencing July 1, 2006) and recognized approximately $128,000 in deferred gain in operating expenses.
7. | Contingencies |
As of September 30, 2007, the Company had $2.2 million in restricted cash used to collateralize shipments at 110% of the ¥232,000,000 standby letter of credit opened in April 2007. The standby letter of credit is used to support purchases on open terms with Tajima Industries, Ltd.
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements which involve risks and uncertainties. When used herein, the words “anticipate”, “believe”, “estimate” and “expect” and similar expressions as they relate to Hirsch International Corp. (the “Company”) or its management are intended to identify such forward-looking statements. The Company’s actual results, performance or achievements could differ materially from the results expressed in or implied by these forward-looking statements. Factors that could cause or contribute to such differences, include, without limitation, the risks and uncertainties discussed under the caption “Risk Factors” in the Company’s Form 10-K for the 11 months ended December 31, 2006 and in the Company’s other filings made from time to time with the Securities and Exchange Commission. The discussion and analysis should be read in conjunction with, and is qualified in its entirety by, the Company’s Consolidated Financial Statements, including the notes thereto. Historical results are not necessarily indicative of trends in operating results for any future period.
Three and nine months ended September 30, 2007 as compared to the three and eight months ended September 30, 2006.
Net sales. Net sales for the three months ended September 30, 2007 were $11.9 million, a decrease of $0.5 million, or 4%, compared to $12.4 million for the three months ended September 30, 2006, and for the nine months ended September 30, 2007 were $38.1 million, an increase of $3.4 million, or 10%, compared to $34.7 million for the eight months ended September 30, 2006. The decrease in sales for the three months ended September 30, 2007 is primarily attributable to a decrease in new and used embroidery machine sales of $0.5 million. The increase in sales for the nine months ended September 30, 2007 is primarily attributable to the inclusion of nine months of sales versus eight months for the comparable period as well as the increase in sales from the MHM screen printing equipment line of $3.0 million that the Company only had 1 month of sales during the eight month period ended September 30, 2006.
Cost of sales. For the three months ended September 30, 2007, cost of sales decreased $0.5 million to $7.4 million from $7.9 million for the three months ended September 30, 2006, and for the nine months ended September 30, 2007 increased $1.1 million to $23.7 million from $22.6 million for the eight months ended September 30, 2006. The decrease for the three month period ended September 30, 2007 is the result of lower sales volume of $0.5 million offset by lower costs in the new embroidery machine categories resulting from pricing adjustments from the manufacturer. The increase for the nine months ended September 30, 2007 is directly related to higher sales volume recorded during the longer (nine months) reporting period versus the eight months ended September 30, 2006. The Company’s gross margin increased to 38% for the three months ended September 30, 2007 as compared to 36% for the three months ended September 30, 2006, and increased to 37.8% for the nine months ended September 30, 2007 from 34.9% for the eight months ended September 30, 2006. For the three month period ended September 30, 2007 compared to the three month period ended September 30, 2006, the Company had promotional pricing from the manufacturer of the new embroidery machine category which increased gross margin by $155,000 a decrease in the used machine, parts, service and other categories which decreased gross margin by $78,000. For the nine month period ended September 30, 2007 compared to the eight month period ended September 30, 2006, the Company experienced an increase in the new embroidery machine categories which increased gross margin by $1.3 million, an increase in the used machine, parts, service and other categories which increased gross margin by $0.5 million, and an increase to the MHM machine category of $0.5 million. The fluctuation of the dollar against the yen, which is the currency that the Company’s embroidery machines are purchased in, has affected and is likely to continue to affect the Company’s embroidery machine gross margins. Yen fluctuations amounted to a increase in gross profit of $87,000 for the three months ended September 30, 2007, compared to an increase in gross profit of $95,000 for the three months ended September 30, 2006, and a increase in gross profit of $15,000 for the nine months ended September 30, 2007 compared to a decrease in gross profit of $18,000 for the eight months ended September 30, 2006.
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Operating Expenses. For the three months ended September 30, 2007 operating expenses were $4.7 million, a increase of $0.6 million, or 15%, as compared to $ 4.1 million for the three months ended September 30, 2006, and for the nine months ended September 30, 2007, operating expenses were $13.1 million, an increase of $2.2 million, or 20%, as compared to $10.9 million for the eight months ended September 30, 2006. The increase in operating expenses for the three months ended September 30, 2007 is attributable to the hiring of additional sales and technical service personnel, additional options issued which increased FAS123R compensation expense in the current year, and additional professional fees. A significant difference for the nine months ended September 30, 2007 was the timing of expenses associated with the change of fiscal year from a 52/53 week fiscal year to a year ended December 31 as compared to the eight months ended September 30, 2006, the hiring of additional staff and the inclusion of higher FAS123R compensation expense. Included in operating expenses for the nine months ended September 30, 2007 is the recognition of $450,000 in income associated with the settlement agreement with Sheridan Square. (See Note 4 to the Consolidated Financial Statements). Included in operating expenses for the eight months ended September 30, 2006 is the recognition of $128,000 in deferred gain associated with the termination of the lease on the Company’s former corporate headquarters. (See Note 6 to the Consolidated Financial Statements).
Interest Expense. Interest expense for the three months ended September 30, 2007 was $4,000 and for the three months ended September 30, 2006 was $0. For the nine months ended September 30, 2007, interest expense was $10,000 as compared to $61,000 for the eight months ended September 30, 2006. For the three months and nine months ended September 30, 2007, interest expense was related to the financing of insurance premiums. For the eight months ended September 30, 2006 interest expense was primarily associated with the sale/leaseback transaction of the corporate headquarters (See Note 6 to the Consolidated Financial Statements).
Interest and Other Income. Interest and other income for the three months ended September 30, 2007 increased by $11,000 to $98,000 from $87,000 for the three months ended September 30, 2006, and for the nine months ended September 30, 2007, other income increased $7,000 to $214,000 from $207,000 for the eight months ended September 30, 2006. The increase/decrease in both periods is primarily attributable to the change in interest income.
Income Tax Expense. Income tax expense for the three months ended September 30, 2007 was $9,000 compared to $20,000 for the three months ended September 30, 2006 and for the nine months ended September 30, 2007 was $84,000 compared to $34,000 for the eight months ended September 30, 2006. These differences were caused by year end income for various state and local income taxes, for which the net operating loss carry-forwards from prior years do not apply.
Net Income (Loss). Net loss for the three months ended September 30, 2007 was $119,000, a decrease of $543,000 over the net income of $424,000 for the three months ended September 30, 2006. For the nine months ended September 30, 2007 was $1,459,000, an increase of $162,000 over the net income of $1,297,000 for the eight months ended September 30, 2006 primarily from the increase in operating income.
Liquidity and Capital Resources
Operating Activities and Cash Flows. The Company’s working capital was $18.3 million at September 30, 2007, increasing $2.6 million, or 16.6%, from $15.7 million at December 31, 2006.
During the nine months ended September 30, 2007, the Company’s cash and cash equivalents (excluding restricted cash) decreased to $12.7 million from $14.5 million at December 31, 2006. $2.3 million net cash was used during the first nine months of 2007 by the Company’s operating activities, of which $2.2 million was the restricting of cash for a standby letter of credit; $1.4 was used to pay down Accounts Payable and Accrued Expenses which was offset by income from operations of $1.4 million. Income from operations also included the $450,000 Sheridan Square settlement. Cash of $205,000 was used for capital expenditures and $0.7 million was provided by financing activities, which were primarily from the exercise of stock options and the collection of officers loans receivable.
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Inventory purchase commitments are covered by current purchases of foreign currency. As of September 30, 2007 the Company did not own any foreign currency futures contracts.
Revolving Credit Facility and Borrowings
The Company had a Loan and Security Agreement (the “Congress Agreement”) with Congress Financial Corporation (“Congress”) for an initial term of three years which expired on November 26, 2005. On February 23, 2006, the Company terminated its lease for its facility in Hauppauge, New York. As of February 28, 2006, the Company signed a Termination Agreement with Wachovia Bank, National Association (successor by merger to Congress Financial Corporation). In conjunction with this transaction, the standby letter of credit of approximately $500,000 was terminated. The Company, at this time, does not intend to enter into a new credit facility.
On April 4, 2007, the Company opened a standby letter of credit denominated in Japanese yen in the amount of ¥232,000,000 (or approximately $2,200,000 as of September 30, 2007). The standby letter of credit was opened with Wachovia Bank, National Association and the beneficiary is Tajima America Corp. The standby letter of credit will be used to support purchases on open terms with Tajima America Corp. and is collateralized by the restricted cash in our Yen account at Wachovia Bank, National Association.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates from those disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2006.
Future Capital Requirements
The Company believes that its existing cash and funds generated from operations, will be sufficient to meet its working capital and capital expenditure requirements in the foreseeable future.
Backlog and Inventory
The ability of the Company to fill orders quickly is an important part of its customer service strategy. The embroidery machines held in inventory by the Company are generally shipped within a week from the date that a customer’s orders are received, and as a result, backlog is not meaningful as an indicator of future sales.
Inflation
The Company does not believe that inflation has had, or will have in the foreseeable future, a material impact upon the Company’s operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. The recent fluctuation of the dollar against the yen, which is the currency that the company’s embroidery machines are priced in, has affected and is likely to continue to affect the Company’s machine sales pricing competitiveness. Embroidery machinery prices have changed in US dollars due to these exchange rate fluctuations. Some but not all of the Company’s competitors face similar circumstances. The Company has a formal policy that prohibits the use of currency derivatives or other financial instruments for trading or speculative purposes. The policy permits the use of financial instruments to manage and reduce the impact of changes in foreign currency exchange rates that may arise in the normal course of the Company’s business. Currently, the Company does not use interest rate derivatives and does not have any foreign currency derivatives.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, the Company carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, as of the end of the period covered by this Report, in ensuring that material information relating to the Company required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rule and forms, including ensuring that such material information is accumulated and communicated to the Company’s Management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to affect, the Company’s internal controls over financial reporting.
PART II-OTHER INFORMATION
Item 1. | Legal Proceedings |
We are, from time to time, a party to various legal actions arising in the normal course of business. However, management believes that as a result of legal defenses and insurance arrangements with parties believed to be financially capable, there are no proceedings, threatened or pending against us that, if determined adversely, would have a material adverse effect on our business or financial position.
Item 1A. | Risk Factors |
There were no material changes from the risk factors previously disclosed in our Report on Form 10-K for the 11 months ended December 31, 2006. For a full description of these risk factors, please refer to Item 1A (Risk Factors) in the Company’s Report on Form 10-K for the 11 months ended December 31, 2006.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
The Company’s Annual Meeting of stockholders was held on September 20, 2007. At the close of business on the record date for the meeting (which was July 23, 2007), there were 9,001,002 shares of Class A Common Stock outstanding and entitled to vote, and 400,018 shares of Class B Common Stock outstanding and entitled to vote at the meeting.
Proposal number 1 involved the election of directors. The Company’s Class A stockholders elected the below two individuals to be directors of the Company. In connection with such election, there were no broker non-votes.
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Name | Votes For | Votes Withheld |
Marvin Broitman | 7,927,769 | 218,349 |
Mary Ann Domuracki | 7,934,473 | 211,645 |
The Company’s Class B stockholder elected the below two individuals to be directors of the Company. In connection with such election, there were no broker non-votes.
Name | Votes For | Votes Withheld |
Henry Arnberg | 400,018 | 0 |
Christopher J. Davino | 400,018 | 0 |
Paul Gallagher | 400,018 | 0 |
Proposal number 2 involved the ratification of the appointment of BDO Siedman, LLP as the Company’s independent auditors for the fiscal year ending December 31, 2007. There were no broker non-votes in connection with such proposal. The Company’s Class A and B stockholders, voting together as a class, voted as follows:
Votes For | Votes Against | Abstentions |
8,472,039 | 24,040 | 50,056 |
Proposal number 3 involved the approval of the increase in the number of shares of the Company’s Class A Common Stock available for issuance pursuant to the Company’s 2003 Stock Option Plan from 1,750,000 to 2,750,000. There were 3,331,219 broker non-votes in connection with such proposal. The Company’s Class A and B stockholders, voting together as a class, voted as follows:
Votes For | Votes Against | Abstentions |
3,011,008 | 2,190,029 | 13,880 |
Item 5. | Other Information |
None.
Item 6. | Exhibits |
(a) | Exhibits |
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*3.1 | Restated Certificate of Incorporation of the Registrant |
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**3.2 | Amended and Restated By-laws of the Registrant |
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***4.1 | Specimen of Class A Common Stock Certificate |
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***4.2 | Specimen of Class B Common Stock Certificate |
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31.1 | Certification of Chief Executive Officer pursuant to Rule 13a – 14(a) or Rule 15d – 14(a). |
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31.2 | Certification of Chief Financial Officer to Section Rule 13a – 14(a) or Rule 15d – 14(a). |
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32.1 | Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
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32.2 | Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
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*Incorporated by reference from the Registrant’s Form 10-Q filed for the quarter ended July 31, 1997.
**Incorporated by reference from the Registrant’s Form 10-Q filed for the quarter ended October 31, 1997.
***Incorporated by reference from the Registrant’s Registration Statement on Form S-1, Registration Number 33-72618
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HIRSCH INTERNATIONAL CORP. | |
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| By: | /s/ Paul Gallagher |
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| Paul Gallagher |
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| President and Chief Executive Officer |
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| By: | /s/ Beverly Eichel |
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| Beverly Eichel |
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| Executive Vice President, Finance, Chief Financial |
Dated: November 14, 2007
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