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 July 31, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______________ to ________________.
Commission File No.: 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2230715
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
200 Wireless Boulevard, Hauppauge, New York 11788 (Address of
principal executive offices)
Registrant's telephone number, including area code: (631) 436-7100
Check 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of September 14, 2000.
Class of Number of
Common Equity Shares
------------- ------
Class A Common Stock, 6,468,011
par value $.01
Class B Common Stock, 2,668,139
par value $.01
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - July 31, 2000
and January 31, 2000 F-2 to F-3
Condensed Consolidated Statements of Operations for the
Six Months and Three Months Ended July 31, 2000 and 1999 F-4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended July 31, 2000 and 1999 F-5 to F-6
Notes to Condensed Consolidated Financial Statements F-7 to F-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations F-12 to F-16
Part II. Other Information
Signatures F-17
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
2000 2000
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $4,812,000 $1,290,000
Accounts receivable, net 12,165,000 17,293,000
Net investment in sales-type leases,
current portion (Note 3) 2,305,000 2,583,000
Inventories, net (Note 2) 17,819,000 25,711,000
Prepaid income taxes 957,000 3,673,000
Other current assets 173,000 423,000
----------- ----------
Total current assets 38,231,000 50,973,000
----------- ----------
NET INVESTMENT IN SALES-TYPE LEASES,
non-current portion (Note 3) 5,837,000 8,207,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of
approximately $4,433,000 and $3,851,000,
respectively 12,392,000 12,974,000
PURCHASED TECHNOLOGIES, net of accumulated
amortization of approximately $1,228,000
and $1,132,000, respectively 112,000 207,000
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization
of $8,641,000 and $7,758,000, respectively 6,344,000 6,544,000
OTHER ASSETS 931,000 1,311,000
----------- -----------
TOTAL ASSETS $63,847,000 $80,216,000
=========== ===========
See notes to Condensed Consolidated financial statements.
F-2
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
2000 2000
---------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $731,000 $6,199,000
Accounts payable and accrued expenses 7,957,000 12,805,000
Current maturities of long-term debt 48,000 2,342,000
---------- ----------
Total current liabilities 8,736,000 21,346,000
LONG-TERM DEBT, less current maturities
(Note 4) 128,000 989,000
---------- ----------
Total liabilities 8,864,000 22,335,000
---------- ----------
MINORITY INTEREST (Note 1) 1,509,000 1,628,000
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized:
1,000,000 shares; issued: none -- --
Class A common stock, $.01 par value; authorized:
20,000,000 shares, issued and outstanding:
6,815,000 and 6,468,011 shares, respectively,
at July 31, 2000; and 6,815,000 and 6,488,700
shares, respectively, at January 31, 2000 68,000 68,000
Class B common stock, $.01 par value; authorized:
3,000,000 shares, issued and outstanding:
2,668,139 shares at July 31,2000 and
January 31, 2000, respectively 27,000 27,000
Additional paid-in capital 41,397,000 41,397,000
Retained earnings 13,044,000 15,721,000
Accumulated other comprehensive income 144,000 221,000
---------- ----------
54,680,000 57,434,000
Less: Treasury stock, at cost; 346,120 shares
and 326,300 shares, respectively 1,206,000 1,181,000
---------- ----------
Total stockholders' equity 53,474,000 56,253,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $63,847,000 $80,216,000
=========== ===========
See notes to Condensed Consolidated financial statements.
F-3
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
July 31, July 31,
---------------------------------- ---------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(Restated : (Restated :
See Note 6) See Note 6)
REVENUES
Net Sales $36,121,000 $44,363,000 $18,027,000 $19,865,000
Interest income related to sales-type leases 1,149,000 1,405,000 517,000 527,000
---------------- ---------------- ---------------- ---------------
Total revenue 37,270,000 45,768,000 18,544,000 20,392,000
---------------- ---------------- ---------------- ---------------
COST OF SALES 23,092,000 29,478,000 11,569,000 13,437,000
---------------- ---------------- ---------------- ---------------
GROSS PROFIT 14,178,000 16,290,000 6,975,000 6,955,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 16,949,000 19,171,000 8,831,000 9,275,000
---------------- ---------------- ---------------- ---------------
OPERATING LOSS (2,771,000) (2,881,000) (1,856,000) (2,320,000)
---------------- ---------------- ---------------- ---------------
OTHER EXPENSE (INCOME)
Interest expense 239,000 704,000 159,000 380,000
Other (income) expense 24,000 (80,000) 4,000 154,000
---------------- ---------------- ---------------- ---------------
Total other expense 263,000 624,000 163,000 534,000
---------------- ---------------- ---------------- ---------------
LOSS BEFORE INCOME TAX (BENEFIT)
AND MINORITY INTEREST IN NET
LOSS OF CONSOLIDATED SUBSIDIARY (3,034,000) (3,505,000) (2,019,000) (2,854,000)
INCOME TAX BENEFIT (241,000) (1,592,000) (238,000) (1,500,000)
MINORITY INTEREST IN NET EARNINGS (LOSS)
OF CONSOLIDATED SUBSIDIARY (Note 1) (119,000) 200,000 (76,000) 29,000
---------------- ---------------- ---------------- ---------------
NET LOSS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE ($2,674,000) ($2,113,000) ($1,705,000) ($1,383,000)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE - ($2,187,000) - -
---------------- ---------------- ---------------- ---------------
NET LOSS ($2,674,000) ($4,300,000) (1,705,000) (1,383,000)
================ ================ ================ ===============
LOSS PER SHARE:
Basic
Loss before cumulative effect
Of accounting change ($0.29) ($0.22) ($0.19) ($0.15)
Cumulative effect of accounting
Change ($0.23)
---------------- ---------------- ---------------- ---------------
NET Loss ($0.29) ($0.45) ($0.19) ($0.15)
================ ================ ================ ===============
Diluted
Loss before cumulative effect ($0.29) ($0.22) ($0.19) ($0.15)
Of accounting change
Cumulative effect of accounting ($0.23)
Change
---------------- ---------------- ---------------- ---------------
NET Loss ($0.29) ($0.45) ($0.19) ($0.15)
================ ================ ================ ===============
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF LOSS
PER SHARE
Basic 9,152,000 9,392,000 9,148,000 9,392,000
================ ================ ================ ===============
Diluted 9,152,000 9,392,000 9,148,000 9,392,000
================ ================ ================ ===============
See notes to Condensed Consolidated financial statements.
F-4
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 31,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,674,000)($4,300,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 1,834,000 1,916,000
Provision for reserves 0 1,644,000
Bad Debt Expense 987,000 -
Minority interest (119,000) 200,000
Changes in assets and liabilities:
Accounts receivable 4,141,000 7,271,000
Net investment in sales-type leases 2,648,000 521,000
Inventories 7,892,000 (2,343,000)
Prepaid taxes 2,715,000 (1,554,000)
Other assets 495,000 (84,000)
Trade acceptances payable (5,468,000) 1,061,000
Accounts payable and accrued expenses (4,848,000) (3,429,000)
---------- ----------
Net cash provided by operations 7,603,000 903,000
----------- ----------
See notes to Condensed Consolidated financial statements.
F-5
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 31,
2000 1999
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (822,000) (583,000)
--------- --------
Net cash used in investing activities (822,000) (583,000)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (Repayments) of bank financing (2,294,000) 6,643,000
Repayments of long-term debt (861,000) (4,626,000)
Purchase of treasury shares (25,000) -
--------- --------
Net cash provided by (used in)
financing activities (3,180,000) 2,017,000
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (79,000) -
--------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 3,522,000 2,337,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,290,000 3,078,000
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $4,812,000 $5,415,000
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $239,000 $752,000
Income taxes paid $228,000 $948,000
See notes to Condensed Consolidated financial statements.
F-6
Hirsch International Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Six and Three Months Ended July 31, 2000 and 1999
1. Organization and Basis of Presentation
The accompanying Condensed Consolidated financial statements as of and for
the six month and three month periods ended July 31, 2000 and 1999 include the
accounts of Hirsch International Corp.("Hirsch"), HAPL Leasing Co.,
Inc.("HAPL"), Pulse Microsystems Ltd. ("Pulse"), Tajima USA, Inc. ("TUI"),
Hometown Threads, LLC, and HJ Grassroots, LLC (collectively, the "Company").
On January 6, 1998, Tokai Industrial Sewing Machine Company ("Tokai")
purchased a 45 percent interest in TUI for $900,000. For financial purposes, the
assets, liabilities and earnings of TUI are consolidated in the Company's
financial statements. Tokai's 45 percent interest in TUI has been reported as
minority interest in the Company's Condensed Consolidated Balance Sheet and
Tokai's share of the earnings have been reported as minority interest in the
Company's Condensed Consolidated Statements of Operations.
In the opinion of management, the accompanying unaudited Condensed
Consolidated financial statements contain all the adjustments, consisting of
normal accruals, necessary to present fairly the results of operations for each
of the six and three month periods ended July 31, 2000 and 1999, the financial
position at July 31, 2000 and cash flows for the six month periods ended July
31, 2000 and 1999, respectively. Such adjustments consisted only of normal
recurring items. The Condensed Consolidated financial statements and notes
thereto should be read in conjunction with the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 2000 as filed with the Securities and
Exchange Commission.
The interim financial results are not necessarily indicative of the results
to be expected for the full year.
2. Inventories
July 31, 2000 January 31, 2000
----------- -----------
New Machines...................$11,755,000 $20,455,000
Used Machines.................. 4,059,000 4,795,000
Parts and Accessories.......... 4,936,000 4,092,000
----------- -----------
20,750,000 29,342,000
Less: Reserve for Slow
Moving Inventory............. (2,931,000) (3,631,000)
----------- -----------
Inventories, net............... $17,819,000 $25,711,000
============ ===========
F-7
3. Net Investment in Sales-Type Leases
July 31, 2000 January 31, 2000
-------------- ----------------
Total minimum lease payments
receivable.......................... $5,453,000 $9,688,000
Estimated residual value of leased
property (unguaranteed)........... 5,245,000 4,848,000
Reserve for estimated uncollectible
lease payments..................... (1,100,000) (1,100,000)
Less: Unearned income................. (1,456,000) (2,646,000)
----------- -----------
Net investment......................... 8,142,000 10,790,000
Less: Current portion..................(2,305,000) (2,583,000)
---------- -----------
Non-current portion....................$5,837,000 $ 8,207,000
=========== ===========
4. Long-Term Debt
July 31, 2000 January 31, 2000
-------------- ----------------
Revolving credit facility (A)...... $ 0 $ 2,064,000
Long Term Debt:
Mortgage (B)............................ 0 1,090,000
Capitalized Leases...................... 176,000 177,000
----------- -------------
Total................................... 176,000 3,331,000
Less: Current maturities................ ( 48,000) (2,342,000)
------------ -----------
Long-term maturities..................... $128,000 $ 989,000
============ ===========
F-8
(A) Effective as of September 30, 1999 the Company satisfied all of its
obligations and exited its Revolving Credit Facility with a syndicate led by
Bank of New York and replaced it with a new Revolving Credit and Security
Agreement (the "Agreement") with PNC Bank. The Agreement provides for a
commitment of $20.0 million for Hirsch and all wholly-owned subsidiaries. The
Agreement is used for working capital loans, letters of credit and deferred
payment letters of credit and bears interest as defined in the Agreement. The
terms of the Agreement restrict additional borrowings by the Company and require
the Company to maintain certain levels of stockholders' equity, as defined
therein. The Company was in default of the financial covenant contained in its
Agreement with PNC Bank at quarter-end. The Company was advised by PNC Bank that
it had been granted a waiver of such default for the fiscal quarters ended
January 31, April 30, and July 31, 2000. The Company has reached tentative
agreement with PNC Bank to amend the Agreement by changing the current
performance criteria from the stockholders' equity covenant to measurement by an
interest coverage ratio. The Company and PNC Bank are currently working to
finalize the abovementioned waiver and amendment. There were no outstanding
working capital borrowings against the Agreement at July 31, 2000. The Agreement
was also used to support trade acceptances payable of approximately $0.7 million
as of that date.
(B) On October 27, 1994, Hirsch entered into a ten-year, $2,295,000
mortgage agreement with a bank (the "Mortgage") for its new corporate
headquarters. The Company satisfied the remaining balance of the Mortgage on May
12, 2000.
5. Industry Segments
The Company operates in two reportable segments; Embroidery equipment and
Leasing. The Embroidery segment consists principally of the sale of new and used
embroidery equipment and value added products such as parts, accessories and
software. The Leasing segment provides leasing services to customers of the
Company.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies as previously reported. The "Corporate" Column includes
corporate-related items not allocated to reportable segments. Identifiable
assets are those tangible and intangible assets used in operations in each
reportable segment. Corporate assets are principally the Company's land and
building and the excess of cost over fair value of net assets acquired.
F-9
Six Months Ended July 31, 2000 Embroidery Leasing Corporate Consolidated
- ------------------------------- ----------- ---------- ----------- -----------
Total revenues $36,121,000 $1,149,000 $ -- $37,270,000
=========== ========== =========== ===========
Interest expense 234,000 5,000 -- 239,000
=========== ========== =========== ===========
Depreciation and amortization expense 779,000 202,000 853,000 1,834,000
=========== ========== =========== ===========
(Loss) income before income tax
benefit (3,264,000) 230,000 -- (3,034,000)
=========== ========== =========== ===========
Income tax (benefit) provision (241,000) -- -- (241,000)
=========== ========== =========== ===========
Identifiable assets $41,123,000 $7,219,000 $15,505,000 $63,847,000
=========== ========== =========== ===========
Six Months Ended July 31, 1999 Embroidery Leasing Corporate Consolidated
- ---------------------------------- ----------- ---------- ----------- -----------
Total revenues $44,363,000 $1,405,000 $ -- $45,768,000
=========== ========== =========== ===========
Interest expense $ 687,000 $ 17,000 $ -- $ 704,000
=========== ========== =========== ===========
Depreciation and amortization expense $ 1,006,000 $ 196,000 $ 714,000 $ 1,916,000
=========== ========== =========== ===========
(Loss) income before income tax
(benefit) provision $(3,645,000) $ 77,000 $ 63,000 $(3,505,000)
=========== ========== =========== ===========
Income tax (benefit) provision $(1,623,000) $ 31,000 $ -- $(1,592,000)
=========== ========== =========== ===========
Identifiable assets $68,233,000 $18,867,000 $16,692,000 $103,792,000
=========== ========== =========== ===========
Three Months Ended July 31, 2000 Embroidery Leasing Corporate Consolidated
- ------------------------------- ----------- ---------- ----------- -----------
Total revenues 18,027,000 517,000 -- $18,544,000
=========== ========== =========== ===========
Interest expense 157,000 2,000 -- 159,000
=========== ========== =========== ===========
Depreciation and amortization expense 370,000 95,000 553,000 1,018,000
=========== ========== =========== ===========
(Loss) income before income tax
benefit (2,113,000) 28,000 66,000 (2,019,000)
=========== ========== =========== ===========
Income tax benefit (238,000) -- -- (238,000)
=========== ========== =========== ===========
Identifiable assets $41,123,000 $7,219,000 $15,505,000 $63,847,000
=========== ========== =========== ===========
Three Months Ended July 31, 1999 Embroidery Leasing Corporate Consolidated
- ---------------------------------- ----------- ---------- ----------- -----------
Total revenues $19,865,000 $ 527,000 $ -- $20,392,000
=========== ========== =========== ===========
Interest expense $ 378,000 $ 2,000 $ -- $ 380,000
=========== ========== =========== ===========
Depreciation and amortization expense $ 561,000 $ 93,000 $ 375,000 $ 1,029,000
=========== ========== =========== ===========
Loss before income tax
benefit provision $(2,712,000) $ (58,000) $ (84,000) $(2,854,000)
=========== ========== =========== ===========
Income tax benefit $(1,477,000) $ (23,000) $ -- $(1,500,000)
=========== ========== =========== ===========
Identifiable assets $68,233,000 $18,867,000 $16,692,000 $103,792,000
=========== ========== =========== ===========
F-10
6. Change in Accounting Method
On December 3, 1999, The SEC issued its "Staff Accounting Bulletin No. 101-
Revenue Recognition in Financial Statements," ("SAB 101") which represents a
clarification of "Generally Accepted Accounting Principles" ("GAAP") regarding
the timing of revenue recognition. Beginning with the reporting of the year
ended January 31, 2000 results, Hirsch has implemented the recommendations
contained in SAB 101. SAB 101 establishes and clarifies the basis for revenue
recognition. Revenue is recorded on equipment sales based upon customer
acceptance of the machines upon the completion of installation, rather than upon
shipment by the Company, where installation is a substantive component of the
sale. Historically, as the cost of the installation is not material to the sale,
Hirsch's accounting practice had been to record the sale upon shipment and to
accrue the installation expense where installation was not yet completed. This
change in accounting method results in an increase of $6.4 million in sales and
$4.2 million in cost of sales during the year ended January 31, 2000 which were
originally reported in the year ended January 31, 1999 and requires an
adjustment of the year ended January 31, 2000 results in the amount of $2.2
million, disclosed as the cumulative effect on the results of the six months
ended July 31, 1999 due to the application of the changed accounting method. The
following table presents the adjusted effect of the accounting change on the
prior years. Key figures for the six and three months ended July 31,2000 are
summarized below:
(All figures in $000,000) Six Months Ended Quarter Ended
July 31, 1999 July 31, 1999
-------------- --------------
Revenue:
As originally reported $ 43.2 $ 17.4
Adjusted for Accounting Change $ 45.8 $ 20.4
Cost of sales:
As originally reported $ 27.8 $ 11.5
Adjusted for Accounting Change $ 29.5 $ 13.4
Gross Profit:
As originally reported $ 15.4 $ 5.9
Adjusted for Accounting Change $ 16.3 $ 7.0
Loss before Income tax benefit:
As originally reported $ (4.4) $(3.9)
Adjusted for Accounting Change $ (3.5) $(2.9)
Net Loss:
As originally reported $ (3.0) $(2.5)
Adjusted for Accounting Change $ (4.3) $(1.4)
F-11
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 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 should be read in conjunction with, and is qualified in its entirety
by, the Company's Condensed Consolidated Financial Statements, including the
Notes thereto. Historical results are not necessarily indicative of trends in
operating results for any future period. As used herein, "fiscal year" and
"fiscal" refers to the applicable fiscal year ending January 31 of the
applicable calendar year.
Six months and three months ended July 31, 2000 as compared to the six months
and three months ended July 31, 1999, as adjusted for the change in accounting
method.
Net sales. Net sales for the six months and three months ended July 31,
2000 were $36.1 million and $18.0 million, a decrease of $8.3 million or 18.6%
and a decrease of $1.9 million or 9.5%, respectively, compared to $44.4 million
and $19.9 million for the six months and three months, respectively, ended July
31, 1999. The Company believes that the reduction in the sales level for the six
months ended July 31, 2000 is attributable to a decrease in overall demand for
new embroidery machines.
The sale of new embroidery machinery represented approximately $22.4
million and $9.7 million, or 62.0% and 53.8%, and $29.8 million and $11.1
million, or 67.1% and 56.0%, of net sales for the six months and three months
ended July 31, 2000 and 1999, respectively. Small embroidery machines (one
through six-head "FX" models) and large embroidery machines (six-head "DC"
models through thirty-head models) represented approximately $15.2 million and
$7.2 million and $6.9 million and $2.8 million, respectively, of total new
embroidery machine sales during the six months and three months ended July 31,
2000, as compared to approximately $16.9 million and $12.9 million, and $6.6
million and $4.5 million for the six months and three months ended July 31,
1999, respectively.
Revenue from the sale of the Company's used machines, computer hardware and
software, parts and service, application software and embroidery supplies for
the six months and three months ended July 31, 2000 aggregated approximately
$13.8 million and $8.3 million as compared to $12.0 million and $6.0 million for
the six months and three months ended July 31, 1999. This increase is primarily
due to the increased sale of used machines.
F-12
Interest income related to sales-type leases. HAPL's interest income
decreased 21.4% and showed no change (0.0%) to $1.1 million and $0.5 million for
the six months and three months ended July 31, 2000 versus $1.4 million and $0.5
million for the comparable periods of the prior year. This decrease is directly
related to the decrease in lease related receivables. The percentage of new
equipment sales which are leased was 22.0% and 19.0% of total new equipment
sales for the six months and three months ended July 31, 2000 as compared to
45.1% and 47.4% for the six months and three months ended July 31, 1999. The
reduction in share of leased equipment versus total sales is due to more
stringent credit requirements established by the company.
Cost of sales. For the six months and three months ended July 31, 2000,
cost of sales decreased $6.4 million and $1.8 million, or 21.7% and 13.4%, to
$23.1 million and $11.6 million from $29.5 million and $13.4 million for the six
months and three months ended July 31, 1999. The decrease was a result of the
related decrease in net sales for the comparable six month and three month
periods. The fluctuation of the US Dollar against the Yen has historically had a
minimal effect on Tajima equipment gross margins since currency fluctuations are
generally reflected in pricing adjustments in order to maintain consistent gross
margins on machine revenues. The Company's gross margin improved to 38.0% and
37.6% for the six months and three months ended July 31, 2000 as compared to
35.6% and 34.1% for the six months and three months ended July 31, 1999 due to
changes in the sales mix for the period.
Selling, General and Administrative ("SG&A") Expenses. For the six months
and three months ended July 31, 2000, SG&A decreased $2.3 million and $0.5
million, or 12.0% and 5.4%, to $16.9 million and $8.8 million, from $19.2
million and $9.3 million for the six months and three months ended July 31,
1999. For the six months ended July 31, 2000, SG&A expenses increased as a
percentage of revenues to 45.3% from 41.9% for the comparable period in the
previous year. For the three months ended July 31, 2000, SG&A expenses increased
as a percentage of revenues as compared to the three months ended July 31, 1999.
Recurring SG&A expenses associated with the Company's core businesses have
continued to decline as a result of the Company's cost reduction plan, however,
the Company has increased SG&A expenses to support the introductions of new
product lines at its Pulse and Hometown Threads subsidiaries. The Company
continues to pursue its cost reduction plan and anticipates this will bring SG&A
expenses in line with core business sales projections.
Interest Expense. Interest expense for the six months and three months
ended July 31, 2000 decreased $0.5 million and $0.3 million, or 71.4% and 75.0%,
to $0.2 million and $0.1 million as compared to $0.7 million and $0.4 million
for the six months and three months ended July 31, 1999. This decrease in
interest expense is the result of decreased working capital borrowings
outstanding against the Company's Revolving Credit Facility and the satisfaction
of the outstanding mortgage loan on the Company's headquarters facility.
Income tax benefit. The income tax benefit declined from a benefit of $1.5
million to a benefit of $0.2 million for both six months and three months when
compared to the same periods in the prior year. The Company has established a
valuation allowance against deferred tax assets as management believes it is not
specifically determinable as to when the Company will realize these assets in
the future based upon the profitable operations of the Company.
F-13
Net Loss. The net loss for the six months and three months ended July 31,
2000 was $2.7 million and $1.7 million, a decrease of $1.6 million and an
increase of $0.3 million, compared to the net loss of $4.3 million and $1.4
million, respectively, for the six months and three months ended July 31, 1999
as adjusted for the cumulative effect of the accounting change of $2.2 million.
The net margin improved to (6.8%) from (9.4%) for the six months ended July 31,
2000 versus the six months ended July 31, 1999, and declined from (6.8%) to
(9.2%) for the three months ended July 31, 2000 versus the three months ended
July 31, 1999. These changes are attributable to the decrease in net sales, a
decrease in SG&A expenses and the cumulative effect of the change in accounting
method.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $29.4 million at July 31, 2000,
decreasing by $0.2 million, or 0.7%, from $29.6 million at January 31, 2000. The
Company has financed its operations principally through internally generated
funds, supplemented by working capital borrowings under its Revolving Line of
Credit Agreement when necessary.
During the six months ended July 31, 2000, the Company's cash and cash
equivalents increased by $3.5 million to $4.8 million. Net cash of $7.6 million
was provided by the Company's operating activities, offset by cash used for
investing activities of $0.8 million and for financing activities of $3.2
million.
The Company's strategy is to mitigate its exposure to foreign currency
fluctuations by utilizing purchases of foreign currency on the current market as
well as forward contracts to satisfy specific purchase commitments. Inventory
purchase commitments may be matched with specific foreign currency futures
contracts or covered by current purchases of foreign currency. Consequently, the
Company believes that no material foreign currency exchange risk exists relating
to outstanding trade acceptances payable. The cost of such contracts are
included in the cost of inventory.
F-14
Revolving Credit Facility and Borrowings
Effective as of September 30, 1999 the Company satisfied all of its
obligations and exited its Revolving Credit Facility with a syndicate led by
Bank of New York and replaced it with a new Revolving Credit and Security
Agreement (the "Agreement") with PNC Bank. The Agreement provides for a
commitment of $20.0 million for Hirsch and all wholly-owned subsidiaries. The
Agreement is used for working capital loans, letters of credit and deferred
payment letters of credit and bears interest as defined in the Agreement. The
terms of the Agreement restrict additional borrowings by the Company and require
the Company to maintain certain levels of stockholders' equity, as defined
therein. The Company was in default of the financial covenant contained in its
Agreement with PNC Bank at quarter-end. The Company was advised by PNC Bank that
it had been granted a waiver of such default for the fiscal quarters ended
January 31, April 30, and July 31, 2000. The Company has reached agreement with
PNC Bank to amend the Agreement by changing the current performance criteria
from the stockholders' equity covenant to measurement by an interest coverage
ratio. The Company and PNC Bank are currently working to finalize the
abovementioned waiver and amendment. There were no outstanding working capital
borrowings against the Agreement at July 31, 2000. The Agreement was also used
to support trade acceptances payable of approximately $0.7 million as of that
date.
HAPL sells most of its leases to financial institutions on either a
non-recourse basis or a limited-liability basis within several months after the
commencement of the lease term thereby reducing its financing requirements. HAPL
Leasing, which was fully activated in May 1993, has closed approximately $223.1
million in lease agreements through July 31, 2000. As of July 31, 2000,
approximately $202.8 million, or 90.9%, of the leases written have been sold to
third-party financial institutions.
On October 27, 1994, Hirsch entered into a ten-year, $2,295,000 mortgage
agreement with a bank (the "Mortgage") for its new corporate headquarters. The
Company satisfied the remaining balance of the Mortgage on May 12, 2000.
Future Capital Requirements
The Company believes that its existing cash and funds generated from
operations, together with its revolving credit facility, will be sufficient to
meet its working capital and capital expenditure requirements and to finance
planned growth.
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 the 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.
F-15
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
The Company was in default of the financial covenant contained in its
Agreement with PNC Bank at quarter-end. The Company was advised by PNC Bank that
it had been granted a waiver of such default for the fiscal quarters ended
January 31, April 30, and July 31, 2000. The Company has reached tentative
agreement with PNC Bank to amend the Agreement by changing the current
performance criteria from the stockholders' equity covenant to measurement by an
interest coverage ratio.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On August 4, 1999, the Company held its Annual Meeting of
Stockholders (the "Meeting").
(c) At the Meeting, the Stockholders elected Marvin Broitman,
Ronald Krasnitz and Douglas Schenendorf as Class A directors
and Henry Arnberg, Herbert M. Gardner, Paul Levine and Tas
Tsonis as Class B directors. The results of the voting were as
follows:
Class A Directors
Name Number of Votes Cast in Favor Number of Votes Cast Against
- ---- ----------------------------- ----------------------------
Marvin Broitman 5,712,268 202,783
Ronald Krasnitz 5,712,268 202,183
Douglas Schenendorf 5,594,649 320,402
Class B Directors
Name Number of Votes Cast in Favor Number of Votes Cast Against
- ---- ----------------------------- ----------------------------
Henry Arnberg 2,268,139 0
Herbert M. Gardner 2,268,139 0
Paul Levine 2,268,139 0
Tas Tsonis 2,268,139 0
At the Meeting, the Stockholders approved the appointment of BDO
Seidman, LLP as the Company's independent auditors for the fiscal year ending
January 31, 2001. The results of the voting were as follows:
Number of Votes Cast in Favor Number of Votes Cast Against Number of Votes Abstain
- ----------------------------- ---------------------------- -----------------------
8,019,317 132,022 31,851
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*3.1 Restated Certificate of Incorporation of the Registrant
**3.2 Amended and Restated By-laws of the Registrant
***4.1 Specimen of Class A Common Stock Certificate
***4.2 Specimen of Class B Common Stock Certificate
27 Financial Data Schedule
- ---------------
*Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter end July 31, 1997.
** Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter-end October 31, 1997.
*** Incorporated by reference from the Registrant's Registration Statement
on Form S-1, Registration Number 33-72618.
F-16
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.
Registrant
By: /S/Henry Arnberg
------------------------------
Henry Arnberg, Chairman and
Chief Executive Officer
By: /s/Richard M. Richer
------------------------------
Richard M. Richer, Executive
Vice President - Finance and
Administration and Chief Financial
Officer
Dated: September 14, 2000
F-17