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 October 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 December 14, 2000.
Class of Number of
Common Equity Shares
------------- ------
Class A Common Stock, 6,368,111
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 - October 31, 2000
and January 31, 2000 F-2 to F-3
Condensed Consolidated Statements of Operations for
the Nine Months and Three Months Ended October 31, 2000 and 1999 F-4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended October 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
October 31, January 31,
2000 2000
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $4,560,000 $1,290,000
Accounts receivable, net 15,434,000 17,293,000
Net investment in sales-type leases,
current portion (Note 3) 2,958,000 2,583,000
Inventories, net (Note 2) 14,657,000 25,711,000
Prepaid income taxes 792,000 3,673,000
Other current assets 421,000 423,000
----------- ----------
Total current assets 38,822,000 50,973,000
----------- ----------
NET INVESTMENT IN SALES-TYPE LEASES,
non-current portion (Note 3) 7,874,000 8,207,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of
approximately $4,724,000 and $3,851,000,
respectively 12,100,000 12,974,000
PURCHASED TECHNOLOGIES, net of accumulated
amortization of approximately $1,275,000
and $1,132,000, respectively 64,000 207,000
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization
of $8,575,000 and $7,758,000, respectively 5,445,000 6,544,000
OTHER ASSETS 864,000 1,311,000
----------- -----------
TOTAL ASSETS $65,169,000 $80,216,000
=========== ===========
See notes to Condensed Consolidated financial statements.
F-2
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
2000 2000
---------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $3,155,000 $6,199,000
Accounts payable and accrued expenses 8,266,000 12,805,000
Current maturities of long-term debt (Note 4) 14,000 2,342,000
---------- ----------
Total current liabilities 11,435,000 21,346,000
LONG-TERM DEBT, less current maturities
(Note 4) 72,000 989,000
---------- ----------
Total liabilities 11,507,000 22,335,000
---------- ----------
MINORITY INTEREST (Note 1) 1,552,000 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 6,368,111 shares, respectively,
at October 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 October 31, 2000 and
January 31, 2000, respectively 27,000 27,000
Additional paid-in capital 41,397,000 41,397,000
Retained earnings 12,010,000 15,721,000
Accumulated other comprehensive income (loss) (56,000) 221,000
---------- ----------
53,446,000 57,434,000
Less: Treasury stock, at cost; 446,020 shares
and 326,300 shares, respectively 1,336,000 1,181,000
---------- ----------
Total stockholders' equity 52,110,000 56,253,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $65,169,000 $80,216,000
=========== ===========
See notes to Condensed Consolidated financial statements.
F-3
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
NINE MONTHS ENDED THREE MONTHS ENDED
October 31, October 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Restated; See (Restated; See
Note 6) Note 6)
REVENUES
Net Sales $55,679,000 $64,093,000 $19,558,000 $19,715,000
Interest income related to sales-type leases 1,323,000 2,754,000 174,000 1,349,000
----------- ----------- ----------- -----------
Total revenue 57,002,000 66,847,000 19,732,000 21,064,000
----------- ----------- ----------- -----------
COST OF SALES 36,441,000 44,670,000 13,349,000 15,182,000
----------- ----------- ----------- -----------
GROSS PROFIT 20,561,000 22,177,000 6,383,000 5,882,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 24,211,000 28,590,000 7,262,000 9,419,000
----------- ----------- ----------- -----------
OPERATING (LOSS) (3,650,000) (6,413,000) (879,000) (3,537,000)
----------- ----------- ----------- -----------
OTHER EXPENSE (INCOME)
Interest expense 356,000 1,010,000 117,000 306,000
Other (income) expense (80,000) (386,000) (104,000) (306,000)
----------- ----------- ----------- -----------
Total other expense 276,000 624,000 13,000 0
----------- ----------- ----------- -----------
(LOSS) BEFORE INCOME TAX (BENEFIT)
AND MINORITY INTEREST IN NET EARNINGS
(LOSS)OF CONSOLIDATED SUBSIDIARY (3,926,000) (7,037,000) (892,000) (3,537,000)
INCOME TAX PROVISION (BENEFIT) (141,000) (2,435,000) 100,000 (843,000)
MINORITY INTEREST IN NET EARNINGS (LOSS)
OF CONSOLIDATED SUBSIDIARY (Note 1) (76,000) 88,000 43,000 (112,000)
----------- ----------- ----------- -----------
NET (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE ($3,709,000) ($4,690,000) ($1,035,000) ($2,582,000)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (Note 6) - ($2,187,000) - -
----------- ----------- ----------- -----------
NET (LOSS) ($3,709,000) ($6,877,000) (1,035,000) (2,582,000)
=========== =========== =========== ===========
(LOSS) PER SHARE:
Basic
(Loss) before cumulative effect
Of accounting change ($0.41) ($0.50) ($0.11) ($0.28)
Cumulative effect of accounting
Change - ($0.23) - -
----------- ----------- ----------- -----------
NET (Loss) ($0.41) ($0.73) ($0.11) ($0.28)
=========== =========== =========== ===========
Diluted
(Loss) before cumulative effect
Of accounting change ($0.41) ($0.50) ($0.11) ($0.28)
Cumulative effect of accounting
Change - ($0.23) - -
----------- ----------- ----------- -----------
NET (Loss) ($0.41) ($0.73) ($0.11) ($0.28)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF (LOSS)
PER SHARE
Basic 9,138,400 9,301,400 9,111,400 9,301,400
========= ========= ========= =========
Diluted 9,138,400 9,301,400 9,111,400 9,301,400
========= ========= ========= =========
<FN>
See notes to Condensed Consolidated financial statements.
</FN>
F-4
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 31,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($3,709,000)($6,877,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 2,567,000 2,829,000
Provision for reserves (643,000) 1,944,000
Bad Debt Expense 987,000 -
Deferred Income Taxes - 1,061,000
Minority interest (76,000) 88,000
Changes in assets and liabilities:
Accounts receivable 872,000 7,861,000
Net investment in sales-type leases (42,000) 2,844,000
Inventories 11,697,000 4,692,000
Prepaid taxes 2,881,000 (3,176,000)
Other assets 225,000 52,000
Trade acceptances payable (4,539,000) (1,604,000)
Accounts payable and accrued expenses (3,044,000) (3,595,000)
---------- ----------
Net cash provided by operations 7,176,000 6,119,000
---------- ----------
See notes to Condensed Consolidated financial statements.
F-5
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 31,
2000 1999
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (227,000) (780,000)
--------- --------
Net cash used in investing activities (227,000) (780,000)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (Repayments) of bank financing (2,328,000) 6,952,000
Repayments of long-term debt (917,000)(14,555,000)
Purchase of treasury shares (155,000) (178,000)
Net cash used in
financing activities (3,400,000) (7,781,000)
---------- ---------
Effect of Exchange Rate Changes on Cash (279,000) -
---------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,270,000 (2,442,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,290,000 3,078,000
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $4,560,000 $636,000
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $356,000 $1,010,000
Income taxes paid $400,000 -
See notes to Condensed Consolidated financial statements.
F-6
Hirsch International Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Nine and Three Months Ended October 31, 2000 and 1999
1. Organization and Basis of Presentation
The accompanying Condensed Consolidated financial statements as of and for
the nine month and three month periods ended October 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, (f/k/a HJ Grassroots, LLC)("Hometown") and Hirsch
Business Concepts, LLC (f/k/a Hometown Threads, LLC)("HBC")(collectively, the
"Company").
On January 6, 1998, Tokai Industrial Sewing Machine Company ("Tokai")
purchased a 45 percent interest in TUI for $900,000. For financial purposes, the
assets, liabilities and earnings of TUI are consolidated in the Company's
financial statements. Tokai's 45 percent interest in TUI has been reported as
minority interest in the Company's Condensed Consolidated Balance Sheet and
Tokai's share of the earnings have been reported as minority interest in the
Company's Condensed Consolidated Statements of Operations.
In the opinion of management, the accompanying unaudited Condensed
Consolidated financial statements contain all the adjustments, consisting of
normal accruals, necessary to present fairly the results of operations for each
of the nine and three month periods ended October 31, 2000 and 1999, the
financial position at October 31, 2000 and cash flows for the nine month periods
ended October 31, 2000 and 1999, respectively. Such adjustments consisted only
of normal recurring items. The Condensed Consolidated financial statements and
notes thereto should be read in conjunction with the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 2000 as filed with the
Securities and Exchange Commission.
The interim financial results are not necessarily indicative of the results
to be expected for the full year.
2. Inventories
October 31, 2000 January 31, 2000
----------- -----------
New Machines...................$ 9,457,000 $20,455,000
Used Machines.................. 3,267,000 4,795,000
Parts and Accessories.......... 4,221,000 4,092,000
----------- -----------
16,945,000 29,342,000
Less: Reserve for Slow
Moving Inventory............. (2,288,000) (3,631,000)
----------- -----------
Inventories, net............... $14,657,000 $25,711,000
============ ===========
F-7
3. Net Investment in Sales-Type Leases
October 31, 2000 January 31, 2000
---------------- ----------------
Total minimum lease payments
receivable.......................... $8,818,000 $9,688,000
Estimated residual value of leased
property (unguaranteed)........... 5,546,000 4,848,000
Reserve for estimated uncollectible
lease payments and residual value.. (1,100,000) (1,100,000)
Less: Unearned income................. (2,432,000) (2,646,000)
----------- -----------
Net investment.........................10,832,000 10,790,000
Less: Current portion..................(2,958,000) (2,583,000)
---------- -----------
Non-current portion....................$7,874,000 $ 8,207,000
=========== ===========
4. Long-Term Debt
October 31, 2000 January 31, 2000
---------------- ----------------
Revolving credit facility (A)...... $ 0 $ 2,064,000
Long Term Debt:
Mortgage (B)............................ 0 1,090,000
Capitalized Leases...................... 86,000 177,000
--------- -----------
Total................................... 86,000 3,331,000
Less: Current maturities................ ( 14,000) (2,342,000)
--------- -----------
Long-term maturities..................... $72,000 $ 989,000
========= ==========
F-8
(A) Effective as of September 30, 1999 the Company initiated a Revolving
Credit and Security Agreement (the "Agreement") with PNC Bank ("Bank"). The
Agreement provides for a total commitment of $20.0 million for Hirsch and all
wholly-owned subsidiaries. The funds advanced pursuant to the Agreement are used
for working capital loans, letters of credit and deferred payment letters of
credit and bear interest as provided for in the Agreement. The original terms of
the Agreement restrict additional borrowings by the Company and required the
Company to maintain certain levels of stockholders' equity. The Company was in
default of this covenant for each of the quarters ending January 31, April 30,
and July 31, 2000. Pursuant to the First Amendment to Revolving Credit and
Security Agreement, dated as of October 30, 2000 (the "Amendment"), between the
Bank and the Company, all of such defaults were waived by the Bank. The
Amendment also amended the Agreement effective October 30, 2000 to replace the
stockholders' equity covenant with a covenant based on an interest coverage
ratio, as defined therein. The Company was in compliance with that covenant as
of the close of the third quarter on October 31, 2000. There were no outstanding
working capital borrowings against the Agreement at October 31, 2000. The credit
facility incorporated in the Agreement was also used to support trade
acceptances payable of approximately $3.2 million as of that date.
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
Nine Months Ended October 31, 2000 Embroidery Leasing Corporate Consolidated
- ------------------------------- ---------- --------- --------- ------------
Total revenues 55,679,000 1,323,000 -- $57,002,000
========== ========= ========= ============
Interest expense 352,000 4,000 -- 356,000
========== ========= ========= ============
Depreciation & amortization expense 1,052,000 275,000 1,240,000 2,567,000
========== ========= ========= ============
(Loss) income before income tax
benefit (3,922,000) ( 4,000) -- (3,926,000)
========== ========= ========= ============
Income tax (benefit) provision (141,000) -- -- (141,000)
========== ========= ========= ============
Identifiable assets $ 45,687,000 $7,231,000 $12,251,000 $ 65,169,000
============ ========= ========== ===========
Nine Months Ended October 31, 1999 Embroidery Leasing Corporate Consolidated
- ---------------------------------- ---------- --------- --------- ------------
Total revenues $64,093,000 $2,754,000 $ - $66,847,000
========== ========= ========= ============
Interest expense $ 977,000 $ 33,000 $ - $ 1,010,000
========== ========= ========= ===========
Depreciation and amortization expense $ 1,544,000 $ 297,000 $ 988,000 $ 2,829,000
========== ========= ========= ===========
(Loss) income before income tax
(benefit) provision $(7,663,000) $ 618,000 $ 8,000 $(7,037,000)
========== ========= ========= ===========
Income tax (benefit) provision $(2,682,000) $ 247,000 $ - $(2,435,000)
========== ========= ========= ===========
Identifiable assets $53,800,000 $15,144,000 $11,272,000 $80,216,000
========== ========== ========== ===========
Three Months Ended October 31, 2000 Embroidery Leasing Corporate Consolidated
- ---------------------------------- ---------- --------- --------- ------------
Total revenues $19,558,000 174,000 -- $19,732,000
========== ========= ========= ============
Interest expense 117,000 -- -- 117,000
========== ========= ========= ============
Depreciation and amortization expense 273,000 73,000 387,000 733,000
========== ========= ========= ============
(Loss) income before income tax
benefit ( 658,000) (234,000) -- ( 892,000)
========== ========= ========= ============
Income tax (benefit) provision 100,000 -- -- 100,000
========== ========= ========= ============
Identifiable assets $ 45,687,000 $7,231,000 $12,251,000 $ 65,169,000
============ ========= ========== ===========
Three Months Ended October 31, 1999 Embroidery Leasing Corporate Consolidated
- ---------------------------------- ---------- --------- --------- ------------
Total revenues $19,715,000 $1,349,000 $ - $21,064,000
========== ========= ========= ============
Interest expense $ 290,000 $ 16,000 $ - $ 306,000
========== ========= ========= ============
Depreciation and amortization expense $ 518,000 $ 101,000 $ 274,000 $ 893,000
========== ========= ========= ============
(Loss) income before income tax
(benefit) provision $(2,941,000) $(541,000) $(55,000) $(3,537,000)
========== ========= ========= ============
Income tax (benefit) provision $(1,059,000) $ 216,000 $ - $( 843,000)
========== ========= ========= ============
Identifiable assets $53,800,000 $15,144,000 $11,272,000 $80,216,000
========== =========== =========== ===========
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 results
for the year ended January 31, 2000, 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, since 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 nine months
ended October 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 nine and three months ended October 31, 2000
are summarized below:
(All figures in $000,000) Nine Months Ended Quarter Ended
October 31, 1999 October 31, 1999
-------------- --------------
Revenue:
As originally reported $ 67.7 $ 24.5
Adjusted for Accounting Change $ 66.8 $ 21.1
Cost of sales:
As originally reported $ 45.2 $ 17.5
Adjusted for Accounting Change $ 44.7 $ 15.2
Gross Profit:
As originally reported $ 22.5 $ 7.1
Adjusted for Accounting Change $ 22.2 $ 5.9
Loss before Income tax benefit:
As originally reported $ (6.7) $(2.4)
Adjusted for Accounting Change $ (7.0) $(3.5)
Net Loss:
As originally reported $ (4.4) $(1.4)
Adjusted for Accounting Change $ (6.9) $(2.6)
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.
Nine months and three months ended October 31, 2000 as compared to the nine
months and three months ended October 31, 1999, as adjusted for the change in
accounting method.
Net sales. Net sales for the nine months and three months ended October 31,
2000 were $57.0 million and $19.7 million, a decrease of $9.9 million or 14.8%
and a decrease of $1.4 million or 6.6%, respectively, compared to $66.9 million
and $21.1 million for the nine months and three months, respectively, ended
October 31, 1999. The Company believes that the reduction in the sales level for
the nine months ended October 31, 2000 as compared to the same period last year
is attributable to an industry-wide decline in demand in the market for new
embroidery machinery in its authorized territories, however the sales volumes
for the most recent series of quarters indicate a stabilizing trend in sales
volume for equipment. Sales of software in the United States have followed the
declining trend of equipment, however the Company is taking steps to reposition
its software sales efforts to uncouple its historic reliance on equipment sales.
International software sales have increased as a result of expansion of the
Pulse distribution network.
The sale of new embroidery machinery represents the largest segment of
revenue, with approximately $38.1 million and $15.7 million, or 66.8% and 79.7%,
and $46.0 million and $13.7 million, or 68.8% and 64.9%, of net sales for the
nine months and three months ended October 31, 2000 and 1999, respectively.
Small embroidery machines (one through six-head "EX" and "FX" models) and large
embroidery machines (six-head "DC" models through thirty-head models)
represented approximately $22.5 million and $11.9 million and $7.3 million and
$4.7 million, respectively, of total new embroidery machine shipments during the
nine months and three months ended October 31, 2000, as compared to
approximately $27.5 million and $19.4 million, and $10.5 million and $6.5
million for the nine months and three months ended October 31, 1999,
respectively. The trend in the sales mix from predominantly large, multi-head
machines versus small and single head machines has largely stabilized at levels
of approximately two-thirds of the equipment sales volume being represented by
small and single head machines.
The balance of sales revenue is derived from the sale of the Company's used
embroidery machines, computer hardware, parts and service, and embroidery
supplies, which have followed the same trend of overall sales in the industry.
F-12
Interest income related to sales-type leases. For the nine months and three
months ended October 31, 2000 when compared to the same period ended October 31,
1999, HAPL's interest income decreased from $2.8 million to $1.3 million, and
decreased from $1.3 million to $0.2 million. This decrease is directly related
to the decline in overall sales of new equipment, reduced share of leased
equipment versus total sales, and the timing of funding by third party sources
in the routine bundling and sale of lease revenue streams. Share of equipment
sales which are leased was 23.2% of total new equipment sales for the three
months ended October 31, 2000 as compared to 35.7% for the three months ended
October 31, 1999. The reduction in the share of leased equipment versus total
sales is due to more stringent credit requirements established by the company.
Cost of sales. For the nine months and three months ended October 31, 2000,
cost of sales decreased $8.3 million and $1.9 million, or 18.6% and 12.5%, to
$36.4 million and $13.3 million from $44.7 million and $15.2 million for the
nine months and three months ended October 31, 1999. The decrease was a result
of the related decrease in net sales for the comparable nine 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 36.1% and 32.3% for the nine months and three months ended October
31, 2000 as compared to 33.2% and 27.9% for the nine months and three months
ended October 31, 1999 due to changes in the sales mix for the period.
Selling, General and Administrative ("SG&A") Expenses. For the nine months
and three months ended October 31, 2000, SG&A decreased $4.4 million and $2.1
million, or 18.2% and 22.3%, to $24.2 million and $7.3 million, from $28.6
million and $9.4 million for the nine months and three months ended October 31,
1999. For the nine months ended October 31, 2000, SG&A expenses decreased as a
percentage of revenues to 42.5% from 42.8% for the comparable period in the
previous year. For the three months ended October 31, 2000, SG&A expenses
decreased as a percentage of revenues from 44.7% to 36.8% when comparing the
current quarter to the same period in the previous year. 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 restructuring reserves established at the end
of fiscal 1999 were reconciled against expenses associated with reduction of
personnel, closure of certain facilities and relocation of machine repair,
fulfillment of parts and supplies, and related operations during this quarter.
This essentially concludes any economic impact of the restructuring initiated at
that time. 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 nine months and three months
ended October 31, 2000 decreased $0.6 million and $0.2 million, or 64.8% and
61.7%, to $0.4 million and $0.1 million as compared to $1.0 million and $0.3
million for the nine months and three months ended October 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
($2.4) million to a (benefit) of ($0.2) million for nine months and declined
from a (benefit) of ($0.8 million) to an expense of $0.1 million compared to the
three months ended October 31, 2000 and 1999, respectively. The Company has
established a 100% 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 nine months and three months ended October
31, 2000 was $3.7 million and $1.0 million, a decrease of $3.2 million and a
decrease of $1.6 million, compared to the net loss of $6.9 million and $2.6
million, respectively, for the nine months and three months ended October 31,
1999 as adjusted for the cumulative effect of the accounting change of $2.2
million. The net margin improved to (6.5%) from (10.3%) for the nine months
ended October 31, 2000 versus the nine months ended October 31, 1999, and
improved to (5.2%) from (12.3%) for the three months ended October 31, 2000
versus the three months ended October 31, 1999. These changes are attributable
to a more rapid decrease in SG&A expenses relative to the decline in sales
revenue, 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 $27.4 million at October 31, 2000, a
decrease of $2.2 million, or 7.6%, 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 nine months ended October 31, 2000, the Company's cash and cash
equivalents increased by $3.3 million to $4.6 million. Net cash of $7.2 million
was provided by the Company's operating activities, offset by cash used for
investing activities of $0.2 million and for financing activities of $3.4
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 costs of such contracts when
utilized are included in the cost of inventory.
F-14
Revolving Credit Facility and Borrowings
Effective as of September 30, 1999 the Company initiated a Revolving Credit
and Security Agreement (the "Agreement") with PNC Bank ("Bank"). The Agreement
provides for a total commitment of $20.0 million for Hirsch and all wholly-owned
subsidiaries. The funds advanced pursuant to the Agreement are used for working
capital loans, letters of credit and deferred payment letters of credit and bear
interest as provided for in the Agreement. The original terms of the Agreement
restrict additional borrowings by the Company and required the Company to
maintain certain levels of stockholders' equity. The Company was in default of
this covenant for each of the quarters ending January 31, April 30, and July 31,
2000. Pursuant to the First Amendment to Revolving Credit and Security
Agreement, dated as of October 30, 2000 (the "Amendment"), between the Bank and
the Company, all of such defaults were waived by the Bank. The Amendment also
amended the Agreement effective October 30, 2000 to replace the stockholders'
equity covenant with a covenant based on an interest coverage ratio, as defined
therein. The Company was in compliance with that covenant as of the close of the
third quarter on October 31, 2000. There were no outstanding working capital
borrowings against the Agreement at October 31, 2000. The credit facility
incorporated in the Agreement was also used to support trade acceptances payable
of approximately $3.2 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. From
May 1993 through October 31, 2000, HAPL Leasing has closed approximately $226.2
million in lease agreements. As of October 31, 2000, approximately $202.8
million, or 89.7%, of the leases written have been sold to third-party financial
institutions.
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 granted a waiver by PNC Bank for the default of the
financial covenant contained in its original Revolving Credit and Security
Agreement for the fiscal quarters ended January 31, April 30, and July 31, 2000.
Pursuant to the first Amendment to Revolving Credit and Security Agreement dated
as of October 31, 2000, the Agreement was amended by changing the performance
criteria from a stockholders' equity covenant to measurement by an interest
coverage ratio. The Company satisfied the requirements of this covenant as of
the quarter ended on October 31, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Subsequent to the close of the quarter, the Company and Brandywine Realty
Trust ("Brandywine") reached a tenative agreement for the sale of the Company's
Hauppauge, New York facility. Concurrent with the closing of the sale, a
leaseback agreement for the offices contained in the facility will be executed.
The Company expects that the definitive agreement for these transactions will be
executed shortly.
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
10.1 First Amendment to Revolving Security Agreement dated as of October
30, 2000, by and among Hirsch International Corp., HAPL Leasing Co.,
Inc., Pulse Microsystems Ltd., Sedeco, Inc., Sewing Machine Exchange,
Inc., Hirsch Equipment Connection, Inc., Hometown Threads LLC,
Hirsch Business Concepts LLC and PNC Bank, National Association, as
agent and lender.
27 Financial Data Schedule
*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 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.
(b) Reports on Form 8K
None.
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,
Chief Financial Officer
Dated: December 14, 2000
F-17